Telephone: (02) 8239 2111
Facsimile: (02) 8239 2100

Level 19, 50 Bridge Street
Sydney NSW 2000
GPO Box 551
Sydney NSW 2001

Manager
Small Business Entities and Industries Concessions Unit
The Treasury
Langton Crescent
PARKES ACT 2600

By email: [email protected]

Dear Manager,

Transparency of Business Tax Debts

The Inspector-General of Taxation (IGT) is pleased to provide the attached submission with respect to the recently announced consultation on the proposed Transparency of Business Tax Debts measures.^[1]The Hon Kelly O’Dwyer MP, Transparency of business tax debts (Media Release, 11 January 2018).

The IGT has reviewed all relevant material provided and has sought to recommend improvements which ensure the measures operate efficiently and equitably for all parties and fulfil the legislative intent.

In summary these improvements, largely, require the Australian Taxation Office (ATO) to inform affected taxpayers that they can lodge a complaint with the IGT, if they have not already done so, and consider the IGT’s findings with respect to that complaint before disclosing information about any tax debt to Credit Reporting Bureaus. There are also recommendations regarding how the ATO notifies affected taxpayers and the type of engagement between the two that precludes the ATO from making any disclosure.

Please contact Jarrod Joseph, Director, on (02) 8239 2102 if you have any queries in relation to the IGT’s submission.

Yours faithfully

[SIGNED]

Ali Noroozi
Inspector-General of Taxation

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INSPECTOR-GENERAL OF TAXATION: SUBMISSION ON TRANSPARENCY OF BUSINESS TAX DEBTS MEASURES

1.1    The Inspector-General of Taxation (IGT) welcomes the opportunity to make a submission to the Government’s consultation on the draft Transparency of Business Tax Debts (TBTD) measures.

1.2    The exposure draft materials relating to the TBTD consultation include the draft Bill (Bill) and accompanying Explanatory Memorandum (EM) as well as the draft declaration or Legislative Instrument (LI) and associated draft Explanatory Statement (ES). There is also the Australian Taxation Office’s (ATO) consultation paper (ATO CP) which sets out how the measures would be administered. The latter is an important initiative consistent with the recommendation made by the IGT in his Review into improving the self assessment system.

^[2]IGT, Review into improving the self assessment system (2013) Rec 5.3.

 However, the ATO CP contains a disclaimer which, whilst appropriate at the exposure draft stage, should be removed when issuing in final form such that all parties can rely on the guidance it contains.

1.3    The IGT has reviewed the above material and notes that a new and specific role is envisaged for the IGT who is to provide independent assurance and safeguard with respect to the administration of the measures. This is achieved through a complaint investigation mechanism for affected taxpayers.

1.4    In this submission, the IGT has sought to recommend improvements which ensure the measures operate efficiently and equitably for all parties and fulfil the legislative intent. Broadly, the recommended improvements require the ATO to inform affected taxpayers that they can lodge a complaint with the IGT, if they have not already done so, and consider the IGT’s findings with respect to that complaint before disclosing information about the related tax debt to Credit Reporting Bureaus (CRB). There are also recommendations regarding how the ATO notifies affected taxpayers and the type of engagement between the two that precludes the ATO from making any disclosure.

1.5    The submission is structured around the following four requirements:

• the Commissioner of Taxation (Commissioner) requirement to take reasonable steps to confirm with the IGT;
• the Commissioner requirement to consult with the IGT;
• the Commissioner requirement to provide a notice to the affected taxpayer; and
• the taxpayer effective engagement requirement.

COMMISSIONER REQUIREMENT TO TAKE REASONABLE STEPS TO CONFIRM WITH THE IGT

1.6    The effective starting point from an affected taxpayer’s perspective is the satisfaction of the LI requirements referred to in paragraph 355-72(1)(c) and subsection 355-72(5) of the Bill in relation to the class of entities that may have their tax debts disclosed to CRBs.

1.7    Paragraph 7(1) of the LI sets out certain tests, the key one for present purposes, being paragraph 7(1)(e) which requires that:

the Commissioner has taken reasonable steps to confirm that the Inspector-General of Taxation does not have an active complaint from the entity [or affected taxpayer] that is, or could be, the subject of an investigation… relating to the Commissioner’s intention to disclose the tax debt information of the entity.

1.8    Accordingly, before the ATO may contemplate disclosure of an affected taxpayer’s debt information, the ATO must take reasonable steps to confirm that the IGT does not have an active complaint from the affected taxpayer prior to notifying them of the intended disclosure. Where the affected taxpayer has made a complaint to the IGT, the ES states that the Commissioner would generally not disclose the entity’s tax debt information to CRBs.^[3]The IGT is an independent statutory agency from the ATO. The IGT may make non-binding determinations with respect to complaint investigations.

1.9    If the Commissioner confirms with the IGT that there is an active complaint that is, or could be, subject of an investigation, the process ends and no disclosure is possible. If there are no complaints on foot with the IGT, the Commissioner may proceed with the disclosure subject to a number of other requirements in the Bill.

Example 1 – Complaint made to IGT before ATO considers disclosing informationA sole trader has lodged a complaint with the IGT in relation to difficulties reaching an agreement on a suitable payment arrangement with the ATO to pay their tax debt.Once the tax debt has been outstanding for more than 90 days, the ATO considers disclosure to CRBs. The ATO checks with the IGT as to whether the IGT is investigating a relevant complaint. The IGT confirms a relevant complaint exists.The ATO does not issue a written notice regarding possible disclosure of the taxpayer’s debt information to a CRB.

COMMISSIONER REQUIREMENT TO CONSULT WITH THE IGT

1.10    The next step in the process provided in the Bill is a requirement for the Commissioner to:

5. in the case of a disclosure of information… both:
   1. the Inspector General has been consulted on the disclosure; and
   2. 21 days have passed after a notice under subsection (2) of this section was given to the primary entity for the disclosure.

1.11    Accordingly, the Commissioner is required to consult with the IGT on the disclosure separately from the requirement that 21 days has passed after notice is given to the affected taxpayer. Thus, both requirements need to be satisfied before the Commissioner can proceed further.

1.12    The challenge is that the Commissioner may consult the IGT at any time during this 21 day period. For example, the Commissioner could consult with the IGT on day one of the affected taxpayer’s notice period at which time there was no relevant complaint on foot as contemplated by the LI. However, subsequently and within the 21 day notice period, the taxpayer may make a complaint to the IGT which is otherwise consistent with the intention of the provision. In this case, the Commissioner has met the above LI requirement even though a relevant complaint has been lodged with the IGT.

1.13    The above anomaly can be addressed by requiring the Commissioner to notify the taxpayer first and only seek to consult with the IGT seven days after the 21 day notice period has ended. It is acknowledged that this would effectively extend the period from 21 days to 28 days in total, but in doing so, the intention of the provision is better achieved and reduces the potential for affected taxpayers being stymied in pursuing their right to complain to the IGT by a mere technicality.

1.14    For completeness, it should be noted that the ES states that where a subsequent disclosure of a taxpayer’s debt information (not being an initial disclosure) is to be made, the Commissioner is still required to take reasonable steps to confirm that there is not a complaint on foot with the IGT although a more streamlined process is envisaged.^[4]Treasury, Draft Explanatory Statement, Tax Debt Information Disclosure Declaration (2018) p 6. The ES further explains that an ATO officer cannot disclose the tax debt information until the complaint lodged with the IGT has been resolved.^[5]It is noted that complainants are also entitled to seek an internal review of IGT decisions. However, neither the Bill nor LI formally requires the Commissioner to further consult or confirm with the IGT in respect of subsequent disclosures. Accordingly the Bill and LI need to be amended to reflect the intent outlined in the ES.

1.15    Turning to the more important issue of the requirement in the Bill for the Commissioner to consult with the IGT, it is crucial to understand what constitutes consult and its interaction with the LI requirement to confirm.

1.16    The requirement, in the Bill, for the Commissioner to consult with the IGT seems to be a purely procedural step and little guidance is provided as to how it may be satisfied. It is the LI requirement of taking reasonable steps to confirm with the IGT that an active complaint is, or could be, on foot that actually prevents the disclosure of the debt information, i.e. the taxpayer is no longer within the ‘class of entities’ under paragraph 355-72(1)(c) of the Bill.

1.17    Taxpayers should be informed of their right and allowed time to lodge a complaint with the IGT as explained below. Where they do lodge a complaint with the IGT, the Bill’s requirement to consult and the LI requirement to confirm should be appropriately amended to make it clear that the ATO should await the outcome of the IGT investigation and duly consider the IGT findings in deciding whether to proceed with the disclosure to CRBs.

1.18    Where affected taxpayers make no complaint to the IGT within the 21 day period and the ATO confirms this with the IGT after seven days have elapsed since the expiration of the notice period, the disclosure may proceed. The same outcome results where the IGT complaint investigation is completed with no adverse finding with respect to the disclosure being made. However, if the IGT does raise concerns, the ATO should consider them in deciding whether to proceed with the disclosure.

Example 2 – Complaint made to the IGT following the ATO’s written noticeA company incurs a tax debt and does not take action to address the debt. After 90 days, the ATO considers disclosing the company’s tax debt to a CRB. The ATO issues a written notice of its intention to disclose the company’s tax debt information to a CRB, including the company’s avenue to lodge a complaint about the proposed disclosure to the IGT.After 21 days has passed of the notice issuing, the ATO checks with the IGT whether the company has made a complaint to the IGT. The IGT confirms that there is a relevant IGT investigation on foot. Accordingly, the taxpayer is not within the class of entities set out in the LI.The ATO does not proceed with disclosure of the taxpayer’s information and awaits the completion of the IGT investigation.

Example 3 – Complaint made to the IGT and IGT makes a determinationFollowing on from Example 2, the IGT completes its investigation of the company’s complaint about the disclosure of their tax debt information.The IGT finds that the company had not received the ATO’s debt-related correspondence and was not aware of their debt obligations. Whilst the company does not wish to dispute the debt, the IGT makes a determination that the ATO should provide the company with additional time to address their tax debt.Given the circumstances, the ATO agrees to provide the company with an additional 3 weeks to negotiate a payment arrangement before again contemplating disclosure of the company’s tax debt information to a CRB.

COMMISSIONER REQUIREMENT TO PROVIDE A NOTICE TO THE AFFECTED TAXPAYER

1.19    Subsections 355-72(2) and (3) of the Bill requires the Commissioner to give affected taxpayers notice in writing and for that notice to be served on the taxpayer. The particular items that the Commissioner is required to provide within the notice are also listed in subsection 355-72(3) of the Bill. The period for the notice has been discussed previously and is found in subparagraph 355-72(1)(e)(ii) of the Bill.

1.20    Relevantly, a key requirement in this notice is that the Commissioner should explain to the affected taxpayer how to make a complaint in relation to the proposed disclosure. The term ‘complaint’ is not defined within the Taxation Administration Act 1953 (TAA 1953) or Bill. Furthermore, the Bill does not expressly require the Commissioner to explain to whom a complaint may be made. However, the EM states that an entity who ‘has been given a notification of the Commissioner’s intention to disclose their tax debt information and is not satisfied with the complaint mechanisms provided by the ATO may wish to lodge a complaint with the Inspector-General of Taxation’.^[6]Treasury, Treasury Laws Amendment (Tax Transparency) Bill 2018, Exposure Draft Explanatory Materials, at [1.63].

1.21    The absence of an express reference to the IGT in paragraph 355-72(3)(d) of the Bill has the potential to stymie the policy intent of providing an independent assurance as a ‘check and balance’ on the process. Specifically, affected taxpayers may lodge a complaint with the ATO complaint unit in the first instance and may await the outcome of that complaint before lodging a complaint with the IGT. This may result in complaints not being lodged with the IGT within the 21 day period stipulated in subparagraph 355-72(1)(e)(ii) of the Bill.

1.22    Accordingly, paragraph 355-72(3)(d) of the Bill should be amended to include an express reference to the IGT as the party to whom the affected taxpayer may complain in order to ensure that they are not prevented from accessing the intended independent assurance or safeguard.

Service of Notice

1.23    As noted in the section above, the Bill requires the Commissioner to serve written notice on an entity concerning the intended disclosure of their tax debt information.

1.24    The EM explains that service of the notice may be in accordance with Division 4 of the Taxation Administration Regulations 2017 and section 28A of the Acts Interpretations Act 1901. It follows that service of the notice under the Bill would be considered effective where it has been issued in circumstances similar to those for other tax debt related documents.

1.25    The IGT has recently examined concerns regarding certain ATO correspondence not reaching taxpayers or their advisors with the result being that taxpayers may be left unaware of their obligations and not expecting ATO debt recovery action when their tax debts remain outstanding.

^[7]IGT, Review into aspects of the pay as you go instalments system (2018).

 The major underlying cause was found to be the interaction between the ATO’s accounting systems. Accordingly, as a longer term goal, the IGT had recommended the ATO consider using a single integrated accounting system for administering the income tax and PAYG instalments regimes, and in the interim, a number of other recommendations were made aimed at improving the existing processes.

1.26    In the context of the TBTD measures, given that service may depend on the type of taxpayer entity, for example service to a company

^[8]For example, service of documents to a company may be achieved in accordance with section 109X of the Corporations Act 2001.

 would differ from that for a sole trader or business partnership, it is recommended that the ATO consider a differentiated approach. For example, personal service may be considered in certain cases to ensure prompt and effective service and minimise any potential further delay.

EFFECTIVE ENGAGEMENT

1.27    The Bill and LI provide an additional exemption for taxpayers from having their tax debt information being disclosed if they are effectively engaging with the Commissioner to manage their tax debt. The term ‘effective engagement’ is specifically defined in paragraph 7(3) of the LI to include:

• an arrangement entered into with the Commissioner to pay their tax debt by instalments (known as ‘payment arrangements’) under section 255-115 in schedule 1 to the TAA 1953 and the entity is complying with the arrangement;
• the entity has objected against a taxation decision (within the meaning of section 14ZL of the TAA 1953) to which the tax debt relates; or
• the entity, under section 14ZZ of the TAA 1953, applied to the Administrative Appeals Tribunal for review or appealed to the Federal Court of Australia against a decision made by the Commissioner to which the tax debt relates.

1.28    Taxpayers may, however, consider that they are effectively engaging with the Commissioner by other means such as requesting a payment deferral,

^[9]Taxation Administration Act 1953 sch 1 s 255-10.

providing a security

^[10]Taxation Administration Act 1953 sch 1 subdiv 255-D.

towards a debt or seeking release from the debt due to serious financial hardship.

^[11]Taxation Administration Act 1953 sch 1 pt 4.50.

 Accordingly the definition of effective engagement in the LI should be expanded from the current limited list to a non-exhaustive list which includes these additional courses of action that the taxpayer might take.

1.29    Another challenge is that affected taxpayers may consider that the payment arrangement, or otherwise, they are offering the ATO is reasonable but the ATO has not agreed to it. The IGT had previously examined such concerns in his Debt Collection review,

^[12]IGT, Debt Collection (2015).

 including that ATO staff did not have sufficient capability to analyse the commercial viability of businesses and their particular circumstances, causing delays in negotiating payment arrangements.

1.30    Since the Debt Collection review, the IGT continues to receive complaints concerning difficulties in negotiating payment arrangements with the ATO. Accordingly, it is expected that taxpayer concerns may arise with respect to ‘effectively engaging’ with the Commissioner and require remedy through the IGT’s complaint handling service. Such situations further support the earlier IGT recommended improvements.

Executive Summary

The Inspector-General of Taxation (IGT) welcomes the opportunity to participate in the Tax Forum and is pleased to provide this submission to generate debate on one of the designated topics: namely, Tax System Governance. Governance is a key aspect of any tax system. The approach of tax administrators has a direct bearing on policy implementation and taxpayer confidence through application of fairness, certainty, transparency, minimisation of compliance costs and reduction in unnecessary complexity. Accordingly, the development of a more effective and comprehensive set of governance arrangements for the Australian Taxation Office (ATO) has strong merit. This submission outlines three key options for consideration. These are:

Establishment of a management board (such as those of an advisory or supervisory nature) to bring into the ATO a diverse mix of expertise and experience including information technology, human resources, finance and communication.
Appointment of additional Second Commissioners from the private sector to diversify the ATO Executive Committee, inject a wider range of experiences and perspectives and also provide intelligence on trends in corporate governance and taxation risks. These additional Second Commissioners to be appointed to lead the more contentious areas of the ATO, including one as head of a separate appeals area.
Enhancement and centralisation of the ATO scrutineer function to provide a single port-of-call for taxpayer grievances with tax administration, be they specific disputes or systemic issues. A more co-ordinated approach to ATO scrutiny would also minimise duplication and the cost of external scrutiny.

The three options form an integrated package that provides synergistic benefits beyond each as stand-alone considerations. The package supports a more comprehensive governance framework aimed at providing the ATO with a wider range of expertise to deal with present and future challenges, as well as improving taxpayer experience. The management board has strong stakeholder support and the Government is currently considering its implementation. The IGT recommends that options 2 and 3 be also considered by the Tax Forum to further address the systemic issues identified by business and tax professionals.

