Chapter 2

Paragraph 2.5

The Tax Office notes the Inspector-General, based on his sample of audit adjustments, claims that only 32 per cent of them involve a net contribution to revenue. While it is clear that the adjustments identified by the Inspector-General will always involve a net contribution to revenue some other areas noted by the Inspector-General may also involve a net contribution to revenue including both lodgement work and some of the so called revenue neutral adjustments.

Paragraph 2.6

The Tax Office seeks to maximise the voluntary compliance of taxpayers with their tax obligations. The GST large market strategy involves a combination of audit activity and client relationship management to seek to maximise voluntary compliance. Results from voluntary disclosures when made directly to audit staff in the GST Large Active Compliance area are treated as outcomes of our overall GST active compliance activities in the large market.

Paragraph 2.7

While the Tax Office accepts that it would be better to provide a more detailed picture of its active compliance results, it doesn't agree that current reporting gives an overly negative picture of large market compliance. The Tax Office view is that the failure of large market businesses to comply with their obligations under GST law to properly account for and report their GST obligations in the correct period represents non compliance with the law even if the actual adjustments might eventually turn out to be revenue neutral.

Paragraph 2.8

The difference between liabilities and collections is not significant in the large market. The 2005-06 GST collection rate for the large market was 95 per cent, the figure for 2006-07 was 94 per cent. The collection rate for liabilities raised in a year also continues to improve over time with continuing collection activity over time bringing it closer to 97 per cent of liabilities collected.

Paragraph 2.11

The Tax Office disagrees with this paragraph. The 2007-08 planning process for the GST Business Line (BSL) ensured that resources were allocated based on the risks to the GST system. The GST planning process involves a balancing of resources across the risks that are rated significant and above.

Active compliance activity is selected not only according to the risk to immediate revenue, but also risks to the integrity of the system, and community confidence. The number and value of risks that are identified will vary across sites as the population and incidence of the risks vary.

GST has recently realigned its structure resulting in a separation of the risk and strategy function from the active compliance function. GST has identified risks specific to the large market and documented these in the Large and International Market Diagnostic and in the GST Risk Register.

Paragraph 2.12

The Tax Office does not consider that there is a low strike rate in GST audits nor that there are many unresolved audits chasing elusive issues. The strike rate of 17.4 per cent includes a major component of office based compliance activity in relation to GST refunds. We expect a relatively low strike rate from this but undertake these activities to protect the integrity of the GST refunds that issue. The strike rate for field audit work of 41 per cent is the more relevant figure and is a reasonable strike rate for this more resource intensive work.

The Tax Office does not consider that strike rates are the only measure of success in our compliance program. The Tax Office's Strategic Statement 2006-10 outlines our goal to optimise voluntary compliance through our activities.

The Tax Office considers errors in wash transactions and other non-sticky transactions (for example, where the wrong entity accounts) are important matters requiring audit intervention and amendment for the reasons set out in paragraph 3.51.

Paragraph 2.16

The Tax Office disagrees with the view that there is any systemic problem concerning the imposition of penalties in relation to large market audits when in fact both the number of penalties imposed compared to the total number of audits with adjustments and the amount of penalties imposed compared to the total shortfall is extremely small. Refer to our comments at paragraph 4.43.

Paragraph 2.17

The Tax Office notes the fact that in some cases penalty decisions were reviewed and revised at the objection stage indicates that the current checks and balances in the system are working effectively. It would be unrealistic to believe that every decision by an auditor in relation to penalties will be correct. The objection process provides taxpayers with a low cost option to have concerns with the audit decision reviewed by the Tax Office.

Paragraph 2.18

The Tax Office has indicated to the Inspector-General that there are systems issues that limit its current ability to report on penalties to the extent sought by the Inspector-General. Whilst the Tax Office notes that more detailed reporting indicated by the Inspector-General would be useful, we do not believe that our current inability to obtain these reports is a critical problem in managing the imposition of penalties in large market audit cases.

Paragraph 2.20

The Tax Office does not agree with the findings of the Inspector-General that the imposition of the General Interest Charge (GIC) is inappropriate in relation to certain 'procedural compliance adjustments which are revenue neutral and made as a result of a GST audit'.

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

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.

The Tax Office is currently reviewing its practice statement PSLA 2003/2 in relation to GST 'wash' transactions and the Inspector-General's comments and recommendations will be considered as part of this review.

Paragraph 2.25

The Tax Office disagrees that we have not consistently applied our policy in relation to voluntary disclosures. The Inspector-General statement that the Tax Office policy is 'that GIC in such cases will generally be calculated at a rate which is seven percentage points less than the prevailing GIC rate' is incorrect. The Tax Office practice statement indicates that GIC should not be automatically remitted to the base rate in cases of voluntary disclosure but indicates that this should only occur where certain factors are present.

