Part 1: Overview
Inspector-General of Taxation report
The past year marked the 10-year anniversary of my office. It provided an appropriate opportunity to reflect on our achievements, learnings and future directions. It was also a fitting time to express my gratitude to our many and diverse stakeholders, without whose significant contributions the successes of the office would not have been possible.
The position of the Inspector-General of Taxation (IGT) was created in response to taxpayer concerns about the administration of the tax system. These concerns reached a crescendo in the aftermath of the so-called mass marketed schemes which were promoted in the 1990s.
Australians generally appreciate their obligation to pay taxes and the role that the Australian Taxation Office (ATO) has to play in this regard but they also expect fairness and transparency. The relationship between taxpayers and the ATO can be sorely tested where perceptions and actual outcomes do not align with these expectations. Such tensions have certainly arisen on a number of occasions in the past 20 years or so.
The role of the IGT is to investigate systemic issues relating to tax administration and make recommendations for improving the system for all Australians. Addressing perceptions of inequity or lack of transparency forms a significant part of this role.
The IGT has been likened to a ‘safety valve’ for the administration of the tax system, providing a source of accountability, confidence and integrity.
The IGT has moved onward and upward from its early origins. Resulting improvements to tax administration may be very public on occasions, bringing about major changes to the system. On other occasions, the improvements are made less publicly, delivering better outcomes in the background.
In the initial years, there was a significant focus on reviewing issues relating to the Goods and Services Tax (GST). As this tax was relatively new at the time, perhaps this is not so surprising. As time has moved on, the IGT has conducted a range of reviews into different aspects of the administration of taxation and superannuation systems.
I would now like to reflect on some more recent IGT reviews that I believe have been publicly recognised for their contribution:
Review into the ATO’s administration of the Superannuation Guarantee Charge
This was the IGT’s first review into the important area of superannuation administration. It also marked an organisational change in the dynamics between my office and the ATO with increased levels of cooperation providing a blueprint for developing both administrative and policy recommendations for improvement.
Review into the ATO’s use of benchmarking to target the cash economy (benchmarking review)
The review engaged small business taxpayers and their tax agents to address their concerns regarding the ATO’s benchmarking-based compliance action. The review marked a strong uptake in recognition and understanding of the IGT’s role to an expanded audience whose awareness of the office had been hitherto quite limited.
Review into the ATO’s use of early and Alternative Dispute Resolution (ADR review)
The ADR review took place due to taxpayer and tax practitioner representations as well as at the ATO’s own request. It involved consultation with a very wide range of stakeholders, including academics and the judiciary. It has provided a major impetus for, and has accelerated, the ATO’s work in this area.
Review into improving the self assessment system (self assessment review)
Comprehensive reviews such as this are a challenge for any office. This review sought to address a very wide range of issues raised by the full spectrum of taxpayers — from individual to the largest business taxpayers. The report contains 33 recommendations almost half of which are policy related and addressed to the Government. The review naturally had a number of follow up points which may be the subject of partial or comprehensive reviews in the future. For example, as already indicated in my current work program, I may conduct a review of the ATO’s services and support for tax practitioners (tax practitioner review).
Other reviews and submissions
Other major reviews that the IGT has undertaken in recent times also include reviews into the ATO’s Change Program, the so-called ‘U-turns’,1 compliance approaches to SMEs2 and large business compliance.3
In addition to the above major reviews, the IGT has made significant submissions to the Australia’s Future Tax System review (Henry review) and the October 2011 Tax Forum. The recommendations contained in these submissions have been influential in shaping the debate and bringing about structural change in our tax administration.
Key outcomes and observations
The nature of the role of the IGT, which is reviewing systemic tax administration issues and reporting to Government, necessitates a broad range of activities and interactions. The key outcomes flowing from these activities are highlighted below.
On 30 April 2013, my office celebrated 10 years of service to the Australian community. Based on representations from key stakeholders, it is fair to say that the impact of the office has far exceeded original expectations.
Strong support for the continued role of the IGT was received in speeches made by the Assistant Treasurer, Secretary of the Treasury and the Commissioner of Taxation. The event was also attended by Board of Taxation members, academics, representatives of the professional bodies and the judiciary as well as a broad spectrum of tax practitioners and taxpayers that had significantly contributed to the work of the office.
I took this opportunity to release a new booklet that provides the community with a simple and easy to understand guide about my office and how to engage with us. It sets out our motto: ‘Consult, Review, Advise, Improve’. We consult widely, conduct considered reviews and publicly advise on improvements to the tax system. The booklet is designed to promote access to my office for a broader audience including individual and small business taxpayers.
