Chapter 2 — Taxpayer awareness of PAYG instalment obligations
2.1 This chapter explores concerns raised regarding taxpayers’ level of awareness of PAYG instalment obligations, including the ATO’s key correspondence and advice to affected individual taxpayers. It also considers training and support provided to ATO staff who, for example, assist taxpayers with their enquiries about the PAYG instalments system.
2.2 The IGT’s complaint investigations and stakeholders’ submissions to the review have highlighted a number of aspects of the PAYG instalments system of which individual taxpayers are commonly unaware and that the relevant ATO correspondence do not address.
2.3 First, taxpayers are not provided specific reasoning for being entered into the PAYG instalments system and the resulting taxpayer obligations are not adequately explained. Therefore, some taxpayers may disregard the correspondence, believing they have complied with their annual tax obligations and no further action is required. Such taxpayers are then surprised when the ATO takes action to recover the resulting tax debt which may also include an interest component and penalties.
2.4 Secondly, taxpayers are not sufficiently made aware of the tools on the ATO website, which can assist them to vary the amount of their PAYG instalments. Some taxpayers are apprehensive about making such variations due to the complexity of the instalment amount calculations and potential to incur interest and penalties for underestimating the amount needed to cover their final income tax liability. Accordingly, stakeholders believe that this leads some taxpayers to pay more than is needed and unnecessarily impacts their cash flows.
2.5 Thirdly, the eligibility requirements for taxpayers to report and pay instalments annually are not adequately explained. They are also not made aware of the impact of seeking to vary instalment amounts after the due date. As a result, stakeholders have commented that some taxpayers have formed an impression that the ATO is not processing their requests, which unnecessarily affects their cash flow, or increases their compliance burden in trying to correct what they believe to be an error.
2.6 Fourthly, it is unclear to taxpayers the date on which they will be removed from the system following an exit request (the ‘effective date’), for example, where their circumstances have changed during the financial year. In particular, it is not clear that all PAYG instalment obligations, which arose prior to the effective date of the exit request, must still be met. In these cases, stakeholders have commented that some taxpayers perceive that the ATO is not processing their exit requests, particularly as they receive no acknowledgement or confirmation from the ATO. In some situations, stakeholders have also observed that the ATO has advised taxpayers to await the lodgment of their next annual income tax return to be removed from the PAYG instalments system which is said to be an ineffective solution and results in unnecessary debts and recovery action.
2.7 Lastly, the ATO includes notional credits on an individual taxpayer’s NOA for PAYG instalment amounts, regardless of whether they have been paid. Stakeholders have said that this leads some taxpayers to believe that they have fulfilled their income tax and PAYG instalment obligations upon making any final payments specified on the NOA or receipt of refunds. It is not clear to these taxpayers that unpaid PAYG instalments are recoverable debts and they are surprised when debt collection action is later taken by the ATO.
2.8 Given the range of aspects of the PAYG instalments system of which taxpayers are unaware, stakeholders believe that the ATO should improve its guidance material. It should also be noted that tax practitioners have also commented that they expend considerable amounts of unbillable time and resources in explaining the ATO’s PAYG instalments correspondence to their clients.
2.9 Stakeholders have singled out the ATO’s welcome letter, issued to taxpayers upon their entry into the PAYG instalments system, as key to improving taxpayers’ knowledge in this area. The letter is an opportunity for the ATO to more clearly explain the system, its main features and taxpayers’ obligations. Additionally, stakeholders believe that the ATO should provide more detailed information by way of an easy to read guide to accompany the welcome letter.
2.10 Furthermore, stakeholders have observed that ATO staff dealing with telephone enquires often lack basic knowledge of the PAYG instalments system. They believe that such ATO staff should be provided additional training and support to effectively deal with these enquires.
2.11 The ATO had commissioned research in 2011 to better understand the compliance experience of individual and small business taxpayers as well as tax professionals in dealing with the PAYG instalments system.
