Inspector-General of Taxation review into improving the self assessment system

1

2.1

The ATO should expand the range of indicators it uses to publicly report on the level of certainty that it provides with minimal compliance cost to taxpayers.

ATO response
Agree
The ATO agrees that there is benefit in publishing information about progress towards achieving greater certainty.
The ATO will discuss with the Inspector-General of Taxation and consult with the community, through appropriate consultative forums, to explore options that may be feasible and to identify what additional information might be usefully published.

2

2.2

(a) The Commissioner should amend PSLA 2008/5 to allow ATO staff to make assumptions of fact in private rulings, in a broader range of circumstances, without being required to request additional information. In these circumstances, the taxpayer should be given a reasonable opportunity to review the assumptions and be required to confirm that the assumptions are correct.
(b) If the Commissioner considers that he is not empowered to implement (a) above, the Government should consider amending the law to provide the Commissioner with such power.

ATO response
Matter for Government
The current law does not support an amendment of PSLA 2008/5 along the lines recommended – it would require a change in legislation. Section 357-105of Schedule 1 to the Taxation Administration Act 1953 provides thatwhere further information is required to make a private ruling, the Commissioner must request the applicant to provide that information. This approach has been confirmed by the Courts (see for example CTC Resources NL v FC of T 94 ATC 4072).
Government response
Agree-in-principle
The Government agrees the Commissioner should have the power to use assumptions in a broader range of circumstances. This may be best achieved through a discretion for the Commissioner to use assumptions, which would be developed through further consultation.

3

2.3

Where the tripartite tax law design teams consider that certain details are more effectively addressed in ATO public binding advice (see recommendation 5.1), the Government should consider requiring the ATO to synchronise its public binding advice with the enactment of substantial new tax law. Whether any particular new tax law requires synchronised ATO public binding advice, and what matters such advice must cover, should be subject of consultation on the development of that law. After enactment of the new laws, the advice should be monitored and where necessary updated with those changes having prospective effect.

Government response
Agree-in-principle
The Government is committed to improving the level of interaction between Government and stakeholders.  As part of this commitment, Treasury with the ATO, is continuing to undertake work in the areas of law development, consultation and communication with stakeholders. 
As part of the Government’s commitment to continually improve its consultation processes, the Government has adopted a tailored consultation approach for tax issues.  In this regard, where matters are new and complex or entail major reforms, early ATO involvement in all relevant processes so that it can synchronise the development of its advice will enhance certainty for the community.

4

2.4

The ATO should make more use of determinations by, for example, considering:
(a) the conversion of significant ATO Interpretative Decisions into determinations periodically; and
(b) issuing a number of determinations on key factual scenarios as a prelude to developing a public ruling on the broader topic.

ATO response
Agree
Identification and prioritisation of potential topics for rulings and determinations is largely a demand-driven consultative and collaborative process involving representatives from the tax profession, such as the technical sub-committees of the National Tax Liaison Group (NTLG) and the NTLG Public Rulings Steering Committee. Discussion with these groups already includes consideration of the appropriate vehicle for ATO advice or guidance on any given topic. The ATO’s public rulings manual and other instructional guidance also covers conversion of ATO IDs into determinations or rulings, and the use of determinations to cover specific factual scenarios.
The ATO will however work with the consultative forums identified above to implement a process to ensure that the forums periodically identify and consider opportunities for the conversion of significant ATO IDs into determinations and identify and prioritise potential determinations on key factual scenarios as a prelude to developing a public ruling on a broader topic.

5

2.5

The ATO should expand the sources, that it uses to identify topics for public binding advice, to include common issues arising in pre-assessment and expanded lodgement disclosures, such as reportable tax position schedules and annual compliance arrangements.

ATO response
Agree
The ATO continues to look for new sources for potential public rulings as they arise – such as those recommended here – and will ensure that these new products and processes are expressly included in relevant ATO staff instructional material.

6

2.6

(a) The Government should consider introducing legislation to ensure that penalties and interest do not apply where:
(i) there is no public ATO advice (binding or non-binding) available on a substantial issue; and
(ii) the taxpayer took reasonable care (as defined in recommendation 4.2) in assessing their liability in relation to that issue.

Government response
Disagree
The Commissioner already has the capacity to remit or reduce penalties and interest where the circumstances warrant it.  As such, the Government considers that the issue of penalties and interest not applying where there is no ATO advice is best dealt with at an administrative level.
Providing such a blanket protection could create unintended consequences including a significant risk to the revenue.

7

2.7

ATO should re-instate TaxPack to its former scope and declare as public rulings the entire contents of Tax Pack, e-tax and web-based individual income tax return lodgement systems.

