4.1 This chapter examines a number of aspects of Tax Office performance regarding objections. Firstly, it sets out the extent and outcomes of objections and the Tax Office's handling of objections from a Taxpayers' Charter perspective. It also examines the Tax Office's performance from an external perspective, by looking at the outcome of objection decisions that proceed to litigation.

Extent and outcomes of objections

Objections received

4.2 Table 4.1 sets out the number of objections other than to private written binding advice received in the 2004‑05, 2005‑06, 2006‑07 and 2007‑08 income years.

Table 4.1: Number of objections received in the 2004-05 — 2007-08 income years
Business lines 2004-05 2005-06 2006-07 2007-08
ATP 4,787 998 253 111
EXC 52 83 111 70
GST 1,875 2,535 2,736 1,450
L&P/OCTC 0 11 15 21
LBI 817 367 236 216
MEI 5,592 5,715 6,645 8,968
SME 1,931 1,778 598 545
SPR 1,949 2,246 3,071 3,357
Total 17,003 13,733 13,665 14,738
Total (excl ATP) 12,216 12,735 13,412 14,627

4.3 Between 2004-05 and 2007-08 there has been a steady increase in the total number of objections (excluding Aggressive Tax Planning (ATP)) received by the Tax Office.

4.4 In this period there was also a dramatic reduction in the number of ATP objections as the outstanding mass-marketed arrangement disputes were settled. There was also a significant increase in the number of GST objections from 2005-06 to 2006-07. The resulting backlog created by this increase was one of the key reasons for the Tax Office's internal review of its objections procedures and work practices. There has been a decrease in the number of SME objections between 2005-06 and 2006-07 and an increase in MEI objection numbers over the same period as a result of the micro business responsibility moving from SME to MEI — however, the total number across the two business lines has remained fairly constant. In 2007-08 there was a significant increase in the number of MEI objections caused by a large increase in extension-of-time objection requests as a consequence of the shorter periods of review introduced by the RoSA legislation.

4.5 The numbers shown as objections in Table 4.1 and subsequent tables are, however, not an accurate reflection of disputation within the tax system, except possibly for GST and Excise. This is because the numbers include cases recorded as objections but which are not necessarily audit-sourced. For instance, within these numbers would be included objections seeking an amendment and out-of-time objection requests. These cases arise where there is no real dispute with a Tax Office decision, but a taxpayer or their agent wishes to amend information included on a self assessed income tax return. Instead of simply asking for the amendment to be made, the taxpayer or agent uses an objection as the means to achieve it. This category of objections emerged as a significant issue in the course of this review and it is discussed fully in subsequent parts of this report.

4.6 Also, it should be noted that previously each business line adopted a different method to record and report received objections. For example, for MEI — Individuals, MEI — Micro and Superannuation areas reported numbers of taxpayers objecting, regardless of the number of decisions they were objecting against. However, the GST area reported the number of decisions objected against irrespective of the number of taxpayers who were objecting — for example, if a taxpayer objected to both a tax shortfall and penalty assessment, then it would have been recorded as two objections by GST. Following the Cross-Line Taskforce on Objections Management report (the 'taskforce report'), the Tax Office adopted a common reporting approach across all business lines based on the number of taxpayer correspondence received. So if the Tax Office receives one letter with a taxpayer objecting to three income years, then this will be recorded as one objection. In contrast, if the Tax Office receives three separate letters each objecting to a particular income year, then this will be recorded as three objections.

4.7 The Tax Office advises that the fluctuations in the objections received are due to a variety of factors. These include the drop in ATP objection receipts and a spike in GST objection receipts over two years, inherent in the introduction of a new tax system.

Finalisation of objections

4.8 Table 4.2 sets out the number and outcome of objections other than objections to private written binding advice finalised in the 2004-05, 2005-06, 2006-07 and 2007-08 income years by business line.

Table 4.2: Number and outcome of objections finalised in the 2004-05 — 2007-08 income years by business line
Outcome EXC GST LBI MEI SME SPR Total %
2004-05
Allowed in full 6 322 62 2,681 686 393 4,150 35.35
Allowed in part 3 245 66 523 277 380 1494 12.72
Disallowed 69 540 136 1,829 811 584 3,969 33.80
Request invalid 0 41 129 0 4 44 218 1.86
Settled 0 60 0 97 0 0 157 1.34
Withdrawn by taxpayer 17 69 391 416 167 693 1,753 14.93
Total 95 1277 784 5,546 1,945 2,094 11,741 100
2005-06
Allowed in full 8 414 100 2,636 777 405 4,340 34.79
Allowed in part 7 299 54 520 256 378 1,514 12.14
Disallowed 19 724 177 1,734 977 899 4,529 36.31
Request invalid 0 40 28 0 0 435 503 4.03
Settled 0 11 0 64 0 0 75 0.60
Withdrawn by taxpayer 15 115 128 328 205 722 1,513 12.13
Total 48 1,603 487 5,282 2,215 2,839 12,474 100
2006-07
Allowed in full 6 738 44 2,819 173 567 4,347 31.10
Allowed in part 18 842 37 712 92 248 1949 13.94
Disallowed 36 1,322 500 2,653 282 693 5,486 39.25
Request invalid 0 115 18 0 6 726 865 6.19
Settled 0 7 0 63 0 0 70 0.50
Withdrawn by taxpayer 2 197 92 439 67 463 1,260 9.01
Total 62 3,221 691 6,686 620 2,697 13,977 100
2007-08
Allowed in full 14 405 31 4,412 198 651 5,711 36.71
Allowed in part 12 439 44 1,074 67 381 2,017 12.96
Disallowed 32 547 182 2,996 234 811 4,802 30.87
Request invalid 3 191 15 208 57 778 1,252 8.05
Settled 0 28 1 57 0 0 86 0.55
Withdrawn by taxpayer 0 145 16 602 27 900 1,690 10.86
Total 61 1,755 289 9,349 583 3,521 15,558 100