2.12 The research found entry into the system was confusing for many, especially individuals, as it is a significant increase in reporting and payment obligations from their usual income tax preparation and lodgment experience.40 It was also observed that once taxpayers had mastered the basics of the PAYG instalments system, they continued to use an approach which was pragmatic and economical. However it was clear that there was still a significant knowledge gap—the report refers to this as ‘not knowing what they don’t know’.41
2.13 Individual taxpayers were found to have the lowest levels of awareness of key aspects of the system, including the different options for calculating instalment amounts, the ability to vary instalment amounts if their circumstances changed during the year and the ability to exit the system should their business or investment activities cease.42
2.14 The research also found that, for both individuals and businesses, the ATO website was the primary information channel. The next source of information for individuals was generally the ATO’s call centre, whereas businesses contacted their tax representatives.43 Both individual and business taxpayers asked similar questions of the ATO and their tax representatives, including:
- general information about the PAYG instalments system;
- how much they need to pay;
- how to vary instalments;
- the frequency of payment required; and
- the reasons they have been entered into the system.44
2.15 A number of areas for improvement were identified, including that the ATO:
- review its suite of correspondence provided to taxpayers upon their entry into the PAYG instalments system and address the information gap in the materials to improve taxpayers’ understanding of the system, including the development of a simplistic overview brochure to foster initial system wide understanding; and
- build awareness of the system through existing touch points including better communicating the options to calculate instalment amounts and their associated risks and benefits, the ability to vary instalment amounts should taxpayers’ circumstances change and the ability for taxpayers to exit the system should their business or investment activity cease as well as the system’s integrity measures.
2.16 During this review, ATO management implemented its 2017–18 PAYG instalments communication plan. The communication plan details how the ATO aims to help taxpayers understand and meet their PAYG instalments obligations and improve the taxpayer experience with the system such as through review of its correspondence, updating online content and scripting for ATO call centre staff.45
ATO welcome letter and brochure
2.17 The ATO’s PAYG instalments welcome letter was last amended 3 years ago. It is provided to taxpayers upon their entry into the PAYG instalments system. A template of this letter is reproduced in Appendix 3.
2.18 The ATO’s welcome letter explains broadly the requirement for taxpayers to pay instalments and the crediting of those instalments toward their annual income tax liability. It sets out the options for taxpayers to pay the instalment amounts calculated by the ATO or to calculate their own instalments, how to vary instalments if their income changes and how to elect to report and pay annually. It also explains that taxpayers may visit the ATO’s website or contact the ATO if they have any further questions.46
2.19 During this review, ATO management endorsed a brochure, Top tips for PAYG instalments, to assist individual taxpayers to better understand the PAYG instalments system. The brochure provides an overview of taxpayer obligations under the PAYG instalments system as well as informing taxpayers that a calculator is available on its website to help them work out how much to pay, that they may vary instalments amounts and where they may obtain further information.47 The ATO has advised that the brochure is currently only provided to taxpayers at public events attended by ATO representatives.
2.20 The ATO’s website explains that the PAYG instalments system is a system for making regular payments towards expected annual income tax liabilities and only applies if taxpayers earn business or investment income over a certain amount. The website also informs taxpayers that the ATO will notify them if they need to start paying instalments and will send them an Activity Statement before instalments are due. Additionally, taxpayers are informed that where they have a myGov account linked to the ATO, they are able to view, lodge, pay, vary and manage all their PAYG instalment obligations online. Other relevant information on the ATO website are provided under the following headings:
- Who needs to pay PAYG instalments;
- How to start paying instalments;
- Your PAYG instalments correspondence;
- Calculating the amount you pay;
- How to vary the amount you pay;
- How often you lodge and pay;
- Your activity statement or instalment notice;
- Getting your PAYG instalments right; and
- Contact us about PAYG instalments.48
Notice of assessment
2.21 The NOA provides an itemised account of the income tax liability following the lodgment of a tax return.49 Any PAYG instalments raised during the year are credited towards the taxpayer’s income tax assessment, even if the instalments were not paid.50 However, the NOA does not specify which of these instalments have been paid.
ATO staff training and support
2.22 The ATO directs telephone calls from individual taxpayers with PAYG instalment enquiries to ATO staff members who have obtained the required training.51
2.23 The ATO provides a one day training program to its staff on the PAYG instalments system in two modules, namely a primary training module52 and a secondary training module.53 Both training modules were updated during this review.
2.24 At the conclusion of the primary training module, ATO staff are expected to:
- be familiar with the principles and administration of the PAYG instalments system;
- understand the relationship between PAYG instalments and income tax;
- describe the calculations that are relevant to PAYG instalments;
- explain the reporting options and the eligibility requirements for specific taxpayers;
- explain variations;
- identify ‘wash up’ cases;54 and
- understand the PAYG instalment procedures.
