4.1 Consistency of application of penalties is implicit in achieving fairness, equity and effectiveness in the administration of the penalty regime.24 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.
4.2 The administration of penalties and interest represents a double-edged sword for both the Tax Office and the community. Taxpayers want greater consistency in the application and remission of penalties and interest while expecting that tax officers exercise appropriate judgment and flexibility to respond to individual facts and circumstances.
4.3 In the Inspector-General's view the consistent and equitable imposition of penalties and interest is promoted by:
- having a corporate approach to the administration of the penalty and interest regimes, including providing 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
- having in place quality assurance and staff-skilling processes.
4.4 This chapter examines each of these key features in the Tax Office's administration of the penalty and interest regimes and discusses concerns raised in submissions from taxpayers, tax practitioners and tax practitioner associations.
Uniform corporate approach in administration of penalty and interest regimes
Management of penalty and interest regimes
4.5 The Tax Office has a Penalty, Policy and Practice Committee, which has the role of developing Tax Office-wide penalty policy. The work practices are the responsibility of each business line.
4.6 The Tax Office also has a number of systems and support mechanisms designed to assist in managing the administration of the penalty regime. Some of the systems and support, like guidance to staff in the form of rulings and the Technical Decision Making System, apply across the Tax Office. Other systems and support, such as the guidance notes to staff and the case management systems designed to record and report penalty and interest information, are developed at a business line level.
4.7 However, there is no overarching management of the systems and support mechanisms for penalties and interest from a Tax Office-wide perspective. While it is expected that each business line will tailor its arrangements to match its client group, it is also expected that there would be a uniform set of processes, procedures, management information systems and guidance to staff.
4.8 The Tax Office review team has identified, as a potential issue, the Tax Office's current approach in administering the penalty regime across business lines and segments.
4.9 The Tax Office advises that currently the Active Compliance Steering Committee and ATOField, a Tax Office website designed to enable Tax Office staff to achieve best practice in their field work, are a means of ensuring consistency amongst business lines. The Active Compliance Steering Committee has the role of reviewing and driving corporate initiatives and capabilities. The Tax Office has also advised that as part of the Change Program work is in progress to develop a single case management system.
4.10 Broad concerns have also been raised by taxpayers and tax practitioner associations about the penalty ramifications from Tax Office compliance activities. A taxpayer may be selected for a number of compliance activities such as a client risk review, specific issues review or audit. Submissions have suggested that different penalty outcomes arise depending on the risk strategy and active compliance activity adopted by the Tax Office. This, they argue, could lead to an inconsistent application of penalties.
4.11 For example, if a taxpayer is selected for a client risk review and makes a voluntary disclosure in the course of that review, the penalty that would otherwise be imposed for a shortfall amount will be reduced by 80 per cent.25 If the same taxpayer is selected for an audit, then a voluntary disclosure made in the course of that audit will not attract the same penalty concessions. Taxpayers and their advisers have also expressed some uncertainty as to whether a particular compliance activity is an audit or review, and the different expectations and consequences between these two types of compliance activities.
4.12 Submissions to the Inspector-General suggest that the Tax Office should put in place protocols for advising taxpayers about whether a particular compliance activity is an audit, and if so, when the audit commences. Submissions also suggest that irrespective of whether the Tax Office initiates a client risk review or an audit, taxpayers should be provided with a reasonable period to make voluntary disclosures which attract the same penalty concessions. This would prevent the different types of active compliance review activity having different penalty ramifications for taxpayers.
4.13 Given the Tax Office's internal review into its administration of the penalty regime, the Inspector-General has not examined case files to test directly the concerns expressed in the submissions. However, the issues raised in these submissions have also been identified by the Tax Office. In the course of the review the Inspector-General was provided with an internal Tax Office document prepared by the ATPF Working Group on Audit Activities which sought to provide some protocols concerning the Tax Office practices for notifying the commencement of a compliance activity. The paper also stated that this was an important issue for a number of reasons, most obviously the application of the penalty concessions for tax shortfalls relating to voluntary disclosures.
4.14 Practice Statement PS LA 2004/5 does state that the Commissioner has the discretion to treat a disclosure made after an audit commences as having been made before the taxpayer is informed of the commencement of the audit. It states that this discretion will be exercised where a taxpayer, after being advised of a compliance activity, makes a voluntary disclosure before the formal date of commencement of the audit. The effect of this discretion is to reduce the penalty by 80 per cent.
4.15 Broad concerns have been raised with the Inspector-General regarding the Tax Office's procedures in imposing penalties arising from an audit. A number of submissions expressed some uncertainty over when in the audit process the Tax Office considers the application of penalties.