4.9 Table 4.2 shows that over the four-year period approximately 47 per cent of original assessments were varied to some extent in favour of the taxpayer by the objection being allowed in full or in part. It should be noted that these figures do not include taxation scheme cases or those completed by the ATP business line.

4.10 It also shows that approximately 47 per cent of objections were finalised with no variation in the original assessment, either due to the objection being disallowed or by the taxpayer's withdrawal of their objection.

4.11 In addition, a very low proportion of objections are finalised by way of settlement (less that 1 per cent) and in some business lines there is a relatively high proportion of invalid objections. An examination of the Tax Office's Settlement Register shows that in the 2007-08 income year 56 settlements (approximately 7 per cent of all non-ATP settlements) were initiated at the objection stage.

4.12 The Tax Office advises that the use of the 'settled' code has been interpreted differently across business lines and does not truly reflect the nature of an agreed outcome. Some business lines have closed cases as 'allowed in part' to reflect the outcome of a formal settlement. Additionally, some business lines have used 'settlement' closure codes to reflect an agreed outcome of the dispute. During the 2007-08 year processes have been updated to reflect consistent recording of objection outcomes.

4.13 However, caution must be exercised in using these figures to reach conclusions about the quality of decisions in Tax Office active compliance activities and the outcome of objections. This is because there are a high number of extension-of-time requests and different methods to record and report objections in some business lines. This will be discussed further in Chapter 5.

4.14 The Tax Office's taskforce report looked at objections finalised in the 2004-05 to 2005-06 income years. It found that, for all objections and for all business lines, the proportion of objection decisions allowed in full or in part across some business lines was approaching 60 per cent. The report expressed some concern at this high rate. It suggested that this high rate may be linked to further information being required or not forthcoming from the taxpayer. It posed the question of whether this information was provided at the start of the audit activity and whether this information should have, or could have, been obtained during the audit activity.

4.15 The report noted that the audit areas of each business line operate independently of each other and there appeared to be a need to review the audit work practices at the business line level.

Nature of objections

4.16 As with the source of objections, at the corporate level the Tax Office has also not been able to differentiate and record the subject matter of objections — that is, whether the objection relates to tax shortfall only, penalty only or both. Some insight on this may be gleaned from the Tax Office's taskforce report.

4.17 The taskforce report found that MEI — Individuals (76 per cent), MEI — Micro (56 per cent) and Superannuation (80 per cent) all had a reasonably high percentage of tax shortfall only objections. It concluded that this was, in part, due to a direct correlation with the lower proportion of objections arising from audits for these business lines. Table 5.2 sets out further details for each of the business lines.

Table 4.3: Tax Office taskforce's tax shortfall and penalty analysis — proportion of total cases
GST
%
MEI-Individual
%
MEI-Micro
%
SPR
%
Proportion of
total cases (%)
Both tax shortfall and penalty 50 20 34 9 28
Penalty only 28 5 10 11 14
Tax shortfall only 22 76 56 80 58

Source: Tax Office.

4.18 Overall, within the GST business line 78 per cent of all taxpayers' objections included an objection to the penalty component of their GST assessment, significantly higher than the other business lines. The report concluded that the higher rate of such penalty objections in the GST business line was due to the higher rate of audit-sourced objections. The report also states that each audit adjustment requires a penalty decision and given the limited circumstances where a penalty will be remitted, this will invariably mean that a taxpayer will have both a tax shortfall adjustment and a penalty.

Audit-source objection decisions — only tax shortfall

4.19 Table 4.4 lists the proportion of audit-sourced objections where only the tax shortfall was in dispute.

Table 4.4: Outcome of audit-source objections — include only tax shortfall issues
GST
%
MEI-Individual
%
MEI-Micro
%
SPR
%
Proportion of
total cases (%)
Allowed in full 33 32 53 6 26
Allowed in part 19 20 20 56 33
Disallowed 33 36 20 19 27
Withdrawn 14 12 7 19 14

Source: Tax Office.

4.20 The taskforce report found that within the GST business line, 52 per cent of objections result in a change in the audit decision; 52 per cent in MEI — Individual, 73 per cent in MEI — Micro and 62 per cent in Superannuation. Overall, 59 per cent of objections relating only to primary tax issues result in a change in the audit decision.

4.21 The report states that for MEI — Micro the high number of objections allowed in full is due to circumstances where audit has raised an assessment based on the taxpayer's inability to substantiate deductions. It suggests that, subsequent to the lodgement of the objection, the taxpayer is able to substantiate the claim at objection.

4.22 In respect of the Superannuation business line, the report indicates that many of its active compliance activities involve the calculation of employee entitlements for superannuation guarantee purposes. As such, there is often a change in the calculations based on information from the superannuation fund and salary and wages records, leading to the objection being allowed in part.

