2.1 The terms of reference for this review have required the Inspector-General to consider whether the Tax Office's application of penalties and interest to businesses during active compliance activities is consistent. In doing so, the Inspector-General has focused on the consistency in the nature and extent of penalties applied and the consistency of the Tax Office's approach in that application.
2.2 The Tax Office administers a number of administrative penalties and charges, the most relevant arising from audit and other active compliance activity being tax shortfall penalties and the general interest charge. The Tax Office states in its annual reports that, during 2002-03, it raised a total of approximately $6.138 billion as a result of its active compliance programme, composed of $4.387 billion in tax and $1.75 billion in penalties and interest. During 2003-04, it raised approximately $6.368 billion as a result of its active compliance programme, composed of $4.902 billion in tax and $1.466 billion in penalties and interest.
2.3 Consistency of application of penalties is implicit in achieving fairness, equity and effectiveness in the administration of the penalty regime.2 The importance of consistency in the imposition of interest is equally relevant in the administration of the interest regime. Consistency, however, has many facets. It includes consistency between taxpayers in similar circumstances, consistency of approach over time and the consistent consideration of a taxpayer's individual circumstances.
2.4 In the Inspector-General's view the consistent and equitable imposition of penalties and interest arising from active compliance activities is promoted by:
- having a corporate approach to the administration of the penalty and interest regimes, including a uniform set of work practices and support tools for staff
- having in place corporate management information systems
- providing guidance to taxpayers and their advisers on the application and remission of penalties and interest, and
- having in place quality assurance and staff-skilling processes.
2.5 Information provided by the Tax Office shows some variation in the average rate of penalties between business lines, market segments and the different types of tax. However, this is not unexpected and could be due to a number of different factors. These include the different focus of each business line and market segment, the nature of the tax shortfall, type of taxpayer and level of taxpayer compliance within each business line and market segment.
2.6 It is important, however, that the Tax Office be able to differentiate between variations in the average rate of penalties caused by such factors, and variations caused by the approach adopted by each business line in administering penalties.
2.7 In comparing individual cases, there are difficulties in determining consistency in the application of penalties and interest. This is because the application and remission of penalties and interest involve a consideration of the taxpayer's individual facts and circumstances and an assessment of their culpability. The Tax Office has in place a framework of rulings and practice statements to provide guidance to staff in the application and remission of penalties and interest. A tax officer is required to exercise judgment in how the case law, rulings and practice statements apply in particular circumstances. It is not the role of the Inspector-General to stand in the shoes of the Commissioner of Taxation in exercising these judgments.
2.8 Currently, the Tax Office does not have the corporate management information systems to examine whether there is consistency in the nature and extent of penalties and interest applied at a broader level. One example of this broader level requirement is the application and remission of penalties and interest for similar groups of taxpayers across business lines, for example, those involved in aggressive tax planning. Another example of this broader level requirement is the approach of different business lines in increasing or decreasing the base penalty amount according to whether the taxpayer has prevented or obstructed the Tax Office in investigating the shortfall, has previously been penalised for a shortfall, or has made a voluntary disclosure of the shortfall.
2.9 Improvements in the Tax Office's ability to examine the administration of the penalty and interest regimes at this broader level would provide greater assurances to Tax Office management and the community that the Tax Office's approach in the application of penalties and interest is equitable and consistent.
2.10 In February 2000 the Australian National Audit Office (ANAO) made a number of recommendations to improve the administration of the penalty regime, all of which were agreed to by the Tax Office. Although these recommendations were in relation to the Tax Office's administration of the previous penalty regime, they are equally relevant to the current uniform administrative penalty regime, which came into effect on 1 July 2000.
2.11 The Tax Office indicated in the ANAO report that because of the high demand on system changes during the period of tax reform, it would stagger the implementation of any changes to penalties over a period of up to two years to fit into its systems development schedule.
2.12 To date, the Tax Office has yet to implement fully all of the ANAO recommendations. The Tax Office has stated that it deferred implementing a number of recommendations as there were fewer instances where penalties were imposed given the concessions in relation to the application of penalties as part of the new tax system.3 The Tax Office has advised that with the penalty concessions no longer generally applicable it is now better placed to implement the outstanding ANAO recommendations.4
2.13 While some progress has been made by the Tax Office in implementing the ANAO recommendations, such as the establishment of a technical quality review process and a Penalty Policy and Practice Committee, the Inspector-General notes that further work needs to be done in addressing the findings of the ANAO report and improving the Tax Office's penalty administration. This was evidenced during the Inspector-General's review, with a number of key findings identified by the ANAO remaining of concern to taxpayers and their advisers.
