Part 1: Overview
I commenced my role as Inspector-General of Taxation (IGT) on 06 November 2008 taking over from David Vos AM, the first IGT.
I thank David for establishing the office, for his work to ensure its viability and continuity, and for the contribution to improving tax administration that he made during his five years as IGT.
My priorities on commencing as IGT were:
- to progress and complete pre-existing reviews;
- to develop a new forward work program and commence new reviews;
- to consider what factors might underlie the tensions between the Australian Taxation Office (ATO) and taxpayers in developing review findings and potential improvements to tax administration; and
- to establish a positive working relationship with the ATO.
At November 2008, four reviews were underway and as at the end of the 2008/2009 financial year they had been progressed as follows:
- a review into the underlying causes and the management of objections to Tax Office decisions (commenced January 2007, completed on 15 April 2009 and released by the Minister on 11 August 2009);
- a review into the Tax Office’s administration of public binding advice (commenced November 2007, completed 7 April 2009 and released by the Minister on 7 August 2009);
- a review into the non-lodgement of income tax returns (commenced November 2007, completed and submitted to the Minister on 11 June 2009); and
- a review into aspects of the Tax Office’s settlement of active compliance activities (commenced October 2007, and at the draft report stage).
A fourth, summary report on the review of the Tax Office’s handling of complex matters arising from the three case study reviews completed during 2007 (commenced June 2007) was completed and publicly released 29 October 2008. A full list and report of all reviews released since the IGT was established is on my website, www.igt.gov.au.
Forward work program
To develop my forward work program I consulted widely with business and other taxpayers, tax practitioners (legal and accounting), professional bodies and industry associations about areas of tax administration that could be improved. The Assistant Treasurer, the Joint Committee on Public Accounts and Audit (JCPAA), the Commonwealth Auditor-General, the Commonwealth Ombudsman, the ATO and the Treasury were also consulted. Overall, the consultation process considered over 50 written and oral submissions from the community, which collectively raised over 160 issues.
This process surfaced a wide range of issues and concerns about tax administration that the community considered should be reviewed by the IGT. Some of these issues and concerns had also been raised with the Assistant Treasurer and the ATO.
In response to submissions from concerned taxpayers and at the direction of the Assistant Treasurer, I have commenced a review into the implications of any delayed or changed ATO advice on significant issues. Taxpayers and tax professionals have cited examples of where they considered that the ATO’s views had undergone “U-turns” on significant interpretative matters or on past practices, especially where they had retrospective application. ATO opinions that came after lengthy periods of having no ATO view, but with retrospective application, were also raised as a concern.
In response to an invitation from the Commissioner, I have also commenced a review of the private rulings system. One of the most repeated concerns raised in submissions was the ATO’s proposal to withdraw public access to the edited versions of the rulings themselves, held on the public register of private rulings. Having conducted its own consultation process including discussions with the IGT, the ATO decided to retain the register, and suggested that the IGT undertake a broad review of the private rulings system. The issues that this review will consider include productivity, timeliness and the system’s future integrity. The use of the register of rulings and the access to edited private rulings will also be examined together with related authoritative (but non-binding) forms of ATO advice such as ATO Interpretative Decisions (ATOIDs).
From the wide range of other issues raised in consultation, I distilled the following further issues that will form my work program for 2009 and into 2010 (subject to any matters of overriding priority that may arise):
- review into the ATO’s administration of the Superannuation Guarantee Charge (SGC) (commenced in June 2009);
- review into the ATO’s practices for finalising large company audits;
- review into the ATO’s compliance focus on Small to Medium Enterprises (SME);
- review into the efficiency of the ATO’s compliance and regulatory approaches to Self Managed Super Funds (SMSFs); and
- follow-up review into the ATO’s implementation of agreed IGT recommendations (commenced in June 2009). This second follow-up review will focus mainly on the ATO’s progress with implementing changes agreed in the IGT’s six reviews released between April 2007 and October 2008.