4.23 Overall, the report found that objection decision percentages for allowed in full, allowed in part, disallowed and withdrawn were reasonably consistent across all business lines.

Audit-sourced objection decisions — both tax shortfall and penalty

4.24 Table 4.5 lists the proportion of audit-sourced objections where both the tax shortfall and penalty decisions were in dispute.

Table 4.5: Outcome of audit-source objections — include both tax shortfall and penalty issues
GST
%
MEI-Individual
%
MEI-Micro
%
SPR
%
Totals
%
Allowed in full 15 12 12 0 12
Allowed in part 50 53 41 89 51
Disallowed 30 29 32 11 29
Withdrawn 4 6 15 0 8

Source: Tax Office.

4.25 The taskforce report found that in the GST business line, 65 per cent of objections involving both a tax shortfall and penalty issue resulted in a change to the audit decision; 65 per cent in MEI-Individual, 53 per cent in MEI-Micro and 89 per cent in Superannuation — overall, 63 per cent of such objections resulted in a change to the audit decision.

4.26 The higher rate of objections allowed in part in Superannuation is attributed to the nature of superannuation audit activities. These often involve the calculation of employee entitlements for superannuation guarantee purposes, which is based on routine, but lengthy calculations based on contributions made to a superannuation fund and the salary and wages of the employees. Where one of these variables is amended as part of the objection decision, then there is an immediate decision to at least allow the objection in part.

Audit-sourced objection decisions — penalty only cases

4.27 Table 4.6 sets out the proportion of audit-sourced objections where the penalty decision was in dispute.

Table 4.6: Outcome of audit-source objections — include only penalty issues
GST
%
MEI-Individual
%
MEI-Micro
%
SPR
%
Totals
%
Allowed in full 33 0 0 0 18
Allowed in part 25 0 14 11 18
Disallowed 38 75 86 78 57
Withdrawn 4 25 0 11 7

Source: Tax Office.

4.28 The taskforce report found that there was significant variation amongst business lines in this decision category. For example, the GST business line was the only business line to have any allowed in full decisions in the sample and it also had a significantly higher proportion of objection decisions allowed in part. The report indicated that further analysis of the GST sample showed that the decision rates for penalty only objections were consistent with the decision rates for tax shortfall only objections. The taskforce report suggested that this variation may be a more generic issue rather than one particularly limited to penalty only objections.

Taxpayers' Charter standards

4.29 The Taxpayers' Charter sets out a number of service standards in relation to objections. These include:

  • the Tax Office performance standard for finalising objections of '56-days available-to-the-Tax Office or as otherwise negotiated' (the 56-day finalisation standard). Under this standard the Tax Office aims to finalise an objection within 56 days of receiving all the necessary information (this means that the clock stops where the Tax Office is awaiting further taxpayer information) or within a timeframe negotiated with the taxpayer. If the objection raises particularly complex matters that will take more than 56 days to resolve after receiving all the required information, then the standard is to contact the taxpayer within 14 days to negotiate an extended reply date; and
  • the 14-day standard — if all the information to decide the objection is not available, then the standard is to contact the taxpayer within 14 days to seek any further information.

4.30 The Tax Office has also set itself an aspirational internal target to complete objections within 120 elapsed days, known as the completion standard. The elapsed days include all time spent awaiting further information. From 2007-08, the completion standard was revised from 100 per cent to 99 per cent and excludes cases which are considered complex and are finalised by a negotiated date. Although not one of the Tax Office's Taxpayers' Charter service standards, its performance against the completion standard is included in its corporate Heartbeat report.

4.31 Understanding Tax Office reporting of its performance against the 56-day and 120-day performance standards can be difficult. For example, if the Tax Office negotiates with the taxpayers and agrees to finalise their objection within five months (circa 150 days) and does so, this will be recorded as achieving the 56-day (or otherwise negotiated) standard, but failing the 120-day (elapsed time) standard. Also, if the Tax Office seeks additional information from the taxpayer to resolve an objection, it will 'stop-the-clock' on the 56 days it allows itself until the information is received. If the information from the taxpayer is delayed, the Tax Office may fail the 120-day elapsed time standard but still achieve the 56-day standard. In these ways, the Tax Office can appear to be achieving better performance within its '56-day' standard than it does against the 120-day standard. Additionally, the Tax Office advises that where cases are considered complex and the case is finalised by the negotiated date, the case will be taken to have met the completion standard. However, from the 2007-08 income year, where cases are considered complex and the case is finalised by the negotiated date, the case will meet the completion standard.

4.32 In any event, the Tax Office only publicly reports its achievement against the 56-day standard, having set itself a benchmark of seeking to finalise 70 per cent of objections within that time. It should be noted that this benchmark is one of the lowest of all Taxpayers' Charter service standards. For example, the Tax Office standard for providing a written private binding ruling on the application of the tax laws is 28 days.

4.33 In 2006-07 the Tax Office finalised 82 per cent of objections within the 56-day (unless otherwise negotiated) service standard. In 2007-08 the Tax Office's performance against this service standard dropped, with 74 per cent of objections finalised within the 56-day standard.