ATO response
Disagree
We believe that within the context of the self assessment system the current advice and guidance framework strikes the right balance between appropriate levels of guidance for all taxpayers and appropriately graduated levels of protection.
We are concerned that shifting tools and calculators to higher categories of protection would require introducing more detailed and legalistic content. Our feedback is that taxpayers that use these products prefer more straightforward guidance on what they need to do in their circumstances rather than more detailed legal explanations required for higher protection levels such as in rulings.
We disagree that TaxPack should be reinstated and given public ruling status. Since e-tax was launched in 1999 lodgment of paper individual tax returns has declined steadily and now represents only 6.5% of all individual tax returns lodged. Due to falling demand, TaxPack was replaced this year with Individual Tax Return Instructions 2012, following extensive consultation with the community.Feedback to date indicates that this change has been well received.
We will review these arrangements at the end of the lodgment season, however we believe it is unlikely to reveal community demand for the reinstatement of TaxPack.

8

2.8

The ATO should consult with taxpayers, tax practitioners and their representative bodies on ways to improve its Decision Impact Statements (DIS’s). Such consultation should consider:
(a) communicating those parts of the ATO’s view (for example, the paragraphs in the relevant public rulings, etc.) that are being reviewed as a result of the adverse decision;
(b) improving the timeliness of DIS’s, including issuing a draft DIS particularly where a final DIS is likely to be delayed beyond the 8 week timeframe; and
(c) improving transparency of the ATO’s DIS’s by:
(i) explaining the material facts that distinguish the application of the ATO view for those unfavourable decisions that do not lead to a change in ATO view; and
(ii) publishing a compendium of feedback in the DIS’s, and its consideration of the issues raised in that feedback.

ATO response
Agree
Decision Impact Statements were established by the ATO following an earlier IGT recommendation in April 2006 (Key Recommendation 6 of the Review of Tax Office Management of Part IVC Litigation), and so it is timely for us to review these products with the community to ensure they continue to be fit for purpose, including identification of opportunities for improvement as suggested by this recommendation. The ATO has a number of existing consultative forums – particularly the Dispute Resolution Sub-committee of the National Tax Liaison Group (NTLG) – which we will use to consult on potential improvements to our Decision Impact Statements.

9

2.9

The ATO should communicate the reason for withdrawing or changing any precedential documents which convey its approach to the law.

ATO response
Agree
The ATO agrees that it is important to provide an explanation for withdrawal or changes to precedential documents which convey the ATO's approach to the law, and, as the Inspector-General has noted, we already do this for most types of precedential documents. The ATO will revise instructions (PS LA 2008/12 Public advice and guidance products: selection, development, publication and review processes) to ensure staff provide an explanation for withdrawal or changes for all precedential documents, including precedential fact sheets and guides.

10

3.1

The Government should consider commissioning an appropriate independent body, such as the Productivity Commission, to publicly report on the cost of taxation related compliance, including taxpayers’ costs and the overall cost to the economy.

Government response
Noted
The Government vision is for a stronger, fairer and simpler tax system.  The Government has implemented a number of reforms to reduce compliance costs, such as tripling the tax‑free threshold and simplifying small business tax arrangements.
The Government is of the view that the tripartite approach – involving Treasury, the ATO and stakeholders – should be given the opportunity to develop best practice, including the consideration of compliance costs.
The Government has also requested the Productivity Commission to undertake a benchmarking study into regulator engagement with small business, to identify leading practices and whether opportunities exist to reduce compliance burdens for small businesses. 
The terms of reference are available at:
http://www.pc.gov.au/projects/study/small-business

11

3.2

(a)The ATO should consult with taxpayers, tax practitioners and/or their representative bodies every five years on information it seeks in company returns (as well as associated pre-assessment and expanded lodgement disclosure, such as annual compliance arrangements, pre-lodgement compliance reviews, the international dealing schedule and the reportable tax position schedules). This is in addition to its current practice of consulting on new information as the need for them arises pursuant to a change in the law.
(b) The ATO consultation with tax taxpayers, tax practitioners and/or their representative bodies on individual tax returns should include discussion on the information being sought through expanded lodgement disclosures as well as the tax return itself.

ATO response
Agree
We will develop and implement procedures to periodically consult with relevant consultative forums and the community to review the information required on company and individual income tax returns and associated schedules as well as the information requested as part of pre-lodgment compliance reviews and annual compliance arrangements.

12

3.3

With the aim of reducing compliance costs, the ATO should better align its tax information collection with natural business systems, such as electronic company financial systems.