Paragraph 2.26

The Tax Office agrees that it does not know the total amount of GIC imposed in relation to GST audit cases. This is a direct result of the legislative requirements in relation to the establishment of a Running Balance Account (RBA), whereby audit assessments are added to the taxpayer's RBA, upon which GIC is automatically calculated and updated by reference to all debts on the RBA. This therefore makes it impossible to track the specific element of the GIC which relates to individual audit cases.

Paragraph 2.27

The Tax Office considers that the current processes are adequate and notes that GIC decisions made within GST are subject to a high level of internal review. It is mandatory that all GIC decisions are technically cleared by a member of the GST Penalty and Interest Network. This additional review step seeks to ensure the correct application of the guidelines and that remission has been considered in all relevant circumstances.

The Tax Office has developed a number of products and tools to assist staff when making GIC decisions and is currently undertaking a process to embed these into the case management system.

The Tax Office notes that, like all changes, the requirement for GST auditors to consider GIC remissions as part of their audit case finalisation took some time to be fully implemented by all audit staff. However, the Tax Office has an ongoing commitment to developing staff capability and will be providing further training to ensure the correct application of GIC remission policy. TQR results indicate a continuing improvement in the application of GIC remission policies by GST auditors.

Paragraph 2.28

The Tax Office believes that it already has in place adequate quality control processes to monitor the imposition and remission of GIC but has agreed to continue to review and monitor the effectiveness of these processes to see if there are further opportunities for improvement.

Paragraph 2.30

The Tax Office has in most cases provided taxpayers with details of why their valuations failed to be assessed by the Australian Valuation Office (AVO) as being a complying valuation. The Tax Office agrees that in a small number of cases, taxpayers were not provided with sufficient details of the reasons for the AVO finding that they were non compliant. In addition, in a number of cases, the AVO as part of their critique of the valuation provided an indicative estimate of the valuation of the property. In these situations, because of concerns that these estimates did not represent a true professional valuation by the AVO, the Tax Office did not provide this information to taxpayers.

The use by the Tax Office of the original purchase price in those situations where the taxpayer did not provide what the Tax Office considered to be a complying valuation is based on our view of the law as it currently stands.

Paragraph 2.32

The Tax Office acknowledges that the application of the law in disputes over margin scheme valuations has caused considerable concern to some taxpayers and the Tax Office is currently examining if there are options by which the Tax Office can substitute an alternative valuation where it believes the taxpayer's valuation is non-complying.

Paragraph 2.35

The Tax Office does not agree with this conclusion. GST has audit cycle timeframes for audit products. We have not been able to establish the basis on which other tax authorities establish their audit cycle times, if indeed they have established them, although we would be interested in exploring this issue with them. The comments about planning and governance relate largely to the past rather than the present and were addressed by the Tax Office prior to this review. The Tax Office continues to focus on ensuring cases are finalised within appropriate timeframes and has established a 'case leadership area' with a key role in relation to this issue.

The Tax Office agrees that in prior years some audits may have lacked an audit plan. However, with the introduction of the 2006 Large business and tax compliance booklet new processes and procedures have been put in place to ensure that audit plans are drafted and discussed with the taxpayer at the initial audit interview. These issues are reviewed by the GST Case Leadership area in their call overs of audit cases in LAC.

Paragraph 2.37

For some office based audits limited to confirming the validity of a refund claim the taxpayer will be verbally advised by phone of the commencement of the audit rather than by way of a formal audit letter. The objective is to speed up the audit process to enable refunds to be released. The Tax Office has now agreed to confirm this verbal advice in writing.

Paragraph 2.38

The Tax Office has a policy that taxpayers should have access to the relevant technical decision maker and arrangements which ensure that senior technical experts will be brought into the audit process early have been put in place.

Where a taxpayer fails to gain access to a technical decision maker they are encouraged to escalate this issue to senior officers for resolution. This process is documented in the 2006 Large business and tax compliance booklet. The booklet states that the Tax Office may meet the taxpayer to discuss their response to the Tax Office position, and where appropriate, the meeting may include technical specialists or industry or topic experts.

GST has put in place procedures to ensure taxpayers have access to technical decision makers to discuss the merits of the decisions made.

Paragraph 2.39

The Tax Office does not consider that a retrospective claim is indicative of non-compliance or bad practice.

The Tax Office initially queried the appropriateness of retrospective changes to apportionment methodologies when first raised by taxpayers. The Tax Office undertook a thorough technical review taking into account taxpayer contentions and formally concluded that a revised apportionment method may be retrospectively applied subject to the normal 4 year limitation on amendment of returns.

Requests for amendments have been received and have either been processed or are being processed.

The Tax Office will, where appropriate, review any claim arising from a retrospective change in methodology. Again, this does not imply that making a retrospective claim is indicative of non-compliance or bad practice.