Taxpayers' Charter finalisation standard results

4.34 Table 4.7 outlines the Tax Office's performance in meeting the 56-day standard in finalising objections in the 2004-05, 2005-06, 2006-07 and 2007-08 income years by business line. Again, it should be noted that ATP cases are excluded from this part of the discussion. The Inspector-General believes that delays with ATP objection cases raise systemic issues but more in relation to the dispute resolution process for groups of taxpayers rather than the objection process itself.

Table 4.7: Tax Office performance in respect of the Taxpayers' Charter objections finalisation benchmark (56-days unless otherwise negotiated)
2004-05 EXC GST LBI MEI SME SPR Total
Failed finalisation standard 14
(7.82)
233
(17.11)
34
(4.31)
750
(13.32)
415
(21.29)
1101
(43.04)
2,547
(20.46)
Passed finalisation standard 165
(92.18)
1116
(82.73)
754
(95.69)
4,877
(86.68)
1534
(78.71)
1455
(56.96)
9,902
(79.54)
2005-06 EXC GST LBI MEI SME SPR Total
Failed finalisation standard 6
(7.41)
478
(28.3)
37
(7.60)
1560
(29.09)
354
(15.87)
712
(25.08)
3,147
(24.8)
Passed finalisation standard 75
(92.59)
1211
(71.7)
450
(92.4)
3802
(70.91)
1877
(84.13)
2,127
(74.92)
9,542
(75.2)
2006-07 EXC GST LBI MEI SME SPR Total
Failed finalisation standard 14
(14.74)
945
(27.54)
11
(1.59)
937
(13.94)
140
(22.36)
198
(7.25)
2,254
(15.7)
Passed finalisation standard 81
(85.26)
2486
(72.46)
680
(98.41)
5,784
(86.06)
486
(77.64)
2,534
(92.75)
12,055
(84.3)
2007-08 EXC GST LBI MEI SME SPR Total
Failed finalisation standard 5
(7.25)
440
(24.18)
11
(3.81)
2,543
(27.03)
96
(16.47)
964
(27.35)
4,059
(25.89)
Passed finalisation standard 64
(92.75)
1380
(75.82)
278
(96.19)
6,847
(72.92)
487
(83.53)
2,561
(72.65)
11,617
(74.11)

Figures in parenthesis represent percentage of cases.

4.35 Overall, approximately 78 per cent of objections are finalised within the 56-day service standard. It should be noted that this performance level is enhanced by the inclusion of simple extension-of-time objection requests and other objections seeking a self amendment as noted above. In instances where objections were not finalised within the 56-day standard, then this must have been due to Tax Office delay, given that the clock stops where the Tax Office is awaiting further taxpayer information. This delay may have been caused by the escalation of the issue to other technical tax officers, seeking legal advice or the objection officer may require the establishment of the Tax Office view before being able to finalise the objection. However, what is unclear in these instances is the Tax Office's GIC remission policy in respect of the Tax Office's delay in finalising the objection. This issue is explored further in Chapter 6.

4.36 In relation to GIC remission, the Tax Office advises that each case is considered on its own circumstances and merit. In considering interest remission, case officers rely on Chapter 93 of the ATO Receivables Policy and PS LA 2006/8 for guidance.

Taxpayers' Charter completion standard results

4.37 Table 4.8 sets out the Tax Office's performance in meeting the 120-elapsed day standard in the completion of objections in the 2004-05, 2005-06, 2006-07 and 2007-08 income years by way of business line.

Table 4.8: Tax Office performance in respect of the Taxpayers' Charter objections completion benchmark
2004-05 EXC GST LBI MEI SME SPR Total
Failed completion standard 24
(13.41)
356
(26.39)
586
(74.37)
791
(14.05)
497
(25.50)
1,385
(54.19)
3,639
(29.23)
Passed completion standard 155
(86.59)
993
(73.61)
202
(25.47)
4,837
(85.95)
1452
(74.5)
1,171
(45/81)
8,810
(70.77)
2005-06 EXC GST LBI MEI SME SPR Total
Failed completion standard 18
(21.43)
771
(45.65)
357
(73.31)
999
(18.63)
682
(30.57)
860
(30.29)
3,687
(29.06)
Passed completion standard 63
(77.78)
918
(54.35)
130
(26.8)
4,363
(81.37)
1,549
(69.43)
1,979
(69.71)
9,002
(70.94)
2006-07 EXC GST LBI MEI SME SPR Total
Failed completion standard 12
(12.63)
1,747
(50.92)
572
(82.78)
1,183
(17.6)
261
(41.69)
119
(4.36)
3,894
(27.24)
Passed completion standard 83
(87.37)
1,684
(49.08)
119
(17.22)
5,538
(82.4)
365
(58.31)
2,613
(95.64)
10,402
(72.76)
2007-08 EXC GST LBI MEI SME SPR Total
Failed completion standard 2
(2.9)
315
(17.31)
6
(2.08)
831
(8.85)
59
(10.12)
459
(13.02)
1,672
(10.67)
Passed completion standard 67
(97.1)
1,505
(82.69)
283
(97.92)
8,559
(91.15)
524
(89.88)
3,066
(86.98)
14,004
(89.33)

Figures in parenthesis represent percentage of cases.