2. Introduction

The Tax Forum convened by the Australian Government provides a unique opportunity for the Australian community to contribute to the future direction of Australia’s tax and transfer system. The IGT welcomes the opportunity to provide this submission and participate at the Forum. The IGT is well-positioned to explore and contribute to a number of matters regarding tax administration given his office’s function, expertise and broad-based consultative relationship with both government agencies and private-sector stakeholders at all levels in the community. In seeking to address the designated topics for the Forum, this submission focuses on specific matters affecting governance of the ATO. The submission takes a three pronged approach by addressing the need for a management board (such as those of an advisory or supervisory nature), diversification in the ATO Executive Committee and an improved ATO scrutineering function. There are a range of other important tax administration system issues that the IGT is also considering, but these may be addressed in the conduct of the IGT’s core work program. This submission draws upon earlier IGT submissions to the Australia’s Future Tax System (AFTS) review dated 3rd and 30th of September 2009 respectively.

3. Current ATO Governance Arrangements
   3.1 External Governance

The external governance arrangements currently overseeing the ATO are considerable, many of which have evolved in a piecemeal fashion over the last thirty years. The Commonwealth Ombudsman, established in 1977 as part of the federal government’s coordinated approach to administrative law reform development, is, in the main, responsible for investigating taxpayer complaints. In addition, the Australian National Audit Office (ANAO) carries out performance and financial statement audits. Following the Ralph Review in 1999, the Board of Taxation was established to provide a business and community perspective on the tax system, including advice on improvements that can be made to the implementation of tax laws. The IGT, established in 2003, reviews systemic tax administration issues and reports to the Government with recommendations for improvement for the benefit of all taxpayers. The ATO also has formal accountability to ministers and Parliament through its annual reporting and appearance before parliamentary bodies such as the Joint Committee of Public Accounts and Audit (JCPAA) and the Senate Economics Legislation Committee. Since 2007, the JCPAA has held a biannual public hearing with the Commissioner of Taxation in the interests of greater public accountability and transparency. More recently the JCPAA has foreshadowed greater scrutiny of the ATO through the biannual public hearings having given notice to the Commissioner that he will be required to address issues or concerns raised by scrutineer agencies such as the IGT, the Ombudsman and the ANAO.

3.2 Internal Governance

The Commissioner of Taxation has established the ATO Executive Committee to assist him in setting the longer term direction of the ATO and to administer aspects of Australia’s tax and superannuation systems, while delivering the ATO’s commitments to government. The ATO Executive Committee currently comprises eight senior tax officers including the Commissioner (as Chair), the Second Commissioners and other senior ATO officers (as nominated from time to time by the Chair). Currently, the additional senior ATO members are the Chief Finance Officer, the First Assistant Commissioner ATO People, the Chief Information Officer and the Chief Operating Officer. Independent advisers and other senior ATO representatives may be required to attend and present a report relating to their area of responsibility as a standing item.

4. Case for Reform

The issues relating to ATO governance and the need to reform are not new and date back to the 1975 Asprey Review. The IGT believes that there is merit in the Tax Forum considering the adequacy of these arrangements given:

international trends establishing comprehensive governance frameworks, including the creation of management  boards and specific governance functions;
strong community support for ATO governance reforms to ease the burden of compliance on taxpayers including reducing compliance costs; and
underlying concerns regarding ATO capabilities and approaches evidenced in IGT reviews and community consultations.
4.1 International Trends and Perspective

Management boards are now a characteristic of many revenue authorities around the world, including the United States and United Kingdom.^[1]Organisation for Economic Co-Operation and Development, Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2010), 3 March 2011, pp. 31-36. It is important that Australia keeps pace with international changes in tax administration and adopts those features that would likely deliver benefits in the Australian context. A 2006 International Monetary Fund (IMF) Working Paper^[2]Kidd, M. and Crandall, C., Revenue Authorities: Issues and Problems in Evaluating Their Success; IMF Working Paper 06/240; 1 October 2006. also notes that management boards have now become a common feature of a comprehensive governance framework.

4.1.1 United States Tax Administration Governance

The Internal Revenue Service (IRS) Oversight Board (the IRS Board) was created by the IRS Restructuring and Reform Act of 1998 (USA). The IRS Board has seven Presidential appointees together with the Secretary of Treasury and the IRS Commissioner. The aims of the IRS Board are to improve accountability, continuity, expertise and to provide a private sector perspective.

4.1.1.1 Role and responsibilities of the IRS Board

The IRS Board operates much like a corporate board of directors, but is tailored to fit a public sector organisation. The IRS Board provides the IRS with long term guidance and direction, and applies its private sector experience and expertise in evaluating the IRS progress in improving its service. Specifically, the responsibilities of the IRS Board are to:

review and approve the IRS budget;
review and approve the IRS strategic plan;
select and evaluate some senior IRS executives; and
submit the annual report to Congress.

The IRS Board meets five or more times a year and has a number of committees that assist in its functions and responsibilities — they include an operations committee (which oversees the service and enforcement functions of the IRS), an operations support committee (which oversees the human capital, training, information technology and support functions at the IRS) and the executive committee (which oversees agency-wide personnel matters at the IRS). These committees also meet quarterly to review the array of performance measures against targets. The IRS Board is also active in ensuring that it remains informed — for instance, it holds IRS briefings, it attends Congressional Committees, it makes a number of field visits to both IRS and stakeholder sites and maintains a Stakeholder Outreach Program, which includes conducting annual public meetings, attending nationwide tax forums, conducting an annual taxpayer satisfaction survey and maintaining an ongoing relationship with tax professionals. Under the law, the IRS Board cannot be involved in specific law enforcement activities, including audits, collection activities or criminal investigations. It also cannot be involved in specific procurement activities and it does not develop or formulate tax policy or practice in relation to existing or proposed tax laws. The IRS notes that there are a number of major trends affecting tax administration including the increasing complexity of tax administration, growing human capital challenges, an increase in electronic data, online transactions and related security risks and accelerating globalisation. The IRS believes that the existence of a management board allows it to adapt to these changing circumstances by injecting a wider range of experience, expertise and approaches to tax administration.

4.1.1.2 Role and responsibilities of the Taxpayer Advocate Service

In addition to the IRS Board, the Taxpayer Advocate Service (TAS) was also established to help taxpayers resolve problems and recommend changes. The TAS is an independent organisation within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels or who believe that an IRS system or procedure is not working as it should. The functions of the TAS are set out in the Taxpayer Bill of Rights as follows:

to assist taxpayers in resolving problems with the IRS;
to identify areas in which taxpayers have problems in dealing with the IRS;
to propose changes in the administrative practices of the IRS to mitigate those identified problems, to the extent possible; and
to identify potential legislative changes that may be appropriate to mitigate such problems.

The TAS is headed by the National Taxpayer Advocate, who is appointed by the head of the Treasury and reports directly to the Commissioner of Internal Revenue. Taxpayers may be eligible for assistance if:

they are experiencing economic harm or significant cost (including fees for professional representation),
they have experienced a delay of more than 30 days to resolve their tax issue, or
they have not received a response or resolution to the problem by the date that was promised by the IRS.

The Office of Systemic Advocacy is part of the larger TAS organisation. Systemic advocacy means addressing broad issues that impact groups of taxpayers, including both individuals and businesses. These issues normally:

affect multiple taxpayers;
affect segments of the taxpayer population, locally, regionally or nationally;
relate to IRS systems, policies, and procedures;
require study, analysis, administrative changes or legislative remedies; and
involve protecting taxpayer rights, reducing or preventing taxpayer burden or ensuring the equitable treatment of taxpayers.

The Office of Systemic Advocacy works within the IRS to resolve issues involving procedures and policies by bringing those issues to the attention of IRS management and by making legislative proposals in the annual report to Congress where necessary. The TAS provides two annual reports to Congress — one which identifies the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year and the other which includes a summary of the most serious problems encountered by taxpayers, recommendations for solving those problems and other IRS efforts to improve customer service and reduce taxpayer burden.

4.1.2 United Kingdom Tax Administration Governance

The United Kingdom’s HM Revenue and Customs (HMRC) is a non-ministerial department similar to that of the ATO. This makes it different from most other government departments which work under the direct day-to-day control of a minister. Legislation for the creation of the new HMRC department was enacted in 2005 and included provision for the creation of a management board comprising a Non-Executive Chairman, five internal  HMRC Executive Committee members and four external Non-Executive Directors (the HMRC Board).

4.1.2.1  Role and responsibilities of the HMRC Board

The Chairman leads the HMRC Board which sits a minimum of ten times a year and has the following responsibilities:

development and final approval of HMRC’s overall strategy;
development and final approval of HMRC’s communications strategy and sign off for significant communications identified within it;
development and final approval of the culture and values objectives and strategies;
approval of the final sub-strategies of business lines and functions;
approval of final business plans (including the annual financial plan);
advising the Chief Executive on the appointment of senior executives; and
ensuring the strength of the HMRC Board and committees by participating in the appointment of and advising on the ongoing competence of board members, Executive Committee members and other key appointments.

The HMRC Board’s Non-Executive Directors are senior business figures from outside the department who bring a diverse mix of expertise and skills from across both the public and private sector. HMRC looks to its Non-Executive Directors to:

bring guidance and advice;
support and challenge management about the department’s strategic direction; and
provide support in monitoring and reviewing progress.

In approving the strategies and plans, the HMRC Board must ensure that the views of HMRC’s stakeholders are taken into account. The HMRC Board is supported by the People, Ethics & Responsibilities and Audit & Risk committees to assure the highest standards of corporate governance are in place. Membership of these committees is drawn exclusively from the Non-Executive Directors, with each committee having its own terms of reference setting out its membership, responsibilities, reporting and information requirements. In addition to the HMRC Board, the Chief Executive Officer is responsible for providing leadership and direction to the department and runs all aspects of HMRC’s business, ensuring delivery of the strategic objectives and driving continuous improvement. The Permanent Secretary for Tax reports to the Chief Executive as the Deputy Chief Executive and is the senior tax professional in HMRC. The Permanent Secretary has specific well-defined accountabilities in the areas of tax policy and tax strategy. The Chief Executive Officer and the Permanent Secretary, together with the other Commissioners, make up the Executive Committee, which is the executive decision making body for HMRC. Following the strategic direction provided by the HMRC Board, the Executive Committee oversees the whole breadth of HMRC’s work and is responsible for driving forward continuous improvement and change agendas. It initiates and supervises at a high level the practical steps required to deliver the department’s vision. The Executive Committee’s responsibilities include:

ensuring effective and efficient delivery of the department’s business;
shaping departmental behaviours, policies, processes and structures to achieve our objectives;
leading and promoting change to secure improved performance — including successful delivery of the portfolio of major programmes and projects;
reviewing overall business planning and performance and its contribution to the delivery of departmental objectives and targets;
oversight of the development and management of business lines and function strategies;
ownership and management of key strategic risks;
managing external relations with stakeholders and promoting the department’s good reputation; and
providing oversight of HMRC’s governance arrangements to ensure they remain robust and appropriate.
4.1.3 International Monetary Fund Working Paper

An IMF Working Paper^[3]Ibid; Note also, reference to this paper in Crandall, C., Revenue Administration: Autonomy in Tax Administration and the Revenue Authority Mode l, IMF Technical Notes and Manuals, 18 June … Continue reading found that 75 per cent of surveyed revenue authorities had boards, and nearly all were empowered management boards with specific responsibilities and oversight functions. While the IMF paper was not unequivocal on the real influence of management boards in improving tax administration, it did note management boards with private sector representation may be able to inject a more business-orientated approach to the workings of a revenue authority and thus bring more rigour to financial and human resource matters. The IMF paper also lists a number of considerations concerning the design of a comprehensive governance framework, including the roles and responsibilities of the government, the board and the Chief Executive Officer, so as to ensure that revenue authorities discharge their functions and remain accountable as a public institution. Excerpts of the relevant sections of the IMF Working Paper are contained in Appendix 1.

4.2 Community Calls for ATO Governance Reforms

In submission to the AFTS review, a number of stakeholders (for example, the Group of 100 (G100), Corporate Tax Association, Australian Bankers Association (ABA) and the Business Coalition for Tax Reform) suggested the need to improve the pre-existing governance models through the introduction of a management board. In support of such a proposal, the G100 submission pointed to increasing complexity in response to economic and social trends and the need to keep pace with global business developments. Likewise, the ABA submission pointed to various examples of ATO approaches where it considers that problems are getting more difficult, not better, and, in the ABA’s view, indicates that there are systemic issues involved in achieving consistency and balance in tax administration. The G100 submission suggested that a complex system without someone capable of administering that system objectively, consistently and in a timely manner will fail irrespective of improvements to the policy settings. It noted that the ATO has over the years been given a number of duties apart from responsibility for the collection of tax including administering social welfare programs, superannuation and pension programs, the administration of certain aspects of charitable institutions and other support services to various government agencies. The G100 stated that this increase in scope of ATO activities places additional stresses and strains on its resourcing, human capital needs, managerial capability, governance and risk management framework. The G100 submitted that the operation of market forces means that the majority of the ATO staff, including those in senior ranks and managerial positions, have little or no experience in the private sector and that their entire cultural upbringing and corporate mindset has been fashioned by a public sector outlook and upbringing. The G100 believed that, because of the different culture sets between the private sector and the human capital upbringing within the ATO, there is a ‘disconnect’ which results in a sense of distrust and lack of empathy. The G100 considered that this disconnect can only be systematically addressed by introducing oversight, including external guidance as part of an overall risk management and governance framework, so as to lead to an improvement in ATO culture and performance. Similarly, the ABA and the Business Coalition for Tax Reform recommended the need for a broader cultural change in tax administration so as to have more regard to underlying policy and greater recognition of business realities. The ABA submitted that such a cultural change requires internal processes within the ATO, not more external reviews. In support of a board, the ABA referred to the establishment of the Board of Taxation in relation to tax policy as a significant success and submitted that it should be considered as a model for the ATO. The G100 also expressed particular concern that the perceived culture within the ATO demonstrated a bias to revenue collection. It noted that while the function of the ATO is to enforce and administer the law based on the ‘rule of law’ and in a manner which advances the objectives of timely, consistent and objective administration of the law, it did not believe that the ATO culture is consistent with this. The G100 submitted that while the ATO states that applying the rule of law is a key value, there was a need to have robust governance and risk frameworks capable of overseeing management to ensure that the ATO embraces and ‘lives out’ such values. The G100 submission also presented the results of a high level survey of its members that suggested a strong culture within the ATO, manifested in senior executives as well as other tax officers, whose sense of public duty results in a culture whereby maximising the revenue wherever possible becomes the key, if not primary, objective. The Business Coalition for Tax Reform also believed that the ATO, at times, was inclined to adopt technical positions which would result in greater revenue collection if upheld, which often surprised tax practitioners in the sense that they had thought the law was settled, and which were regarded by many as being inconsistent with policy. Importantly, beyond the establishment of a management board, the Business Coalition for Tax Reform considered that active steps need to be taken to bring in suitably experienced private sector personnel to fill roles at Commissioner and Second Commissioner level so as to bring in a much needed fresh perspective to the ATO.

4.3 Underlying Concerns Regarding the ATO’s Capabilities and Approaches

The IGT’s consultative process, combined with the reports of previous IGT reviews, provide a useful input when considering the deeper issues that might underlie the tensions in tax administration and the calls for improvements to the ATO governance arrangements by business and tax professionals. The principles of good tax administration mentioned in the explanatory memorandum to the IGT Act — namely, fairness, transparency, simplicity and efficiency — are subscribed to by the ATO. However, these principles are perceived sometimes to succumb to the pressure of other forces such as resources, capabilities, complexity, revenue collection and sometimes to the design of the system itself. The IGT also supports stakeholder views that an injection of a wider range of experiences and perspectives into the governance and management of the ATO would assist in responding to these pressures. Over the years, the ATO has established a substantial public consultation framework with the community and the profession in the development of its work initiatives. It should also be recognised that there has been an increase in the external independent scrutineering function over the ATO during that time. Scrutineer reviews and related reporting, including those of the Ombudsman, the ANAO and the IGT, have also been important additions to the tax system. The increased participation of private-sector stakeholders in ATO consultation and scrutineer functions improve transparency, accountability, technical decision making and practical robustness of the system. Notwithstanding the above ATO initiatives, the IGT notes that concerns about tax administration continue to surface 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 the smaller taxpayers (including individuals) not being as well equipped as the business sector to identify and raise any collective or individual concerns. Underlying concerns from the business sector relate to the ATO’s capabilities and approaches in developing and applying its view of the law in significant compliance issues or on new laws. In addition, the business sector often expresses concern over a prevailing, unchecked compliance influence in the approaches and actions of the ATO. These aspects of tax administration have also arisen as significant factors in several IGT reviews.^[4]For example, ATO Management of Part IVC Litigation, Potential Revenue Bias in Private Binding Rulings, Settlement of Active Compliance Activities, Delayed or Changed ATO Advice on … Continue reading Taxpayers are more likely to perceive fair treatment where the ATO openly considers whether it has contributed to specific problems. In the course of community consultations, many taxpayers and tax professionals expressed the view that ATO ‘gloss’ on tax disputes erodes confidence in the tax system and believed that the ATO should openly acknowledge both its positive and negative involvement. It has been suggested 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. The IGT is currently reviewing the ATO’s compliance focus on Small to Medium Enterprises, its implementation of recommendations arising out of the Treasury’s Review on Aspects of Income Tax Self-Assessment and the ATO’s use of early and alternative dispute resolution. The IGT notes that in the course of these current reviews a number of taxpayer concerns, which were previously raised, have resurfaced.