Paragraph 2.40

The large market covers a wide range of industries and businesses. The Tax Office seeks to ensure that its staff are appropriately trained in technical knowledge of the law and in their understanding of business operations. For a number of key industries including financial services, property and energy it seeks to provide auditors with specialist industry knowledge. This is an ongoing task and the Tax Office agrees to continue with the further development of our staff.

Paragraph 2.41

The Tax Office had already implemented, as a separate initiative unrelated to this review, a process to provide individual auditors with feedback on the results of objections to cases they have audited.

Chapter 3

Paragraph 3.19

The Tax Office believes that it analyses its active compliance results to the extent that it requires to undertake its business in an efficient manner. It has provided the Inspector-General during the review with the analysis it does of audit cases completed in its Large Active Compliance (LAC) branch. This branch accounts for the overwhelming majority of audit work in the large market. LAC analyses audit outcomes by nature of the risk and by the nature of the eventual adjustment ie sticky, timing, wash, or unprompted voluntary disclosures. While these figures are not able to be directly reconciled with the large market results for GST they are sufficiently indicative for the purposes of risk management and planning and for assessing the effectiveness of our audit activities in the large market.

Paragraph 3.20

The Tax Office's Annual Report for each year covers the activities undertaken by it for the relevant financial year. The covering letter to the Assistant Treasurer indicates the financial year that the report relates to. The function of the report is to inform both Parliament and the community of the activities and revenue collected during that financial year. It is not a document that seeks to reconcile adjustments made to liabilities raised in a previous financial year. Collections are net collections which may include liabilities or refunds from a previous year.

The report meets all legislative requirements that the Commissioner of Taxation is obliged to report on.

The Compliance Program Booklet also provides preliminary results on a financial year basis.

Paragraph 3.34

The Tax Office disagrees with this paragraph. The Tax Office does have a consolidated statement of its policy on what constitutes a voluntary disclosure and how it deals with them and this is contained at page 58 of the 2006 Large business and tax compliance booklet. The Tax Office has agreed to work towards the development of a consolidated statement or guide for the community on the making of voluntary disclosures.

Paragraph 3.42

While the Tax Office acknowledges that the reporting of active compliance results for the large market could provide a more detailed break up of those results it rejects the view stated in this paragraph that these reported results 'give an overly negative view'.

Paragraph 3.44

The Tax Office does not agree that it does not have in place a process for assessing and prioritising all GST risks in the large market. While the Tax Office acknowledges that its risk processing is still developing and is continuing to improve, it has set up a separate unit responsible for assessing the risks in the large market. This unit has completed a thorough risk assessment of the large market. Identified risks have been reviewed and endorsed by the GST Risk Management Sub-Committee as part of its overall review of GST risks. Resources are allocated to deal with these risks depending on the nature of each risk.

Paragraph 3.49

The strike rate of 17.4 per cent includes compliance activity on which we expect a relatively low strike rate but we undertake these activities to protect the integrity of the GST refunds that issue, in line with recommendations made by the Australian National Audit Office. The strike rate for field audit work of 41 per cent is the more relevant figure and provides a reasonable strike rate in our view.

Paragraph 3.54

The Tax Office disagrees with this paragraph. The 2007-08 planning process for the GST Business Line (BSL) ensures that resources are allocated based on the risks to the GST system. The GST planning process involves a balancing of resources across the risks that are rated significant and above.

Active compliance activity is selected not only according to the risk to immediate revenue, but also risks to the integrity of the system, and community confidence. The number and value of risks that are identified will vary across sites as the population and incidence of the risks vary.

GST has recently realigned its structure resulting in a separation of the risk and strategy function from the active compliance function. GST has identified risks specific to the large market and documented these through the Large and International Market Diagnostic and through the GST Risk Register.

The Tax Office does not consider that strike rates are the only measure of success in our compliance program. The Tax Office's Strategic Statement 2006-10 outlines our goal to optimise voluntary compliance through our activities.

The Tax Office considers errors in wash transactions and other non-sticky transactions (for example, where the wrong entity accounts) as important matters requiring audit intervention and amendment for the reasons set out in paragraph 3.51 of the report.

Chapter 4

Paragraph 4.19

There is one additional stated policy reason for the imposition of taxation interest charges and that is 'to compensate the community for the impact of late payments'. The Tax Office would also indicate that many of the comments made on revenue neutral transactions in this report seem to miss the point above about ensuring that taxpayers who fail to meet their statement or payment obligations do not receive an unfair advantage over those who meet their liabilities in full by the due date, which is critical for remission consideration by auditors.

Paragraph 4.30

The Tax Office has developed a number of products and tools to assist staff when making GIC decisions and is currently undertaking a process to embed these into the case management system. These are contained within an interest charge index which provides links to all of the relevant legislation, policy, remission support tools and answers to frequently asked questions.