Further information on the forward work program, including a shortlist of reserve topics that I may elevate into my active work program as priorities and resources allow, is at Part 2 of this report and full details are available on my website.
I thank all those in the community who provided input to the development of my forward work program.
Factors underlying tensions in tax administration
The consultation process outlined above, combined with the reports of previous IGT reviews, have been useful input when considering the deeper issues that might underlie the tensions in tax administration that surface with some frequency in Australia. The principles of good tax administration mentioned in the Explanatory Memorandum to the IGT law — fairness, transparency, simplicity and efficiency — are clearly subscribed to by the ATO. However, these principles are perceived sometimes to succumb to the pressure of other forces such as, resources, capability, complexity, revenue collection and sometimes the design of the system itself.
With the notable exception of the SGC, concerns about tax administration predominantly come from the business sector, especially from medium to large businesses and from those that represent them. This may in part be due to the large business sector being subjected to more compliance action by the ATO, but it may also be due to smaller taxpayers (including individuals) not being as well equipped as the business sector to identify and raise any collective concerns. However, downward trends in individual complaints to the Taxation Ombudsman since the cooling of the mass-marketed schemes period tend to support a view that improvements to tax administration for individuals, support for them from the ATO and the relative simplicity of their tax affairs, underlies the limited number of issues raised by this section of the community. The days of widespread concern over, for example, systemic delays in processing individual income tax refunds and major ATO operational faux pas are hopefully long gone.
Tax agents do have concerns, mainly about their operational interactions with the ATO but most acknowledge major steps forward in recent years and this is consistent with positive feedback contained in ATO surveys. Without undertaking a formal review, during 2008/2009 financial year my staff facilitated communication between the ATO and tax agents in Tasmania about their concerns and I have recently published key documents from this exchange on my website.
Underlying concerns from the business sector is the ATO’s capabilities and approaches in developing and applying its view of the law in significant compliance issues or on new laws. This fundamental aspect of tax administration has surfaced as a causal factor in several IGT reviews including the ATO’s Management of Litigation, the three complex issue case studies (Research and Development Syndicates, Living Away from Home Allowances, Service Entity Arrangements) and Potential Revenue Bias in Private Binding Rulings involving large complex matters. It has surfaced again as the underlying factor in my major new review directed by the Assistant Treasurer into the Implications of any Delayed or Changed ATO advice on Significant Issues (the so called ‘U-Turn’ Review).
During consultation on my work program, representatives of businesses and the tax profession pointed repeatedly to recent examples of what they saw as delayed ATO views and changes (or perceived changes) to pre-existing views or practices that were applied with retrospective effect. To date over 60 such examples have been raised with me and they include the ATO’s approach to service trusts, managed investment schemes and thin capitalisation rules.
These perceptions will be examined during the new review and business stakeholders will need to support their assertions. Whilst the ATO rejects any instances of changed ATO views being retrospectively applied, the mere existence of such perceptions, compounded by the findings of earlier reviews, suggests dissatisfaction by business taxpayers with the fairness of the ATO’s approaches and its ability to act within timeframes that are commensurate with business needs. In a spirit of collaboration, we are forming a joint working group with the ATO, involving practitioners and other business stakeholders, to find solutions and put systems in place so that such instances are minimised in the future.
Related to this concern is a question of how well some features of the tax law which acknowledge complexity in the system — such as reasonable arguable position and general administrative practice — are being embraced by the ATO to provide fairness and flexibility in its administration in line with its stated approach of trusting taxpayers and giving them the benefit of the doubt. These related questions will also be canvassed in my new reviews and in on-going dialogue with the ATO. For example, we are attempting to resolve our difference of view on the meaning of general administrative practice by seeking an independent legal opinion.