ATO response
Matter for Treasury
This is the intent of Standard Business Reporting (SBR) which is current government policy and the responsibility of the Treasury.
The ATO, as a participating agency, is committed to supporting the business outcomes of SBR and has agreed to contribute to the ongoing development of the SBR taxonomy as a whole-of-government asset.
Treasury response
Agree-in-principle
SBR provides for the electronic transmission of accounting and tax information to agencies such as the ATO and its usage would assist in aligning ATO requirements with taxpayers’ natural business systems.  The ATO has already implemented SBR for some of its taxation reports and by 2015/16 is expected to have the majority of its business taxation reports available through SBR.

13

3.4

The ATO should explore options for further reduction of compliance costs related to individuals’ tax return lodgement obligations, such as:
(a) the earlier provision of third party information (without increase in their compliance costs); and
(b) improved technological platforms.

ATO response
3.4(a) Matter for Government
The ATO believes that there are limited opportunities to further expand this area without legislative change.
3.4(b) Agree
Our future direction is to move to more web-based applications. The speed of our movement will be impacted by technological capability and cost.
In the longer term our aspiration is to move to device agnostic approaches which will enable taxpayers, regardless of the platform they use, to interact with us in a similar way.
Government response
3.4(a) Agree-in-principle
The use of third party information by Government for a range of regulatory compliance functions continues to evolve.  The Government will consider the appropriateness of possible refinements to the law to facilitate additional use of third party information going forward.

14

3.5

To improve community confidence that ATO risk ratings are based on cogent and independently verifiable criteria, the ATO should, to the extent possible, make publicly available more details on the risk filters and criteria it uses in its risk differentiation framework.

ATO response
Agree in principle
We will review the material that we already publish about our approach at a market or segment level to see if there is any additional material that is able to be published.

15

3.6

The ATO should continue consultation with the tax profession to identify strategies to achieve a more constructive relationship. Such consultation should include discussions on whether the use of a risk differentiation system is appropriate and if so how it should be implemented.

ATO response
Agree in part
The use of risk management approaches is fundamental to good administration and efficient use of limited resources so it is not considered an option for the ATO to consult on whether the use of a risk differentiation system is appropriate in respect of the tax profession.
To assess a tax practitioner's practice risk, we apply a risk differentiation framework (RDF) based on the risk profile of the tax practitioner's client base. We have publicly stated that we do not, and will not, release an advisor’s risk categorisation to their clients.
However, we will consult with the tax profession on how we implement the framework. We will give effect to this part of the recommendation through implementation of the Tax Practitioner Action Plan. This plan sets the direction, the detail, the what, the how and the when we would like to work in collaboration with tax practitioners and their professional bodies. The plan is iterative and to this end we have consulted and will continue to consult with the National Tax Liaison Group (NTLG), ATO Tax Practitioner Forum (ATPF) and Regional Tax Practitioner Working Groups.

16

3.7

The Government should consider providing a shorter period of review for micro and small business taxpayers with sufficiently low turnover.

Government response
Agree-in-principle
The Government will suggest the Commissioner consider placing this issue on the agenda of the Commissioner’s Small Business Consultative Group.
For compliance benefits for business to be achieved, interactions and implications for other areas of the tax law need be understood and considered.

17

3.8

To reduce the extent of uncertainty for taxpayers, the Government should consider:
(a) starting the period for amendment from the date on which a taxpayer provides information that is the subject of disclosure before an assessment is lodged (preassessment disclosures) or as a result of increased requirements for additional disclosures at the time of lodgement (expanded lodgement disclosure), if that is earlier than the notified or required date of lodgement of the relevant income tax return; and
(b) where taxpayers provide pre-assessment disclosures or expanded lodgement disclosures, requiring the ATO to commence compliance detection activities within one year of receiving such disclosures.

Government response
Noted
The Government is of the view that further work into how this might affect compliance outcomes should be undertaken.

The Government also notes that the ATO will continue to pursue improvements in the timeliness of its audits, including acting on recommendations made by the Inspector-General in his Report into the Australian Taxation Office’s large business risk review and audit policies, procedures and practices.

18

3.9

To improve the rigour and transparency of decisions to extend the statutory timeframes for review, the ATO should:
(a) require Senior Executive approval before the taxpayer is asked to agree to an extension to the timeframe; and
(b) publicly report on the cases in which extensions to the periods of review are requested and the reasons why compliance activities could not be completed within the statutory timeframes (in a manner that takes account of secrecy or privacy laws).