4.38 Evident is the fairly constant proportion of objections that have met the completion standard over the last three years, at approximately 71 per cent. However, this has jumped to 89 per cent for the 2007-08 income year. For some business lines, there is a significant difference between the proportion of objections that meet the 56-day finalisation standard (for example, GST — 72 per cent, LBI — 98 per cent, SME — 77 per cent) and those meeting the 120-day completion standard (GST — 49 per cent, LBI — 17 per cent, SME — 58 per cent). This reflects the previous discussion about understanding Tax Office performance reporting. Clearly, for a substantial number of objections within these three business lines, the Tax Office is not meeting the 120-day elapsed time standard.

4.39 The Tax Office states that it has introduced strategies to deal with increasing workloads over the past few years in various business areas. It believes that it has consistently met externally reported service standards and has seen a 30 per cent reduction in average cycle times in the past year, whilst workloads have increased. Additionally, commencing the 2008-09 year, it has observed its lowest recorded volume of objections on hand, indicating some success in the strategies employed.

4.40 For the 2007-08 year, the results appear to have improved, but this is largely due to a change in how results are calculated. The Tax Office advises that for the 2007-08 year the 120-day completion standard was revised. Irrespective of a case taking more than 120 days to complete in elapsed time, so long as the case is considered 'complex' and the case is finalised by the negotiated date, the case will meet the 120-day completion standard. On this new definition of the completion standard the 2007-08 completion result was 89 per cent. However, using the old definition (that is, 120 days of elapsed time) the result for the 2007-08 year would have been 74 per cent — a slight increase from the previous years.

4.41 The difference between the old measure and the new measure for the completion standard would suggest that at least 15 per cent of cases in 2007-08 were considered complex and had a negotiated date. This proportion of complex cases varies considerably from the information obtained from the Tax Office's information management system, presented in Table 4.9, which suggests that only about 9 per cent of case are considered to be complex and that approximately 91 per cent of cases have no negotiated due date. However, LBI has a much greater proportion of 'complex' objections as compared to the other business lines.

Table 4.9: Taxpayers' Charter standard — classification of objections into complex or routine (number of cases)
2004-05 EXC GST LBI MEI SME SPR Total
Complex 15 164 590 56 246 3 1,074 (8.65)
Routine 164 1,219 203 5,543 1,693 2,524 11,346 (91.35)
2005-06 EXC GST LBI MEI SME SPR Total
Complex 11 274 381 64 208 12 950 (7.51)
Routine 73 1,428 104 5,271 2,004 2,812 11,692 (92.49)
2006-07 EXC GST LBI MEI SME SPR Total
Complex 21 389 563 396 131 5 1,505 (10.53)
Routine 74 3,042 128 6,325 495 2,727 12,791 (89.47)
2007-08 EXC GST LBI MEI SME SPR Total
Complex 12 326 164 210 128 28 868 (5.54)
Routine 57 1,494 125 9,180 455 3,497 14,808 (94.46)

4.42 An indication of the reasons why the 120-day elapsed time standard was exceeded is provided in the Tax Office's corporate Heartbeat report for June 2008. It shows that 27 per cent of unfinalised cases were awaiting further information from the taxpayer, with a further 26 per cent awaiting a court or tribunal decision. Of the remaining unfinalised cases, 23 per cent had been previously held up due to requests for further information, internal technical advice or pending a court or tribunal decision, but were now being progressed. In addition, 7 per cent of cases were classified as complex and therefore excluded from the Tax Office's completion target performance measure, while 6 per cent of these unfinalised cases were awaiting internal technical advice (either from the Centres of Expertise, the Tax Counsel Network or specific industry teams). Finally, 8 per cent of unfinalised cases had no prior reason for exceeding the 120-day elapsed time standard.

4.43 While the Heartbeat report sheds some light on objection cases exceeding the 120-day elapsed time standard, the Inspector-General believes that more analysis needs to be undertaken, especially in the 'awaiting further information from the taxpayer' category before it could be concluded that the delay was outside the Tax Office's control. In particular, where the objection arises from an audit activity, one consideration should be whether relevant information was requested at that earlier stage and, if not, then why not. In addition, the Tax Office's Heartbeat report does not capture whether delays in the Tax Office requesting further information contributed to the unfinalised case exceeding the 120-day elapsed time standard. This would seem to be a possibility given that in 2007-08 only 8 per cent of cases had a further information request that met the Taxpayers' Charter service standard of being sought within 14 days, with 28 per cent of cases having a request that failed the service standard and 63 per cent of cases having no further information request. This aspect of Tax Office performance is discussed in greater detail below.

4.44 Table 4.10 brings together the Tax Office's performance against both its finalisation and completion benchmarks in an effort to gain a better understanding of the progress of objection cases.