The ATO is to be commended for the annual publication of its Compliance Program. However, concerns are still being raised in community consultation about the transparency of its reporting on results of the program, particularly the actual revenue results after compliance actions are fully completed as opposed to the liabilities initially raised, and the relative size and cost effectiveness of compliance results across different case sizes and taxpayer sectors. A number of past and recent IGT reviews have revealed that significant amounts of compliance liabilities originally raised, including penalties, are negated by subsequent disputes and settlements. These reviews have raised the concern that the quality of ATO views of the law taken during compliance actions and uncooperative taxpayer behaviour underlie these reductions.
Reporting the proportion of each type of ATO active compliance action that actually achieves a worthwhile result would also inform public opinion about the focus and balance of investment in the program. Of course, the indirect “voluntary” compliance impact of compliance actions is rightly cited as important. However, it is largely unmeasured and, to the extent that there is a high proportion of relatively inconsequential outcomes achieved at high cost, it could result in a compliance backlash over time.
Whilst the IGT has not conducted a formal review into the concerns raised above with the ATO’s compliance program, the ATO has offered to provide briefings to us in this regard and, if necessary, we may embark on such a review in the future.
Following representations from business organisations a few years ago, improvements to compliance reporting have been made but costs to business of the ATO’s income tax and GST active compliance actions are a mounting concern. The costs of the ATO’s project to review all SMEs for both income tax and GST has drawn particular criticism and will be the subject of a review in my forward work program. Large business continues to decry the cost impacts of what it sees as the ATO’s lack of commercial knowledge, lack of pragmatism, lack of urgency, and tendency to focus on minutiae. Repeated reports of inappropriate ATO actions in the final stages of audits, caused by its inefficient management of the early stages, have led me to include a review of these concerns in my work program as well.
Community concerns that some employers are not meeting their SGC obligations are one example of how concern for fairness in the system in respect of individuals is strong. SGC was an area where, unlike some of the areas discussed above, I received comment that ATO compliance action needed to be increased and re-engineered. Observations made during consultation that compliance with SGC is largely reliant on the least empowered in the system — namely those employees (often at lower levels) prepared to notify the ATO that they believe their SGC has not been paid — have already been strongly reinforced in submissions to my review of SGC compliance. However, the ATO has advised that data is obtained from multiple sources (ie other than employee complaints) in formulating their SGC compliance activities and we will be exploring this issue amongst others. Submissions also expressed the view that the ATO lacks the staffing resources to deliver an adequate level of SGC compliance.
All of the above tensions surfaced during community consultation and they suggest growing perceptions that the ATO should do more to report the full reality of its return on active compliance investment, factor community perceptions into its risk analyses, and potentially re-focus its resources to achieve better voluntary compliance at reduced costs to the community.
During the consultations on my work program, a number of notable groups were also of the view that many of the above concerns could only be addressed by a fundamental change to the ATO governance structure and examples of oversight, management or advisory boards associated with revenue authorities in other jurisdictions were cited as alternatives.
Based on overseas experience, it is difficult to see the role that such boards alone could play in alleviating taxpayer concerns such as revenue bias and so called “U – Turns”. However, they may assist the ATO with its strategic planning and management as well as the reporting of the outcome of its active compliance program resulting in a more efficient and even better run organisation.
While the issue of ATO governance is on my reserved list of reviews, this matter is being considered by Australia’s future tax system review (the Henry Review). Alongside other stakeholders, I have been providing input into this review and we await the outcome of the review panel’s deliberations.
These initial observations of some of the factors that are influencing tax administration in Australia will continue to evolve as a framework for my future reviews and in dialogue with the ATO on what further improvement can be made.
Relationship with the ATO
I take this opportunity to thank the Commissioner and his Executive staff for welcoming me into my role as the new IGT and making efforts to establish a positive working relationship going forward. The direct involvement of Second Commissioners and other senior staff in my reviews is of great benefit.
I see the role of the IGT in reviews as, in a sense, facilitator and mediator between the taxpaying community and the ATO, bringing perspectives together as a basis for discussing the way forward. The co-operative approach being taken on reviews generally, and the collaboration on finalising the review into settlements and undertaking the new review requested by the ATO into private rulings, reflects this view and my aim of delivering agreed changes based on mutually understood perspectives wherever possible.