The key to my office’s continuing success is consultation. We have always been open to listen to stakeholders’ concerns and ideas for improvement and we work hard with the ATO and Treasury to better understand these concerns and to design lasting improvements.
It is also interesting to note that there is increasing international support for specialist scrutineering functions, such as those of my office, as an important means to enhance the accountability and transparency of tax administration.
Evolution of the IGT-ATO relationship
There has been a gradual shift in the ATO’s perceptions of the IGT and increasingly the ATO is appreciating that, in addition to being a scrutineer, my office can also play a role as an independent consultant.
Such a shift more clearly recognises that my office is able to engage with external stakeholders and the ATO in an unbiased, candid and evidentiary-based dialogue to identify improvement opportunities. Accordingly, I have observed that the ATO has begun to harness the consultative aspect of my role to provide:
- valuable input into internal review assurance processes and draw on IGT expertise to identify potential systemic issues; and
- an independent check on ATO process controls and ATO business objectives in designing or implementing administrative systems.
For example, the Commissioner recently consulted with me on his proposal to implement an independent review function for certain tax disputes. Although this ATO proposal did not implement any particular IGT recommendations, it was informed by my submission to the October 2011 Tax Forum, recommendation 6.1 of the ADR review and recommendation 9.3 of the large business compliance review.4 I highlighted the risks as well as benefits of such a function and these were considered in the ATO’s design.
Improving implementation of IGT recommendations
My office continues to work collaboratively with ATO senior management to firmly establish an efficient assurance process for the implementation of agreed recommendations contained in my review reports.
The ATO has instituted an internal assurance function under the auspices of its audit committee that oversees the effective implementation of agreed IGT recommendations. The ATO has further supported this initiative by publishing the agreed IGT recommendations along with their implementation status on its website which is periodically updated.
Prior to these initiatives, the IGT would originate a formal follow up review to assess the effectiveness of the ATO’s implementation of agreed recommendations contained in earlier IGT reviews.
Under the new approach, the IGT provides an advisory function before the ATO’s implementation plan is finalised. This dialogue facilitates a closer alignment of views on implementation, allowing consideration of issues which may only come to light at this stage of the process.
Addressing specific issues outside the formal review process
From time to time, discrete and specific issues are raised with my office which may have merit but do not justify a review in their own right or cannot otherwise be included in a wider review. Nevertheless, these issues may deserve attention. Consequently, the IGT has begun a process of writing to the ATO advising them of such issues and, where possible, developing improvements without the conduct of a formal detailed review.
Recent examples where the IGT has raised specific issues with the ATO for formal response include the following:
- taxpayers being inadvertently led to use commercial services as opposed to the free ATO service for lodging income tax returns electronically; and
- ATO call centres not being open outside of business hours, the very times when individual and small business taxpayers are often better able to consider their tax obligations and may be in need of assistance.
I will be seeking to make more use of this avenue in future where appropriately discrete and specific systemic issues are raised with my office.
International revenue and scrutineer body interaction
My office continues to draw on strong ties with other countries’ revenue authorities and associated scrutineer bodies to better inform us of new international developments and potential improvement opportunities for tax administration in Australia.
For example, I consulted the United Kingdom’s HM Revenue and Customs and the United States’ Internal Revenue Service on their approaches to transfer pricing in the course of my review into the ATO’s management of transfer pricing matters (transfer pricing review) as well as their approach to issues relevant to other IGT reviews.
I have also been invited to provide my insights on tax administration through presentations at international tax conferences which are also a useful source of information and ideas.
International and Australian taxation academic interaction
My office also continues to foster closer relationship with academics engaged in the field of tax law and tax administration both within Australia and internationally. The IGT values the independent insights, experiences and innovations that they bring to bear in developing and testing options to improve tax administration. Our involvement with academics includes presenting and participating in their conferences as well as consulting with them on specific IGT reviews.
Interaction with government organisations
My office continues to interact with other government organisations particularly in relation to relevant IGT reviews. For example, the self assessment review involved interaction with Treasury and the Board of Taxation to ensure that recommendations on changed approaches were fully informed of broader government initiatives.
Emerging themes in tax administration
Emerging themes that I have previously highlighted continue to maintain their significance. These themes include: timeliness of delivery, ATO staff capability, increasing ATO appetite for information, certainty of outcomes and compliance costs.
A current theme that is gaining momentum in a number of jurisdictions is a bill of rights for taxpayers. The issue before us is whether the current Taxpayers’ Charter, which is an ATO administrative document, is sufficient or whether we should seek a legislative bill of rights with enforceable remedies. A related issue that continues to be raised with the IGT is whether the current compensation schemes for aggrieved taxpayers are adequate and administered appropriately.