4.4 Previous Reviews that Considered ATO Governance Arrangements

The Joint Standing Committee of Public Accounts (as it then was) in 1993 considered the need to restructure the senior management structure of the ATO. It believed that the administration of the ATO and the taxation system generally would benefit significantly from the injection of opinions and strategies developed externally to the culture of the ATO and from the strengthening and formalisation of tax advisory committees.^[5]Joint Standing Committee of Public Accounts, 326th Report: An assessment of tax – An inquiry into the Australian Taxation Office, Canberra, 1993. The IGT notes that a management board to oversee the ATO was proposed at the time of the Ralph Review and supported by professional bodies. Ultimately, the Ralph Review did not believe the establishment of a policy-constrained board of directors would be helpful to either government or the business community. The Review saw a need to have an independent and business-focused advisory Board of Taxation to assist up front in the development of clear and improved business taxation policy processes and in monitoring the performance of the administrative functions against the Taxpayers’ Charter. The Ralph Review, in not favouring a board responsible for the administration of the ATO, believed that the Board of Taxation approach offered the prospect of greater certainty and less conflict in the downstream administration of business tax laws and therefore would minimise the problems which had given rise to the requests for external control over the administration of the ATO. It should be noted that, at that time, the decision to proceed with the Board of Taxation and leave ATO governance arrangements unchanged may have been influenced by the impending introduction of substantial tax policy reform and that the focus, rightly, was more on achieving the right policy rather than the administration of the new policy or law. The growing support for reforming ATO governance arrangements amongst business taxpayers and tax professionals, together with the continued surfacing of concerns regarding the ATO’s capabilities and approaches, would indicate that we now need to also consider ways of further improving tax administration in Australia.

4.5 Limitations of Aspects of Current ATO Governance Arrangements
4.5.1 Reliance on consultative forums

The ATO publicly places strong emphasis on consultation and engagement with stakeholders in the care and management of the tax system as a means to embed trust and confidence. The ATO has established a large number of consultative forums to ensure that it understands external perspectives. The Commissioner of Taxation reports using around 50 consultative forums with taxpayer, business and tax professional representatives to foster good compliance and to reduce compliance costs. However, the sole reliance on consultative forums as a governance process needs re-examining in light of the ongoing stakeholder concerns with aspects of the ATO’s administration, including its capabilities and approaches. First, consultative forums only provide an input into ATO decision-making, allowing stakeholders to identify and raise problems and concerns. However, there is some dissatisfaction with the degree to which such input is reflected in the final outcome. In an IGT review context, the ATO’s handling of over 60 examples of perceived ‘U-turns’, many of which were raised at ATO consultative forums, suggests that the ATO consultation process is not a complete solution for taxpayers and their representatives to voice and address concerns. Second, the effectiveness of consultative forums relies upon tax officers taking on board issues and concerns raised by taxpayer, business and tax professional representatives and advancing them through the ATO decision-making hierarchy. This is not considered to be a substitute for an injection of taxpayer, business and tax profession experiences and perspectives within senior ATO management.

4.5.2 Role of Parliament

As noted by Dr Ken Henry in his speech ‘Confidence in the operation of the tax system’

^[6]Henry, K., “Confidence in the operation of the tax system”, speech delivered to the Taxation Institute of Australia conference on 13 March 2009, Sydney, available at … Continue reading

 the ultimate ‘owners’ of the Australian tax system are the Australian community. Parliament might be thought of as the community’s ultimate board of directors, with the Commissioner being accountable to it for the administration of his office. The Commissioner also appears before parliamentary committees to explain his administration of the tax laws such as during Senate estimates hearings and the biannual hearings of the Joint Committee of Public Accounts and Audit. The parliamentary committee process has significant practical limitations in scrutinising the ATO (due to the ATO’s size, scope and complexity in function). A review of ATO administration often requires significant amounts of information, judgement and interpretation, which also includes the examination of case files, correspondence, internal ATO communications and tax officer meetings. The parliamentary review process is not designed for that level of scrutiny and is often reliant upon information provided by the ATO which may not always present every perspective (as was evidenced with the ATO’s Moving On document

^[7]Australian Taxation Office, Moving On, 50.1 Supplementary submission to submission 50 into the JCPAA Inquiry reviewing a range of taxation issues within Australia, June 2006, available at … Continue reading

 and the JCPAA’s findings in its Tax Administration report^[8]Joint Committee of Public Accounts and Audit, Report 410 Tax Administration, Canberra, 2008.). The IGT has also found that taxpayers are reluctant or unwilling to raise their concerns in the administration of the tax system directly with the ATO or in parliamentary committees. A number of stakeholders have expressed concern about a fear of ATO retribution against those who publicly criticise the ATO’s conduct or approaches.

5. Options for Reform

The IGT believes that there is merit in establishing comprehensive ATO governance arrangements in line with international tax administration developments and community expectations. There is growing support for the tax system to inject a wider range of experiences and perspectives into ATO management. This is evidenced by the ongoing community feedback together with the wide ranging issues investigated by the IGT and previous parliamentary committee reports. A great majority of the systemic issues identified by the IGT may have been better handled if there was a greater appreciation of taxpayer and business perspectives. While the current ATO governance arrangements are considerable, there are a number of shortcomings that warrant examination in developing a more effective structure. The shortcomings include, a reliance on consultative forums as a substitute for a more participatory form of tax administration, practical limitations of the parliamentary committee process and the piecemeal development of the current governance arrangements, in particular the executive agencies overseeing the ATO and its administration. The key objective of any governance changes should be to promote greater representation of taxpayer, business and tax professionals’ perspectives at the senior levels of tax administration. It should allow for the better fulfilment of the administrative design principles espoused in the Ralph Report — namely engendering taxpayer trust, facilitating and enforcing taxpayer compliance and ensuring a responsive administration. The IGT believes that the following options should be considered in an attempt to improve ATO governance arrangements:

Establishment of a management board (such as those of an advisory or supervisory nature) to bring a diverse mix of expertise, experience and skills from across both public and private sector into the ATO including areas such as information technology, human resources, finance and communication;
Appointment of additional Second Commissioners from the private sector to diversify the ATO Executive Committee, inject a wider range of experiences and perspectives and provide intelligence on trends in corporate governance and taxation risks; and
Enhancement and centralisation of the ATO scrutineer function to provide a single port-of-call for all taxpayer concerns or grievances about the ATO.

The optimal outcome is expected to be achieved by implementing all three options listed above as an integrated package, providing synergistic benefits beyond the options as stand-alone considerations. Whilst a board has strong stakeholder support, the IGT would suggest that for the type of systemic issues identified by business and tax professionals, options 2 and 3 should also be considered.

5.1 Option 1 — Establishment of a Management Board

The ongoing international trend towards a comprehensive set of governance arrangements consisting of a management board provides a good starting point. Other government agencies have already moved down this path with some examples including the Reserve Bank, the Australian Prudential Regulation Authority (APRA) Risk Management and Audit Committee and Australian Securities and Investments Commission (ASIC). The establishment of a management board will have number of positive influences in tax administration. It will bring a diverse mix of expertise and skills from across both public and private sector into the ATO in areas such as information technology, human resources, finance and communication. This is especially relevant given that the role and scale of the ATO’s operations have grown substantially over the last twenty years. It will also help instil better project management skills and provide a new source of intelligence regarding business practices. As listed by the IMF Working Paper, and drawing from the United States and the United Kingdom experience, the role and features of a management board could, amongst others:

comprise private and public sector (including the Commissioner of Taxation) membership including non-executive directors representing the business community and other interests of government;
provide advice on the management of the ATO including:
development and final approval of the ATO’s overall strategy including performance indicators;
development and final approval of the ATO’s communications strategy and sign off of significant ATO communications identified within it;
development and final approval of the culture and values objectives and strategies;
approval of the final sub-strategies for business lines and functions;
approval of final business plans (including the annual financial plan);
advising the Commissioner of Taxation on the appointment of senior executives; and
ensuring  the strength of the management team by participating in the appointment of and advising on the ongoing competence of board members, Executive Committee members and other key appointments;
maintain the independence and authority of the Commissioner of Taxation by:
the board having no authority over the administration and enforcement of tax legislation and no access to confidential taxpayer information; and
the Commissioner of Taxation being responsible for the day-to-day operations of the ATO.

Along with the establishment of a management board, there would be considerable advantages in also establishing a number of committees to support the board in its functions and responsibilities. One possibility, along the lines of the United Kingdom approach, would be having an Audit and Risk Committee, the People Committee and the Ethics and Responsibilities Committee. Membership of these committees would be drawn exclusively from the non-executive directors. In addition, each committee would have its own terms of reference setting out its membership, responsibilities, reporting and information requirements. Particular senior ATO staff would have to attend committee meetings and provide relevant information, data and reports to allow an in-depth examination of ATO corporate performance.

5.1.1 Recent Government action

In 2009, the Government announced a review, Australia’s future tax system (AFTS) and the IGT proposed to that review for consideration potential alternative ATO board structures. Appendix 2 contains a diagrammatic representation of an example of a management board. It should be noted that the head of a centralised scrutineer agency (described below) would also be a member. The IGT believes that the appointment of the scrutineer agency head on the board provides an independence check and balance on the ATO’s internal management as well a pro-active and real-time response to significant systemic issues. Appendix 3 contains an example of a possible committee structure. On 5 August 2010, the Government announced the establishment of a Tax System Advisory Board (the Board) to assist the Commissioner and the ATO Executive Committee on the general management and organisation of the ATO. In January 2011, the Assistant Treasurer released a discussion paper setting out the design parameters for the Board and invited submissions on each of the three potential models for the Board. In response to this discussion paper, the IGT has met with the Consultation Panel to discuss his views, in particular that the success of the Board will largely rely on the Board not just being independent but also seen to be independent. The IGT also raised the need for options 2 and 3 (mentioned above and detailed further below) to be considered.

5.2 Option 2 — Diversification Of The Ato Executive Committee
5.2.1 The benefits of diversification

The IGT considers that there are broader benefits to be realised by the diversification of the ATO Executive Committee, in addition to the suggestions noted in option 1 above. As Dr Ken Henry noted in his speech ‘Confidence in the operation of the tax system’, a key difference between the ATO and a number of Australian regulators, including Australian Competition and Consumer Commission (ACCC), APRA and ASIC is that tax commissioners have largely been appointed from within the ranks of the ATO. This, he says, may have contributed to perceptions that the ATO could be more ‘outward looking’. The IGT also agrees with stakeholder submissions that the majority of the ATO staff, including those in senior ranks and managerial positions, have limited experience in the private sector. As a consequence, the organisational culture and mindset is fashioned from a public sector perspective. Given that the ATO interfaces directly with business, there is a real need for both parties to ‘speak the same language’ and have shared expectations. Stakeholders often contrast the Australian position with that of the United States, where it is much more common and culturally accepted for professional personnel to work both inside and outside of the government revenue collection agency, being the IRS. To address the issues identified by business and tax professionals, a board, in isolation, may not be sufficient. The overall governance structure is likely to be enhanced by the diversification in the composition of the ATO Executive Committee. To this end, the IGT proposes the appointment of two additional Second Commissioners from the private sector to inject a wider range of experiences and perspectives into ATO management and provide intelligence and insight regarding trends in corporate governance and taxation risks.

5.2.2 The role and functions of the additional Second Commissioners

The additional Second Commissioners should be full-time roles. They would be both members of the ATO management executive and be part of the day-to-day management team. These Second Commissioners may serve the system best by having specific responsibility for particularly critical or contentious areas of tax administration. These areas may be those where the ATO’s approaches, views and actions may be enhanced by having informed business perspectives and taxpayer experiences. One such area is the ATO’s objection and litigation sections. Stakeholders, by way of example, perceive that there is a lack of independent review where an ATO objection officer is located within the same business line as the original decision-maker, albeit a different section. The original decision-maker is perceived by taxpayers to have some kind of input or influence on the objection determination, either directly or indirectly, due to factors such as organisational, behavioural or social considerations. The Joint Standing Committee of Public Accounts also reflected on this independence concern noting that it was difficult to characterise the objections process as an ‘independent review’ where objections officers were subject to the same culture, corporate goals and values as the rest of the ATO.^[9]Joint Standing Committee of Public Accounts, above n 6, p. 325. The IGT’s report into the Underlying Causes and Management of Objections to Tax Office Decisions found that in relatively simple matters, there was independent review but in larger, more complex, objections the line between the objections officer and original decision-maker was blurred. The IGT’s report into Large Business Audit and Risk reviews considered similar concerns regarding the ATO’s technical decision making review, where recommendation was made and accepted by the ATO for improvement. An innovation, suggested by a wide range of stakeholders, is that the ATO should have a strong independent internal appeals or review area. The IGT sees considerable merit in this idea. While increasing the independence of review of original ATO decisions, the IGT believes that a separate appeals area would empower the ATO’s in-house legal section to independently assess the evidence and prospects of a case before progressing the matter to litigation. The ATO’s litigation arm would, like the Director of Public Prosecutions in criminal matters, have ultimate discretion as to which matters the ATO would litigate, which would be conceded and which should otherwise be settled. This would ensure that only genuine and fundamental disputes on interpretation or application of the law are litigated, resulting in cost savings for both government and taxpayers. To achieve such an outcome, one of the additional Second Commissioners would head up this new appeals and review area, providing stakeholders with stronger assurance of independence. The IGT notes that such a model currently exists in the IRS in the United States, with its Appeals area being empowered to separately and independently settle and pursue matters arising out of original IRS decisions. It is appreciated that this approach may on occasions give rise to internal tensions within the ATO. The IGT considers that tensions of this nature are desirable in ensuring appropriate outcomes are achieved, thereby reducing the overall level of taxpayer disputes and the cost to the broader tax system. In relation to the role of the other additional Second Commissioner, a number of options are available. For example, the appointment could be to a compliance role with responsibility for liaising with business, tax professionals and advisers where there is conflict or disagreement between the ATO and taxpayers. Other options may be for them to act as high level circuit-breakers within the ATO by being able to co-ordinate and drive the requisite ATO responses and be responsible for implementing changes to address identified shortcomings or to bring together key ATO decision-makers (for example, the Tax Counsel Network, centres of expertise and business lines compliance segments) where required to reach internal resolution of technical issues or disputes more quickly.

5.3 Option 3 — Centralised Scrutineer Agency

The IGT believes that a well-resourced and centralised ATO scrutineer function, incorporating best local and overseas practice, would better serve the Australian tax system.

5.3.1 Benefits of a well-resourced and centralised scrutineer agency

Under the proposed centralised model, the scrutineer would continue to play an important role in ensuring taxpayer rights are protected and would promote confidence in the integrity, transparency and accountability of the administrator. It would also provide a range of other benefits, including:

a single port-of-call for considering taxpayers’ administration issues and simplifying and improving access;
a more holistic understanding of taxpayer issues arising in relation to their dealings with the tax system;
prompt systemic issues identification that emerges from handling significant number of similar complaints;
removal of overlap between the current scrutineer agencies;
economies of scale and scope in centralising the separate scrutineer functions; and
greater synergistic benefits for the ATO in only having a single tax administration scrutineer agency.

The centralisation provides a single port-of-call for taxpayer grievances, be they specific disputes or systemic issues. The investigation and resolution of specific taxpayer disputes would ensure the proposed central scrutineer agency has greater opportunity to foresee likely systemic issues arising and would prevent unnecessary delay in their resolution. In relation to the ATO, it would only be subject to one scrutineer as opposed to the current model in which it is required to respond to several agencies. The multiplicity and duplication of action by scrutineers sometimes requires multiple ATO responses to aspects of the same issue. It would also arguably enable the ATO to enhance its responsiveness and reduce the cost of scrutineer engagement.^[10]Commissioner of Taxation, “Sustaining Good Practice Tax Administration”, Speech delivered to the Australasian Tax Teachers Association Conference, New Zealand on 20 January 2009. The … Continue reading As foreshadowed above, it is also envisaged that the head of the scrutineer agency would participate at the proposed management board level of the ATO, allowing for the proactive and timely consideration of issues and concerns rather than the more reactive nature of current scrutiny which investigates or reviews taxpayer concerns after the event. It will also encourage the scrutineer agency to play a more supporting role in tax administration, not only through responding to taxpayer concerns and issues, but also providing input to ATO senior management in its strategies and approaches.