2.25 ATO staff may be required to complete a written assessment at the completion of the primary training module. Whilst there is no ‘pass’ or ‘fail’ mark, the assessment is designed to highlight areas where further understanding is required by ATO staff.55
2.26 Upon completing the secondary training module, ATO staff are expected to be able to explain how to:
- make Activity Statement elections;
- report PAYG instalments in Activity Statements; and
- vary instalments.
2.27 ATO staff are assessed on the secondary training module using skills verification questions.56 Whilst there is no pass or fail mark, the questions are designed to help staff identify areas in which they need to revisit.57
2.28 ATO staff are also provided with scripting to help guide them in answering telephone enquiries about the PAYG instalments system. In particular, the scripting provides ATO staff with an overview of the system and general guidance on the following topics:
- entry and exit;
- reporting and calculations;
- PAYG letters; and
- incorrect PAYG instalment amounts on the NOA.58
2.29 Taxpayers’ awareness of their tax obligations and the complexity of the administrative rules directly affect their ability and willingness to comply. For example, recent research has revealed that individuals who were fully dedicated to compliance could still fail through lack of awareness of rules, mistakes or unforced errors when navigating the tax system.59
2.30 The ATO has acknowledged that improving individual taxpayers’ understanding of the PAYG instalments system would improve compliance, reduce costs of responding to taxpayer queries and address taxpayer errors as well as deliver an improved taxpayer experience. The issue for the ATO is identifying the best approach which the IGT believes may be achieved through the following:
- improvements to the welcome letter;
- a brief brochure;
- a comprehensive web-based guide;
- improvements to the NOA; and
- enhancing the training and support for ATO staff.
2.31 There is a balance between providing enough information in the welcome letter so that taxpayers are able to understand how to comply with their PAYG instalments obligations and providing too much information resulting in ‘information overload’ such that key areas of the letter are ignored.
2.32 Financial institutions experience the same challenges of ensuring their clients understand their obligations when they register for a financial product. They address this issue by providing their clients with the key information in a letter accompanied with a paper copy of the financial product guides. The IGT is of the view that the ATO should adopt a similar approach by providing sufficient information in the welcome letter to alert the taxpayer to the specific actions they need to take to comply with their obligations and more general information in an accompanying brochure. The brochure, as well as the welcome letter, would refer to a more comprehensive guide which would be available on the ATO website.
2.33 The IGT also believes that improvements can be made to the NOA and ATO staff training and support.
ATO welcome letter
2.34 As stated earlier, the ATO’s commissioned research has identified that entry into the system is confusing, particularly for individual taxpayers who become subjected to an increased compliance burden and have the lowest level of knowledge about the system. The report asserts that this may lead to inadvertent failure to comply or making overpayments.60
2.35 Accordingly, the initial welcome letter provides an important ‘touch point’ for providing key information needed by taxpayers at that stage in the process. This letter was also identified by the ATO in the process of reviewing its current PAYG instalments correspondence as a means to raise taxpayers’ awareness of their instalment obligations.61
2.36 Currently, the welcome letter provides taxpayers with general information on the criteria for entry but those general criteria are not applied to their particular circumstances. As a result, they do not understand why they have entered the system and are required to prepay tax towards the current financial year. Although the taxpayer’s notional tax is specified in the welcome letter, other elements of the ATO’s entry criteria are not specified, for example, the taxpayer’s business and investment income, tax payable and eligibility to the seniors and pensioners tax offset. These terms also require an explanation for most taxpayers.
2.37 The welcome letter is automatically generated and to include information, such as the taxpayer’s business or investment income, system changes would be required. The IGT believes that these system changes are warranted so that the necessary information could be included in the welcome letter to explain why the taxpayer has been entered into the system. Figure 2.1 depicts how this may be achieved in tabular form in the welcome letter.