Another emerging theme is the increasing need to conduct significant valuation work. Whilst market value and arm’s length price may be sound economic concepts, their use in tax legislation has necessitated much valuation work for both taxpayers and revenue authorities alike. This may be explored as part of one of my announced but not yet commenced reviews.5
Anti-avoidance measures are another topic that has been a focus for revenue authorities, the tax profession and taxpayers. In my current work program, I have also indicated that I may conduct a review of the ATO’s administration of the general anti-avoidance rules (GAAR review).
A number of other emerging themes are largely covered by my current work program. For example, issues of base erosion and profit shifting are largely covered from an administrative perspective in the transfer pricing review. Similarly, revenue authorities’ risk-based approach to compliance is covered in my review into aspects of the ATO’s use of compliance risk assessment tools (risk review).
Two reviews were in progress at the start of the 2012-13 financial year, with an additional seven commenced during the year. By year end, two reviews were complete, four are significantly advanced and the remaining three are in the final stages.
Both of the completed review reports were publicly released. Additionally, one review report completed in the previous year was publicly released this year.
The first report to be publicly released this year was the report of the ADR review. The review found that approximately 90 per cent of applications for review of tax matters at the Administrative Appeals Tribunal are resolved prior to hearing. This indicated that there was significant opportunity for greater engagement to resolve disputes earlier and reduce unnecessary costs for taxpayers and the ATO alike.
The report contains certain recommendations which are aimed at:
- bringing early engagement and ADR to the forefront of ATO dispute resolution efforts and only litigating cases which turn on genuine and fundamental disputes as to law and where there is a public benefit in having the matters judicially determined;
- the ATO publishing a clear statement of its expectations of taxpayers and ATO staff when engaging in ADR as well as enhancing the skills and understanding of both parties of the different types of ADR; and
- identifying opportunities for continuous improvement through implementing processes to provide feedback on the use of ADR in the tax dispute context.
The second report released this year was the report of the benchmarking review. Stakeholders generally supported benchmarks as a risk identification tool, however, concerns were raised with how they were developed and used in ATO compliance activities.
The review determined that many of the concerns related to the transparency of the process. As a result, I have recommended that the input data and methodology used to develop the benchmarks be made public and independent third party assurance on the methodology be sought.
The review also found that of over 7600 benchmarking audits, the ATO made adjustments in only 24 per cent of cases. Consequently recommendations have been made to improve the ATO’s risk identification and audit processes including the evidentiary requirements to support audit decisions.
The last report released this year was the report of the self assessment review. It arose largely due to an emerging global trend amongst revenue agencies to bring compliance activities forward and, in some cases, prior to lodgement of returns. It has been likened to a pendulum swinging back from pure self assessment to a quasi-full assessment system, without many of the perceived benefits of the former regime.
The 33 recommendations in the report seek to improve taxpayer certainty, reduce compliance costs and rebalance taxpayer protections. A key area identified for improvement, amongst others, is the augmentation of existing public consultation processes with tripartite tax law design teams (comprising ATO and Treasury senior officials as well as paid external tax experts) who would provide advice on the proposed tax law, relevant explanatory memoranda and the nature and timing of ATO advice.
I have also made recommendations relating to key features of the current self assessment regime including, the penalties and interest regime, the Commissioner’s administrative discretion, amendment periods and the ATO’s advice framework.
The ATO has already commenced a process of implementing the agreed recommendations to all of the above three reports.
The remaining seven reviews were announced in my current work program and significant work has been done on each of them this year. The three that are in their final stages are the risk, ITRIP6 and data matching7 reviews. The other four are the penalties8, superannuation excess contributions tax,9 follow-up10 and transfer pricing reviews.
The road ahead
As already mentioned, there is one review on the current work program that will commence before the calendar year end. This is the ATO’s interactions with the Australian Valuation Office.
There are also two further reviews that I have indicated I may conduct either as part of this work program or in a future work program. These are the GAAR and tax practitioner reviews.
It may be necessary to delay the commencement of these reviews to allow the ATO more time to apply recent relevant legislative amendments in the case of the GAAR review and to fully implement its Tax Practitioner Action Plan 2011 — 15 in respect of the tax practitioner review.
I will commence consultation on a new work program in the next calendar year. I welcome submissions from a broad spectrum of taxpayers and tax professionals.
The review selection for the work program is shaped by the scope and objectives of the relevant governing legislation, IGT resources, stakeholder consultations and submissions. Whilst all submissions are given due consideration, priority is given to those review topics which are aimed at enhancing the fairness, transparency, efficiency and simplicity of tax administration for the benefit of all taxpayers.
