Conduct of the review
1.1 The Inspector-General of Taxation (IGT) conducted this review in response to stakeholders’ concerns1 regarding the adequacy of the Australian Taxation Office’s (ATO) Taxpayers’ Charter (the Charter), compensation schemes and adherence to the Model Litigant Obligation (MLO) in ensuring that taxpayers are afforded procedural fairness and appropriate outcomes. These concerns were raised during consultation on the current work program and have been acknowledged in a number of previous IGT reviews2 as well as the IGT Annual Report 2012–13.3
1.2 It should be noted that this review was delayed due to the tax complaints function being transferred to the IGT from the Commonwealth Ombudsman (Ombudsman). The transfer took effect on 1 May 2015 and work on this review did not commence in earnest until after this function was developed and operating smoothly.
1.3 This report is produced pursuant to paragraph 7(1)(f) of the Inspector-General of Taxation Act 2003 (IGT Act 2003).
1.4 The IGT invited and received many submissions to this review.4 The IGT also met with a number of taxpayers, tax practitioners and their representative bodies as well as academics, senior staff in other government departments and members of the judiciary to gain a better understanding of the issues and areas requiring improvement. The concerns may be broken down into the following themes:
- inadequate taxpayer protection provided in the Charter including the lack of enforceability of the rights contained within it, processes to ensure adherence to it, reporting of any breaches as well as education and communication on its nature and purpose;
- limited avenues of redress where taxpayers’ rights are breached, particularly in relation to the Scheme for Compensation for Detriment caused by Defective Administration (the CDDA Scheme), the lack of independence and transparency in the ATO’s associated administration and decision-making processes, the absence of any internal and external review for such decisions and limited public information on these matters;
- insufficient ATO processes to ensure compliance with the MLO, processes for investigating and publicly reporting any breaches, internal and public guidance as well as the inability of affected parties to take action to enforce compliance with the MLO; and
- lack of information regarding protection of taxpayers’ rights in the cross-border context, specifically whether taxpayers would be informed if their information is provided to another revenue agency, how they can rectify any inaccuracies in the information exchanged, whether the scope of information requests is appropriate and how the confidentiality of their information is maintained following an information exchange.
1.5 As part of this review, the IGT engaged Dr Kalmen Datt and Professor Michael Walpole of the University of New South Wales (UNSW) to research and identify existing legislative and common law rights available to taxpayers in Australia. Their report is set out in Appendix 2.
1.6 In addition, the IGT has also worked progressively with ATO senior management to distil potential areas for examination and to agree on specific improvements. This work has been informed by IGT review team discussions with ATO staff in the ATO Corporate and ATO General Counsel units as well as those from the Review and Dispute Resolution (RDR) and Public Groups and International (PGI) business lines (BSLs). The IGT review team also examined case records on the ATO’s case management system, Siebel, to better understand taxpayer concerns in this area and analysed ATO statistics which related to ATO performance and its impact on the above issues.
1.7 The Commissioner of Taxation (Commissioner) was provided with an opportunity to make submissions on any implied or actual criticisms in this report.5
The importance of taxpayer rights and protections in a self-assessment tax system
1.8 This review represents an important step in improving the administration of the tax system in Australia. It builds upon ideas which have percolated in the international sphere for some years and focuses not only on taxpayer rights and protections in isolation, but the important role that such rights and protections play in encouraging voluntary compliance.
1.9 The efficient administration of a self-assessment tax system relies upon the majority of taxpayers voluntarily complying with their tax obligations. This is so as revenue authorities are not resourced to verify compliance of such obligations in respect of each taxpayer.