It is also fair to say that globally the relationship between the revenue authorities and taxpayers continues to evolve. The aim in Australia should be to continue to develop a more trusting and positive relationship. The role of tax practitioners in fostering such relationships cannot be overstated. Generally, they rightfully assert that representing their clients’ interest is paramount. However, this does not necessarily preclude them from acting as effective mediators between the revenue authority and their clients in settling disputes. This to some extent already happens and where possible I hope to encourage all three parties to further embrace this approach.
Improvements to tax administration
From the establishment of the role in 2003, IGT reviews have achieved or contributed to a significant number of improvements to tax administration. The Commissioner has agreed wholly or in part to the vast majority of recommendations made in IGT reports to Government as shown in the following table. A follow-up review of the first six reviews showed that, with very few exceptions, the ATO has implemented agreed recommendations. I commenced a second follow-up review in June 2009 to examine ATO progress with implementing agreed recommendations from more recent reviews.
Table 1: Number of IGT recommendations accepted or partially accepted
Number accepted/total recommendations
|Review of remission of general interest charge for taxpayers in dispute with the Tax Office||16/19*|
|Review of Tax Office administration of GST refunds resulting from the lodgement of credit BASs||12/12|
|Review into the Tax Office’s small business debt collection practices||2/2|
|Review into Tax Office’s administration of penalties and interest arising from active compliance||4/4|
|Review into Tax Office audit time frames||4/4|
|Review into the Tax Office’s management of litigation||27/32|
|Case Study — Service Entity Arrangements||10/12|
|Case Study — Living Away from Home Allowances||2/2|
|Case Study — Research and Development syndicates||1/2|
|Review into potential bias of private binding rulings for large businesses||10/10|
|Review into the Tax Office’s administration of GST audits for large businesses||12/14|
|Report on improvements to tax administration arising from the IGT’s case study reviews of the Tax Office’s management of major, complex issues||6/6|
|Review into the non-lodgement of income tax returns||Awaiting public release|
|Review into the underlying causes and the management of objections to Tax Office decisions||10/12|
|Review into the Tax Office’s administration of public binding advice||6/7|
|Total recommendations accepted/total recommendations||122/138|
Public sector stakeholders
The Commonwealth Auditor-General and the Commonwealth (and Taxation) Ombudsman also scrutinise the ATO from their perspectives. The roles of each agency are different and we have sought to communicate with each other regularly to ensure that there is no unnecessary duplication of the reviews conducted by each agency. My office is in contact with these agencies both in respect of developing our respective work programs and on some specific reviews.
Pursuant to subsection 41(2) of the Inspector-General of Taxation Act 2003 (the Act) the Assistant Treasurer made one direction to the Inspector-General under subsection 8(2) of the Act during the year. This direction was to review the implications of any delayed or changed ATO advice on significant issues as described above.
In setting my work program, I have taken into account the requirements of subsection 9(2) of the Act and have consulted with the Commonwealth Ombudsman and the Commonwealth Auditor-General.
Inspector-General of Taxation
The Inspector-General of Taxation Act 2003 established an independent statutory agency to review:
- systems established by the Australian Taxation Office to administer the tax laws; and
- systems established by tax laws in relation to administrative matters.
The Inspector-General seeks to improve the administration of the tax laws for the benefit of all taxpayers. This is to be achieved by identifying systemic issues in the administration of the tax laws and providing independent advice to the government on the administration of the tax laws.
To ensure that reviews undertaken reflect areas of key concern to the Australian community, the Inspector-General develops a work program following broad-based consultation with other stakeholders including taxpayers and their representatives, the Commonwealth Ombudsman, the Commonwealth Auditor-General and the Commissioner of Taxation.
Table A1: IGT resource statement for 2008
as at Budget May 2008