Once again, I would like to sincerely thank the many taxpayers, tax practitioners and their respective representative bodies who bring matters for review to our attention and for their assistance in the conduct of reviews. Due to its relative size, my office is heavily reliant on the contribution of such external stakeholders.
The contribution of external stakeholders is increasing as they become better acquainted with the work of the office and appreciate that matters can be shared with us on a strictly confidential basis without waiving any legal professional privilege.
Public sector stakeholders
The Commonwealth Auditor-General and the Commonwealth Ombudsman also scrutinise the ATO from their perspectives. The roles of each of their agencies are different but there is potential for some overlap. I am required to consult with both these agencies at least annually in developing my work program.11 Furthermore, pursuant to a recommendation by the Joint Committee of Public Accounts and Audit,12 the three agencies formally agreed, in the previous financial year, to meet annually to share information and consider broadly the ATO review activity.
Accordingly, the three agencies have met as part of their respective annual planning processes. Review activity will continue to be undertaken as appropriate, within the boundaries of our respective legislative frameworks.
I appreciate the assistance that my office has received from these agencies.
I would also like to thank the Commissioner of Taxation and ATO personnel for their professional assistance. Communication between our respective offices has been frank, open and has led to improvements to the tax system.
I would also like to thank Treasury as another partner in this relationship and also the Assistant Treasurer and his staff for their support.
Inspector-General of Taxation
Role, function, outcome and output structure
The IGT Act established an independent statutory agency to review:
- systems established by the ATO to administer tax laws; and
- systems established by tax laws in relation to administrative matters.
The IGT seeks to improve the administration of tax laws for the benefit of all taxpayers. This is to be achieved by identifying systemic tax administration issues and providing independent advice to Government on how these issues may be overcome or alleviated.
To ensure that reviews undertaken reflect areas of key concern to the Australian community, the IGT develops a work program following broad-based consultation with stakeholders including taxpayers, tax practitioners and their representatives, the Commonwealth Ombudsman, the Commonwealth Auditor-General and the Commissioner of Taxation.
Figure 1: Outcome and program structure
Figure 2: Inspector-General of Taxation management structure
Appendix 1 — Expenses for outcomes
|Outcome 1: Improved tax administration through community consultation, review, and independent advice to Government||Budget
|Program 1.1: Inspector-General of Taxation|
|Expenses not requiring appropriation in the Budget Year||30||17||13|
|Total for Program 1.1||2,685||2,619||66|
|Price of departmental outputs||–||–||–|
|Total estimated resourcing||2,685||2,619||66|
|Total expenses for Outcome 1||2,685||2,619||66|
1 Ordinary annual services (Appropriation Bill No.1).
|Average staffing level (number)2||11||10|
2 Portfolio Budget Statement 2012-13.
Appendix 2 — Agency resource statement
|Ordinary Annual Services1|
|Total ordinary annual services||5,566||2,526||3,040|
|Total Available Annual|
|Appropriations and payments||5,566||2,526||3,040|
|Total resourcing and payments||5,566||2,526||3,040|
|Total net resourcing and payments for Inspector-General of Taxation||5,566||2,526||3,040|
1 Appropriation Bill (No1) 2012-13. This may also include Prior Year departmental appropriation and s.31 relevant agency receipts.
2 Includes an amount of $0.03 million in 2012-13 for the Departmental Capital Budget. For accounting purposes this amount has been designated as ‘contributions by owners’.
1 Review into delayed or changed ATO views on significant issues.
2 Review into the ATO’s compliance approaches to small and medium enterprises with annual turnovers between $100 million and $250 million and high wealth individuals.
3 Review into the ATO’s large business risk review and audit policies, procedures and practices.
4 Review into the ATO’s large business risk review and audit policies, procedures and practices.
5 Review of the ATO’s interaction with the Australian Valuation Office.
6 Review into the ATO’s compliance approach to individual taxpayers — income tax refund integrity program.
7 Review into the ATO’s compliance approach to individual taxpayers — use of data matching.
8 Review into the ATO’s administration of penalties.
9 Review into the ATO’s compliance approach to individual taxpayers — superannuation excess contributions tax.
10 Review of the ATO’s implementation of agreed recommendations arising out of reports published between August 2009 and November 2010.
11 Subsection 9(2) of the IGT Act.
12 Joint Committee of Public Accounts and Audit, Parliament of Australia, Report 426: Ninth Annual Public Hearing with the Commissioner of Taxation (2011), p 32.