Table 4.10: Number and proportion of objections finalised within 56-elapsed days and 120-elapsed days
2004-05 All objections Per cent Excluding-ATP Per cent
Total number of objections 16,823 100 12,448 100
Number of cases finalised within 56 days 6,497 38.62 5,734 46.06
Number of cases finalised beyond 56 days 10,326 61.38 6,715 53.94
Number of cases beyond 56 days but within 120 days 3,953 23.5 3,076 24.71
Number of cases beyond 120 days 6,373 37.88 3,639 29.23
2005-06 All objections Per cent Excluding-ATP Per cent
Total number of objections 16,287 100 12,689 100
Number of cases finalised within 56 days 5,875 36.07 5,432 42.81
Number of cases finalised beyond 56 days 10,412 63.93 7,257 57.19
Number of cases beyond 56 days but within 120 days 3,798 23.32 3,570 28.13
Number of cases beyond 120 days 6,614 40.61 3,687 29.06
2006-07 All objections Per cent Excluding-ATP Per cent
Total number of objections 14,993 100 14,296 100
Number of cases finalised within 56 days 7,621 50.83 7,484 52.35
Number of cases finalised beyond 56 days 7,372 49.17 6,812 47.65
Number of cases beyond 56 days but within 120 days 3,038 20.26 2,918 20.41
Number of cases beyond 120 days 4,334 28.91 3,894 27.24
2007-08 All objections Per cent Excluding-ATP Per cent
Total number of objections 15,831 100 15,676 100
Number of cases finalised within 56 days 7,434 46.96 7,373 47.03
Number of cases finalised beyond 56 days 8,397 53.04 8,303 52.97
Number of cases beyond 56 days but within 120 days 4,443 28.07 4,420 28.20
Number of cases beyond 120 days 3,954 24.98 3,883 24.77

4.45 Table 4.10 shows that approximately 47 per cent of objections (excluding ATP) are finalised within 56 days of Tax Office-available time, with approximately 53 per cent requiring more than 56 days of Tax Office-available time. Of this later population, just over half require more than 120 days for finalisation. Again, one difficulty faced with drawing any conclusions from this information is the inability to differentiate between the different category of objections (audit-sourced, out-of-time extension requests, within-time amendments lodged as objections). The Inspector-General believes that this level of analysis is important to better understand the drivers of objections and to manage the resolution of disputes.

4.46 Another Taxpayers' Charter service standard is that if an objection raises particularly complex matters that will take more than 56 days to resolve after receiving all the required information, then the Tax Office is to contact the taxpayer within 14 days to negotiate an extended reply date. Information obtained from the Tax Office indicates that in 90 per cent of objections no new due date for the finalisation of the objection was negotiated. This fits with the Tax Office classification of objections as either 'complex' or 'routine' (10 per cent and 90 per cent respectively). Of the remaining 10 per cent of cases where a new due date was negotiated, approximately half failed the 14-day service standard.

Taxpayers' Charter further information requests standard results

4.47 Table 4.11 examines the Tax Office's performance in meeting the further information request standard in the 2004-05, 2005-06, 2006-07 and 2007-08 income years by way of business line. Where a tax officer handling an objection determines that all the information to decide the objection is not available, then the Taxpayers' Charter standard requires them to contact the taxpayer within 14 days to seek any further information.

Table 4.11: Tax Office performance in respect of the Taxpayers' Charter further information request benchmark for objections
2004-05 EXC GST LBI MEI SME SPR Total
Failed further info standard 15
(8.38)
399
(28.58)
356
(44.89)
1,954
(34.9)
542
(27.95)
1,047
(41.43)
4,313
(34.73)
Passed further info standard 19
(10.61)
321
(23.21)
60
(7.57)
331
(5.91)
317
(16.35)
117
(4.63)
1,165
(9.38)
Further info not requested 145
(81.01)
663
(47.94)
377
(47.54)
3,314
(59.19)
1,080
(55.7)
1,363
(53.94)
6,942
(55.89)
2005-06 EXC GST LBI MEI SME SPR Total
Failed further info standard 17
(20.24)
571
(33.55)
143
(29.48)
1,672
(31.34)
744
(33.63)
993
(35.16)
4,140
(32.75)
Passed further info standard 21
(25)
330
(19.39)
24
(4.95)
178
(3.34)
451
(20.39)
141
(4.99)
1,145
(9.06)
Further info not requested 46
(54.76)
801
(47.06)
318
(65.57)
3,485
(65.32)
1,017
(45.98)
1,690
(59.84)
7,357
(58.19)
2006-07 EXC GST LBI MEI SME SPR Total
Failed further info standard 24
(25.26)
1,394
(40.63)
267
(38.64)
1,943
(28.91)
212
(33.87)
337
(12.34)
4,177
(29.22)
Passed further info standard 12
(12.63)
350
(10.12)
227
(32.85)
648
(9.64)
101
(16.13)
269
(9.85)
1,607
(11.24)
Further info not requested 59
(62.11)
1,687
(49.17)
197
(28.51)
4,130
(61.45)
313
(50)
2,126
(77.82)
8,512
(59.54)
2007-08 EXC GST LBI MEI SME SPR Total
Failed further info standard 20
(28.99)
729
(40.05)
101
(34.95)
2,359
(25.12)
204
(34.99)
1,120
(31.77)
4,533
(28.92)
Passed further info standard 14
(20.29)
386
(21.21)
34
(11.76)
556
(5.92)
80
(13.72)
253
(7.18)
1,323
(8.44)
Further info not requested 35
(50.72)
705
(38.74)
154
(53.29)
6,475
(68.96)
299
(51.29)
2,152
(61.05)
9,820
(62.64)

Figures in parenthesis represent percentage of cases.

4.48 Nearly 60 per cent of objections did not require further information prior to finalisation. This suggests that either all the information was available to the tax officer to make a decision or that further information was provided at the time of the lodgement of the objection. However, where further information is requested, then approximately 75 per cent of those cases fail the further information 14-day standard.