4.16 Specifically, one submission from an accounting firm suggested that the Tax Office's procedures should require case officers to resolve substantive tax issues in negotiations before they commence discussions of penalties. The submission noted that:
Shortfall penalties are generally imposed as a matter of course upon issue of an amended assessment despite the fact that the Commissioner is technically not entitled to shortfall penalties until such time the tax shortfall is determined. A tax shortfall should not be considered as being 'determined' if the taxpayer genuinely disputes it. Indeed, the Commissioner's Settlement Guidelines at paragraph 5.1.1 state that primary tax should be agreed upon prior to discussion of penalties and interest. Therefore, the Commissioner should not be permitted to impose shortfall penalties until such time the substantive issue (that is, the issue concerning the tax shortfall) is resolved.
4.17 In response to this submission, the Tax Office states:
The intention of the Code is to indicate that global settlements are only to be entered into in exceptional cases. That is, if the settlement involves more than one issue, regard must be had to the legal and practical merits of each issue. Negotiations around a single amount in full settlement of the tax, penalties and interest attributable to all unrelated issues under review (sometimes referred to as a 'global' settlement) are only to be entered into in exceptional cases (and must be approved by senior officers).
The Code deals with the process for settling substantive disputes — it does not imply that, whenever an amended assessment is issued, the Commissioner must reach agreement on the primary tax before imposing penalties and interest. Where the Commissioner makes a bona fide assessment of a tax shortfall, he is also entitled to make an assessment of the applicable shortfall penalty, notwithstanding that the taxpayer may have rights of objection. Similarly, tax shortfall interest attaches by law upon the issue of the amended assessment. While the Commissioner may exercise his discretion to remit interest at that time, or at any later time, there is nothing in the scheme of the law that suggests that the imposition of shortfall interest is to be delayed until all of a taxpayer's rights of objection or appeal are exhausted.
4.18 Paragraph 5.1.1 of the Tax Office's Code of Settlement states that:
…wherever possible agreement should be reached in respect of the substantive issues before officers consider penalties and interest.
4.19 Paragraph 5.1.5 of the Code of Settlement provides that there may be exceptional circumstances, such as global settlements, where penalty and interest could be considered as part of the settlement process.
Tax Office audit procedures
4.20 Business lines within the Tax Office have developed procedures or 'process maps', which provide a broad 'best practice' approach to staff conducting a client risk review or an audit. These set out step by step what case officers should consider as part of a client risk review or an audit. Appendix 6 provides information on the Tax Office process maps relevant to the application of penalties as part of an audit.
4.21 A review of selected audit case files by the Inspector-General did indicate some divergence from the audit procedures. This included some variation in the content and quality of the information contained in the final audit report and penalty submissions regarding the imposition and remission of penalties and interest.
4.22 The Inspector-General also found some variation in the content and detail between the business lines' audit process maps. In particular, much of the detail included in the large business audit process map was absent from the small business audit process maps. The Inspector-General considers that the large business audit process map provides greater guidance to staff for each step of an audit.
4.23 The small business area has a focus on the higher turnover end of the small to medium enterprise market. The Inspector-General is of the view that the Tax Office should examine whether relevant content and detail in the large business audit map could be adopted by the small business area for the higher turnover end of the small to medium enterprise market in its audit process maps, in particular for the audit finalisation steps.
4.24 The Tax Office advises that it has been moving towards this and has brought together a number of people with large case experience to develop an audit process map that takes into account the experience in the large market and is tailored specifically to the top end of the small to medium enterprise market.
Consideration of interest remission
4.25 It is important that all business lines adopt a common approach to whether tax shortfall interest remission is considered where adjustments are made arising from active compliance activities.
4.26 An examination of selected audit case files revealed some variation in the interest remission processes for the pre-amended assessment period. In some instances, case officers considered the remission of interest for Tax Office delay as part of the audit report or penalty submission. In some of the cases where the case officer did consider interest remission this was only after there had been a specific request by the taxpayer.
4.27 In other instances there was no evidence of interest remission for Tax Office delay being considered as part of the audit. This could be despite lengthy delays in finalising the audit, caused partly by the Tax Office in concluding its views as outlined in an audit report or position paper. In one case reviewed there was no consideration of interest remission after the taxpayer had made a voluntary disclosure of a tax shortfall to the Tax Office during an audit, and the amended assessments were not issued until seven months later.
4.28 The Tax Office advises that following the Inspector-General's review into the remission of the general interest charge for groups of taxpayers in dispute with the Tax Office, the Tax Office is reviewing its guidelines on the remission of the general interest charge, in particular where the general interest charge relates to the pre-amended assessment period.
4.29 The Tax Office advises that these new guidelines will provide more detailed guidance around the issue of delay, covering not just situations where an amended assessment is delayed once the Commissioner has all information necessary to make an amended assessment (a situation already dealt with in Chapter 93 of the ATO receivables policy), but also situations where delay arises during the conduct of an audit, or where the complexity of the issues under consideration leads to delay. The Tax Office anticipates that similar considerations will apply to the remission of the shortfall interest charge.
4.30 Part of this problem relates to the inconsistent approach between business lines in considering interest remission arising during the pre-amended assessment period. Some business lines are of the view that the consideration of interest remission for Tax Office delay should be the responsibility of the business line conducting the audit. Other business lines, however, have indicated that interest remission is the responsibility of the Operations line, which is responsible for administering the Tax Office's receivables policy.