5.3.2 Operational structure of new scrutineer agency

The roles and responsibilities of the IGT and aspects of those of the Ombudsman and the ANAO (i.e. those relating to tax administration) may be brought together into one statutory agency. The functions of this taxation administration scrutineering agency would include:

assisting taxpayers in resolving complaints and problems with the ATO;
identifying systemic issues in which taxpayers have problems in dealings with the ATO;
recommending proposed improvements to the ATO’s administrative systems and practices in mitigating systemic issues; and
identifying tax administration policy issues, for legislative consideration, that seek to mitigate those systemic issues.

Similar to the activities of the Ombudsman relating to tax administration, this agency would consider and investigate specific taxpayer complaints from people or businesses who believe they have been treated unfairly or unreasonably by the ATO. The aim would be to resolve complaints impartially, informally and quickly or to suggest other avenues for resolving the matter. The handling of such complaints would assist in the identification of potential systemic issues, as a number of taxpayers raising similar concerns could suggest an underlying problem. Similar to the IGT, this agency would undertake reviews into systems established by the ATO to administer the tax laws or systems established by the tax laws and then make recommendations for the improvement of those systems.

5.3.3 Resourcing and Funding of the centralised scrutineer agency

The AFTS review raised the need for the existing scrutineering functions to be resourced appropriately beyond that of the current level of funding and made recommendation accordingly.^[11]Treasury, Australia’s future tax system—Report to the Treasurer, Canberra, 2009, recommendation 117 at pp. 663-4. Analysis will be required to determine the appropriate level of resourcing that is required to operate the proposed centralised agency effectively.

5.3.4 Reporting

The centralised scrutineer agency reporting line would need to be considered. The reporting may be directly to Parliament and/or to Government. Where the scrutineer agency head is on the ATO management board, there may be scope to differentiate the agency’s reporting. One possibility could be along the lines of the United States TAS, where the scrutineer agency is required to provide two annual reports that would be tabled in Parliament. One report would identify the priority issues that the scrutineer agency will address in the coming fiscal year and the other would set out:

a summary of the most serious problems encountered by taxpayers;
findings from specific reviews undertaken on systemic tax issues and recommendations for improving tax administration; and
other efforts to improve taxpayer experience and reduce the compliance burden.

Lastly, and consistent with the AFTS’ recommendation 118,^[12]ibid., p. 664. the centralised scrutineer agency reports may also be considered by the JCPAA. This ensures Parliament receives an independent and candid report of the problems taxpayers are experiencing and the scrutineer’s opinion on their redress. These reports may then be used in the scrutiny of the ATO’s performance in any parliamentary review process.

Appendix 1: Excerpts From IMF Working Paper
Role of the Minister of Finance
Control over the RA

The legislated role of the minister of finance with respect to the Revenue Authority (RA) has a major impact on the governance as well as the degree of autonomy from the executive level of government. Therefore, it is critical to set out the role of the minister in terms of the control and supervision of the RA (direct control and supervision in some cases, almost nil in others), the appointment of the chair and members of the board and the CEO, the approval of the budget, and so on. If too much authority is granted to the minister in these areas, the RA will de facto have a significantly reduced autonomy; if too little authority is granted to the minister, there is a danger that the RA may lose necessary sensitivity to its inherent public sector role.

Implications of corporate character

The role for the government in a more autonomous revenue authority will be much more limited than would be the case for a RA which was not a ‘body corporate’ and which was in effect directly subordinated to the minister of finance. For this kind of RA, a first consideration is in regard to the board. Clearly, the government is the ‘shareholder’ of the corporate body (the RA) and therefore needs to have a say in the appointment of those who will govern that body. There are two aspects to this: the appointment of the chair of the board and its members; and the appointment of the CEO.

Relationship to CEO

The position of CEO is one of the most important in the RA, and the CEO will in effect have a dual set of accountabilities. He or she will be subordinate to the board in terms of the management; however, he or she will also be directly accountable to the legislature and to the government for the execution of all the operational powers and functions assigned to the RA by virtue of the tax and customs laws.

Power of directive

Many government institutions that have been established as corporate bodies, including RAs, include a provision for the minister to issue a directive to that corporate body. This kind of provision allows the government as the effective shareholder to direct that some particular action be done. Any such direction requires maximum transparency, usually through publication in a country’s official gazette. The argument in favour of these kinds of mechanisms is that they maintain a certain amount of executive level authority and accountability without materially affecting the autonomous nature of the RA, since the expectation is they would be rarely used.

Role of the board

RAs normally have a board whose functions and powers form an essential part of the organization’s governance framework. Such boards can be advisory in nature, usually in cases where the minister has a strong role and autonomy is more limited, or they can be management boards with strong functions set out in legislation. Boards are almost always prohibited from involvement in the operational execution of the tax and customs laws, and from access to any information about individuals or corporations obtained as a result of the administration and enforcement of those laws. To do otherwise would place the (private sector) members of the board in an obvious and untenable potential conflict of interest situation.

Board functions

The role and functions of the board flow directly from the legislation. Board functions, again depending on degree of autonomy, could include the following: to oversee the administration, management, and organization of the RA; to oversee the management of resources, services, property, personnel, and contracts; to approve the strategic plans and the budget of the RA; to approve the annual report; to establish policies to be followed; to establish by-laws for the functioning and operations of the board. In general, the board will have the power to execute all the authorities of RA with respect to carrying out the board’s mandate.

Board meetings

The chair will normally preside over the board’s meetings and exercise the powers and functions as prescribed by by-laws established by the board under its legislated authority.

Ex-officio members

A board has many duties and functions to perform and requires a mixture of skills and experiences in order to be effective. As a RA remains a government institution, it is often considered advisable to include certain government representatives on the board. In order to ensure autonomy at the same time, these positions are usually based on the notion of fixed ex-officio, or non-voting, appointments. This will respect the principle that all (voting) members of the board are required to act strictly in the best interests of the organisation, and not represent the interests of some other constituency.

The CEO

In the context of corporate governance, there is a debate as to whether the CEO should also be a member of the board. The CEO of the RA has a critical role to play and has an important relationship with the board, as well as with the minister of finance in terms of the revenue laws. Careful consideration needs to be given to the most effective role for the CEO on the board.

Selection of board members

In the interest of ensuring sufficient capacity on the board, the legislation should clearly indicate that all members of the board must have the experience and knowledge required for discharging their functions, normally in finance, accounting, taxation, public administration, law, or some other related field.

Size of the board

Considerable debate has also taken place concerning the optimum size for corporate boards. It would appear from the literature that boards of 7 to 12 members are now being considered optimal in terms of the efficient and effective functioning of corporate boards. Larger boards than this are considered unwieldy; smaller ones are felt to be too narrow and tending to lack comprehensive skills.

Role of the CEO

Powers vested in CEO. The CEO is generally responsible for supervising and managing the day-to-day operations of the RA. The management authority of the organization is embodied in the board, and in that respect the CEO, even though possibly a member of the board, is subordinated to it. However, the RA also has the mandate for the execution and enforcement of the revenue legislation, and the board will be prohibited from involvement in these areas. It is possible, then, to have an RA where the CEO only has responsibility over the areas where the board has a mandate, and where the heads of the revenue departments retain their powers and functions directly from the respective legislation. At issue here is the extent to which all the powers and obligations related to the revenue laws (such as the power to assess taxes, make a customs determination, issue interpretations, impose or waive penalties, and so on) are actually given to the CEO through the enabling legislation of the revenue authority, who in turn delegates them to other senior officials and staff, or whether they are still given directly to the departmental heads, which serves to exclude the CEO from operations (this was a feature of some early RAs).

Accountability to the government

Although RAs are intended to have independence from the public sector, it is important that they retain accountability to the government as a public institution. After all, an RA, despite its independence, continues to perform critical public sector functions. It is thus essential to establish appropriate accountability mechanisms that reflect the desired degree of autonomy for the organization. It is generally felt that the greater the autonomy of the RA from the public service, the greater the need for unique, structured, and transparent accountability mechanisms in the legislation. In the government context, laws assign responsibility and authority to organizations and individuals within them, and these organizations and individuals are held accountable for the effective and efficient performance of their responsibilities according to the governance framework established for them. Many of the aspects discussed earlier in this paper constitute in effect accountability mechanisms to serve this purpose.

Internal and external audit

A first element concerns the issue of auditing, both internal and external. As for internal audit, it is generally accepted that boards of RAs will have an active role in reviewing the outputs of internal audit (including internal affairs) in order to be able to exercise their management responsibilities, and that the organization should have an independent internal audit function reporting directly to the CEO (there is some current debate as to whether internal audit should report to the board). An RA must also have external audit. There are two choices for external audit—either the board appoints the external auditor, or the auditor general of the country, which reports to parliament, is named the external auditor for the RA.

Reporting to parliament

Providing formal reports to parliament is another means of ensuring accountability to both the parliament and the executive. The two most common forms of reporting are through the annual corporate plan and budget (a look ahead at what the RA plans to do in the coming year) and the annual report (a look back at what was accomplished in the year past). Such documents provide valuable information to the government and the parliament, to ensure transparency.

Appendix 2: Example of a Management Board Structure

Appendix 3: Example of Committee Structure

On 8 May 2020, the IGTO lodged a submission to assist the Committee in its Inquiry into the Commissioner of Taxation Annual Report 2018-19. Following our appearance at a public hearing before the Committee, we lodged a supplementary submission on 13 August 2020. The Committee has also published the IGTO’s opening statement which was tabled at the public hearing on 31 July 2020.

On 23 April 2020, the IGTO lodged a submission to assist the Committee in its Inquiry into the Tax Treatment of Employee Share Schemes. Following our appearance at a public hearing before the Committee, we lodged a supplementary submission on 14 July 2020.

On 17 April 2020, the IGTO lodged a submission to assist the Committee in its Inquiry into the Development of the Australian Corporate Bond Market. Following our appearance at a public hearing before the Committee, we lodged a supplementary submission on 19 November 2020.

1. Introduction

1.1 The Inspector-General of Taxation (IGT) welcomes the opportunity to make a submission to the House of Representatives Standing Committee on Tax and Revenue’s (Committee) Inquiry into Taxpayer Engagement with the Tax System (Inquiry).

1.2 It is widely acknowledged that the willing engagement of taxpayers in the tax system is a key driver for voluntary compliance:

Contemporary taxation authorities are heavily invested in genuine engagement with the community. Taxation is a complex socio-economic phenomenon that is a great deal more than just economics and fiscal policy. The citizens’ willingness to voluntarily comply with their tax obligations is directly related to the salience of their relationship with the revenue authority. Engagement is therefore critical to successful administration as it improves efficiency, reduces the cost of administration and enhances compliance.

^[1]Jo’Anne Langham and Neil Paulsen, ‘Effective engagement: Building a relationship of cooperation and trust with the community’ (2015) eJournal of Tax Research 13:1, pp 378-402 at 378.

1.3 The Australian Taxation Office (ATO) has also recognised the importance of the willingness of taxpayers to engage:

Our mission is to contribute to the economic and social wellbeing of Australians by fostering willing participation in our tax and superannuation systems, and our vision is that we are a trusted and respected administrator both here and internationally. Effective client and industry engagement goes to the very core of those things.

^[2]Australian Taxation Office (ATO), ‘Our evolving approach to taxpayer engagement’ (Speech delivered to the Tax Institute of Victoria Fourth Annual Forum, 5 October 2016) <www.ato.gov.au>

1.4 Within this context, scrutineers, such as the IGT, play a critical role in fostering community trust and confidence in the tax system which in turn enhances voluntary participation and efficient administration. Taxpayers and their advisers take comfort that an independent agency can investigate their complaints or broader systemic issues, provide impartial views and make recommendations for improvement. The availability of such avenues significantly contributes to the perception of fairness in the tax system as a whole.

1.5 This submission seeks to faithfully address the Committee’s terms of reference and, in doing so, it has drawn on findings from the IGT’s prior reviews and complaints handling function as well as relevant research on current international practices. It is structured around the four themes specified in the terms of reference:

• the prevalence and impact of the ‘cash economy’ on the tax system, mechanisms to ensure tax compliance and strategies used by comparable countries’ revenue authorities;
• how taxpayers currently interact with the tax and superannuation system, including through tax agents and other intermediaries, and the different compliance burdens of doing so;
• the contemporary use of information and communication technology by the Australian Taxation Office and comparative tax administrators to deliver services; and
• behavioural insights from other service delivery agencies including possible ways to better inform taxpayers to help them make decisions in their best interests.

^[3]House of Representatives Standing Committee on Tax and Revenue, ‘Inquiry into Taxpayer Engagement with the Tax System’ (25 November 2016) <www.aph.gov.au>

2. The cash economy

2.1 There is currently no universally accepted definition of the ‘cash economy’. It varies from jurisdiction to jurisdiction and may be referred to by a number of different names, including the ‘hidden economy’, ‘non-observed economy’ (NOE), ‘underground economy’ or ‘black economy’.

2.2 In Australia, the ATO has defined the cash economy as those:

…businesses that deliberately hide income to avoid paying the right amount of tax or superannuation. They usually do this by not recording or reporting all their cash or electronic transactions.

^[4]ATO, ‘The cash and hidden economy’ (2 November 2016) < www.ato.gov.au>

Prevalence and impact of the cash economy on the tax system

2.3 In order to develop mechanisms and strategies to combat the cash economy, a clear understanding of its scope and prevalence is needed. However, as the Australian Bureau of Statistics (ABS) has previously noted:

By its very nature, the NOE cannot be directly measured, or it can be very expensive to attempt this measurement. Therefore, estimates of NOE activity must rely on limited indicative information and a variety of indirect methods – all of which can be regarded as contentious. It is likely that an unknown proportion of underground production is already captured in the observable data, owing to the data sources used and the estimation methods employed in collecting the observable data.

^[5]Australian Bureau of Statistics, ‘5204.0.55.008 – Information paper: The Non-Observed Economy and Australia’s GDP, 2012’ (18 September 2013) <www.abs.gov.au>

2.4 Historically, the prevalence of the cash economy in Australia has been estimated to be between 3 and 15 per cent of gross domestic product (GDP).

^[6]Senate Economic References Committee, The structure and distributive effects of the Australian taxation system (2004), p 62.

However, more recent estimates from the ABS suggest that the figure is closer to 1.5 per cent of GDP or $24 billion.^[7]Above n 5.

2.5 The ATO considers that the cash economy is most prevalent in the small business market segment where approximately 1.6 million small businesses, operating across 233 industries, are likely to have regular access to cash.

^[8]Australian National Audit Office (ANAO), Strategies and Activities to Address the Cash and Hidden Economy (2016).

2.6 More recently, tax gap methodology has been used by revenue authorities to assist in measuring, amongst other things, the cash economy. The tax gap:

…is an estimate of the difference between what the ATO collects and the amount that would have been collected if every taxpayer was fully compliant….

Tax gaps are, in effect, about measuring what is not visible – what people have not told us about their compliance, whether through misunderstanding, by choice or by taking a tax position that differs from the ATO view of the law.

^[9]Commissioner of Taxation, Annual Report 2015-16 (2016) p 43.

2.7 In 2014, the Commissioner of Taxation (Commissioner) committed to estimating tax gaps for all taxes and programs that the ATO administers. Whilst the ATO has yet to establish a full set of reliable gaps for income tax, the ATO has published tax gap estimates for goods and services tax (GST), wine equalisation tax, luxury car tax, petrol and diesel excise and duty, pay as you go (PAYG) withholding and fuel tax credits.

^[10]ATO, ‘Australian tax gaps 2015-16’ (2 November 2016) <www.ato.gov.au>

2.8 The ATO’s recent approach to measure tax gap seems to align with processes adopted by other revenue authorities, such as the United Kingdom’s (UK) Her Majesty’s Revenue and Customs (HMRC). HMRC, who has been measuring tax gap for some time, publishes an annual report of its tax gap analysis. For the 2014-15 financial year, HMRC reported that the tax gap attributable to the hidden economy was £6.2 billion

^[11]Her Majesty’s Revenue & Customs (HMRC), Measuring tax gaps 2016 edition (2016) <www.gov.uk>

 which represents approximately 17 per cent of the total tax gap of £36 billion.

2.9 In terms of impact of the cash economy, it is wide-reaching and affects all Australians. As the ATO has stated:^[12]Above n 4.

The cash and hidden economy affects all Australians. It affects us by reducing the amount of money available to fund community services such as health, education and other government programs.

Honest businesses face unfair competition when others don’t correctly record and report all their income and expenses.

The cash and hidden economy can also hurt you as an individual. Consumers who support it, by paying cash and not obtaining a receipt, risk having no evidence to:

• support a claim for a refund if the goods or services purchased are faulty
• prove who was responsible in cases of poor work quality.

Those who participate in the cash and hidden economy are disadvantaging the community, honest taxpayers and honest businesses by not competing fairly.

Mechanisms to ensure tax compliance

International approaches

2.10 Based on surveys of 26 member countries, in 2012, the OECD delivered its report on combating the cash economy. The report noted that whilst a number of jurisdictions had comprehensive overarching strategies, many did not, ‘suggesting that this area of non-compliance may not be receiving adequate attention.’

^[13]Organisation for Economic Cooperation and Development (OECD), Reducing opportunities for tax non-compliance in the underground economy (2012), p 2.

