On 10 October 2012, the Inspector-General of Taxation (IGT), Mr Ali Noroozi, announced his new work program for improving tax administration in Australia following an extensive community consultation process.
The IGT consulted with taxpayers, tax practitioners, professional bodies, industry associations and tax academics to identify concerns and improvement opportunities. The Assistant Treasurer, the Hon David Bradbury MP, the Joint Committee of Public Accounts and Audit and government agencies, namely the Commonwealth Auditor-General, the Commonwealth Ombudsman, the Australian Taxation Office (ATO) and the Department of Treasury were also consulted.
Key stakeholder concerns have emerged from this frank and open consultation process, assisting the IGT in directing his limited resources to the most appropriate areas.
The IGT expresses his thanks to all parties who contributed, during and prior to the formal work program consultation process. While the IGT seeks to set a challenging program, it is not possible to review every topic raised with the IGT. Topics included on the work program reflect the greatest levels of community concern and/or their importance in achieving a more efficient, fair and transparent tax administration.
Each IGT review achieves both direct and incremental improvements. Whilst the full benefit of a given review may not always be immediately apparent, the IGT is confident that the incremental changes brought about by the reviews and other complimentary activities that the IGT undertakes, over time, will result in enduring improvements to tax administration for the benefit of all Australians.
The new IGT work program of reviews is briefly outlined below.
Review into aspects of the ATO's use of compliance risk assessment tools
Many submissions raised concerns with the ATO's risk assessment tools and their application in selecting taxpayers for audit or other compliance activities. Stakeholders questioned whether a significant number of compliant taxpayers were inadvertently captured resulting in the unnecessary imposition of higher compliance costs. Concerns were also expressed in relation to inaccurate risk ratings based on incorrect assumptions or irrelevant factors which taxpayers cannot correct or test due to the lack of transparency of the process. The robustness of the methodology was also questioned, particularly the potential for arbitrary risk ratings where subjective criteria were the determinative factors.
In this review, the IGT will consider the ATO's broad approach to risk assessment and examine a sample of risk assessment tools used in particular market segments or for particular ATO revenue 'products'. The IGT will seek to determine the effectiveness of these tools in accurately determining the risk of non-compliance, including the role of random audits in developing risk factors or validating compliance effectiveness. Consideration of whether adequate due process is afforded to taxpayers will also be examined, including whether opportunities exist to test the underlying information on which risk assessments are based. Such a review may also consider the inputs and methodologies used by the ATO.
Review into the ATO's administration of penalties
Stakeholder concerns with the sustainability of ATO penalty decisions continue to be raised. In particular, questions have been raised as to whether the relevant ATO processes place sufficient emphasis on appropriate evidentiary bases for penalty decisions to avoid unsustainable penalties being used as 'bargaining chips' in settlement negotiations.
Furthermore, submissions refer to significant compliance costs in disputing ATO penalty decisions. The ATO's recent publication, Your case matters, also indicates an increase in objections to penalties and interest alone.
In this review, the IGT will seek to determine the underlying causes for unsustainable ATO penalty decisions and whether improvements can be made to the ATO's policies, procedures, training and support tools to achieve better outcomes. The IGT will also aim to examine the fairness of aspects of the penalty regime whilst recognising its role as a deterrent against non-compliance.
Review of the ATO's management of transfer pricing matters
Submissions raised concerns with the ATO's compliance approach to transfer pricing within the small to medium enterprise and large business market segments. They have cited considerable delays and compliance costs as key issues. Such delays and compliance costs are seen to be compounded by the current structure of the ATO's internal transfer pricing capability, inconsistent approaches and appetite for considerable amounts of information. Submissions have also suggested that the Commissioner's interpretation of the law, and his discretion to make transfer pricing adjustments, set out in different ATO advice 'products', do not seamlessly fit together. They have suggested that greater clarity could be achieved by consolidating and updating such advice to take into account relevant changes in international arrangements.
The IGT will examine the ATO's transfer pricing activities and investigate whether opportunities for improvement can be secured, such as through safe harbours, to reduce compliance costs and delays. The review will also consider ATO policies and processes used in managing and resolving transfer pricing matters, as well as the adequacy of ATO staff's technical capability and business expertise.
Review into aspects of the ATO's compliance approaches to individual taxpayers
The individual and micro business market segment consists of a very large number of taxpayers and, correspondingly, a wide range of issues have been raised with the IGT. Such issues include delays, perceptions of ATO auditor aggressiveness and lack of capability, the clarity of ATO communications and the adequacy of available ATO guidance to assist individual taxpayers comply with their obligations.