4.31 The internal Tax Office guidance notes and penalty checklists provided to staff are also not clear on whether and when tax shortfall interest remission is to be considered where adjustments are made arising from active compliance activities. Some refer to interest remission as part of the penalty consideration while other guidance notes state that under no circumstances should the case officer undertake to remit interest in part or in full as the Operations line should consider all requests for remission. Other guidance notes make no reference to interest remission.
Support to staff
Current support tools
4.32 The development of work procedures and guidance notes is currently the responsibility of each business line. These work procedures and guidance notes are additional to the rulings, practice statements and interpretive decisions made available to the public. The Tax Office advises that currently the Active Compliance Steering Committee and ATOField, a Tax Office website designed to enable Tax Office staff to achieve best practice in their field work, play a role in ensuring consistency amongst business lines.
4.33 The Tax Office intranet site indicates a number of different business line procedures providing guidance to staff on the application and remission of penalties and interest. These guidance notes include the:
- GST General Compliance procedures for issuing an amended tax assessment and imposing tax shortfall penalties
- GST procedures for imposing administrative penalties for false or misleading statements
- procedures to impose administrative penalties — Small Business
- penalties relating to statements — step-by-step guide
4.34 A number of business lines have also developed their own 'Penalty Checklists' to provide guidance to staff. These include:
- LB&I Penalties Checklist — Shortfall and Scheme Penalties
- SB Field — Penalty Submission Checklist.
4.35 The Tax Office has developed a number of tax and penalty calculators to assist staff to calculate the amount of penalty to be imposed. The Tax Office has also introduced a repository for all its technical decisions — the Technical Decision-Making System (TDMS). Staff may access other penalty decisions on similar issues from TDMS when considering the application and remission of penalties. Case officers, however, do not record interest remission decisions onto TDMS.
4.36 The Tax Office conducts a biannual Technical Quality Review (TQR) process that seeks to assess the Tax Office's performance in providing advice that is accurate, consistent, relevant and clearly explained.26 Following the TQR process in August 2004, some concerns were expressed regarding the support tools available to staff.27 The report outlining the results of this TQR process (the TQR report) mentioned a number of reasons for penalty decisions not obtaining a 'Pass' rating. These reasons included:
- Tax Office staff within particular business lines not adequately explaining the reasons for the imposition of the penalty
- inadequate or non-existent documentation of client behaviour
- the lack of penalty consideration despite a tax shortfall
- the failure to consider correctly a voluntary disclosure
- the failure to refer to the relevant Practice Statement when considering a remission
- lack of guidance amongst staff regarding the application of the 'reasonable care' principle
- standard letters not being customised to individual taxpayer circumstances.
4.37 One business line indicated that the lack of consolidated instructions to staff on the application of penalties is a contributing factor to non-conformance and inaccuracy.
4.38 The TQR report suggested that there is a need to ensure that the support tools available to staff, such as checklists, templates and guidance notes, are consistent across business lines to minimise any inconsistent application of penalties.
4.39 The external representative of the TQR panel for Large Business & International identified the consistent application of penalties as a major issue. In order to avoid inconsistent treatment across the different business lines, it was suggested that the Tax Office review its practice statements and produce one consolidated document. The external representative suggested that this document also contain examples to guide case officers.
4.40 The Tax Office states that issues identified in the TQR report and suggested by external representatives should be considered in the context of the overall favourable assessment of the TQR process and the improved quality of penalty decision-making.28
4.41 The Tax Office's internal review also suggested that there may be some difficulty in applying the principles expressed across the multitude of Tax Office strategic documents such as the Taxpayers' Charter, Compliance Model, rulings, practice statements and guidance notes on the application and remission of penalties and interest. The internal review suggests that this may lead to different approaches in the application and remission of penalties and interest across the Tax Office.
4.42 The ANAO report identified the need for the Tax Office to develop better decision support tools. The ANAO recommended that the Tax Office investigate the cost effectiveness of providing on-line, decision support tools to staff to assist with consistent and efficient application of penalties. It stated that:
…it considers that better consistency in application of penalties within and between BSLs could be achieved by providing a cost-effective, on-line, rule based information system to support penalty administration. Such a system would respond to information entered, provide options for decisions concerning penalty remission and record statistical information concerning penalty application, including the reasons why remissions are granted. It should be designed to ensure that the ATO maintained the capacity to address exceptional and individual circumstances.
The ANAO considers that a system of this kind could provide multiple benefits for staff administering penalties, particularly Tax Shortfall Penalty. It could assist them to achieve more efficient and consistent decision-making while capturing data for ATO statistical and quality assurance purposes.29
4.43 To date, the Tax Office has deferred the implementation of this recommendation. The Tax Office states that this has been due to the penalty concessions granted in Practice Statements PS LA 2000/9 and PS LA 2002/8, resulting in fewer instances of penalty application during the tax reform period.