2.11 The OECD report provided a summary of the core elements of a comprehensive overarching framework for combating the cash economy including that:^[14]Ibid.

• There are arrangements in place for ‘whole of revenue body‘ co-ordination;
• Comprehensive research efforts are undertaken;
• Enhanced risk detection processes are in place;
• A multi-faceted set of risk treatments is undertaken;
• Steps are taken to leverage improved compliance through key intermediaries;
• There is effective co-operation across Government;
• Wide use is made of the media; and
• Efforts are made to evaluate the impacts of individual risk treatments and/or the overall strategy.

2.12 The report also identified a large range of risk detection and risk treatment approaches reported by the revenue authorities in their survey responses or which were highlighted by the OECD research. These approaches included:^[15]Ibid, p 3.

• Comprehensive industry benchmarking, coupled with leveraging via tax professionals, media engagement and automated targeting of large numbers of taxpayers (Australia).
• Industry-based withholding/third party reporting regimes (Ireland and Canada).
• Increased controls over cash transactions (Netherlands, Spain, and Sweden).
• Increased record-keeping controls for employees in high-risk industry sectors (e.g. restaurants and hairdressing) (Sweden‘s staff ledgers).
• Initiatives aimed at reducing the use of cash transactions (Norway and Turkey).
• The use of monetary incentives to encourage proper record-keeping and deter unrecorded cash payments (Canada‘s and Norway‘s home renovation tax credit, Korea‘s lottery and incentive for obtaining receipts).
• Increased revenue body use of suspicious transactions reports collected by a separate government agency (Australia and France).
• Educating new/potential taxpayers (Austria‘s schools initiative, Canada‘s trade school initiative).^[16]Ibid, p 3.

2.13 Turning to approaches of comparable jurisdictions, in 2007, the United States’ (US) National Taxpayer Advocate (NTA) undertook a review of the revenue forgone because of the cash economy. The report indicated that the difference between the tax payable and the amount voluntarily paid by taxpayers was approximately US$345 billion in 2001, with US$100 billion per year being attributable to the cash economy.

^[17]National Taxpayer Advocate (NTA), 2007 Annual Report to Congress Volume 2 (2008) <www.irs.gov>, p 4.

The major recommendation from the NTA was that a Cash Economy Program Office should be established^[18]Ibid, p 13. as a means of implementing and coordinating the overall strategies of the Internal Revenue Service (IRS) in this area. It appears that the IRS declined to do so and the NTA had expressed concerns that without such an office, ‘ad hoc measures will not get the job done’

^[19]Internal Revenue Service, ‘National Taxpayer Advocate Delivers Report to Congress’ (IR-2008-4, 9 January 2008) < www.irs.gov>

.

2.14 In New Zealand, the Inland Revenue Department (IRD) had indicated in 2011 that it had adopted a range of strategies to target different industries in which the risk had been identified. These strategies included raising awareness of obligations, enforcing penalties, prosecuting serious offenders, increasing data matching and partnering with industry associations and other government agencies on education, information sharing and investigations.

^[20]New Zealand Inland Revenue Department, The Hidden Economy (2011) <www.ird.govt.nz>

2.15 In 2016, the HMRC published a number of consultation papers in relation to proposals to assist in tackling the cash economy.

^[21]HMRC, ‘Proposals to tackle the hidden economy’ (26 August 2006) <www.gov.uk>

These new proposed strategies follow on from earlier initiatives in which the HMRC made use of extensive educational campaigns to improve taxpayer compliance behaviour.

^[22]HMRC, New campaign against tax evasion (November 2012) <www.gov.uk>

The current proposed strategies are three-pronged and include extending the data-gathering powers to ‘money service businesses’,

^[23]HMRC, ‘Tackling the hidden economy: extension of data-gathering powers to money service businesses’ (26 August 2016) <www.gov.uk>

the need for new penalties and sanctions

^[24]HMRC, ‘Tackling the hidden economy: Sanctions’ (26 August 2016) <www.gov.uk>

as well as conditional registration.

^[25]HMRC, ‘Tackling the hidden economy: Conditionality’ (26 August 2016) <www.gov.uk>

The latter point requires ‘tax registration as a condition of access to some essential business services or licences’.^[26]Ibid, p 9. As part of its strategy, the HMRC is also seeking to identify points at which businesses tend to enter the cash economy by failing to register for certain taxes (such as Value Added Tax when certain thresholds are met) and making it as easy as possible for taxpayers to register.

Australian approach

2.16 In 1998, the Government stated that the ‘taxes and collection systems allow too much scope for taxpayers to participate in the cash economy’.

^[27]Peter Costello MP, Tax Reform: Not a new tax, a new tax system (August 1998) <archive.treasury.gov.au>.

The Government at the time proposed and implemented a number of strategies including the introduction of the Australian Business Number (ABN) as a single business identifier for dealing with the whole-of-government, simplifying payment and reporting systems (the PAYG system) as well as other law and administrative changes to promote certainty and make compliance simpler and fairer.^[28]Ibid, pp-132-134. The improvements included the requirement for all businesses to register for ABNs with the consequence that unregistered businesses would have a significant proportion of their payment withheld by trade partners and remitted to the ATO.

2.17 Notwithstanding the legislative improvements, the risk of non-compliance still remains within the tax system. Dealing effectively with the cash economy can present many challenges, including:^[29]Above n 13.

• difficulties in detecting underreported income due to the ‘hidden’ and dispersed nature of the economic activities concerned;
• challenges in identifying the most revenue-productive targets due to the relatively large number of participants, each with small amounts of tax which in aggregate can be sizable;
• many participants having poor records and in some cases may not even be registered with the ATO;
• ascertaining the full extent of a taxpayer’s unreported income for a fiscal period may necessitate exhaustive and often time-consuming inquiries by the ATO;
• collecting the tax, interest and penalties may be difficult even after assessments have been issued;
• detecting and dealing with such non-compliance provides no guarantee that it will not be repeated into the future; and
• compliant taxpayers may become less compliant where they feel that the underground economy is not being properly addressed and that, as a result, they bear an unfair share of the tax burden.

2.18 Given the challenges above and its resources, the ATO has applied a number of different strategies and initiatives to combat these risks over the years. One such strategy is the use of benchmarks which are financial ratios that assist businesses to compare their performance with other businesses within the same industry. The ATO uses such benchmarks to identify businesses, in particular industries, which may incorrectly report their business income and expenses. Businesses significantly outside of the benchmarks can expect a form of ATO engagement to better understand their specific position.

^[30]IGT, Review into the Australian Taxation Office’s use of benchmarking to target the cash economy (2012) p 7.

2.19 The ATO also uses other risk-based approaches to identify taxpayers or transactions which it considers represent a higher risk of non-compliance. It currently publishes material about specific industries in which it is seeing disproportionate numbers of businesses that:

• indicate unrealistic income relative to the assets and lifestyle of the business and owner;
• fail to register for GST or lodge activity statements or tax returns;
• underreport transactions and income according to third-party data;
• fail to meet super or employer obligations;
• operate outside the normal small business benchmarks for their industry; or
• are reported to the ATO by the community for potential tax evasion.

^[31]ATO, ‘Working with industry’ (11 January 2017) <www.ato.gov.au>

2.20 In 2015-16, the ATO committed approximately 400 staff and a budget of $39.5 million to further combat the risk posed by the cash economy.^[32]Above n 8, p 7. The ATO adopted a range of different strategies including computerised risk models and specific data matching which used information from other agencies, business suppliers and banks to target its compliance strategies.

^[33]ATO, ‘Michael Hardy discusses the cash economy with David Koch – transcript’ (12 February 2014) <www.ato.gov.au>

2.21 In 2016, the Australian National Audit Office (ANAO) undertook an independent performance audit of the ATO’s approach to the cash and hidden economy.^[34]Above n 8. As part of its review, the ANAO noted that in 2014-15, the ATO’s approach to the cash economy shifted from:

…focusing primarily on audit activities…to a broad omitted income focus on registration, lodgment and correct reporting by small businesses as part of an overarching community participation and assurance framework. The strategies comprise two elements: community participation and engagement, using a range of media and social media channels; and compliance activities, including taxpayer audits and reviews.^[35]Above n 8, p 16.

2.22 The ANAO concluded that the ATO’s current strategies and activities ‘are consistent with international approaches’ and that ‘the ATO’s planning, liaison and reporting arrangements have been sound, and risk management activities and case selection processes have supported increasingly cost-effective compliance cases being conducted with taxpayers in recent years’.^[36]Ibid, p 7. In addition to the compliance and enforcement initiatives, the ANAO also examined the ATO’s help and education activities, through its website and targeted communications. The ANAO commented that the ATO needed to evaluate the effectiveness of such activities.^[37]Ibid, p 45.

2.23 It should be noted that the above matters may be further considered by the Black Economy Taskforce which has been recently established to develop ‘an overarching whole of government policy framework and detailed proposals for action’.^[38]Kelly O’Dwyer MP, ‘Black Economy Taskforce’ (Media Release, 14 December 2016) <jkmo.ministers.treasury.gov.au>. It is due to deliver an interim report in March 2017 and a final report in October 2017.^[39]Ibid.

IGT observations

2.24 The IGT has previously undertaken two reviews which are relevant to the ATO’s approach to the cash economy.

2.25 Firstly, in 2012, the IGT reviewed one of the ATO’s main initiatives to address the cash economy risks, namely, the use of benchmarks.^[40]Above n 30. The IGT’s review found that of over 7,600 benchmarking audits, the ATO made adjustments in only 24 per cent of cases. Whilst the IGT acknowledged that 24 per cent may be higher than a random sampling of audit cases, there was scope for the ATO to improve its current approach to better exclude compliant taxpayers. In all, the IGT made 11 recommendations to which the ATO agreed in full or in part. Following the implementation of these recommendations, the ATO’s strike rate increased from 24 per cent to over 50 per cent.

^[41]ATO, ‘Commissioner and Minister Senate estimates briefing’ (October 2012) <https://foi.iorder.com.au>

2.26The above improvement in strike rate also reduced the compliance burden on otherwise compliant taxpayers. In that report, the IGT had noted:

…the ATO needs to strike a balance between reducing compliance costs for taxpayers, whilst at the same time collecting enough information about those taxpayers to make an informed risk assessment.^[42]Above n 30, p 67.

and

To ensure compliance costs are minimised, the IGT considers that the ATO should use a staged approach in its information gathering as part of its risk identification process. The approach should also accommodate less formal means where possible. Information gathering that occurs in a less formal context than that of a formal audit may also reduce taxpayer stress given its lower intensity.^[43]Above n 30, p 67.

2.27 Secondly, the ATO’s use of compliance risk assessment tools more generally was examined in another review where the IGT had stressed the importance of clearly articulating the risk hypothesis to ensure that risk inputs, both qualitative and quantitative, are appropriate to detecting and addressing those risks.

^[44]IGT, Review into aspects of the Australian Taxation Office’s use of compliance risk assessment tools (2014), p 142.

The IGT also discussed the use of representative random audits as a means of assessing the underlying levels of non-compliance which in turn may be used for assessing the effectiveness of the ATO’s risk assessment tools.^[45]Ibid, p 145. The use of random audits would also assist the ATO in measuring the tax gap and potentially act as a deterrent against non-compliance.^[46]Ibid, p 147.

2.28 The IGT supports the ATO’s current work to measure the scope and impact of the cash economy and it is pleasing that the ATO has undertaken some work to measure the tax gap. An important factor in this task would be for the ATO to identify which component of the tax gap is in fact attributable to the cash economy and which components are due to other reasons, such as lack of knowledge of tax laws or taxpayers adopting positions that are different to the ATO’s view of the law. In doing so, the ATO could engage with the academic community as well as revenue agencies of comparable jurisdictions, such as the HMRC.

2.29 In respect of enforcement and compliance activities, as mentioned above, the ANAO has found the ATO’s strategies and activities to combat the cash economy are generally working well. In addition, the ANAO has noted that more can be done to measure the effectiveness of help and education programs.

2.30 The IGT believes that the ATO’s enforcement activities should be further augmented by educational programs and campaigns along similar lines to recommendations made by the ATO’s 1998 Cash Economy Taskforce

^[47]Cash Economy Taskforce, Improving tax compliance in the cash economy (April 1998), pp ii and iii.

. Such programs should be aimed at the community as a whole and may have more long term effect when focused on the young or new arrivals to Australia. It should be noted the Commissioner has requested the IGT to conduct a review into improving willing participation in the tax and superannuation systems by targeting these demographics.

^[48]IGT, ‘IGT Work Program 2017’ (31 January 2017) <www.igt.gov.au>

2.31 Education and appropriate campaigns can be very effective. For example, ‘drink driving campaigns’ have transformed the way Australians view drink driving such that it is now socially unacceptable as well as being illegal. As mentioned above, similar educative campaigns have been used by the HMRC to improve taxpayer compliance behaviour.^[49]Above n 22.

2.32 The IGT is also looking forward to the findings and recommendations of the Committee as well as the Black Economy Taskforce. The IGT would be pleased to offer assistance and expertise in relation to any identified measures to combat the significant risks posed by the cash economy.

3. Taxpayer interactions with the taxation and superannuation systems

3.1 Generally, taxpayers interact with the tax and superannuation systems in order to meet their statutory obligations such as registering, reporting, withholding and paying their tax liabilities. Taxpayers may choose to do so through intermediaries, such as tax practitioners, or directly through services and channels provided by the ATO.

Use of tax practitioners and other intermediaries

3.2 Tax practitioners, including lawyers and business activity statement (BAS) preparers, have played a fundamental role in the tax system particularly since the shift from full assessment to self assessment in 1986. The shift to self assessment transferred to taxpayers the responsibility of applying the tax laws to their affairs with the consequence that incorrect application would result in taxpayers being exposed to additional primary tax, penalties and interest.

3.3 Within the self assessment system, taxpayers have increasingly come to depend on tax practitioners who perform a broad range of tax related activities such as preparing and filing tax returns, providing advice and representation when dealing with the ATO. They may also provide non-tax related services such as audit, assurance and financial advisory services. As a result of their activities, tax practitioners are an invaluable source of knowledge and practical experience which may be drawn upon to develop more effective and efficient tax laws and administrative practices.

^[50]OECD, Together for Better Outcomes: Engaging and Involving SME Taxpayers and Stakeholders (2013) pp 16-18.

3.4 The OECD has also acknowledged the crucial intermediary role of tax practitioners between taxpayers and the revenue authorities. In this tripartite relationship, tax practitioners contribute to the smooth functioning of the tax system and facilitate tax compliance.

^[51]OECD, Increasing Taxpayers’ Use of Self-Service Channels (OECD Publishing, 2014) p 35.

 In particular, the OECD has also noted:

The importance of the role tax advisers play in a tax system can be tested by answering a simple question: would compliance with tax laws improve if tax advisers did not exist? The Study Team found no country where the answer to that question is yes. Across the whole range of taxpayers, taxes and circumstances, the vast majority of tax advisers help their clients to avoid errors and deter them from engaging in unlawful or overly-aggressive activities.

^[52]OECD, Study into the Role of Tax Intermediaries (2008) p 14.

3.5 The Productivity Commission has noted that ‘small businesses are much more likely than large businesses to rely on third parties, including industry and professional associations and intermediaries such as tax agents, to receive information on regulatory requirements.’

^[53]Productivity Commission, Regulatory Engagement with Small Business (2013) p 141.

 This should not detract from the important role that tax practitioners across all market segments, including the large business market, play in the effective administration of the tax system.

3.6 As noted by the IGT in his 2015 review into the ATO’s services and support for tax practitioners,^[54]Above n 9, p 46. taxpayer reliance on tax practitioners in Australia has gradually increased since the implementation of self assessment, due to a number of factors including:

• complexity of the business operations and related regulations;
• individual taxpayers involvement in investment activities and income sources others than personal exertion;
• scope and complexity of tax law and related compliance; and
• use of the tax system to deliver social policies as well as to collect revenue.

^[55]IGT, The Australian Taxation Office’s services and support for tax practitioners (2015) p 2; see also: ANAO, The Australian Taxation Office’s Management of its Relationship with … Continue reading

3.7 Australia has some of the highest levels of reliance on tax practitioners of any OECD country.

^[56]OECD, Tax Administration 2015 Comparative Information on OECD and other Advanced and Emerging Economies (2015) p 267.

In 2015-16, the ATO reported that 74.2 per cent of all individuals and over 95 per cent of business taxpayers used the services of a tax practitioner.^[57]Above n 9, p 46.

3.8 In addition to the traditional tax intermediaries noted above, there are increasingly new players providing services and products within the tax sphere. Most notable of the new intermediaries are software developers whose products are being developed to feed directly into ATO systems to align with initiatives, such as Standard Business Reporting (SBR) and Single Touch Payroll (STP). The customer support from these providers and the associated cost will no doubt influence the experience of taxpayers and their advisers in managing their affairs.

3.9 Similarly, as the ATO continues to roll out technology to enable taxpayers to effectively manage their own tax affairs, sufficient take-up depends on ready access to adequate hardware, software and robust internet connections. Accordingly, other software and hardware developers as well as telecommunications entities also necessarily play an important role.