Paragraph 4.36

The Tax Office believes that its reporting on penalties imposed by audits, together with our quality reviews, provides sufficient information to enable it to monitor the effectiveness of the penalty regime. Due to privacy issues the Tax Office does not report externally at the taxpayer level, or at the industry level in the large market.

Paragraph 4.39

It is not the function of the Tax Office reports on the amount of penalties imposed to ensure that technical decisions are being applied consistently and in accordance with existing guidelines.

The Tax Office specifically seeks to assess the extent to which penalty decisions, including the decisions on the remissions of penalties, are being applied consistently and in accordance with existing guidelines through the regular Technical Quality Review (TQR) process. The TQR process includes a specific separate sample of penalty cases. The outcomes of the report prepared on this process provide the Tax Office with an indication of how effective, or not, its penalty decision making has been.

Paragraph 4.41

The Tax Office agrees that it does not know the total amount of GIC imposed in relation to GST audit cases. This is a direct result of the legislative requirements in relation to the establishment of a Running Balance Account (RBA) whereby audit assessments are added to the taxpayer's RBA upon which GIC is automatically calculated and updated by reference to all debts on the RBA. It is not possible under this system to isolate GIC arising solely from GST assessments from GIC arising from other debts. It is possible to manually isolate and calculate an approximation of what the GIC may be arising from GST adjustments. This is not done as a matter of course because of the work which would be involved and the limited value which this process would provide.

Paragraph 4.43

The Tax Office believes that this section of the report creates an impression of a significant problem in relation to the imposition of penalties in relation to large market audits when in fact both the number of penalties imposed compared to the total number of audits with adjustments and the amount of penalties imposed compared to the total shortfall is extremely small.

The following table shows that the number of objections received in the GST large market is decreasing, not increasing and that compared to the total number of audits with adjustments the actual number of audits where penalties are imposed is not significant.

Imposition of penalties in relation to large market audits

*The 2005-06 year includes one case with penalties in dispute of $42 million.

The Tax Office recognises that the imposition of penalties can be a contentious matter with taxpayers and requires a level of subjective judgment on the part of auditors about taxpayer behaviours. It therefore continues to put considerable effort into ensuring shortfall penalties are imposed correctly including:

  • providing ongoing auditor training and feedback;
  • establishing a penalty and interest network to support and review penalty decisions;
  • requiring that penalty decisions are appropriately reviewed;
  • conducting a review of penalty only cases as part of the regular TQR;
  • conducting regular internal business line reviews of the imposition of penalties;
  • providing feedback to auditors where objections to penalties were disallowed in full or part.

Paragraphs 4.44 to 4.46

The Tax Office is of the opinion that the remission of penalties, in part or in full, at the appeal stage is not indicative that the original imposition was inappropriate. While we acknowledge that from time to time there will be instances where the Tax Office has got the decision wrong we do not see this as a 'systemic issue'.

The Tax Office agrees that penalties may be further remitted through the objection and appeal process. There may be a number of reasons for this, including where the taxpayer presents more evidence and/or information in relation to the application of the shortfall penalties. The fact that the objection and appeals process reverses some of the penalties imposed indicates the system of checks and balances is working effectively.

We would further observe that the statistics referred to in these paragraphs do not indicate the reasons why objection decisions were being allowed, either in full or in part, and there is no clear link made to the impact of the penalty decision.

Paragraph 4.47

Based on the statistics and other information provided in our response to paragraph 4.43 the Tax Office does not see how the Inspector-General can draw the inference from the total GST objection figures that 'they strongly suggest that there may be an issue with the manner in which penalties are being levied in large taxpayer GST audits'.

Paragraph 4.49

The Tax Office has in the light of the Inspector-General's feedback had three senior staff with extensive penalty experience review the fifteen 2006-07 penalty cases referred to in paragraph 4.48 and has come to a view that except in one case the penalty decisions correctly applied the law and current Tax Office practice statements on the application of the law. We disagree with the Inspector-General's findings.

Paragraph 4.50

In regard to the 'systemic' issue concerning taxpayers who have obtained external advice, it is the Tax Office's opinion that obtaining external advice is not of itself evidence that a taxpayer has taken reasonable care. Consideration must be given to whether the external advice provided was based on all relevant facts (as sometimes taxpayers do not provide all facts material to obtaining the correct decision), whether the external advice that was being relied upon was specific to the taxpayer's particular circumstances i.e. not generic in nature or not in line with their specific circumstances and in particular, did the taxpayer act in accordance with the advice. This view is supported by case law (please refer to Leary v FCT (80 ATC 4438) and McCutcheon & Anor v FC of T (2006 ATC 2280). In addition, the concept of a reasonably arguable position under Division 284B of Schedule 1 to the TAA only applies to income tax shortfalls. It does not apply to indirect taxes, such as GST.

In consideration of whether an entity has exercised reasonable care, generally no one factor, taken in isolation, will be sufficient to determine reasonable care or the lack thereof, but rather all circumstances need to be considered and it is a question of degree as to the relevance of a particular factor (paragraph 49 of PSLA 2006/2).