4.44 The Tax Office advised that it is currently in the planning stages of implementing a penalty website. This site would be a single electronic access point for staff and taxpayers on material such as legislation, explanatory memorandums, rulings, practice statements and other relevant policy documents. The Tax Office also indicated that business lines are currently developing their own support tools.
Taxpayer compliance history
4.45 There is a need for the Tax Office to provide greater guidance and support to staff in ascertaining a taxpayer's circumstances and compliance history.
4.46 Some taxpayers and tax agents believe that the Tax Office imposes penalties without making any allowance for a taxpayer's prior good compliance record.
4.47 The Taxpayers' Charter states that the Tax Office will treat each taxpayer as an individual and recognise and take into account individual circumstances where it is relevant to the decision. Relevant circumstances include a taxpayer's prior compliance history and their level of knowledge and understanding of the tax laws. The Taxpayers' Charter also provides that where a taxpayer makes a mistake in complying with their obligations, they will be given an opportunity to explain their circumstances and that the Tax Office will take any explanation into account. Such considerations are crucial in determining the imposition of penalties arising from active compliance activities.
4.48 Business lines have developed penalty checklists to assist staff in making a decision regarding the imposition or remission of penalties and interest. However, these checklists do not provide adequate guidance to staff on how they are to consider a taxpayer's compliance history in determining remission of penalties.
4.49 For example, the Large Business & International penalties checklist directs the case officer to the Taxpayers' Charter, Compliance Model and numerous practice statements. There is no guidance to staff, once they have referred to those documents, on how they are to determine a taxpayer's overall level of compliance.
4.50 The Small Business Field penalties checklist makes no specific reference to the Taxpayers' Charter, Compliance Model or any practice statements. Nor does it provide more specific guidance on how a case officer should determine a taxpayer's overall level of compliance.
4.51 The Tax Office review team's paper also identified the consistency in the assessment of taxpayer behaviour as an area of concern.
Corporate information systems
Reporting and analysis of penalty and interest information
4.52 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.
4.53 Each business line has its own management information system, leading to variations between business lines in the type of penalty and interest information that is captured and recorded. The effect of these variations has been that the current management information systems do not adequately support the analysis of this penalty and interest information.
4.54 This has led to the Tax Office encountering difficulties in analysing penalty and interest information from a Tax Office-wide perspective so as to allow it to examine the application of penalties and interest between business lines, market segments and revenue products. For example, the Tax Office is not able to provide information readily on the remission of tax shortfall penalties and interest across the Tax Office. This is further demonstrated by the fact that the recording of cases within the Tax Office does not allow for the clear identification of voluntary disclosures across all business lines. This has also meant that the Tax Office has not been able to measure how effective its compliance and education strategies have been in encouraging voluntary disclosures and greater cooperation on the part of taxpayers.
4.55 There is a need for the Tax Office to develop corporate management information systems that support the broader examination of the consistency in the nature and extent of penalties applied. The development of such systems would improve the Tax Office's ability to analyse penalty and interest information from a Tax Office-wide perspective. It will also provide another means for the Tax Office to identify and address inconsistent approaches in the application of penalties and interest between business lines. The Tax Office advises that as part of the Change Program work is in progress to develop a single case management system, known as 'Siebel'.
4.56 Improvements in the Tax Office's ability to examine the administration of the penalty and interest regimes at this broader level would also 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.
4.57 The ability of the current Tax Office systems to support the recording, reporting and analysis of penalty and interest data has also been raised as an issue for consideration in the Tax Office's internal review.
Taxpayer compliance history
4.58 Submissions to the Inspector-General have expressed some disquiet regarding the Tax Office's ability to consider a taxpayer's circumstances and compliance history properly.
4.59 The ANAO has previously noted that although some Tax Office field team members attempt to ascertain the taxpayer's circumstances and compliance history in applying a tax shortfall penalty, most do not.30
4.60 The ANAO concluded that:
…there was a lack of an appropriate level of access to ATO data systems for staff administering penalties to determine a taxpayer's profile, compliance history and level of compliance with the tax law in order to properly implement the principles of the Taxpayers' Charter and the Compliance Model. There is a risk that in the absence of complete information concerning a taxpayer's compliance history, ATO officers will form different opinions about the compliance status of a taxpayer resulting in the ATO applying penalties in an inconsistent manner. 31
4.61 In response to the ANAO findings the Tax Office recognised that this was a problem area, noting that its systems were designed for a transactional business, not for managing risk and client relationships.32
4.62 The Tax Office advises that it has made a number of improvements since the ANAO report. This includes the introduction of CVoC (Compliance View of Client), a computer application that allows a case officer to access data across Tax Office systems, and the current development of a single case management system.
4.63 The Inspector General's review has found that there is still a need for the Tax Office to improve its management information systems so as to better support Tax Office staff in ascertaining a taxpayer's profile and compliance history. This is particularly important in providing greater assurances to the community that the Tax Office's approach in imposing penalties is consistent with the Taxpayers' Charter.