Self-service channels

3.10 In line with the whole-of-government digital transformation initiative, the ATO has adopted a digital-by-default policy which aims to ‘deliver a simpler, easier, more flexible and adaptable way of interacting digitally’ with ATO services.^[58]ATO, ‘Digital by default’ (undated) <lets-talk.ato.gov.au/> The ATO has noted that:

The proposed initiative will require most of the community to use digital services to send and receive information and payments to the ATO. The ATO is seeking feedback from all sectors of the community to understand the range of support needed to transition fully to digital services.^[59]Ibid.

3.11 The ATO has previously,^[60]Above n 53, p 164. and continues to deliver, a range of online services which are available to individuals, businesses and tax practitioners, examples of which include:

^[61]ATO, Online services: Individuals and sole traders’ (9 August 2016) <www.ato.gov.au>; ATO, Online services: Tax agents’ (13 May 2016) <www.ato.gov.au>; ATO, Online services: BAS … Continue reading

• lodging tax returns electronically using myTax;
• finding and managing superannuation;
• managing PAYG instalments and other activity statements;
• receiving ATO communication electronically via myGov; and
• managing business reporting and transactions via the Tax Agent Portal, BAS Agent Portal and Electronic Lodgment Service (ELS).

3.12 As part of the ATO’s move towards a digital environment, it called for submissions from the general public regarding its Digital by default consultation paper. The consultation paper yielded 1003 responses with more than half of the respondents acknowledging the benefits for the entire community from a digital-by-default concept.^[62]ATO, ‘Digital by Default – Findings report’ (undated), <lets-talk.ato.gov.au >.

3.13 At the same time, the ATO also noted that a key theme emerging from the consultation was that the community expects digital-by-default to be more than digital only. It was accepted that while digital services will be the primary way to interact with the ATO, alternative options needed to be available for users for whom this was not an option.^[63]Ibid, page 2. Specifically, more information was needed about the availability of alternative modes of interaction and to whom they would available.^[64]Ibid, page 5.

3.14 The ATO has noted the community’s views that access to alternative service channels should be available for the following reasons:

• advanced age, serious health issues and physical or cognitive disabilities
• inability to access the internet due to extreme costs
• the internet not being available or extremely unreliable in remote or metropolitan areas
• limited financial capacity and financial hardship; and
• limited computer literacy.^[65]Ibid.

Compliance costs

3.15 For many businesses, tax and superannuation are amongst a much broader spectrum of regulatory requirements^[66]Above n 53, p 293. and concerns about the level of cumulative burdens have been raised by businesses across a range of activities and regulatory areas.^[67]Ibid.

3.16 It is important to acknowledge that all taxpayers are expected to bear a ‘baseline’ level of tax compliance costs. Additional costs may be imposed on taxpayers where further engagement with the ATO is required, for example when the ATO undertakes compliance activities.^[68]Above n 44, p 81. Stakeholders believe that such costs may be unnecessarily imposed where the ATO’s risk assessment is inaccurate, its communication inadequate or its actions are disproportionate to the mischief or identified risks.^[69]Above n 44, p iii.

3.17 There have been a number of studies which have examined the compliance burden. These include a Productivity Commission research paper

^[70]Productivity Commission, Compliance Costs of Taxation in Australia (1996) <https://www.pc.gov.au>

as well as a number of academic papers which have examined compliance costs and their impact on both small and large taxpayers

^[71]Chris Evans, Phil Lignier and Binh Tran-Nam, Tax Compliance Costs for the Small and Medium Enterprise Sector: Recent Evidence from Australia (26 September 2013) … Continue reading

. Some of these studies suggest that compliance costs represent a higher percentage of sales and income for small and medium enterprises when compared with larger businesses.

^[72]OECD, Taxation of SMEs in OECD and G20 Countries, OECD Tax Policy Studies (2015), p 13; Productivity Commission, Regulator Engagement with Small Businesses (2013) pp 72-73.

 For example, a 2012 comparative study found that ‘while medium and large businesses usually spend less than 1/10th of 1% of their turnover on TCC [tax compliance costs], small businesses often face TCC of 5% or more of turnover, which can be compared to an extra tax burden’.

^[73]Jacqueline Coolidge, (2012), ‘Findings of tax compliance cost surveys in developing countries’ (2012) eJournal of Tax Research, 10(2), pp. 250-287.

3.18 It should also be noted that large businesses are increasingly concerned about the growing compliance costs arising from a range of initiatives being implemented by the ATO in the last few years. These concerns were raised with the IGT during the development of his 2017 Work Program.^[74]Above n 48.

IGT observations

3.19 The IGT supports the ongoing use of technology where such technology makes it easier and cheaper for taxpayers to effectively interact with the system to discharge their obligations. However, notwithstanding the increased use of technology and digital channels, it is necessary to appreciate that tax practitioners and other intermediaries continue to play a crucial role in the tax system. The ATO’s ongoing service delivery should not detract or dissuade taxpayers from seeking independent tax and legal advice on their tax affairs. The ATO cannot and should not be the sole source of advice for taxpayers.

3.20 The IGT has previously examined the role of tax practitioners and the ATO’s support and services for them in 2015.^[75]IGT, Above n 55. In that report, the IGT noted that tax practitioners face a number of challenges including ‘new technology, globalisation, client demand for a wider range of services, future changes arising from ‘disruptive’ technology and an impending generational change’.^[76]IGT, Above n 55, p 10. Moreover, the IGT observed the strain on the relationship between tax practitioners and the ATO which was, in part, due to dissatisfaction with some of the ATO services and the communication between them.^[77]IGT, Above n 55, pp iii-iv.

3.21 The ATO has been working to improve its relationship with tax practitioners as it is critical for the efficient administration of the tax system. Furthermore, the IGT has announced that, in response to a request from the Commissioner, a review will be conducted into the future role of the tax profession. The aim of the review is to consult widely with tax practitioners, taxpayers and their representative bodies as well as with the ATO and TPB to ensure all major issues are addressed and to chart the best way forward for the efficient and effective administration of the tax system. In particular, the increased use of digital technology and ATO service delivery initiatives will be explored.

3.22 As technology continues to develop, the role of tax practitioners and their business models will necessarily transform.

^[78]OECD, Rethinking Tax Services: The Changing Role of Tax Service Providers in SME Tax Compliance (2016) p 58.

 The OECD has already observed some changes in this regard, noting that tax service providers (TSPs) are moving from:

…a reactive model of fulfilling customer demand with a more proactive one. Whereas many TSPs are used to executing more operational tasks, based on legal obligations, they are gradually acquiring a more strategic role when it comes to financial planning and business advice.^[79]Ibid.

3.23 The OECD foreshadows the increasing use of data analytics, predictive modelling and advanced decision support systems as a means for TSPs to more comprehensively understand their clients’ circumstances which would provide a basis for more tailored advice.^[80]Above n 78.

3.24 Technological developments may also necessitate greater reliance on third party software providers in future. Whilst the IGT may tangentially consider the role of these new intermediaries as part of the above review, the Committee may also wish to examine how they are currently interacting with the ATO and the community in providing their services and any improvements that may be required.

3.25 In addition to the concerns raised by tax practitioners about digital delivery of services, the IGT has also received complaints from taxpayers directly. These concerns have tended to focus on the difficulties of some taxpayers to use such channels for service delivery. For example, one case concerned a local church’s inability to engage with the SuperStream system electronically due to the remoteness of their location and their limited access to the online services. Other complaints have noted the limited availability of paper forms and guidance and the channels through which these may be requested. The IGT has also received similar feedback through submissions made to the development of his Work Program for 2017^[81]Above n 48..

3.26 As noted above, the ATO has also received feedback on the need for alternatives to digital interaction in certain cases and has published information on its website which outlines the types of services it provides for people with a disability.

^[82]ATO, ‘Our services for people with disability’ (7 January 2016) <www.ato.gov.au>

 Through the IGT’s complaints handling function, we have also become aware that ATO officers seek to assist taxpayers where they can by, for example, providing printed copies of sections of the website and other digital information.

3.27 The lack of access to digital channels has also been explored in other jurisdictions, such as the US where the NTA recently undertook a survey on broadband and internet access. The NTA found that more than 33 million taxpayers in the US did not have access to broadband and 14 million had no internet access at home which significantly limited their online activities.

^[83]NTA, 2016 Annual Report to Congress (2017), p 20.

Taxpayers who were low income, elderly or disabled were found to be less likely to have internet access when compared with survey participants who were classified as ‘not low income’.^[84]Ibid.

3.28 In addition to lack of access to the internet or digital technology, there may be unforeseen technological outages such as the one which occurred in late 2016 and which the Commissioner has referred to as the ‘worst unplanned system outage in recent memory’

^[85]ATO, ‘Commissioner of Taxation, Chris Jordan AO on system outages’ (Media Statement, 16 December 2016) <www.lets-talk.ato.gov.au>

. A second system-wide ATO outage has also occurred in early February 2017. Large-scale systems upgrades may also have a similar effect, such as those experienced during the ATO’s Change Program which led to significant delays in tax return processing.

^[86]See for example, IGT, Review into the ATO’s Change Program (2010).

3.29 In the light of the NTA’s research in the US, taxpayer requests to the IGT and the ATO for alternatives to digital interactions as well as the potential for technological outages, the Committee may wish to consider whether there is a need to formally establish alternative methods of interaction with the ATO, at least as a contingency measure.

3.30 In relation to the recent ATO outages, the IGT has been informed that the ATO is undertaking a number of internal reviews into their causes and consequences. At the same time, it has also commissioned PwC to externally review the matter.^[87]ATO, ‘ATO systems update’ (24 January 2017) <lets-talk.ato.gov.au>. To the extent that outages or disruptions continue and concerns persist, the IGT will consider whether to independently investigate the matter.

3.31 Finally, in relation to issues concerning compliance costs, the IGT believes that a greater understanding of the costs imposed on all taxpayers when interacting with the tax system would assist to inform both tax policy design and administrative practices. The IGT has previously supported the idea of an independent body, such as the Productivity Commission, ‘undertaking a study to measure tax related compliance costs and their impact on the administrator, the taxpayer, tax practitioners and the Australian economy as a whole.’

^[88]IGT, Review into improving the self assessment system (2013) p 63.

 Such a study would also be useful in determining whether the increased use of digital interaction has lessened the compliance burden for the various taxpayer groups.

4. Use of information and communications technology

4.1 The previous chapter of the IGT submission examined a number of ways in which taxpayers interacted with the tax system, including through electronic and digital channels offered by the ATO. The use of electronic and digital channels is supported internally by the ATO’s own Information and Communication Technology (ICT) platform.

4.2 As part of its Capability Review of the ATO in 2013, the Australian Public Service Commission (APSC) stated that:

…ICT is the lifeblood of the ATO. It underpins most, if not all, of the work the ATO performs and has an impact on its ability to be agile, responsive and ultimately perform to meet service delivery and stakeholder expectations.

^[89]Australian Public Service Commission, Capability Review Australian Taxation Office (2013) p 9.

4.3 Following the APSC’s review, the ATO released its Information Technology (IT) Strategy to guide its design of IT services, focusing on the client experience and includes initiatives such as increasing its use of third party data.

^[90]ATO, ATO IT Strategy Summary (July 2014) pp 3-7.

4.4 The IGT has previously examined a number of ATO initiatives aimed at enhancing its technological services through data collection and use as well as the ATO’s communications. These discrete initiatives are separately discussed below and include the IGT’s view and observations.

Use of data matching and pre-filling

4.5 Each year, the ATO receives large amounts of taxpayer data from a number of third party sources including from other government agencies, financial institutions and foreign revenue authorities. Some are required to be provided by legislation whilst others are provided by less formal means.^[91]Data may also be received by the ATO through memoranda of understanding with other government agencies, through use of its information gathering powers or under various treaties and double tax … Continue reading The ATO validates and refines such data before comparing them to taxpayers’ reported information to identify potential discrepancies. The cases which contain discrepancies undergo a selection process to identify those suitable for further scrutiny and potentially lead to audits.

4.6 In addition to using its data holdings to identify potential discrepancies in reported income, the ATO also uses it to pre-fill electronic income tax returns where the data can be appropriately matched to a specific taxpayer. Pre-fill is designed to improve accuracy and ease the preparation of tax returns. Information that may be pre-filled include items such as salary and wages, taxes withheld by employers and bank interest.

4.7 In 2015, the OECD reported that almost half of revenue bodies that it surveyed made use of pre-filling.^[92]Above n 56, p 256. Australia’s use of pre-filling is similar to Canada’s

^[93]Canada Revenue Agency (CRA), ‘About Auto-fill my return’ (2 February 2017) <www.cra-arc.gc.ca>.

and was considered by the OECD to be ‘substantial’ and in line with other jurisdictions such as the Netherlands, Portugal, France and Singapore.^[94]Above n 56, p 256. In contrast, the OECD noted a number of other jurisdictions had the capability to generate fully completed tax returns.^[95]Ibid, p 255.

4.8 Other research has noted different regimes to pre-filling, such as the concept of reduced filing that has been used by HMRC in the UK and IRD in New Zealand.

^[96]Jason Kerr, ‘Tax return simplification: risk key engagement, a return to risk?’ eJournal of Tax Research (2012) vol 10, no 2, pp 465-482.

 Reduced filing systems:

…feature comprehensive withholding mechanisms and little or no deductibility for expenses and result in a situation where the majority of taxpayers are not required to annually reconcile their tax.^[97]Ibid, p 466.

4.9 In Scandinavian countries, revenue agencies have a vastly different approach. Digitisation has been a key objective of the whole of the public sector in Sweden, Norway and Denmark for some time.

^[98]OECD, Third Party Reporting Arrangements and Pre-filled Tax Returns: The Danish and Swedish Approaches (2008), p 4.

Denmark was the first Scandinavian country to introduce pre-filled tax returns in the 1990s, followed by Sweden and Norway.^[99]Ibid, p 9. In Sweden, taxpayers can accept a pre-filled return by internet, phone, SMS or paper. Since 2009, Norway has adopted a silent acceptance approach whereby if taxpayers do not respond to the pre-filled income tax return, it is treated as final and binding. Similarly, in Denmark a ‘no response’ is deemed to be acceptance of the return. The OECD has reported that, the Scandinavian countries experienced a 50 to 75 percent rate of returns not requiring adjustment by taxpayers.

^[100]OECD, Using Third Party Information Reports to Assist Taxpayers Meet Their Return Filing Obligations – Country Experiences with the Use of Pre-Populated Personal Tax Returns (2006).

4.10 The use of data for pre-filling purposes, whether to partially or fully complete a return depends on the receipt of timely and accurate data. In this regard, the ANAO has suggested that the reliance of the goodwill of data providers to deliver data earlier might not be sufficient to optimise the implementation and efficiency of the pre-fill initiative.

^[101]ANAO, The Australian Taxation Office’s Use of Data Matching and Analytics in Tax Administration (2008) 85.

 The OECD has also expressed the need for timely data in relation to pre-fill.

^[102]OECD, Tax repayments: Maintaining the Balance Between Refund Service Delivery, Compliance and Integrity (2011) p 9.

IGT observations

4.11 In 2013, the IGT undertook a review into the ATO’s approach to data matching.

^[103]IGT, Review into the Australian Taxation Office’s compliance approach to individual taxpayers – use of data matching (2014).

 Overall, the ATO’s data matching was found to be effective, however, a number of recommendations were made which included some aimed at ensuring the relevant data is accurate before being used in compliance activities and raising awareness of channels for review where taxpayers disagreed with the ATO’s decisions.^[104]Ibid, p vii.

4.12 The IGT’s review also considered the ATO’s use of its available data to assist taxpayers and tax practitioners in lodging income tax returns. Despite the support for the ATO’s pre-filling program, concerns were raised with the IGT regarding the ATO’s processes for correcting errors in pre-filled data.^[105]Ibid, pp 43-47.

4.13 While the use of pre-filled information has been welcomed suggestions have been made to the IGT that the ATO could do more to collect additional data to assist taxpayers. However, challenges do exist in this regard:

^[106]Fraser Institute, Prefilled Personal Income Tax Returns A Comparative Analysis of Australia, Belgium, California, Québec, and Spain (2011) p 13.

1. timeliness – the legislated deadlines for the provision of third-party information to the ATO are potentially too late for taxpayers who want to submit their income tax returns early;
2. comprehensiveness – the pre-filled information could be more comprehensive and often because of technical problems, some supposedly available pre-fill information may not be available;
3. availability – the availability of systems could be improved; and
4. reliability and accuracy – in some instances, pre-filling information may not be reliable. However, the ATO website does caveat that taxpayers bear the onus of confirming the veracity of any information reported in their tax return.

4.14 Some submissions to the IGT’s 2017 Work Program have suggested that the ATO could do more to bolster its pre-filling program. One example was collecting data on deductible charitable donations and pre-filling those as a means of both assisting taxpayers and fostering greater giving. Any such moves to expand the pre-filling program will necessarily require the ATO to have robust processes for obtaining the data. As mentioned above the ANAO has asserted that it is not sufficient to simply rely on the good will of data providers. Where necessary, the ATO may require legislative changes mandating the provision of relevant data.