In determining whether or not an entity has exercised reasonable care, it is not relevant whether the person intended or tried to exercise reasonable care, but rather whether they have in fact done so. It is generally the case though, that where a person makes a genuine effort to ensure that statements made to the Commissioner are correct, it is likely that the facts will show that reasonable care was taken (paragraph 47 of PSLA 2006/2).

Paragraph 4.51

The Tax Office strongly disagrees that the two issues found represent systemic issues.

Paragraph 4.52

The Tax Office believes it is difficult to draw an inference from a single case that the issues identified in that case represent a systemic problem. In relation to the cases where there were debit and credit adjustments in different periods leading to an overall credit adjustment, the Tax Office notes that for all taxes, where a shortfall occurs for a nominated statutory period a shortfall penalty may apply, notwithstanding that the overall outcome over a number of statutory periods of the audit is a refund.

Paragraph 4.55

In the examples quoted in this paragraph, the Tax Office view is that the taxpayers did not make a voluntary disclosure.

What the taxpayers did was the very reverse, in that they sought through lodging a self amendment to their previous activity statements to claim an increase in their refunds. In doing so it is claimed they 'fully disclosed the basis for the additional refund claim' which appears to be the basis for the Inspector-General claiming that they made a 'voluntary disclosure'.

However, the Tax Office on reviewing their refund claims, found that the bases for the increase in refunds claimed were incorrect and therefore disallowed the claims and on the basis that they had made false and misleading statements, after considering the behaviour that led to them making such statements, imposed appropriate penalties.

A voluntary disclosure, in the Tax Office view, is when a taxpayer makes a statement to the Tax Office that they are required to pay more tax or receive a smaller refund than they have previously disclosed in their activity statement, prior to the discovery of this fact by the Tax Office.

Paragraph 4.57

The quote used by Inspector-General in regard to voluntary disclosures needs to be read in context of the whole section on voluntary disclosures outlined in page 58 of the 2006 Large business and tax compliance booklet. The Tax Office considers that read in context its policy in relation to voluntary disclosures is clearly articulated.

Paragraph 4.58

The Tax Office policy on voluntary disclosures is set out in our response to paragraph 3.24. This response clearly states that refund claims are not considered to be voluntary disclosures but rather are requests for credit amendment.

The Tax Office's policy on what constitutes a voluntary disclosure is clearly articulated at page 58 of the 2006 Large business and tax compliance booklet.

Paragraph 4.60

The Tax Office disagrees that TR94/6 does not make clear that 'self amendment' in this context is limited to debit amendments. The following is from paragraph 49 from TR 94/6 Income tax: tax shortfall penalties: voluntary disclosures:

... Accordingly, where the Commissioner, following a request from a taxpayer, amends an assessment to increase the tax payable by the taxpayer, ...

Paragraph 4.61

The Tax Office does not agree that there are systemic issues in relation to its policy on voluntary disclosures. Self amendments that relate to the full disclosure of a shortfall, and are not the subject of a current audit, will be treated as a voluntary disclosure in accordance with the policy and procedures set out in the 2006 Large Business and tax compliance booklet.

Paragraph 4.66

The Tax Office view is that this statement is factually incorrect. Paragraph 120 of the Practice Statement Law Administration (PSLA) 2006/2 Administration of shortfall penalty for false or misleading statement states:

120. The penalty on a shortfall amount for an accounting period will be reduced by at least 80 per cent under subsection 284-225(2) where an entity voluntarily tells the Commissioner about a shortfall amount before the earlier of:

  • the day the Commissioner tells the entity that a tax audit of their financial affairs for that accounting period is to be conducted, or
  • the day by which the Commissioner has publicly requested voluntary disclosure from entities about a transaction that applies to the financial affairs of that entity.

Paragraph 22 of TR94/6 outlines what constitutes the notification of an audit and also indicates that the use of the word 'audit' is not essential.

Information provided at page 52 of the 2006 Large Business and tax compliance booklet sets out when and how the large market taxpayers are to be notified of an audit. The Taxpayers' Charter booklet, If you're subject to enquiry or audit also has information about notification of an audit.

Paragraph 4.71

The two cases mentioned in paragraph 4.70 involved situations where the other tax periods' errors were not within the scope of the audit. The scope of the audit identifies the risk and the period under audit. Therefore, the other tax periods' disclosures have been correctly treated as voluntary.

Paragraph 4.73

The Tax Office disagrees that there are systemic issues in relation to its written policy on what constitutes a disclosure that is voluntary for GST audits.

The Tax Office view is that although TR 94/6 is an income tax ruling prepared prior to GST the original technical positions taken in the TR 94 series remain appropriate. The Tax Office also acknowledges that the sections dealing with disclosure within PS LA 2006/2 could be expanded upon.