1.10 The threat of compliance action and any associated penalties and sanctions may be influential in deterring non-compliant behaviour for certain classes of taxpayers and to redress any imbalance between those taxpayers who voluntarily comply and those who do not.6 However, research has indicated that the perception of fairness, including how the revenue authority deals with taxpayers, is a key factor in fostering voluntary compliance. It is presented as the interplay between trust and power:
… trust in tax authorities was the strongest predictor of voluntary tax compliance, whereas power attributed to the authorities predicted enforced tax compliance. Furthermore, enforced compliance was negatively related to trust. It seems trust induces voluntary tax compliance, and reduces the feeling that one is forced to pay taxes …
… our emphasis of the importance of trust should be no means be misinterpreted as a naïve approach… we propose that taxpayers should be treated fairly, according to their behavior: committed taxpayers should be supported by the authorities, whereas persistent tax evaders should be prosecuted with the full rigor of the law.7
1.11 The Organisation for Economic Co-operation and Development (OECD) has also observed:
The ways by which revenue authorities interact with taxpayers and employees impact on the public perception of the tax system and the degree of voluntary compliance. Taxpayers who are aware of their rights and expect, and in fact receive, a fair and efficient treatment are more willing to comply.8
1.12 The view that voluntary compliance is directly affected by perceptions of fair tax administration is echoed in comparable jurisdictions, such as the United States of America (USA).9 The ATO seems to be of a similar view with its recent focus on better understanding taxpayers’ perceptions of fair treatment:10
We are deeply interested in fairness because we understand that, in the tax system, if people have a misperception of how the system operates, if they think it operates unfairly, that is a no-no in tax administration. That gets people thinking, ‘Well, if it’s unfair, I don’t want to participate in it’.11
1.13 Beyond the strong links to voluntary compliance, it has also been stated that taxpayer rights are fundamental human rights:
... human rights principles have an application at the level of the implementation, collection, enforcement and dispute procedures embedded in a tax regime. As tax regimes have become more complex and pervasive, jurisdictions have enlarged the powers of tax collectors, so exacerbating the risk of infringing upon the fundamental rights of their citizens. Here the rights at issue are not founded so much in morality or distributive justice but rather as to a fair treatment by the bureaucracy.12
1.14 Similar sentiments have also been echoed by the National Taxpayer Advocate (NTA) in the USA:
At their core, taxpayer rights are human rights. They are about our inherent humanity. Particularly when an organization is large, as is the IRS [Internal Revenue Service], and has power, as does the IRS, these rights serve as a bulwark against the organization’s tendency to arrange things in ways that are convenient for itself, but actually dehumanize us. Taxpayer rights, then, help ensure that taxpayers are treated in a humane manner.13
1.15 In summary, taxpayers are entitled to fair treatment by tax authorities and their perception that their rights are protected and respected is key in fostering voluntary compliance.
Differentiating between taxpayer rights, protections and expectations
1.16 In the conduct of this review, the IGT has noted that terminology in this area may, at times, be used interchangeably. These terms include taxpayer rights, taxpayer protections and expectations. It is important to differentiate between these terms and arrive at a common understanding of the concepts and principles which underpin them.
1.17 There is no universally accepted definition of ‘taxpayer rights’, however, a ‘right’ itself commonly refers to something which may be enforced at law directly by the affected person either as a result of positive action on the taxpayer’s part (for example, appeal a decision) or passive action (for example, by claiming legal professional privilege to not answer questions or provide documents).
1.18 The tax law contains a number of well-recognised and well-utilised rights. Examples of such rights include the taxpayer’s right to seek formal internal and external review of audit decisions.14 Other legislation, such as the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act) and the Freedom of Information Act 1982 (FOI Act), also confer rights on taxpayers, for example in relation to receiving reasons for certain administrative decisions15 and the right to access and correct information held about them by government bodies.16
1.19 In addition to rights which may be conferred in statute, rights may also be available to taxpayers at common law. For example, all taxpayers have a right to claim legal professional privilege over information or documents provided to their legal representative for the purposes of seeking legal advice.17
1.20 Taxpayer protections may refer to those areas of the law which allow another party to act on behalf of the aggrieved taxpayer, or be relied upon by the taxpayer as a shield against ATO action, thereby effectively ‘protecting’ them from actions which may violate their rights. An example of such a protection is the superannuation guarantee charge provisions which effectively require the ATO to protect taxpayers against unpaid superannuation.18 The ATO achieves this through a combination of audit activities and enforcement action to recover unpaid superannuation.
1.21 Another example of such protection is the MLO (which will be discussed later in this report).19 The MLO exists essentially to protect the taxpayer against inappropriate conduct by the Commonwealth in litigation and seeks to re-balance the limited resources and experience of a taxpayer against those of the Commonwealth.20
1.22 Expectations are often reflected in administrative, rather than legal, documents or materials. They usually contain statements regarding standards of service and what taxpayers can reasonably expect of the revenue authority and vice versa. The Charter and its associated publications are examples of a set of taxpayer expectations. This is despite the fact that the Charter itself uses the terms ‘rights’ and ‘obligations’ and some of the principles reflected in the Charter are based on legislative requirements. Similarly, the ATO’s Practice Statements, which are publicly issued, are administrative documents that set out processes which ATO officers are expected to follow in respect of certain matters or activities.
1.23 It is important to note that these documents do not confer on the taxpayer any legally enforceable rights.21 Rather, where the taxpayer is of the view that principles or expectations set out in the Charter or a Practice Statement have been violated, they may lodge a complaint with the ATO for investigation or, alternatively, with the IGT. Where an investigation identifies a potential breach, remedial action may be taken. However, these remedial actions do not take away from the Commissioner’s responsibility to properly assess and collect tax due and payable, nor do they release the taxpayer from such obligations to comply with the tax laws.
1.24The IGT notes that whilst administrative documents do not give rise to any enforceable rights, in some jurisdictions such as the United Kingdom (UK), the legal doctrine of ‘legitimate expectation’ has provided a potential avenue of redress for affected taxpayers. This is discussed further in the next chapter.
Taxpayer obligations and responsibilities
1.25 In the same manner that taxpayer rights, taxpayer protections and expectations may be interchangeably used, the terms ‘obligations’ and ‘responsibilities’ may also be used interchangeably to describe government-mandated behaviours in relation to their tax affairs. These behaviours are legally enforceable or are required to be undertaken for moral reasons.22 They can be differentiated from expected behaviours which are not based in law but to which the parties are expected to adhere based on social norms.