|Criteria for entry into the PAYG instalments system||Your information|
|If gross business and/or investment income is $4,000 or more in the taxpayer’s latest tax return;||Your business and/or investment income in your latest tax return was $8,573|
|Tax payable on the taxpayer’s latest notice of assessment is more than $1,000;||Tax payable on your latest notice of assessment was $1,859|
|The taxpayer’s notional tax is more than $500; or||Your notional tax is $958|
|The taxpayer is not entitled to the seniors and pensioners tax offset.||You are NOT entitled to the seniors and pensioners tax offset.|
2.38 In the IGT’s view, the welcome letter should also explain how the quantum of the instalment was determined and refer the taxpayer to the tools available on the ATO website, such as the PAYG instalments calculator, which allows them to verify the quantum. It is also critical that taxpayers are expressly made aware of the due date for each instalment. Figure 2.2, below, shows how this may be achieved in tabular form in the welcome letter.
|If your circumstances have not changed and you do not contact us, you must pay the following amounts by the due dates:|
|First quarter||Second quarter||Third quarter||Fourth quarter|
|21 October 2017||21 February 2018||21 April 2018||21 July 2018|
Note: interest accrues on instalments that remain unpaid after the due date.
2.39 Although the current welcome letter indicates that instalment amounts may be varied, it does not clearly stipulate that such variation must be lodged by a certain date, nor does it explain the consequences of not lodging such variations on time. The IGT believes that the due date must be clearly stated and taxpayers warned that they have to strictly adhere to it or risk having to pay the amount determined by the ATO. Similarly, the welcome letter should explain how the taxpayer can request an exit from the system and that any amounts that were outstanding prior to the making of the exit request should be paid in full.
2.40 Where taxpayers elect to vary their instalment amount or their reporting frequency, the IGT considers that the ATO should provide taxpayers with confirmation of the variation and provide them with an updated table, similar to figure 2.2, detailing their new PAYG instalment amounts and the due dates for payment.
PAYG instalments brochure
2.41 As stated earlier, the IGT is of the view that the ATO should provide information specific to the taxpayer in the welcome letter and more general information about the PAYG instalments system in an accompanying brochure. The brochure could also be made available online along with a more detailed guide discussed below. The brochure may be particularly useful to new businesses considering voluntary entry into the system and wanting a quick overview.
2.42 Furthermore, the IGT considers the brochure is an appropriate channel to address a range of taxpayer misunderstandings identified in submissions to the review, IGT complaint cases as well as the ATO’s own complaint cases. In this respect, the brochure should provide:
- an explanation of the key information contained in the ‘welcome letter’;
- the address to which the ATO will send Activity Statements and PAYG instalments correspondence;
- the website address for tools available to assist taxpayers, for example the PAYG instalments calculator, and where more comprehensive information can be found;
- instructions and information on how to vary instalments and reporting obligations, including the relevant eligibility criteria, due dates and the consequences of missing those dates; and
- information concerning application of notional credits in NOAs for PAYG instalment liabilities, processing of exit requests and application of penalties.
2.43 To further assist taxpayer understanding, the ATO may also consider the use of visual diagrams as noted in the ATO-commissioned research.62
Online comprehensive PAYG instalments guide
2.44 Whilst the welcome letter and the brochure may deal with a taxpayer’s immediate needs and provide context, some taxpayers may require further information at various stages of the process. As too much information in these two documents may lead to confusion and non-compliance, taxpayers can also be referred to a more comprehensive guide on the ATO website. The brochure could be the summary section of the comprehensive guide to eliminate any duplication.
Notice of assessment and PAYG instalments credits
2.45 As stated earlier, the ATO’s NOA does not specifically identify any instalment amounts which have not been paid. This leads taxpayers to be unaware of any associated outstanding debts particularly given their lack of knowledge about the PAYG instalments system and its interaction with annual income tax assessments.
2.46 Accordingly, the IGT is of the view that the ATO should update the NOA to alert individual taxpayers to any instalment debts that remain outstanding. Alternatively, as some stakeholders have suggested, a single piece of correspondence could be issued to taxpayers with their NOA, clearly identifying any unpaid PAYG instalment liabilities that remain due and payable.
ATO staff training and support
2.47 The IGT has observed that taxpayers may contact the ATO to understand why they have been entered into the system, particularly where they consider that their circumstances have not changed from the prior year. A specific explanation of how their circumstances have changed may not be easily conveyed in ATO correspondence, a brochure or the online comprehensive guide. It may be best achieved through direct contact with the ATO. For example, ATO staff can access the relevant systems, such as the PAYG instalments ‘eligibility form’,63 which provides the information needed to explain the changed circumstances.