Paragraph 4.74

In observance of the Taxpayers' Charter an auditor has the responsibility to inform the taxpayer that a penalty may apply.

It should be noted that a voluntary disclosure does not automatically mean that shortfall penalties will not apply. Paragraph 122 of the Practice Statement Law Administration (PSLA) 2006/2 Administration of shortfall penalty for false or misleading statement states:

122. Where voluntary disclosure is made before the earlier of the days described above, the base penalty amount in respect of the tax shortfall amount is

  • reduced by 80 per cent if the shortfall amount is $1,000 or more, or
  • reduced to nil where the shortfall amount is less than $1,000.

Therefore, until the correct shortfall amount has been determined shortfall penalties may apply.

Paragraph 4.75

The Tax Office is only aware of one occasion where this situation occurred.

The Tax Office considers that this one instance is not representative of the quality of the penalty process and the decisions made.

Paragraph 4.76

The Tax Office conducted an internal review of the shortfall penalty cases reviewed by IGOT and concluded that in all but one of the 27 cases reviewed the penalty imposed was in keeping with the law and existing Tax Office policy. In this one case, the review team concluded the behaviour was reasonable care rather than the lack of reasonable care concluded by the auditor.

During the 2006-07 year the National Technical Quality Review (TQR) results show that penalty decisions met corporate benchmarks. This is also supported by the results of the September 2007 TQR results.

The Tax Office rejects the Inspector-General view that the findings raise issues concerning the adequacy of training of large taxpayer GST auditors on the law and current Tax Office policy on penalties. Also as noted by the Inspector-General at paragraphs 4.85, 4.86 and 4.87 the Tax Office continues to put considerable effort into ensuring penalties are imposed correctly.

Paragraph 4.81

The Tax Office needs to consider all circumstances which led to a shortfall occurring and no one factor is sufficient to determine reasonable care, or lack thereof. Reliance on an external advice is not the sole determinant of the shortfall penalty base amount. All relevant factors must be considered in our penalty decision making process.

Paragraph 4.88

The Tax Office agrees that these figures are correct, but considers they are being quoted out of context. Although the decisions were found to be lacking in their reasoning (a capability issue that has been addressed) the outcome of the review was that in a number of cases a higher level of penalty would have been supported by the law, rather than finding that the penalties imposed were too high, which is the main thrust of the Inspector-General's findings in this section of his report.

Paragraph 4.89

Contrary to the comment attributed to tax officers in paragraph 4.89 that the internal review 'was prompted by concerns that the level of penalties charged to large taxpayers was too low' the review was conducted for the following reasons:

The recent SI&LAC prudential review and the Case Leadership call over process have highlighted that there may be some inconsistent approaches being taken in making decisions regarding penalty imposition and remission, application of law and interpretation of practice statements to the facts of the case and assessing behaviour. There is also some concern that there may be a community perception around the equitable application of penalties within segments and across markets. ('Analysis of a review of the application of penalty policy within GST LAC' report March 2007)

The Tax Office continually seeks to improve the taxpayer experience and reduce the cost of compliance and our action in initiating this internal review without prompting is a consequence of this commitment to continual improvement.

Paragraph 4.95

The Tax Office disagrees with this paragraph. If a taxpayer fails to produce relevant evidence at the audit stage and then provides it at the review stage the results of the audit and the review may well be different. This does not mean that the audit result based on the evidence on hand was incorrect.

The Tax Office has put in place procedures to ensure auditors are informed of any review outcome.

Paragraph 4.109

GIC is imposed at law on a shortfall amount. The scheme of the Act clearly intends for GIC to apply where individual taxpayers fail to report and pay correctly and on time. The Act does not take into consideration the treatment of another taxpayer when applying the GIC on the entity which made the mistake.

Paragraph 4.115

These figures only indicate the number of cases reviewed where GIC was remitted or partially remitted. The fact that there were different outcomes indicates that, consistent with our policy, the individual circumstances of taxpayers were considered.

Paragraph 4.121

The Tax Office disagrees with the view that Tax Office officers are not following the Tax Office administrative rule for remission of GIC in voluntary disclosure cases. The Inspector-General uses the fact that there have been a range of different outcomes in cases where it is claimed there was a voluntary disclosure. The Tax Office practice statement on remission of GIC envisages this on the basis that Tax Office officers should apply the policy taking into account the differing circumstances of each case. There is no intention that remission of GIC to the base rate be semi automatic.

Paragraph 4.122

The Tax Office disagrees that there is a need to review all voluntary disclosure cases where GIC has been charged at the full rate.

Paragraph 4.126

When making GIC remission decisions, auditors must take into account all relevant facts, a wash transaction being just one of the grounds which may apply. The circumstances of individual taxpayers vary greatly and as such it is not unusual that different reductions in GIC may occur.