4.15 However, in the above review, the IGT has noted that although the use of data is helpful, where the ATO requests large amounts of information which are ultimately not used, this creates costs for the third party providers and administrative costs for the ATO.^[107]Above n 103, p 42. To reduce these impacts the IGT recommended that the ATO needs to identify the areas in which its data matching work is effective and those in which it is less effective.^[108]Above n 103, p 43. Moreover, the IGT also recommended that the ATO work closely with potential data providers to consider their ‘natural business systems’ and the options available to the ATO to support or subsidise any necessary changes to improve the provision of data.

4.16 The ATO has recognised the importance of data collection and use and is implementing a strategic Smarter Data program to make smarter, unified use of data to improve decisions, services and compliance. It is a whole-of-ATO approach to risk assessment, intelligence, analytics, data management and technology. This framework will seek to deliver value by ‘making it easy to comply and hard not to’ in line with the ATO’s reinvention program.

^[109]ATO, Smarter Data Program reinventing data and analytics – the ATO experience (Presentation delivered to SAS, May 2015) <www.sas.com>

 The IGT has not had an opportunity to review this program and it may be an area which may benefit from the Committee’s consideration.

4.17 Whilst the ATO continues to improve the accuracy of the pre-filled information, it is important that taxpayers and their advisers do not rely solely on it in completing their tax returns. Any inaccuracies are not desirable for the integrity of the system and may also result in subsequent compliance action which would impose an additional burden on both the ATO and the taxpayer.

4.18 In progressing pre-filling further in this country, it may be useful to consider the approaches of different jurisdictions as outlined above. In this regard, whilst it may be attractive to reach the ultimate goal of relieving taxpayers of the need to lodge annual tax returns, it is necessary to consider the different socio-economic and legal frameworks that vary between such jurisdictions. For example, in many countries where tax returns are fully completed by the revenue authority, there may not be as comprehensive a regime for claiming deductions for work-related expenses as there is in Australia.^[110]Above n 96, p 466.

4.19 The Committee may wish to consider the extent to which pre-filling of tax returns should be further progressed in Australia and the legislative and administrative means which would facilitate such a goal.

Standard Business Reporting

4.20 Many jurisdictions are currently progressing whole-of-government strategies to provide a single portal for citizens to access government information and services including an authentication mechanism.^[111]Above n 51 (2014). Such strategies rely on the sharing and reuse of reported data, implying a need for standardisation of required data.^[112]Ibid, p 26. In Australia, SBR is one such strategy.^[113]IGT, Above n 55.

4.21 Since 2010, Australia has pursued the adoption of SBR which aims to simplify business reporting obligations through a standard approach to online or digital record-keeping, collection of electronically reported information and distribution of that information to the appropriate government agency.^[114]Ibid, p 64. As such, SBR is not an information technology system but a ‘collection of core services, data and message standards that uses a hub or mail centre.’^[115]Ibid.

4.22 SBR is intended to yield a number of benefits including a reduction of data entry, increased productivity, information sharing, greater certainty, real-time validation and security.^[116]Ibid.

4.23 In line with the SBR initiative, the ATO intends to upgrade its current online platform, including the ELS through which tax practitioners lodge their clients’ returns. As a result of this development, practitioners will need to upgrade their current practice management software to one that is SBR-enabled. Taxpayers will also be encouraged to implement SBR-enabled software. In both cases, initial cost outlays are expected for both tax practitioners and their clients.

IGT observations

4.24 The IGT considered SBR in his 2015 review into services and support for tax practitioners.^[117]Ibid. It was found that stakeholders have generally supported the SBR’s aim of streamlining reporting requirements for government departments such as the ATO.^[118]Ibid, p 65. However, at the time the review was conducted, the main impediment to SBR’s success was its low adoption rate by businesses and tax practitioners.^[119]Ibid, p 68. To address the issues related to SBR-adoption, the IGT set out a number of steps that the ATO could take.

4.25 First, closely working with tax practitioners is required to better understand and respond to causes of tax practitioner and taxpayer resistance to adopting SBR-enabled software. The IGT noted that co-operation would be difficult if tax practitioners are pushed towards products which may not provide full functionality and may expose the ATO to the risk of lower practitioner engagement and satisfaction.^[120]IGT, Above n 55, p 68-69.

4.26 Secondly, co-operation with software developers as well as tax practitioners and taxpayers would be necessary to enhance the user experience of SBR-enabled accounting software. Such improved user experience as well as other benefits of adopting SBR could be better communicated to all the relevant parties.^[121]Ibid.

4.27 Thirdly, targeted financial incentives could be considered to reduce set up or upgrade costs for tax practitioners. It could also adopt concessional treatment during the transition period, such as allowing the deferral of certain payments or lodgment obligations without penalties being incurred — as was done in the UK in broadly similar circumstances. Tax practitioners and taxpayers could be made aware of such treatment well in advance of the transition period.^[122]Ibid.

4.28 Lastly, the IGT was of the view that SBR education and training for tax practitioners will be needed to reduce the risk of incorrect reporting and demand on the ATO’s telephony channel from taxpayers and tax practitioners seeking assistance. The ATO could provide educational materials such as online tutorials delivering practical guidance that would assist tax practitioners with the transition to SBR.^[123]Ibid.

4.29 The Committee may wish to further examine the ATO’s implementation of SBR, given the passage of time since the ATO commenced this task and the above IGT review.

Single Touch Payroll

4.30 STP aims to ‘cut red tape’ for employers by ‘simplifying tax and superannuation reporting obligations’.^[124]Josh Frydenberg MP, ‘Cutting red tape for employers through Single Touch Payroll’ (Media Release, 28 December 2015) <jaf.ministers.treasury.gov.au>. Employers who are required to comply with STP requirements will need to report PAYG withholding and superannuation guarantee (SG) information to the ATO every payroll cycle.

4.31Employers with 20 or more employees will be required to comply with STP requirements from 1 July 2018.

^[125]Budget Savings (Omnibus) Act 2016 sch 23 pt 1 div 3.

However there are options for early uptake from 1 July 2017.

^[126]ATO, ‘Simpler reporting with Single Touch Payroll’ (1 December 2016) <www.ato.gov.au>

 Employers who are required to comply with STP will incur some initial set-up costs in either purchasing new software, upgrading existing software or using the services of an external intermediary to comply with their obligations.

4.32 The introduction of STP will not only relieve complying employers of a range of reporting obligations,

^[127]Taxation Administration Act 1953 Sch 1 s 389-20.

 the ‘real time’ nature of STP data should enable the ATO to more proactively address PAYG Withholding and SG risks. As the Explanatory Memorandum to the STP legislation states:

More timely information will allow the Commissioner to engage with employers earlier to address cases of non-compliance. This could potentially prevent more punitive outcomes for such employers which would apply under the SG charge regime where non-compliance is identified further down the track.

^[128]House of Representatives, Revised Explanatory Memorandum, Budget Savings (Omnibus) Bill 2016, p 265.

4.33 In addition to exempting employers with fewer than 20 employees, the STP legislation allows the Commissioner to exempt particular employers or classes of employers from meeting those requirements in appropriate circumstances.

4.34 The ATO is currently conducting a pilot of STP to ascertain the level of ‘deregulation benefits’ for the 710,000 small employers who have less than 20 employees and ‘test support and education tools’.

^[129]The Treasury, Regulation Impact Statement: Single Touch Payroll (October 2015) p 39.

 Following the pilot, the Government will make a decision, by the end of the 2017 calendar year, as to whether employers with less than 20 employees will also be required to comply with STP.^[130]Ibid.

IGT observations

4.35 There are clear benefits in the introduction of STP, both for the reduction of reporting burdens on employers as well as enhancing the availability of timely data to enable the ATO to act quickly and address any compliance risks in relation to PAYGW and SG as they arise.

4.36 Whilst appropriate exemption would be of considerable relief for affected employers, the regulation impact statement states that the benefits and efficiencies anticipated from the successful implementation of STP can only be realised through ‘full participation by all businesses’.^[131]Above n 128, p 283.

4.37 Therefore, the IGT believes that, whilst exemptions are important, particularly for smaller or regional employers who may not have the same level of digital access, it is important to examine alternatives to encourage, as opposed to mandate, full participation. Such encouragement or support may include alternative forms of accessing STP and low or no cost options associated with its adoption. The Committee may wish to consider these matters further.

^[132]The IGT has examined STP as part of his Review into the Australian Taxation Office’s employer obligation compliance activities. The report has been transmitted to the Minister but has not yet … Continue reading

Digital communication

4.38 In addition to using its ICT platform to assist taxpayers, the ATO has also made use of digital communications, including social media channels, as a means of quick and cost effective communication with taxpayers.

Email and SMS

4.39 Prior to 2014, the ATO used digital communication channels for sending ad hoc news and information. In 2014, the ATO launched its Digital Outbound Release (DOR) project to enable sending client-specific correspondence via email and SMS. Within three weeks of the DOR being released, more than 76,500 pieces of ATO correspondence were sent digitally rather than by post.

^[133]Accenture Consulting, ‘Australian Taxation Office – How the Australian Taxation Office is driving digital communication to Australian Taxpayers’ (undated) < www.accenture.com>

4.40 The ATO currently uses SMS and emails for promotional and information purposes. General email and SMS messages promote services the ATO offers such as myTax and myGov. Specific email and SMS messages may request actions be taken by using the ATO’s services, such as to verify changes made to an ATO online account.

^[134]ATO, ‘Current ATO SMS and email activities’ (17 October 2016) <www.ato.gov.au>

Social media

4.41 The OECD has said that social media technologies have the potential to ‘bridge access and take-up gaps still faced by many traditional online government services’.

^[135]OECD, Social Media Use by Governments: A Policy Primer to Discuss Trends, Identify Policy Opportunities and Guide Decision Maker (2014) p 3.

 It has also stated that ‘social media have the potential to make policy processes more inclusive and thereby rebuild some confidence between governments and citizens. But there are no “one size fits all” approaches and government strategies need to seriously consider context and demand factors to be effective’.^[136]Ibid.

4.42 The ATO currently uses social media to share the latest information on tax and superannuation changes, initiatives, products and services as well as reminders.

^[137]ATO, ‘Find us on social media’ (1 March 2016) < www.ato.gov.au>

 They can be found on Facebook, Twitter, LinkedIn and YouTube. For example, the ATO used a combination of social media messaging to promote online lodgment options during the 2016 tax time period.

^[138]ATO, ‘Social media’ (7 March 2016) <www.ato.gov.au>

4.43 As social media sites become more pervasive, they allow governments to use new sources of information to better understand the needs and behaviours of individuals and small businesses.^[139]Above n 135, p 4. This has led to the public perception that governments are using social media in an intrusive way, leading to concerns regarding privacy breaches and perceived surveillance.^[140]Ibid, pp 4-5. For example, in November 2016, an Australian Broadcasting Corporation article warned that the ATO is using Facebook, Instagram and other social media to confirm the accuracy of information that is reported to it.

^[141]Brett Williamson, ‘Tax Office Trawls Facebook, Instagram and other social media to catch out dodgers, cheats’ (17 November 2016) <www.abc.net.au>

4.44 Several OECD member countries such as Ireland, Malaysia, the Netherlands, New Zealand and Singapore are now utilising advanced analytics to carry out social network analysis to help detect certain types of Valued Added Tax fraud.

^[142]OECD, Advanced analytics for better tax administration: Putting data to work (2016) pp 21-22.

IGT observations

4.45 The IGT recognises that new means of communication provide different opportunities for the ATO to engage directly with the community at very low cost. However, care must be taken to respect the role of intermediaries, such as tax practitioners. As noted in the previous chapter, the advent of platforms such as myTax and myGov has caused concerns for tax practitioners who feel they are being circumvented. This is particularly true in instances where taxpayers who rely on tax practitioner services are receiving correspondence directly from the ATO through the myGov inbox without the tax practitioner being necessarily informed.

4.46 The IGT has received a number of complaints on the above issue and has facilitated conversations between the ATO and some affected tax practitioners to ensure appropriate outcomes are achieved and to foster a closer working relationship between the two parties.

4.47 In relation to the use of emails and SMS, security issues need to be addressed before their use is extended beyond its current limits, particularly given their use in scams and phishing schemes to obtain taxpayer information or to assume their identities. The ATO is cognisant of these risks and has sought to manage them through website information on current ATO SMS and email activities as well as providing a free telephone line for verifying the authenticity of correspondence.^[143]Above n 134.

4.48 In respect of using social media as a means of detecting non-compliance, whilst the IGT believes that the ATO should use all information at its disposal to combat non-compliance, care must be taken to ensure that information relied upon is accurate and verifiable and that privacy laws are not breached. This is particularly important in the context of social media or other uncontrolled sources of information in which there is significant scope for inaccuracy and exaggeration.

4.49 The Committee may wish to consider any further use of digital communications, particularly social media, by the ATO and in doing so address any security and privacy concerns.

Other uses of ICT

4.50 In addition to the above, the IGT has also examined other ICT improvements that the ATO could implement to assist taxpayers. In the 2015 review into services and support for tax practitioners, the IGT recommended that the ATO increase its use of modern modes of communication.^[144]IGT, Above n 55, p 51. Other recommendations considered the publication of practical online user guides in relation to certain ATO platforms, simplifying proof of identity through the use of unique identifiers or voice recognition and developing a ‘web chat functionality’ to provide tax practitioners with useful information.

4.51 The ATO has undertaken some work in relation to the above. For example, it is making some use of voice recognition for taxpayers

^[145]ATO, ‘ATO launches voice authentication’ (8 April 2014) <www.ato.gov.au>

and has developed a ‘virtual assistant’ on its website called ‘Alex’ that ‘understands conversational language and can clarify what you want and answer your questions.’

^[146]ATO, ‘Introducing Alex, our new web assistant’ (15 September 2015) <www.ato.gov.au>

 The IGT has not had opportunity to examine the effectiveness of these new technologies. The Committee may wish to consider current ATO endeavours in this regard and explore any additional measures to enhance its service delivery to the community.

5. Use of behavioural insights

5.1 Behavioural insights may be defined as drawing:

…on research into behavioural economics and psychology to influence choices in decision-making. By focusing on the social, cognitive and emotional behaviour of individuals and institutions it suggests that subtle changes to the way decisions are framed and conveyed can have big impacts on behaviour.

^[147]NSW Premier and Cabinet, ‘Behavioural Insights Community of Practice’ (undated) <bi.dpc.nsw.gov.au>.

5.2 In recent years, there has been significant interest in the use of behavioural insights amongst government agencies around the world, particularly those engaged in service delivery such as revenue agencies. The UK Government’s Behavioural Insights Team (BIT) has undertaken significant work in this area. It is focused on:

^[148]UK Cabinet Office Behavioural Insights Team, ‘Who are we’ (undated) <www.behaviouralinsights.co.uk>

• making public services more cost-effective and easier for citizens to use;
• improving outcomes by introducing a more realistic model of human behaviour to policy; and wherever possible,
• enabling people to make ‘better choices for themselves’.

5.3 Central to the behavioural insights research is the use of randomised controlled trials (RCT) which involve:

…dividing the study population into two or more groups and randomly assigning individuals to each of these groups. By giving the intervention (for example the modified letter, the changed process, the new text message) to one of these groups while continuing to treat the other group as business per usual, we can determine the difference in effectiveness of each of the interventions. The key ingredient to this approach is the randomisation of individuals to groups, which enables us to assume that any difference in outcomes is attributed to the intervention rather than other factors.

^[149]UK Cabinet Office Behavioural Insights Team, Applying behavioural insights to reduce fraud, error and debt (2012), p 21.

5.4 In 2012, BIT partnered with the NSW Government’s Department of Premier & Cabinet to create a centrally staffed Behavioural Insights Unit (BIU) in Sydney and to obtain insights which would work in the Australian context. The BIU’s latest report, Behavioural Insights in NSW 2016 showcases the major projects over the previous two years. Some of these projects included the use of text reminders to assist tenants to exit arrears, patient attendance at hospital appointments to save on healthcare costs and reminder letters to increase women’s attendance at cervical cancer screenings.

^[150]NSW Premier and Cabinet, ‘Behavioural Insights in NSW 2016’ (19 December 2016) <bi.dpc.nsw.gov.au>.

5.5 Similar teams to the NSW BIU have since been established in the Federal Government and the Victorian Government. On 1 February 2016, the Behavioural Economics Team of the Australian Government (BETA) started work in the Department of Prime Minister and Cabinet. BETA works with partner agencies, such as the ATO, to:

^[151]Department of the Prime Minister and Cabinet, ‘Behavioural Economics’ (undated) <www.dpmc.gov.au>.

• build the APS capability needed to support greater use of behavioural economics in policy-making;
• provide behavioural economics expertise on a number of projects that apply and test policy programme and administrative designs; and
• establish links between the APS and the behavioural economics research and practitioner community, here and overseas.