4.64 The Tax Office review team's paper also identified the consistency in the assessment of taxpayer behaviour as an area of concern.
The processing and issuing of amended assessments, penalty and GIC notices
4.65 A submission from a tax practitioner association representing the views of a broad range of tax advisers expressed some concern with the delays in issuing amended assessments arising from an audit and in processing GIC amounts. The submission cited two representative examples where the Tax Office has contributed to a delay in finalising a review. These examples involved Tax Office delay in reaching a concluded view on an issue and Tax Office delay in making a decision on whether to remit GIC.
4.66 The submission also stated that the association commonly hears of significant delays in issuing amended assessments arising from audits, resulting in significant GIC accumulating in addition to the primary tax. The submission expressed the view that case officers do not consistently remit GIC where there has been Tax Office delay.
4.67 The submission put forward two recommendations on how the Tax Office could improve its administration of the penalty and GIC regimes. It recommended that:
…the ATO implement appropriate procedures to overcome delays in the processing of GIC and penalty notices after an audit. The ATO should issue GIC and penalty amounts within a reasonable time and include adequate explanations of how the amounts were calculated. At the very least, the ATO should issue a letter to the relevant taxpayer to advise of any delays and the reasons for the delay.
4.68 The submission further recommends that:
…the ATO implement appropriate arrangements to overcome delays in issuing amended assessments. Amended assessments should be issued within a reasonable time frame. Where 'significant delays' have been caused by the ATO the Commissioner should exercise his discretion to remit some of the penalty.
4.69 In a similar vein, another submission from an accounting firm expressed some concern with the lack of an incentive for the Tax Office to complete audits and process amended assessments in a timely manner given that GIC continues to accrue on a daily basis.
4.70 The submission suggested if the Tax Office identifies a matter that is subject to potential adjustment, GIC should be calculated to the earlier of, six months after the commencement of the examination of an issue, and three months after the taxpayer and the Tax Office agree an adjustment is warranted or an amended assessment is issued. The submission noted that:
…often an audit is being conducted before the taxpayer is notified. Consequently, GIC is potentially accruing without the taxpayer's knowledge, leaving the taxpayer with no opportunity to mitigate this imposition. In cases where audits are not finalised and amended assessments are not issued until the 'last minute' (that is, until immediately prior to the expiration of the limitation period) GIC can accrue for four years (six in the case of Part IVA). Further, as GIC is imposed from the date on which the relevant amount would have been due and payable, GIC can accrue despite ATO inefficiencies. We have had experience whereby GIC has continued to accrue despite a particular request being passed between four different decision makers within the ATO. We are sure you will agree that taxpayers should not be liable for inaction or inefficiency on the part of the ATO.
4.71 Given the Tax Office's internal review into its administration of the penalties regime, the Inspector-General has not examined case files to test directly the concerns expressed in the submissions. However, these concerns will be included in any further substantive consideration of this topic following the Tax Office's implementation of recommendations from its internal review and this report. 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.
Communication with taxpayers and their advisers
Level of understanding of the penalty and interest regimes by taxpayers
4.72 Information on how the Tax Office will administer the penalty and interest regimes is made available to the public through a multitude of rulings, practice statements and administrative policies, a list of which is at Appendix 5.
4.73 A number of taxation rulings dealing with the administration of the penalty regime were released in January 1994, prior to the commencement of the current penalty regime on 1 July 2000.33
4.74 Since the release of those taxation rulings the Tax Office has also issued a number of other corporate documents, such as the Taxpayers' Charter, the Compliance Model and practice statements, to provide guidance to staff and taxpayers on the Tax Office's approach to penalties. The multitude of guidance documents has meant that taxpayers and their advisers have found it difficult to determine the relevancy of the taxation rulings and practice statements and how all the guidance documents interact and apply in individual circumstances.
4.75 The Inspector-General believes that with the introduction of the new administrative penalties regime and the Taxpayers' Charter, Compliance Model and practice statements, there is a need for the Tax Office to review the status of taxation rulings currently dealing with the penalty regime.
4.76 The importance of providing clear information about penalties and the consequences for failing to comply with the tax laws were discussed in the ANAO report. If taxpayers are not appropriately informed on how the penalty regime operates and what factors the Tax Office will consider in determining the application and remission of penalties and interest, then taxpayers may view the type and extent of penalty imposition as unfair or unjustified.
4.77 The ANAO recommended that the Tax Office consider options for providing information on its penalty regime in plain English and disseminate this through all current information channels. The Inspector-General supports the ANAO's recommendation to provide taxpayers and their advisers with information on the Tax Office's approach to penalties in plain English, and is encouraged that the Tax Office is considering this issue as part of its internal review.
4.78 While the Tax Office has released a number of practice statements on its approach to penalties, a broad message in submissions has been that there is a need to improve the communication between the Tax Office, taxpayers and their advisers on the Tax Office's approach to penalties and interest. The need to provide greater guidance to taxpayers and their advisers is reinforced by the recommendations of the Review of Aspects of Income Tax Self Assessment, which recommended changes to improve the transparency and fairness of penalty and interest charges.