Paragraph 4.132

Generally, the tax deductible GIC is remitted to base rate where the recipient was registered for GST and would have been entitled to claim a full ITC. Further, the Commissioner will consider remitting GIC in full where it is fair and reasonable or otherwise appropriate to do so. Given the form of the legislation enacted by Parliament and the obligations it imposes on suppliers, it requires the Commissioner to consider issues of integrity and equity, which will differ based on the facts and circumstances of each 'wash' transaction.

Paragraph 4.141

The Tax Office considers that its referral guidelines are detailed. However, the Tax Office does acknowledge that they are not readily available from the case management system and is currently undertaking a process to remedy this. Tax Office auditors have received training in GIC interest remission and have access to the referral guidelines.

The fact that these guidelines are currently not available in the case management system does not mean that they are not readily available to Tax Office auditors.

Paragraph 4.143

It is agreed that there is no requirement to calculate the GIC amount. However, it needs to be noted that the calculation of GIC is quite complicated and is also based on other debts which may be on the RBA, therefore the amount derived through the calculator is an estimate only.

Paragraph 4.144

The Tax Office considers that the current processes are adequate and notes that GIC decisions made within GST are subject to a high level of internal review. It is mandatory, within GST, that all GIC decisions are technically cleared by a member of the Penalty and Interest Network. This additional review step ensures the correct application of the guidelines and that remission has been considered in all relevant circumstances.

The Tax Office has developed a number of products and tools to assist staff when making GIC decisions and is currently undertaking a process to embed these into the case management system.

The Tax Office notes that like most changes, the requirement for GST auditors to consider GIC remissions as part of their audit case finalisation took some time to be fully implemented However, the Tax Office is committed to the ongoing development of staff capability in this regard and will be providing further training to ensure the correct application of GIC remission policy by our auditors. TQR results indicate a continuing improvement in the application of GIC remission policies by GST auditors.

Paragraph 4.148 and 4.149

The General Interest Charge (GIC) is a uniform rate of interest applied to known overdue tax debts, whether or not a taxpayer has acted knowingly to create the debt. GIC is imposed at law on a shortfall amount, regardless of whether a shortfall penalty is imposed.

The scheme of the Act is to apply GIC to individual taxpayers whose responsibility it is to correctly raise and to correctly claim ITCs when they are legally allowed to. The scheme clearly intends for GIC to be applied where individual taxpayers failed to correctly apply the law. The scheme of the Act does not take into consideration the treatment of another taxpayer when applying the GIC on the entity which made the mistake.

The Commissioner is currently considering his policy and practices in relation to revenue neutral and documentation issues and has released a draft practice statement for consultation.

Paragraph 4.152

The Tax Office's Quality Assurance processes have demonstrated that we are applying the guidelines. The most recent corporate wide capability TQR was conducted on a sample of cases finalised between February and July 2007. GST specific results from this TQR showed an 88 per cent pass rate.

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 (12 per cent Fail rating [3 cases]). Of the cases which failed, all had not been technically cleared as mandated by the procedures. The requirement for technical clearance has been re-emphasised with staff and approving officers.

Chapter 5

Paragraph 5.4

In the majority of cases, the Tax Office has provided details to the taxpayer of why their valuation was not considered to be compliant. In a small number of cases, the Tax Office agrees it could have provided more detail to the taxpayer of the basis that their valuation was found to be non compliant.

Paragraph 5.6

In most valuation cases where an AVO critique was obtained by the Tax Office it did not include an estimated valuation or valuation range because the purpose of the critique was to determine whether the methodology used in establishing the taxpayer's valuation was an appropriate one and not to come up with an alternative valuation using some other valuation method. In those cases where an estimated valuation or valuation range was included it was not communicated to the taxpayer because of concerns that such an estimate was not a proper valuation based on the use of a professional valuation method. As indicated by the Inspector-General where a full valuation was obtained from the Tax Office it was provided to the taxpayer. The Tax Office acknowledges that it could have been more transparent in these situations and provided the valuation estimates although indicating that they were not based on a detailed valuation.

Paragraph 5.8

The Tax Office view is that in these situations it is inappropriate to use the Commissioner's general administrative powers. However the use of his specific power to determine what valuations are acceptable may be capable of wider application than used to date. 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.

Paragraph 5.10

The issue of establishing complying valuations for use in the margin scheme has involved technical issues which have been difficult to resolve between the parties. It is therefore not unusual that some of these cases will be taken to the litigation stage by the taxpayer. In these circumstances the Tax Office still strives to reduce the cost of compliance to the taxpayer and this may involve agreeing to a settlement. This is part of the overall objection and litigation process and not a deliberate strategy to force taxpayers into litigation to achieve a resolution of the issue.