4.49 In terms of specific business lines, further information requests appear to be more common in GST, LBI and SME, where in some income years more than 50 per cent of objections required further information. The Tax Office advises that it would be more representative to describe the 14-day further information request standard as a non-reportable service standard.

4.50 The Inspector-General notes that, firstly, the 14-day service standard measures how quickly an objection officer determines what further relevant information is required to determine an objection. If a significant proportion of objections fail the 14-day service standard, then this tends to suggest a potential systemic issue that warrants further investigation. Taxpayer behaviour has no impact on whether the Tax Office is able to meet this service standard.

4.51 Secondly, the Inspector-General believes that the service standard is an important one and is an indicator of the alignment between active compliance work practices and the efficiency and effectiveness of objections. As such, the Tax Office should also publicly report on its performance against the 14-day further information service standard in its annual report.

4.52 The issue of further information requests was also considered by the taskforce report. Table 4.12 lists the outcome of audit-sourced objections where further information is requested.

Table 4.12: Outcomes of objections where further information requests
GST
%
MEI-Individual
%
MEI-Micro
%
SPR
%
Totals
%
Allowed in full 23 36 22 28 27
Allowed in part 37 19 41 54 38
Disallowed 34 28 27 10 25
Withdrawn 6 17 11 8 10

Source: Tax Office.

4.53 The taskforce undertook an examination of objection decisions where further information was requested and where further information was not requested. In the GST and MEI — Individual business lines, where additional information was requested, the objection decision rates were similar to the overall objection decision rates. For MEI — Micro, the proportion of objections allowed in part increased by 9 per cent while the proportion allowed in full decreased by 8 per cent. The taskforce report concluded that this may be due to circumstances where the taxpayer is able to substantiate a part of the deductions disallowed at audit or where the culpability rate is reduced due to the additional information received at the objection stage.

4.54 In the Superannuation business line, the proportion of objections allowed in part increased by 22 per cent while the proportion allowed in full increased by 5 per cent and the disallowed decreased by 21 per cent. The report suggested that this is reflects the impact of additional information on decisions and is indicative of the superannuation guarantee objection cases.

Table 4.13: Outcome of objection where no further information requests
GST
%
MEI-Individual
%
MEI-Micro
%
SPR
%
Totals
%
Allowed in full 34 33 35 18 30
Allowed in Part 26 26 27 10 22
Disallowed 31 41 30 53 39
Withdrawn 9 0 8 18 9

Source: Tax Office.

4.55 Table 4.13 examines the objection decision outcomes where there were no further information requests. The taskforce report found that the most significant difference in the overall results between those objections where further information was requested and not requested was in the allowed in part and disallowed categories.

4.56 Where further information was not requested, the proportion of objections allowed in part decreased by 16 per cent and the disallowed cases increased by 14 per cent. However, the report states that these results were influenced by the superannuation cases included in the sample. The report concluded that these differences were reflective of work type within each of the business lines.

Technical quality of objection decisions

4.57 Objection decisions are reviewed as part of the Tax Office's Technical Quality Review (TQR) process, which seeks to examine the quality of written technical decisions using the Tax Office Judgment Model.

4.58 The TQR methodology set out in Law Administration Practice Statement PS LA 2001/11 requires each business line to rate each sample case in accordance with the Judgment Model. Cases selected for review are rated 'D' or 'E' if any of the following apply:

  • insufficient evidence (for example, lack of documentation) in the case report to arrive at the correct decision;
  • failure to accurately identify and/or address all issues;
  • insufficient evidence from the taxpayer to support the assumptions made; and
  • incorrect treatment of the penalty provisions, incorrect decisions or a failure to understand the taxpayers' questions.

4.59 The Tax Office's TQR Form for dispute decisions focuses on four areas, with each setting out a series of topics for consideration as part of the TQR process:

  • The question — examines whether the case officer understood the taxpayer's problem, whether all the facts were identified and whether the relevant facts were gathered.
  • The decision — considers whether the decision was clear, correct and the thinking direct and convincing with all issues answered and whether the relevant law, Tax Office view and policy were appropriately considered and applied.
  • The explanation — examines whether the reasons were well-explained, in a logical sequence and applied to the taxpayer's situation and whether the relevant legislation, rulings and case law were cited.
  • The delivery — looks at whether the reasons for decision were clearly expressed, grammatically correct, well formatted, courteous and reader friendly.

4.60 Table 4.14 presents the results for technical advice decisions arising from the Tax Office's TQR process.

Table 4.14: Tax Office ratings for technical advice
Corporate standard Aug 06-Jan 07 Feb 07-Jul 07 Aug 07-Jan 08
All finalised 'A' 85 92.85 92.65 80.55
All finalised 'Pass' 95 96.98 97.24 91.51

Source: Tax Office.

4.61 The Tax Office's TQR bi-annual report does not provide a break-up of the different types of technical decision, which would include objection decisions. To that extent, the current TQR results are of limited value in providing a clear picture of the quality of the objection decision making process.

External review

4.62 Another measure of the performance of internal review mechanisms is the extent and outcomes of external review. It has been suggested that a high settlement rate of matters before the court and tribunal is an indication that the filtering effect expected at the first tier of review is not working effectively.

4.63 Table 4.15, sourced from the Tax Office's Annual Report 2007-08, sets out outcomes of court and tribunal cases that did not proceed to hearing. Tables 4.16 and 4.17 show the amount of primary tax and penalties disputed, the adjustment and the final tax position upon the resolution of the dispute.