Penalties relating to schemes
4.79 Submissions to the Inspector-General have noted concern with the Tax Office's approach in the application of penalties where an audit involves a group of taxpayers. It has been asserted that the Tax Office has taken a blanket approach with the application of penalties and does not provide taxpayers with an opportunity to make submissions prior to the Tax Office determining penalties.
4.80 Broadly, it has also been asserted that in dealing with such groups of taxpayers the Tax Office has failed to take into consideration their individual circumstances and compliance history when determining the application and remission of penalties.
4.81 A number of the submissions received from taxpayers regarding this concern involve the application of the penalties relating to schemes.34 These penalties arise where an anti-avoidance provision, such as Part IVA of the Income Tax Assessment Act 1936, is applied to cancel a benefit which a taxpayer has obtained as a result of participating in a scheme.
4.82 Unlike the application of penalties relating to false and misleading statements, an assessment of taxpayer culpability is not required to trigger the penalty provisions applicable to schemes.35 For most schemes, the base penalty amount is 50 per cent of the scheme shortfall amount or 25 per cent of the scheme shortfall amount if it is reasonably arguable that the adjustment provision does not apply. This base penalty amount may be increased or reduced 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.
4.83 The current Tax Office rulings and practice statements do not provide guidance to taxpayers and their advisers on the operation of the penalties relating to schemes. There is currently no information available on how these provisions operate and the circumstances that lead to an increase or decrease in the base penalty amount.
How the Tax Office is influencing taxpayer behaviour through the penalty system
4.84 The need for the Tax Office to study the relative effectiveness of penalties on taxpayer behaviour was previously recommended in the ANAO report in 2000. The ANAO indicated that such a study could assist the Tax Office in improving taxpayer compliance and in refining the Compliance Model.
4.85 The Tax Office has advised that with the introduction of the new penalty regime on 1 July 2000, it has not been appropriate to attempt to measure the effectiveness of the new penalty regime given that very few penalties were imposed during the transition period. This, according to the Tax Office, has been due to the phased introduction of the new penalty regime and the concessionary approach during this transition period in the application of penalties.
4.86 The Tax Office has stated that penalties that were imposed during the transition period related to taxpayers who had a previous history of non-compliance. As such, it was considered that these taxpayers were not the ideal group from which to draw any definitive conclusions about the effectiveness of penalties on compliance behaviour. The Tax Office also consulted with the Australian National University Centre for Tax System Integrity about including this topic in their research programme. However, it was decided due to the low number of penalties being imposed that this research be deferred.
4.87 The Tax Office agrees that it should measure the effectiveness of the penalty framework and it will be conducting research once the effect of Practice Statement PS LA 2004/5 is more evident. The need to undertake some analysis of the effectiveness of penalty administration was also raised in the Tax Office's internal review.
Quality assurance processes and staff skilling
Technical Quality Review
4.88 The Technical Quality Review (TQR) process is the corporate tool used by the Tax Office to measure the quality of technical decisions, including penalty decisions. It involves an examination of a random sample of completed cases to assess the quality of decisions communicated in writing to taxpayers on the interpretation and application of the laws administered by the Commissioner.
4.89 Each Tax Office business line is required to report on the quality of its written interpretive decision-making. Included on each business line TQR panel is one private sector/academic representative and a representative from the Office of the Chief Tax Counsel36, to assist in maintaining a consistent application of the TQR processes. Each case is awarded an A, B, C, D or E rating in accordance with the Judgment Model.37
4.90 The Tax Office states that the aim of the TQR process is to examine whether the advice it provides is accurate, consistent, relevant and clearly explained.38 The Tax Office further states that the quality of its decisions, measured by considering a number of aspects of a good-quality decision, is also a broad indicator of its IT systems, business line work practices and skilling of Tax Office staff.39
4.91 The Tax Office states that there are other quality assurance processes in place apart from the TQR process. For example, a penalty decision arising from an audit requires approval by the case officer's team leader or higher, depending on the level of authorisation. Penalty decisions are deemed interpretive decisions and are recorded on the Tax Office's Technical Decision-Making System (TDMS).
4.92 The Tax Office is of the view that having a representative from the Office of the Chief Tax Counsel as part of the TQR process ensures that there is a consistent approach in the application and remission of penalties. The Inspector-General believes that the TQR process is only one part of the Tax Office's corporate governance approach to ensuring that the application of penalties is equitable and consistent. Equally important are the key features identified by the Inspector-General at paragraph 2.4 of this report.
4.93 The results in the August 2004 TQR report, as presented below in Table 4.1, show that most business lines are achieving 'A' and 'Pass' benchmarks.40
|Business line||Mar 02-Aug 02||Sept 02-Feb 03||Mar 03-Aug 03||Sept 03-Feb 04||Mar 04-Aug 04|
|A %||Pass %||A %||Pass %||A %||Pass %||A %||Pass %||A %||Pass %|
Source: Tax Office.