Paragraph 5.18

Both public rulings and Tax Office IDs are documents which are identified as sources of the Tax Office view and facilitate consistent decision making by the Tax Office. The Tax Office considers that while Tax Office IDs are quicker and simpler to produce than public rulings, the Tax Office ID process is not a substitute for the more rigorous and consultative process of producing public rulings through the public rulings program. The Tax Office recognises that it needs to review how it communicates its decisions to taxpayers to achieve 'through-the-chain certainty, better compliance and lower costs' the Inspector-General suggests.

Paragraph 5.24

The Tax Office developed its current audit cycle time benchmarks based on the best information it had at the time. Its new case management system will now provide consistent GST measurement of the cycle time of all audit cases to enable us to continually review and revise our cycle time benchmarks for the different audits we undertake. The Tax Office has been unable to establish if other tax jurisdictions use similar cycle time benchmarks to the Tax Office to enable any meaningful comparison to be made. The Tax Office will work with taxpayers and their representatives to review and if appropriate revise its audit cycle times.

Paragraph 5.26

As outlined in our response to paragraph 5.24 the Tax Office does have benchmarks for all GST audit products and considers that these benchmarks are both appropriate and meaningful. To date we have not been able to identify the benchmarks used by similar tax revenue authorities but will follow this up.

Paragraph 5.29

The Tax Office agrees that in prior years some audits may have lacked an audit plan. However, with the introduction of the 2006 Large Business and tax compliance booklet, new processes and procedures have been put in place to ensure that audit plans are drafted and discussed with the taxpayer at the initial audit interview. These issues are reviewed by the GST Case Leadership area in their call overs of audit cases in LAC.

Paragraph 5.38

The Tax Office considers that the Case Leadership team within GST has provided guidance on the management of audit cases and as a direct result the number of aged cases on hand has reduced significantly. It is acknowledged that a number of aged cases remain on hand primarily in relation to complex technical issues. This does not indicate that the Case Leadership team have been ineffective in reducing aged cases.

Paragraph 5.39

For the reasons already discussed the Tax Office does not agree with this conclusion. We have not been able to establish the basis on which other tax authorities establish their audit cycle times, if indeed they have established them, although we would be interested in exploring this issue with them. The comments about planning and governance relate largely to the past rather than the present and were addressed by the Tax Office prior to this review. The Tax Office continues to focus on ensuring cases are finalised within appropriate timeframes and has established the Case Leadership team with a key role in this area.

Paragraph 5.55

Refer to our response at Paragraph 5.58.

Paragraph 5.56

The Tax Office disagrees that applying the law as set out in the GST legislation in relation to margin schemes is taking an 'unfair stance'.

Paragraph 5.58

Whilst it is accepted that the finance industry is complex in nature and in the vast variety of transactions that may be encountered, the Tax Office disagrees that auditors in financial supplies teams do not have an understanding of their industry. For a number of years the Tax Office has utilised the relevant technical experts when auditing particular issues and most financial industry audits to date have been on technical issues as opposed to system type audits.

The Tax Office is in the process of finalising panels of internal and external experts to assist with the progression of technical issues.

In the last 18 months GST has trained 320 auditors in Financial Supplies (FS) in the SME and Large markets. The FS training covers:

What are financial supplies; What are not financial supplies; Financial Supply Providers/Facilitators; The financial acquisitions threshold; Financial acquisitions; Reduced Input Tax Credits; Div 84 — Reverse Charging; Apportionment which also covers various methodologies and fair and reasonable; Div 132 — Supplies of things acquired etc. without full ITCs; Div129 — Change in extent of creditable purpose; Securitisation; Factoring; Initial Public Offerings (IPOs); Using Computer Assisted Verification (CAV) techniques in a FS audit; and an extensive case study that brings it all together.

Paragraph 5.59

The Tax Office does not consider that a retrospective claim is indicative of non-compliance or bad practice.

The Tax Office initially queried the appropriateness of retrospective changes to apportionment methodologies when first raised by taxpayers. The Tax Office undertook a thorough technical review, taking into account taxpayer contentions and formally concluded that a revised apportionment method may be retrospectively applied, subject to the normal 4 year limitation on amendment of returns.

Requests for amendments have been received and have either been processed or are being processed.

The Tax Office will, where appropriate, review any claim arising from a retrospective change in methodology. Again, the Tax Office does not imply that making a retrospective claim is indicative of non-compliance or bad practice.

Paragraph 5.64

GST auditors are trained to identify risks that impact on revenue, integrity of the system and community confidence. The relative importance of each of these factors will vary depending on the circumstances of each client. The decision to audit a particular client before others will depend on the overall risk assessment for each client. For example, a significant RCTI failure at a large client which transacts with many suppliers may outweigh the risk posed by a potential small sticky tax error of another client.

The training and processes required to conduct an audit are the same for both sticky and non sticky issues. For example, the technical acumen required to determine the character of a supply is the same for a supply that is sticky (such as a retail supply) as it is for non sticky (such as business to business supply).