Table 4.15: Outcomes of court and tribunal cases that did not proceed to hearing, by cases, 2007-08
Outcome Category Total
Scheme Non-scheme
No. %   No. %   No. %
Settled 252 61   259 51   511 56
Conceded or abandoned by taxpayer 118 29   122 24   164 26
Conceded or abandoned by the Tax Office 40 10   124 25   164 18
Total 410 100   505 100   915 100

Source: Tax Office.

Table 4.16: Outcomes of court and tribunal cases that did not proceed to hearing, by primary tax, 2007-08 ($,000)
Outcome Primary tax disputed Primary tax adjustment Final primary tax position
Scheme Non-scheme Total   Scheme Non-scheme Total   Scheme Non-scheme Total
Settled 49,764 77,246 127,010   29,556 22,538 52,095   20,207 54,708 74,915
Conceded or abandoned by taxpayer 13,911 22,208 36,119   0 0 0   13,911 22,208 36,119
Conceded or abandoned by the Tax Office 16,869 137,098 153,968   16,869 137,098 153,968   0 0 0
Total 80,545 236,553 317,099   46,426 159,637 206,063   34,119 76,916 111,035

Source: Tax Office.

Table 4.17: Outcomes of court and tribunal cases that did not proceed to hearing, by penalties, 2007-08 ($,000)
Outcome Penalty disputed Penalty adjustment Final penalty position
Scheme Non-scheme Total   Scheme Non-scheme Total   Scheme Non-scheme Total
Settled 25,912 13,544 39,457   24,250 11,655 35,906   1,661 1,889 3,550
Conceded or abandoned by taxpayer 5,397 8,360 13,757   0 0 0   5,397 8,360 13,757
Conceded or abandoned by the Tax Office 6,668 3,451 10,119   6,668 3,451 10,119   0 0 0
Total 37,977 25,356 63,333   30,918 15,106 46,025   7,058 10,249 17,308

Source: Tax Office.

4.64 In terms of non-scheme litigation, just over 50 per cent of cases were settled by the Tax Office, which abandoned or conceded a further 25 per cent of cases.

4.65 In respect to primary tax adjustment as a result of settlement, there was a 30 per cent variation between the disputed and final tax positions. The extent of this reduction differs between business lines, ranging from 78 per cent in GST, 66 per cent in MEI, approximately 55 per cent in Superannuation and SME and 11 per cent in LBI.

4.66 The Tax Office reports that 33 of the cases it conceded or abandoned were related and dependent on a court decision. Once the decision was handed down in favour of the taxpayer, then the Tax Office conceded the related matters, with a tax adjustment of $88,667,044 or approximately 54 per cent of the total amount of tax conceded by the Tax Office. Apart from this amount, a further $40,726,181 in total tax was conceded by the Tax Office in litigation involving LBI cases. In addition, the GST, MEI and SME business lines each conceded $2.8 million, $2 million and $2.6 million respectively in primary tax.

4.67 With regard to penalties, settlements prior to hearing resulted in an 86 per cent reduction in penalties raised. Again, the extent of this variation differed between business lines, with approximately 99 per cent of penalty being adjusted in the taxpayers' favour for LBI cases ($4 million adjustment), 85 per cent in GST cases ($3.7 million adjustment), 77 per cent in SME cases ($3.5 million adjustment) and 69 per cent in MEI cases ($367,000 adjustment).

4.68 Of the $3.4 million in penalties conceded by the Tax Office, approximately $2.6 million related to GST cases, with a further $720,000 and $67,000 referable to SME and LBI cases.

4.69 Information is also available from the AAT itself regarding the progress and outcome of tax litigation. In its annual report the AAT states that it aims to finalise the majority of applications within 12 months of lodgement, and has set percentage targets for the finalisation of applications within this timeframe for various jurisdictions. Performance with these targets in 2007-08 and in the previous two years is set out in Table 4.18.

Table 4.18: Percentage of applications finalised within 12 months
Target
%
2005-06
%
2006-07
%
2007-08
%
All applications - 65 67 61
Compensation 75 62 62 60
Social security 90 91 91 84
Veterans' affairs 80 66 67 62
Taxation appeals 75 49 42 31

Source: AAT Annual Report.

4.70 The AAT reports that the overall and Taxation Appeals Division results were affected by the finalisation of a large number of older applications relating to taxation decisions and taxation schemes. For 2006-07, when applications relating to taxation schemes are excluded from the figures for the Taxation Appeals Division, then 62 per cent of applications were finalised within 12 months of lodgement and 79 per cent within 18 months.

4.71 In relation to the small taxation matters, the AAT states that it would aim to finalise applications of this type within 12 weeks of lodgement. The AAT notes that the Small Taxation Claims Tribunal was created to provide a cheaper and more informal means for taxpayers to obtain review of decisions where the amount of taxation in dispute is less that $5,000. The AAT reports that applications dealt with in the Small Taxation Claims Tribunal are not necessarily less complex than applications for review of other types of taxation decisions and that, while the amount of tax in dispute may not be large, the parties may require additional time to gather relevant information. The AAT reports the proportion of applications finalised within the 12-week timeframe declined in 2007-08 to 17 per cent from 36 per cent in 2005-06 and 22 per cent in 2006-07.