4.94 For the penalty TQR process in August 2004, the Tax Office adopted the same benchmark as the existing corporate benchmark for technical advice, namely 83 per cent for 'A' and 93 per cent for 'Pass'. The Tax Office proposes to set specific corporate benchmarks for penalty decisions for the later review periods.
4.95 Overall, the TQR results indicate an improvement in penalty decisions from the previous periods. In particular, within the Large Business and International (LB&I) business line there was a significant improvement in the number of 'A' ratings (from 63 per cent to 95 per cent). This was attributed to the promotion and usage of the LB&I Penalties Checklist as well as better documentation of decisions.
4.96 The Tax Office advises that the external representatives on the TQR panels hold positive views regarding the TQR process and that there is overwhelming support for the process given its transparency and integrity.
4.97 A review of selected audit case files did reveal some cases showing variation both within and between business lines in the quality of penalty and GIC decisions. In some case files, there were no penalty submissions on the file. The Tax Office audit process maps require that a team leader sign off on a penalty submission before the issuing of penalty notices arising from an audit. In other case files, the penalty submission did not adequately set out facts relevant to the taxpayer nor consider the taxpayer's compliance history. Also, in some cases there were only references to the Tax Office's rulings and practice statements, with little evidence of consideration of the application of the Tax Office view to the taxpayer's circumstances.
Ensuring quality GIC remission decisions
4.98 The Inspector-General has previously reported a number of findings regarding the remission of GIC for groups of taxpayers.41 Also, the Treasury, as part of the Review of Aspects of Income Tax Self Assessment, made a number of recommendations regarding the operation of the GIC regime.
4.99 Decisions in respect to GIC remission are currently not subject to specific review as part of the TQR process. In addition, GIC remission decisions are not currently recorded on TDMS. The Tax Office advises that a GIC remission decision can be reviewed where it is part of a penalty decision that has been selected for review. However, as has been previously discussed, there is an inconsistent approach between business lines in considering interest remission arising during the pre-amended period.42 This means that the GIC remission decision will not always form part of the penalty decision that may be selected for technical review.
4.100 A review of selected audit case files by the Inspector-General did indicate some variation between business lines in the GIC remission processes arising from an audit. In some cases, the case officer has not considered GIC remission despite lengthy Tax Office delays. Where GIC remission is considered, the facts behind the delay are often not clearly set out in the decision. On other occasions there is only a reference to the Tax Office delay with little consideration of the ATO receivables policy and its application to the taxpayer's circumstances.
4.101 A submission from an accounting firm also suggested that:
Taxpayers may request that GIC be remitted, however the Commissioner generally remains the final arbiter in administrative matters (such as remission of GIC). Consequently, the entity that determines a GIC remission request is not independent from the entity that imposed GIC in the first instance. That is, it is the Commissioner's office that imposed the GIC, and it is the Commissioner's office that determines whether the GIC should be remitted.
4.102 The Inspector-General is of the view that the improved review and appeal rights arising from the ROSA report will introduce a greater level of transparency and independence in the administration of the GIC regime. It will mean that the Tax Office's interpretation and application of its remission powers for shortfall interest may be subject to external review.
Skilling of staff
4.103 The Tax Office provides training for staff administering penalties via training modules, such as 'Introduction to Penalties', which are available on the Tax Office intranet.
4.104 Various business lines have also implemented a number of strategies to maintain and improve the level of skilling amongst staff. This has included the establishment of dedicated penalty teams within business lines, the review of penalty decisions as part of business line quality assurance processes and the use of technical officers to assist in the penalty decision-making processes. Business lines have also developed penalty training packages as detailed in Table 4.2.
|Business line||Training package||Number of staff
|Excise||Administrative penalties (Excise)||120|
|Small Business||Introduction to administrative penalties, amendments and GIC||432|
|GST General Compliance||Introduction to penalties||2,772|
|LB&I||Penalties and interest||Not available|
Source: Tax Office.
4.105 The Tax Office states that the 3,574 staff that have attended penalties training modules represent approximately 72 per cent of all active compliance staff. The Tax Office indicates that staff feedback suggests that the training packages have helped to improve staff capabilities.
4.106 A submission representing the views of a broad range of tax practitioners expressed some concerns regarding the awareness amongst staff of the Taxpayers' Charter when dealing with penalties. The submission suggested that additional penalties were being levied because taxpayers sought legal or other advice during an audit. The submission claimed that the rationale of the Tax Office was that seeking advice was a demonstration of a lack of cooperation and a delay tactic warranting additional penalty.
4.107 The submission goes on to note that this practice appears to be contrary to the Taxpayers' Charter, which specifically provides for a taxpayer being able to have a representative act on their behalf. The submission states that if a taxpayer does not unreasonably delay seeking advice and the tax practitioner does not unreasonably delay providing that advice, then it is difficult to understand why this would warrant an increase in the level of tax shortfall penalty.