2.48 The IGT has observed, however, that not all ATO call centre staff that respond to PAYG instalments enquiries have access to the eligibility form and associated training. Therefore, the ATO should provide relevant staff with access to the eligibility form as well as updating the procedures and training on how to use the form.
2.49 Furthermore, the online comprehensive guide should be aligned with call centre scripting for ATO staff. This will allow ATO staff to guide taxpayers when responding to enquiries by helping them navigate a document visible to both parties.
The IGT recommends that with respect to the PAYG instalments system, the ATO:
- improve its ‘welcome letter’ to provide taxpayer specific information, including:
- the circumstances that triggered entry into the system;
- a payment schedule of default instalment amounts;
- an explanation of how to make variation elections;
- how the ATO processes an exit from the system; and
- where to find additional information;
- where instalment amounts or reporting frequency have been varied, provide confirmation to taxpayers together with an updated payment schedule;
- accompany the welcome letter with a brochure containing more general information;
- provide a comprehensive PAYG instalments guide on the ATO website;
- update its Notice of Assessment to set out any outstanding instalments; and
- improve ATO staff education and support by, for example, aligning scripting for those handling telephone enquires with the comprehensive PAYG instalments guide and provide access to the PAYG instalments eligibility form and associated training.
The ATO agrees to improve its PAYG instalments welcome letter, but the extent of any changes will be subject to user testing and system capability.
Currently ATO Online provides an electronic confirmation when taxpayers elect to change their reporting frequency or vary their rate or amount using this channel. We will explore other ways to provide confirmation to the taxpayer.
Taxpayers generally vary their rate or amount on their activity statement, with the activity statement being the source of truth. Remaining activity statements in the income year will reflect their varied amount or rate.
The ATO disagrees with a brochure accompanying the letter due to the digital based approach that the ATO is taking as well as the cost involved in producing a brochure. We will consider alternative options, such as improvements to the website in response to recommendation 2.1(d).
Updating the Notice of Assessment is part of the ATO’s transformation agenda. Any updates to the Notice of Assessment to better specify liabilities will depend on funding, systems capability and the prioritisation process.
40 Colmar Brunton, ‘ATO PAYG instalments Exploratory Research’ (2011) pp 6-7 [unpublished research].
41 Ibid p 4.
42 Ibid p 7.
43 Ibid p 5.
44 Ibid p 69.
45 Above n 16.
46 ATO, ‘Welcome to the PAYG instalment system’ (2014 PAYG instalments welcome letter first sent to new entrants over 2014-2017 period).
47 ATO, ‘Top tips for PAYG instalments’ (brochure, 2017).
49 ATO, ‘Your notice of assessment’ (29 June 2017) <www.ato.gov.au>.
50 Taxation Administration Act 1953 s 45-30.
51 ATO, ‘Skill sets escalation directory’, SMART scripting (Internal ATO document, undated).
52 ATO, ‘Training module, PAYG instalments principles’ (Internal ATO document, March 2016).
53 ATO, ‘Training module, PAYG instalment labels’ (Internal ATO document, June 2017).
54 A wash up case occurs where a taxpayer lodges their annual income return before all applicable Activity Statements have been processed by the ATO. Wash up cases will be discussed in greater detail in Chapter 4.
55 ATO, ‘Training module, PAYG instalments principles workbook’ (Internal ATO document, 23 June 2017) p 2.
56 ATO, ‘Training module, PAYG instalment labels workbook’ (Internal ATO document, 28 June 2017) p 2.
57 ATO, ‘Program specific evaluation – B03, Facilitator Guide’ (Internal ATO document, 19 June 2017).
58 ATO, ‘More information – PAYG instalments (B-3 I-4)’, SMART Scripting (Internal ATO document).
59 Jo’Anne Langham and Neil Paulsen, ‘Invisible taxation: fantasy or just good service design?’ (2017) 32 Australian Taxation Forum.
60 Above n 40, p 10.
61 ATO, ‘Pay as you go instalments communication plan 2017-2018’ (Internal ATO document, June 2017); ATO, ‘You have entered PAYG instalments’ (draft 2017 PAYG instalments welcome letter).
62 Above n 40, p 7.
63 The PAYG instalment eligibility form is an ATO created systems-form which sets out the data used to determine a taxpayer’s entry into the PAYG instalments system and their resulting obligations including rates, amount calculations, lodgement cycles and correspondence details.