In the last IGT work program a specific area that was reviewed was the ATO's use of benchmarking to target the cash economy. Three further specific areas, which have been consistently raised with the IGT, will be explored in this review as part of the new work program. Specific improvement opportunities as well as those which may have broader application in this market segment are likely to be identified in this review.
The three discrete compliance areas which make up this review are:
- delayed refunds arising from the income tax refund integrity program;
- administration of excess contributions tax; and
- use of third party data in compliance activities.
While these identified areas may be most relevant to individual taxpayers and to some extent micro businesses, they may also surface common issues or themes having broader application to other taxpayer segments.
The IGT will continue to monitor developments in those ATO compliance activities which adversely impact micro businesses and individuals with a view to examining other areas of concerns as they emerge.
Review of the ATO's interaction with the Australian Valuation Office
Concerns relating to the ATO's interaction with the Australian Valuation Office (AVO) have been raised for some time. Stakeholders question whether the AVO is sufficiently independent of the ATO and whether there is a revenue bias in determining its valuations or related advice. Furthermore, the unnecessary compliance costs and delays incurred in challenging AVO valuations were thought to be exacerbated by a perceived lack of expertise within the AVO and selective provision of information or briefing by the ATO to the AVO.
The IGT will investigate whether an appropriate level of independence is maintained between the ATO and AVO. Such a review would examine the transparency and appropriateness of ATO-AVO instructions, interactions, governance structures and service standards. The IGT will also consider the nature or areas of valuations undertaken by the AVO and its capabilities in provision of services to the ATO.
Additional Review Topics
Two further topics that stakeholders have strongly recommended for inclusion in the IGT work Program are set out below. Whilst both these topics are no less important than the ones outlined above, the IGT considers that there would be greater benefit if these issues were reviewed at a later point in time either as part of this work program, resources permitting, or in a future work program.
Review of the ATO's administration of the General Anti-Avoidance Rules
Significant concerns have been raised regarding the ATO's approach and application of the general anti-avoidance rules (GAAR), in particular Part IVA of the Income Tax Assessment Act 1936. In this regard, stakeholders allege that they have been subjected to unnecessary compliance costs and inappropriate reputational impacts. These adverse consequences are attributed to the GAAR provisions being applied without strong evidentiary bases, demands for excessive amounts of information, the inadequacy of guidance available to both ATO staff and taxpayers and poor case selection for litigation. Stakeholders also believe that the GAAR should be applied as a last resort but claim that the ATO considers them concurrently with other issues in an inappropriate manner. Concerns were also raised with the transparency of the GAAR Panel processes.
However, given the imminent law change announced in March 2012, the IGT considers that it may be more beneficial to await the enactment of the new law and any resultant changes in ATO administrative practices before undertaking such a review.
Review of the ATO's services and support for tax practitioners
Tax practitioners play a key role in facilitating voluntary compliance of a significant portion of the taxpayer population. In earlier reviews, the IGT has recognised their significant contribution and has made recommendations relating to their function, their interaction with the ATO and how the two can work together to improve the administration of the self assessment system.
The ATO publicly recognises the importance of the role of tax practitioners within the tax system and, over the years, has sought to work collaboratively with them. Most recently, the ATO has released its Tax Practitioner Action Plan 2011-15 which outlines a foundation on how the ATO will work with tax practitioners.
Given this recent initiative, the IGT considers that it would be useful to allow an appropriate period of time for the ATO to implement its Action Plan before a review is undertaken in this area.
Reviews currently underway
In August 2012, the IGT commenced a review of the ATO's implementation of agreed recommendations arising out of reports published between August 2009 and November 2010. The IGT reports which are the subject of this review are:
- Review of the Tax Office's administration of public binding advice;
- Review into the underlying causes and the management of objections to Tax Office decisions;
- Review into the non-lodgement of individual income tax returns;
- Review into aspects of the Tax Office's settlement of active compliance activities;
- Review into delayed or changed Australian Taxation Office views on significant issues (the so-called 'U-turns' review); and
- Review into the ATO's administration of the Superannuation Guarantee Charge.
The IGT has received a number of submissions which have raised continuing concerns in relation to some of these reviews, most notably, the U-turns review.
Inspector-General of Taxation
10 October 2012