4.108 To address this concern the submission considers that:
…the ATO needs to implement internal training to create greater awareness and to reinforce the Taxpayers' Charter amongst ATO officers in relation to penalties. This would greatly assist in minimising instances where penalties have been levied as a result of taxpayers seeking legal or other advice in relation to an audit.
4.109 A limited review of selected case files by the Inspector-General did not reveal any evidence to support this concern. However, it has not been possible to identify cases where the Tax Office has imposed additional penalties for preventing or obstructing the Commissioner because a taxpayer sought advice during an audit. This is primarily due to the different systems and work practices used by the business lines to record penalty information. The Tax Office also advises that it currently provides internal training to staff on the Taxpayers' Charter in relation to penalties.
4.110 The Inspector-General has already noted the need for the Tax Office to provide greater guidance to taxpayers on the circumstances it considers in determining the statutory increase, reduction and remission of penalties and GIC. This includes reviewing the currency of a number of taxation rulings released by the Tax Office prior to the introduction of the Taxpayers' Charter, the Compliance Model and the new administrative penalties regime.
Suggested improvements for Tax Office consideration
4.111 Submissions from professional organisations representing accountants and tax practitioners, business and the general public, and enquiries and investigations by the Inspector-General identified a number of improvements that could be made by the Tax Office in its administration of the penalties and interest regimes. These include:
- providing staff with general guidance on determining a taxpayer's overall level of compliance
- providing clearer guidance on when an audit has commenced and providing taxpayers with an opportunity to make voluntary disclosures prior to an audit formally commencing
- providing greater guidance to taxpayers and their advisers on the operation of the penalty concessions for voluntary disclosures
- consolidating the Tax Office view on voluntary disclosures into one corporate document
- introducing service standards for the finalisation of an audit where the taxpayer makes a voluntary disclosure
- introducing service standards for issuing amended assessments once the final audit report is approved and sent to the taxpayer
- clarifying the responsibility of case officers to consider tax shortfall interest remission as part of the audit process under the Tax Office's receivables policy
- providing greater guidance to taxpayers and their advisers on the factors that staff would consider in determining the statutory increase, decrease and remission of penalties
- reviewing the currency of a number of taxation rulings released by the Tax Office prior to the introduction of the new administrative penalties regime
- providing greater guidance to taxpayers and their advisers on the application of penalties relating to schemes pursuant to Subdivision 284-C of the Taxation Administration Act 1953, including how the provisions operate and the circumstances that lead to an increase in the base penalty amount
- providing more targeted information to taxpayers in different markets and tailoring its education strategy to deal with differences in understanding and focus in different markets
- providing further training and guidance to staff to improve file management and the quality of written penalty decisions
- establishing organisation-wide quality assurance processes for tax shortfall interest remission decisions
- developing a skilling package in relation to the tax shortfall interest regime
- developing a template for penalty and interest decisions to provide greater guidance to staff on the key issues that should be addressed when considering the application of penalties and interest
- including, as part of its audit quality assurance process, consideration of the extent that case officers follow the audit procedures regarding the imposition and remission of administrative penalties and interest.
24 Australian National Audit Office, Report No. 31 of 1999/2000, Administration of Tax Penalties, p. 31.
25 This applies where the shortfall amount is $1,000 or more. If the shortfall amount is less than $1,000, then the penalty will be reduced to nil.
26 Practice Statement PS LA 2001/11, page 2.
27 The Technical Quality Review process is the corporate tool used by the Tax Office to measure the quality of technical decisions. Further detail on this process is provided in this chapter.
28 See paragraph 4.88 of this report for further information regarding the TQR process and results from previous technical quality reviews by the Tax Office.
29 Australian National Audit Office, op. cit., at p. 39.
30 Australian National Audit Office, op. cit., at p. 40.
31 ibid., at p. 41.
32 ibid., at p. 40.
33 Taxation Rulings TR 94/2, TR 94/3, TR 94/4, TR 94/5, TR 94/6 and TR 94/7.
34 Prior to 1 July 2000, sections 224, 225 and 226 of the Income Tax Assessment Act 1936. From 1 July 2000 onwards, Subdivision 284-C of Schedule 1 of the Taxation Administration Act 1953.
35 To trigger the penalty provisions relating to schemes, section 284-145 requires that an entity obtains a scheme benefit from a scheme and, having regard to any relevant matters, it is reasonable to conclude that an entity entered into or carried out the scheme, or part of it, with the sole or dominant purpose of obtaining a scheme benefit from the scheme.
36 The Office of the Chief Tax Counsel is a specialist area within the Tax Office.
37 The Tax Office advises that the current rating scale has replaced the 'D' and 'E' ratings with 'Fail'.
38 Practice Statement PS LA 2001/11, at p. 2.
40 A pass rating includes all cases awarded an 'A', 'B' or 'C' rating in accordance with the Judgment Model.
41 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.
42 See paragraph 4.30 of this report.