ATO response
3.9(a) Agree
In response to Recommendation 8.6 in the Inspector-General of Taxation’s Review into the ATO’s large business risk review and audit policies, procedures and practices, we advised that the decision to seek an extension of time to amend a taxpayer’s assessment should be made by our team leaders, in discussion and consultation with their senior executive officer, as appropriate. A guidance note setting out the grounds and approval processes for extending the amendment period was published on 8 June 2012.
We agree to expand the application of this guidance note to all relevant parts of the ATO and will review the process after 12 months of operation to evaluate how it has bedded down.
3.9(b) Agree in principle
The information to support the requirements is not currently captured consistently across our compliance areas. IT systems and business processes will need to be changed to provision the requirements. In some cases these requirements are quite complex.  This work will be subject to prioritisation on the Enterprise Solutions and Technology Forward Program of Work and possibly funding allocation/provision.

19

3.10

To improve the certainty in relation to the review of transfer pricing matters, the Government should consider providing the same period of review for these matters as exists for the general period of review.

Government response
Agree-in-principle
The Government agrees that a finite period should apply and has consulted on the introduction of an eight year time limit for making or amending assessments on the basis of a transfer pricing adjustment.

20

3.11

The Government should consider setting the amendment period for losses to only four years from the year in which those losses are incurred.

Government response
Noted
The Government is of the view that this is an issue that is best considered as part of a wider review of aspects of the legislative scheme for losses under the income tax law, including how the penalties regime applies to over claimed losses.

21

3.12

(a) With the aim of making Annual Compliance Arrangements (ACAs) more widely available to taxpayers, the ATO should publicly communicate the expected work required to enter and maintain an ACA as well as the expected benefits.
(b) With the aim of appropriately addressing the expected increased ATO workload with respect to ACAs and to reduce timeframes and compliance costs associated with ACAs, the ATO should consider overseas models, such as those in Singapore and the United Kingdom.

ATO response
Agree
The ATO will publish more information about the way in which ACAs operate and the outcomes of a survey of ACA participants that was conducted last year.
We regularly monitor international developments for best practice.
We are currently scoping a jointly-administered, external prudential review process for large market taxpayers categorised as 'lower' and 'medium' risk where further assurance on certain aspects is sought. The project will identify and explore options through a collaborative and consultative approach with the community.
If the review process is considered viable, a pilot will be undertaken before commencement of the program. We will, however, reserve the right to open up assessments and review arrangements where appropriate.

22

3.13

The ATO should, in consultation with the community, develop and publish comprehensive materials on pre-lodgement compliance reviews. These materials should include advice regarding:
(a) what the ATO will and will not do during these compliance activities;
(b) the manner in which those activities will be conducted; and
(c) effective escalation processes where ATO officers do not meet these expectations.

ATO response
Agree
Pre-lodgment compliance reviews are only used in the large market.
We consider the Large Business and Tax Compliance booklet to be the appropriate document in which to publish this material. It is currently being redrafted following extensive consultation with the Large Business Advisory Group.

23

4.1

To improve the transparency of ATO penalty decisions, the ATO should:
(a) improve its internal reporting to determine the numbers of cases, and their quantum, in which reasonably arguable position and/or reasonable care penalties were applied and remitted; and
(b) publish these figures.

ATO response
Agree in principle
The information to support the requirements is not currently captured consistently across our compliance areas. IT systems and business processes will need to be changed to provision the requirements. In some cases these requirements are quite complex. This work will be subject to prioritisation on the Enterprise Solutions and Technology Forward Program of Work and possibly funding allocation/provision.

24

4.2

The Government should consider whether taxpayers should be presumed to have taken reasonable care where they have consulted a registered tax agent or a lawyer with regards to the issue in question and provided all the information that would be reasonably required by the adviser to provide advice on the issue.

Government response
Noted
The Tax Administration Act 1953 currently provides a safe harbour in certain circumstances where taxpayers have taken reasonable care to comply with their obligations and have given the necessary information to their tax agent.  This approach was developed after extensive consultation with the community. 

25

4.3

The Government should consider whether the current threshold for RAP penalties should be increased to more appropriately balance the mischief for which they were intended to address against the compliance costs to small businesses and individuals.

Government response
Agree
The Government notes that it may be appropriate to increase the threshold for RAP penalties and is currently undertaking work to determine the level at which the threshold should be set.

26

4.4

In relation to the penalty for no reasonably arguable position, the Government should consider amending the law to place the onus on the ATO to provide reasons for why it considers the taxpayer’s view could not be argued on rational grounds to be about as likely as not, or more likely, to be correct.

Government response
Agree-in-principle
The Government will further consider this issue once additional information has been obtained by the ATO as part of proposed enhancements to the ATO’s data and reporting systems.