1.26 In the tax administration context, obligations generally refer to a set of behavioural norms that are ‘so fundamental to the successful operation of taxation systems that they are legal requirements in many, if not most, countries’23. The basic taxpayer obligations are: to be honest; to provide accurate information and documents on time through lodgments and reporting; to maintain appropriate records; and to pay any liabilities on time. By way of example, taxpayers in Australia are obliged to lodge their tax returns by their respective due dates24 and to pay their taxes as and when they fall due.25
1.27 Conversely, whilst the ATO has indicated that it expects taxpayers to be cooperative in their interactions,26 there is no legal obligation for the taxpayer to do so. However, the ATO is armed with a number of legislative powers to compel taxpayers to act in a particular way in defined circumstances (such as providing information)27 where they do not do so cooperatively.
Terminology used in this report
1.28 In this report, the IGT will seek to distinguish between rights and expectations in the following ways:
- where the rights are legally enforceable, the IGT will use the term ‘enforceable rights’; and
- where they are not legally enforceable, the IGT will refer to them as ‘administrative rights’ or ‘expectations’.
1.29 In certain documents examined by the IGT, such as the Charter documents in Australia and in other jurisdictions, the IGT will reflect the terminology used in those documents but will contain these in inverted commas to distinguish them from other usage. For example, the Australian Charter refers to ‘rights’ and ‘obligations’.
Structure of the report
1.30 Before turning to address stakeholders’ concerns, it is useful to first consider the historical development and current status of taxpayer rights and protections in Australia, including by way of comparison with other jurisdictions. This discussion is set out in Chapter 2.
1.31 Chapter 3 discusses stakeholders’ concerns in relation to the current framework for taxpayer rights and protections in Australia.
1.32 Chapter 4 considers the existing compensation regimes as well as other avenues of redress where taxpayers consider that their rights and protections have been transgressed.
1.33 Chapter 5 explores the ATO’s obligations under the Legal Services Directions 2005 (LSD 2005) and, specifically, the MLO.
1.34 Chapter 6 examines an emerging area of concern in relation to the protection of taxpayers’ rights where information is exchanged across borders.
1 This review was commenced pursuant to paragraph 7(1)(d) of the Inspector-General of Taxation Act 2003.
2 Inspector-General of Taxation (IGT), Review into the Australian Taxation Office’s Change Program (2010); IGT, Report into the Australian Taxation Office’s large business risk review and audit policies, procedures and practices (2011); IGT, Review into improving the self assessment system (2012); IGT, The Management of Tax Disputes (2015).
3 IGT, Annual Report 2012-13 (2013) p 7.
4 Terms of reference are reproduced in Appendix 1 of this report.
5 In accordance with sub-section 8(5) of the Ombudsman Act 1976 which has effect by virtue of section 15 of the Inspector-General of Taxation Act 2003.
6 IGT, Review into the Australian Taxation Office’s administration of penalties (2014) pp 2-3.
7 Stephan Muehlbacher, Erich Kirchler and Herbert Schwarzenberger, ‘Voluntary versus enforced tax compliance: empirical evidence for the ‘slippery slope’ framework ’ (2011) 32 European Journal of Law and Economics 89-97, p 95.
8 Organisation for Economic Co-operation and Development (OECD), Principles of Good Tax Administration (Practice Note GAP001, 2001), p 3.
9 National Taxpayer Advocate (NTA), 2013 Annual Report to Congress – Volume One, (2013) p 6.
11 House of Representatives Standing Committee on Tax and Revenue, Tax Disputes (March 2015) p 16.
12 Justin Dabner, ‘Resolving Australian tax controversies: does the tax jurisprudence under the European Convention on Human Rights suggest a better way?’ (2016) Australian Tax Forum 213, p 215.
13 Nina E Olson, ‘A Brave New World: The Taxpayer Experience in a Post-Sequester IRS Environment,’ 139 Tax Notes 1189 (2013).
14 Taxation Administration Act 1953, Pt IVC.
15 Administrative Decisions (Judicial Review) Act 1977, s 13.
16 Freedom of Information Act 1982, Pt III.
17 Baker v Campbell (1983) 153 CLR 52.
18 Superannuation Guarantee (Administration) Act 1992, s 49.
19 Attorney-General’s Department, Legal Services Directions 2005; Judiciary Act 1903, s 55ZG.
20 Productivity Commission, Access to Justice Arrangements Report No. 72 (September 2014) pp 430-431.
21 Macquarie Bank Limited v Commissioner of Taxation  FCAFC 119.
22 Macmillan Dictionary definition of ‘obligation’.
23 OECD, Taxpayers’ Rights and Obligations (Practice Note GAP002), p 3.
24 Income Tax Assessment Act 1936, s 161.
25 Income Tax Assessment Act 1997, s 5.
27 Taxation Administration Act 1953, Sch 1, Div 353.