2.14 During the course of the Inspector-General's review, the Tax Office informed the Inspector-General that the active compliance area has initiated its own internal review into its administration of the penalties regime. The Tax Office also provided the Inspector-General with the review team's draft report. The Inspector-General commends the Tax Office for its initiative in seeking to improve its administration of the penalty system.
2.15 The internal review is examining the extent to which the Tax Office has a system that enables the equitable application of penalties across all markets and active compliance activities in accordance with Compliance Model and Taxpayers' Charter principles, and adheres to legislation, rulings and practice statements.
2.16 The Tax Office review team's draft report looks at a number of features of the penalty system, including:
- how the Tax Office is influencing taxpayer behaviour through the penalty system
- the level of understanding of the penalty system by taxpayers
- the quality assurance processes undertaken by the Tax Office to examine penalty decisions
- the level of skilling of staff, and
- the systems, support and infrastructure in place to help the Tax Office deliver quality outcomes.
2.17 The Tax Office review team's draft report examines a number of issues raised by the ANAO report, suggesting that further work needs to be done in addressing the ANAO findings and improving the administration of the penalty regime. The draft report also outlines a number of findings and recommendations, however, it has yet to be finalised for consideration by Tax Office senior management.
2.18 The Tax Office's internal review is examining the administration of penalties with a view to addressing issues similar to the key features identified by the Inspector-General as important in promoting the consistent and equitable imposition of penalties and interest. The Inspector-General is of the view that it would be inappropriate to pre-empt the draft report which is yet to be considered by Tax Office senior management.
2.19 Accordingly, the Inspector-General will defer more substantive consideration of this topic until after the Tax Office's implementation of recommendations from its internal review and this report.
2.20 As such, the Inspector-General has not examined case files to test directly the potential systemic issues expressed in the submissions received in the course of this review. However, these potential systemic issues will be included in any further substantive consideration of this topic. In addition, a number of the suggestions made by stakeholders have been included as suggested improvements for the Tax Office to consider as part of the current internal review.
2.21 The Inspector-General has examined selected case files in the course of examining the Tax Office's policies and procedures in the application and remission of penalties and interest. Cases selected were not examined on the basis of whether the decision was correct or fair but rather from the perspective of procedural conformity and consistency. Given the Tax Office's current internal review, a more substantive examination of case files has not been undertaken at this point in time. Any observations resulting from the limited case file examination undertaken are not necessarily indicative of a systemic problem. However, these observations will be examined in greater detail in any further substantive consideration of this topic following the Tax Office's implementation of the recommendations from its internal review and this report.
2.22 Enquiries and observations by the Inspector-General also reveal a lack of uniform processes and procedures between business lines in the administration of the penalty and interest regimes.
2.23 In particular, while the Tax Office has corporate policy documents, each business line has developed line-specific processes, procedures, management information systems and guidance to staff. While it is expected that each business line will tailor its arrangements to match its client group, it is also expected that there will be a uniform set of processes, procedures and guidance to staff. This is particularly important in ensuring that the uniform administrative penalty regime is administered in a manner that ensures that a common penalty is applied where a taxpayer fails to satisfy the same type of obligation irrespective of the internal Tax Office structures.
2.24 In response to the ANAO's recommendation to consider options for providing information in plain English to inform taxpayers better about the penalty regime, the Tax Office states that it has published several practice statements that provide guidance to staff and taxpayers. Submissions to the Inspector-General, however, suggest that there is room for improvement in information provided to taxpayers and their advisers.
2.25 Given that the Tax Office is currently examining its administration of the penalty regime, the Inspector-General makes the following key recommendations:
- The Tax Office promptly acts to ensure that the agreed ANAO recommendations are fully implemented and addresses the findings identified in the ANAO report.
- The Tax Office develops a uniform set of processes, procedures, corporate management information systems and guidance to staff for cross-business line application.
- The Tax Office includes an examination of the administration of the tax shortfall interest regime from the same perspective as its internal review into the penalty regime.
- The Tax Office considers, as part of its internal review, suggested improvements to the administration of the penalty and interest regimes as set out in Chapter 4.
2 Australian National Audit Office, Report No. 31 of 1999-2000, Administration of Tax Penalties, p. 31.
3 These penalty concessions are outlined in Practice Statements PS LA 2000/9 and PS LA 2002/8.
4 Practice Statement PS LA 2004/5 outlines the Tax Office's position on the remission of penalties following the transition period to the new tax system.