27

4.5

The Government should consider whether taxpayers should be deemed to have taken reasonable care where they have met the higher standard of a reasonably arguable position.

Government response
Agree-in-principle
The Government will further consider this issue once additional information has been obtained by the ATO as part of proposed enhancements to the ATO’s data and reporting systems.

28

4.6

The ATO should consider reducing penalties relating to a lack of reasonably arguable position for taxpayers who have made relevant disclosures in reportable tax position schedules.

ATO response
Agree in principle
The ATO continues to encourage taxpayers to engage early with us to seek clarity around uncertain tax positions before they are taken, including through requests for private rulings (for which penalty protection is available). The ATO will consider the circumstances in which a penalty reduction may be warranted where a taxpayer has made a sufficient disclosure as part of a reportable tax position schedule and has been cooperative in dealings with the ATO.

29

4.7

The Government should consider providing taxpayer protection from penalties and cap SIC at two years for issues which have been the subject of pre-lodgement, expanded lodgement disclosures and tax returns.

Government response
Noted
The Government needs to better understand how the ATO uses these tools to address risk and how they are used to enhance compliance levels and the effect on compliance more generally.

30

5.1

To improve taxpayer and administrative certainty, the Government should consider improving tax law design by:
(a) augmenting existing public consultation processes with tri-partite design teams to determine, for significant proposed tax law, what detail should be provided in the law, explanatory memorandum and the nature and timing of ATO public binding advice;
(b) where the ATO is required to synchronise its public binding advice with the enactment of the law (see recommendation 2.3), ensuring the ATO is appropriately engaged to do so; and
(c) on presentation of the proposed legislation in Parliament, requiring the ATO to provide public confirmation on the nature and timing of the advice to be provided).

Government response
Agree-in-principle
As part of the Government’s commitment to continually improve its consultation processes with the community, the Government has adopted a more tailored approach to consultation on tax issues.  In this regard, where matters are new and complex or entail major reforms, early involvement of private sector experts as well as the ATO in all relevant processes will enhance the design of the tax law.
See also the response to recommendation 2.3.

31

5.2

In the event that recommendation 5.1 is implemented, the ATO should monitor more closely the need for updated ATO advice through its consultative forums following the enactment of significant new law and for a reasonable period after that enactment.

Government response
See response to recommendation 5.1.

32

5.3

(a) The Government should consider providing the Commissioner of Taxation with the power to not take compliance action with respect to identified unintended, anomalous, inequitable or, impractical consequences of the tax laws for a period of three years whilst the Government takes any corrective action.
(b) In the longer term, the Government should consider whether the Commissioner should be provided with broader powers in line with recent developments in the field of responsive regulation that may foster better compliance, whilst also addressing the difficulties faced by taxpayers.

Government response
Noted
The ATO has in place an administrative practice that allows taxpayers to self-assess in anticipation of changes being made to the law.
Further discussion on the matters mentioned in this recommendation is ongoing between Treasury and the ATO.  In relation to these issues, relevant developments in international best practice tax administration will be taken into account.

33

5.4

(a) The ATO should consult with taxpayers, tax practitioners and their representative bodies to identify discretions that should be replaced with an objective test and advise the Government of these discretions.
(b) In consultation with taxpayers, tax practitioners and their representative bodies, the Government should consider:
(i) replacing liability discretions in tax laws with objective tests; and
(ii) replacing specific administrative discretions in relation to particular topics with a broader principle.
(c) The ATO should periodically consult on whether further ATO advice should be provided with respect to any liability discretions and where such advice is provided, what factors the Commissioner would consider as relevant and his reasoning in exercising his discretion.

ATO response
5.4(c) – Agree
Identification and prioritisation of potential topics for rulings and determinations is largely a demand-driven consultative and collaborative process involving representatives from the tax profession, such as the technical sub-committees of the National Tax Liaison Group (NTLG) and the NTLG Public Rulings Steering Committee, and the ATO continues to actively encourage the engagement of the tax professions in these processes.
The ATO will work with our various consultative groups to identify and prioritise any areas of uncertainty or significant concern in relation to tax law discretions that affect, either directly or indirectly, a taxpayer’s liability and which could benefit from possible tax rulings or determinations. The ATO will also implement a process with relevant consultative groups to ensure that we regularly focus on identifying any potential areas of uncertainty or significant concern in relation to tax law discretions that affect, either directly or indirectly, a taxpayer’s liability.
Government response
5.4 (a) and (b) Agree-in-principle
The Government is committed to making continual improvements to the tax law. 
As such the Government invites stakeholders who have identified significant areas of concern in relation to liability discretions to advise us of these.