5.6 BETA is in its very early stages and the IGT is not aware of any projects it may have conducted with the ATO. However, the ATO has undertaken some work which have utilised behavioural insights. For example, in January 2014, the ATO commissioned an external consultant to conduct a project called ‘Attitudinal and Behavioural Research on the Prevention of Aged Debt’ (BRP):

^[152]IGT, Debt Collection (2015) p 51.

The key outcomes of the BRP are to understand the drivers for the accumulation of tax debt by small businesses and subsequently develop better services and compliance strategies which, amongst other things, encourage willing payment of taxes and prevent debt accumulation.

Some of the key areas the project will consider include how small businesses make decisions concerning the payment of tax debt and relative payment priorities as well as how small business taxpayers form views about the behaviour of others. Furthermore, key characteristics of taxpayers likely to fall into tax debts were investigated, including the type of taxpayer entity, number of employees, turnover, the age of the entity and the industry within which they operate. The project will also consider the ATO’s role in the prevention of tax debts and specifically whether its interventions ‘promote, limit or prevent tax debt’.

Toward the end of this review, the ATO advised that they have commenced working with the IRD to compare the results of their respective research to provide ‘new ideas on how to prevent the accumulation of aged debt by small businesses’. Additionally, the ATO expressed an intention to strengthen its corporate research capability more broadly to provide evidence which supports improved decision making.

5.7 The ATO has used behavioural insights to develop its communications to improve payments. In doing so, the ATO examined the language, structure and layout of a number of debt letters to increase payment compliance by being clearer about what taxpayers need to do and the consequences of not paying.

^[153]ATO, ‘Better communication to improve payment compliance’ (7 March 2016) <www.ato.gov.au>.

5.8 The ATO is also using behavioural insights in developing a ‘Debt Engagement Framework’ which focuses on re-engagement with taxpayers to help them understand and manage their payment obligations. During conversations with taxpayers, ATO staff are directed to:^[154]Above n 152, p 133.

1. Seek to understand why the taxpayer is in debt;
2. Emphasise the need for the taxpayer to take quick action to pay debts by using ‘behavioural insights’; and
3. Arrive at a constructive solution that results in a greater likelihood of resolving the debt, such as requesting larger initial payments with next payment within a week.

5.9 Behavioural insights may also be useful in assessing the impact of pre-filling on taxpayer compliance. The concept of pre-filling was discussed in the previous chapter. Broadly, research in this area suggests that when taxpayers are presented with completed tax returns, they are more likely to lodge them without disputing the pre-filled data.^[155]Above n 96. The OECD has come to a similar view based on the Danish and Swedish experience where two thirds of recipients of fully completed income tax returns have lodged such returns without dispute or request for changes.^[156]Above n 98, p 7. A positive consequence is a ‘dramatic reduction in the administrative burden’ for those taxpayers.^[157]Ibid, p 5.

IGT observations

5.10 As noted in previous chapters, various jurisdictions have adopted a range of different approaches to assist their citizens comply with tax obligations. The approach to be adopted in each country has to be suited to the particular social, economic and legal environments in that jurisdiction. Therefore, a key consideration in adopting any initiative would be whether it would yield fair and equitable outcomes, in an Australian context, for both the government and the community. As the APSC has noted:

^[158]Australian Public Service Commission, ‘Changing behaviour: A public policy perspective’ (14 December 2015) <www.apsc.gov.au>.

One of the key learnings from international experience is that public sector agencies need to be mindful that behavioural change policy goals have to be reasonably congruent with a particular society’s views on the right balance between individual responsibility and government responsibility. These views vary according to policy area and over time.

5.11 The IGT has for many years championed the increased use of behavioural insights in various aspects of tax administration and much of the work that the ATO has undertaken in this area has been as a result of IGT reviews. For example, in the Review into the ATO’s compliance approach to individual taxpayers – income tax refund integrity program (ITRIP), the IGT considered applied research from the UK BIT. Having regard to that research, recommendations were made for the ATO to assess the effectiveness of the ITRIP letters to generate the intended behavioural response from individual taxpayers through the use of RCTs in correspondence design.

^[159]IGT, Review into the Australia Taxation Office’s compliance approach to individual taxpayers – income tax refund integrity program (2013).

The IGT also reiterated that support through a range of other reviews including those examining data matching,^[160]Above n 103, pp 55-56 . the ATO’s use of risk assessment tools,^[161]Above n 44, pp 148-149. debt collection,^[162]Above n 152, pp 51, 86, 133. excess contributions tax

^[163]IGT, Review into the Australian Taxation Office’s compliance approach to individual taxpayers – superannuation excess contributions tax (2014) p 60.

and penalties

^[164]IGT, Review into the Australian Taxation Office’s administration of penalties (2014) pp 5-6.

.

5.12 In addition to the above work, the IGT believes that the ATO could further benefit from insights arising out of projects conducted by BETA with other comparable service delivery agencies and learnings from the BIU and BIT. In respect of implementing significant new changes, the ATO should continue to make use of RCTs which have been strongly supported by the BIT.

5.13 The Committee may wish to examine the ATO’s current initiatives involving behavioural insights, in particular any work being done outside of the debt area, and how it is assisting taxpayers to make decisions in their best interest. In doing so, the Committee could consider the taxpayer’s best interest, how it varies across different taxpayer groups and how it is determined. In this regard, the Committee may find learnings from the UK in relation to practising mindfulness by public policy makers particularly useful.

^[165]Rachel Lilley, Mark Whitehead, Rachel Howell, Rhys Jones and Jessica Pykett, ‘Mindfulness Behaviour Change and Engagement in Public Policy – An evaluation’ (October 2014) … Continue reading

Executive Summary

The IGT welcomes the opportunity to make submission to the House of Representatives Standing Committee on Tax and Revenue (the Committee) to assist in its Inquiry into the External Scrutiny of the Australian Taxation Office (ATO).

As the Committee has previously found, an examination of the Australian Government scrutiny landscape shows that the ATO is not subject to any more scrutiny than the vast majority of public sector agencies, which are generally scrutinised by Parliament and its committees, the Australian National Audit Office and the Commonwealth Ombudsman (Ombudsman). The Committee has noted that the level of scrutiny was appropriate, given the importance of the ATO’s role. It is ‘too big to fail’ and appropriate levels of governance and independent scrutiny must be available to guard against system failures whilst also ensuring that due processes are followed and taxpayers are afforded procedural fairness.

Whilst the Inspector-General of Taxation (IGT) supports the removal of duplication, inefficiencies and unnecessary costs, any major policy change to reduce external scrutineer functions needs to be informed by a comprehensive analysis that weighs costs against the benefits and risks to arrive at the net benefit. A cursory look at the ATO’s key risks, including systemic and serious system failures (such as those giving rise to the establishment of the IGT) demonstrates the need to exercise extreme care in relation to any change to external scrutineering arrangements.

In respect of the IGT, specifically, the Government’s recent policy decision to transfer the Ombudsman’s tax complaint handling function to the IGT has already created significant efficiencies and minimised duplication. It has provided a single-port-of-call for investigating and reviewing taxation and superannuation administrative matters. The IGT is now essentially performing the functions of a tax specialist ombudsman in respect of the ATO and the Tax Practitioners Board, streamlining the number of agencies with oversight of the ATO on tax administration matters. The specialist nature of the IGT office has, for example, resulted in over 35 per cent of complaints being resolved without needing ATO intervention and, when the ATO’s input is required, the majority of the remaining matters have been resolved with 15 business days.

The Government’s decision has also consolidated the complementary functions of complaints handling and broader reviews. These two aspects of the IGT’s core work go hand-in-hand. The former provides real-time insight into emerging issues which, together with the latter, enables the IGT to move quickly to address problems before they escalate into major causes of taxpayer discontent or serious system failures. Moving forward, the IGT may undertake more targeted reviews in an expedited manner to address particular areas where significant complaints have been received.

The IGT believes that there are opportunities for the ATO to further manage its interactions with external scrutineers, including the IGT, to realise greater efficiencies and cost reductions. Such opportunities include improved engagement and collaboration based on full, frank and expeditious information sharing.

1. Introduction

1.1 The Inspector-General of Taxation (IGT) welcomes the opportunity to make a submission to the Standing Committee on Tax and Revenue’s (the Committee) Inquiry into the External Scrutiny of the Australian Taxation Office (Inquiry). As the IGT’s core function is aimed at delivering improvements to the administration of the tax system, we believe that the Committee’s Inquiry presents a valuable opportunity to assess those aspects of the system that are working well and areas which can be improved.

1.2 In making this submission, the IGT would like to thank the Committee, Parliament more generally, the Government and its agencies, the broad range of taxpayers, the tax profession and their collective representative bodies for their assistance in our common goal of achieving an effective, fair and efficient administration of the tax and superannuation system. The IGT has a proud history of consulting extensively with stakeholders in undertaking reviews to advise the Australian Taxation Office (ATO) and Government on solutions for improvement. In the past this was primarily achieved by calling for submissions to his work program. The range of concerns raised by these stakeholder groups was always considerable and my office sought to apply its limited resources to those areas the reviews of which were likely to deliver the greatest overall benefit for all Australians.

1.3 The IGT role has been expanded by the recent Government policy decision to transfer the complaint handling function from the Commonwealth Ombudsman to the IGT. A single port-of-call for investigating and reviewing taxation and superannuation administrative matters has therefore been created. Effectively this means that the IGT now fulfils the Ombudsman function in relation to these matters. It acts as a dedicated specialist ombudsman providing a complaints handling service as well as conducting broader reviews. The former provides real-time insight into emerging issues and together with the review function enables the IGT to move quickly to address problems before they escalate into major causes of taxpayer discontent or system failures. Therefore, moving forward the IGT may undertake more targeted reviews in an expedited manner to address particular areas where significant complaints have been received.

1.4 The Inquiry’s specific terms of reference, are:

• removing inefficiency and duplication;
• reducing cost to Government; and
• the ‘earned autonomy principle’ set out in Stage 2 of the Public Management Reform Agenda.

^[1]House of Representatives Standing Committee on Tax and Revenue, Inquiry into the External Scrutiny of the Australian Taxation Office Terms of Reference (3 February 2016).

1.5 In order to faithfully address the above three terms of reference it is important that they be considered in the appropriate context.

1.6 Part 2 provides an overview of the Australian Government’s scrutineering arrangements. It is a strong and well established foundation structure that applies across Government and its agencies. Accordingly any proposed policy changes in this area need to be considered very carefully as they have much wider ramifications.

1.7 The benefits of scrutineering both as part of the broader Government system and specifically in relation to the tax system and by extension taxpayers and the ATO are also outlined. This is to facilitate a fulsome understanding of the ‘net benefits’ through a more critical and appropriate analysis of all the ‘costs’, ‘risks’ and benefits.

1.8 A comparative analysis of the ATO with other Government agencies then follows together with a comparative analysis of relevant overseas jurisdictions.

1.9 Part 3 outlines the specialist role of the IGT together with the significant improvements and benefits which the work of his office has delivered.

1.10 Given the interrelationship between reducing costs and removing inefficiencies and duplications, Part 4 addresses these two terms of reference together.

1.11 Part 5 considers the final term of reference regarding ‘earned autonomy’.

2. Australian Government Scrutiny Arrangement– An overview

2.1 Australia’s democratic system of Government is predicated on the principles and traditions of the Westminster System, in which the Government is responsible to Parliament, and robust checks and balances exist on the actions of Government and its agents (the Government’s administration), including those dealing with tax policy and tax administration matters.

2.2 At its highest levels, the two houses of Parliament, whose members are elected and representative of the Australian people, hold the Government to account. The Senate (sometimes referred to as a house of review) also acts as an ‘effective check’ on the Government’s administration by performing a function:

…to probe and check the administration of the laws, to keep itself and the public informed, and to insist on ministerial accountability for the government’s administration.

^[2]Odgers’ Australian Senate Practice, Thirteenth Edition, Chapter 1.

2.3 The make-up and representation of the Senate, as it differs from the House of Representatives (the House) is important in this regard:

The proportional representation system of voting used to elect senators makes it easier for independents and the candidates of the smaller parties to be elected. In recent decades this has meant that the government party usually does not have a majority of votes in the Senate and the non–government senators are able to use their combined voting power to reject or amend government legislation. The Senate’s large and active committee system also enables senators to inquire into policy issues in depth and to scrutinise the way laws and policies are administered by ministers and public servants.

^[3]Parliament of Australia, ‘About the Senate‘.

2.4 In both the House and in the Senate, the Opposition has a recognised and fundamental role in holding the Government to account on its actions and providing a counterbalancing view on issues of contention. It has been noted in Australia that:

The Opposition is considered to be essential for the proper working of Australia’s democratic system of government and it is an essential component of the structure of the House.

and

The House depends on an effective Opposition to carry out its functions in respect of government accountability. Government members can usually be expected to support the Government with their votes and may not be inclined (at least in public) to be too critical of the Government’s actions or legislation. Opposition Members can be expected to criticise and to offer alternative views. The rules and procedures of the House enable the Opposition to perform this role.

^[4]Parliament of Australia, Infosheet 19: The House, Government and Opposition, pp 1-2.

2.5 At all levels of government in Australia, independent voices are heard, debated and considered to ensure that decisions made are in the best interests of the Australian community. The investment of time and monies in these integrity structures and functions ensure that power is exercised appropriately and only in the best interests of the Australian people.

2.6 The same principles of integrity are applicable to all agencies and departments of Government to assure the Australian public that government revenue, funded by taxpayers, is used appropriately and services delivered are in accordance with Government policy and general community expectations. In the words of Woodrow Wilson, President of the United States, 1913-21, whose views were considered important in developing Australia’s Constitution:

It is the proper duty of a representative body to look diligently into every affair of government and to talk much about what it sees. It is meant to be the eyes and the voice, and to embody the wisdom and will of its constituents. Unless Congress have and use every means of acquainting itself with the acts and the disposition of the administrative agents of the government, the country must be helpless to learn how it is being served; and unless Congress both scrutinise these things and sift them by every form of discussion, the country must remain in embarrassing, crippling ignorance of the very affairs which it is most important that it should understand and direct. The informing function of Congress should be preferred even to its legislative function.^[5]Congressional Government, 1885, reprinted Meridian Books, 1956, p. 193 as quoted in above n 2.

2.7 To assist Parliament and the Australian public, every federal government agency regardless of its size and resources is subject to oversight by the Australian National Audit Office (ANAO), the Office of the Australian Information Commissioner (OAIC) and the Commonwealth Ombudsman (Ombudsman) or a specialist body performing ombudsman functions.

2.8 The role of the ANAO:

 …is to provide the Parliament with an independent assessment of selected areas of public administration, and assurance about public sector financial reporting, administration, and accountability. [It does] this primarily by conducting performance audits, financial statement audits, and assurance reviews.

^[6]Australian National Audit Office, ‘About Us’ < https://www.anao.gov.au/About-Us>.

2.9 The OAIC develops and issues whole-of-government information policy, as well as administering the review, complaint and oversight functions conferred by the Freedom of Information Act 1982 and Privacy Act 1988.

^[7]Office of the Australian Information Commissioner, ‘About the OAIC‘.

2.10 The role of the Ombudsman is to:

…consider and investigate complaints from people who believe they have been treated unfairly or unreasonably by an Australian Government department/agency or prescribed private sector organisation, including Australia Post, Centrelink, Child Support (DHS), and Department of Immigration and Border Protection.

^[8]Commonwealth Ombudsman, ‘What we do‘.

2.11 A diagrammatic representation is provided below.

Figure 1: Governance arrangements for all public sector agencies

Note: As public service agencies, the ANAO, OAIC and the Commonwealth Ombudsman are accountable to, and scrutinised by Parliament and its committees as well as by each other. ** A small number of agencies have specialist scrutineers who effectively perform the Ombudsman’s function in respect of that agency only. The IGT is one such scrutineer and essentially performs the Ombudsman’s role as a specialist in respect of the ATO and the Tax Practitioners Board.

2.12 Each of the above oversight functions are applicable to the broad range of public sector agencies including the ATO.

2.13 The ATO itself is in a unique position of being, by necessity, a monopoly service provider whose services permeate the fabric of Australian society. For example, the ATO is responsible for collecting approximately 80 per cent of total Government revenue across all levels

^[9]Australian Bureau of Statistics, ‘Taxation Revenue Key Figures‘ (21 December 2015).

which comprises $340 billion in net revenue for the Federal Government and on behalf of the states.

^[10]Commissioner of Taxation, Annual Report 2014-15 (2015) p 21.

 In addition to managing and collecting revenue, the ATO is also responsible for maintaining oversight of 880,000 employers, 780,000 trusts, 557,000 self-managed superannuation funds and working with 55,000 tax and business activity statement agents.

2.14 The ATO administers the tax affairs of some 12.8 million individual taxpayers and 2.9 million businesses,^[11]Ibid, p 8. whose valuable financial information is also used by other Government bodies to determine eligibility to social support services, such as pensions and child support.

2.15 The data made publicly available by the ATO is also relied upon by commerce and seen as a trusted source. For example, the Australian Business Register (ABR) is amongst the top ten most used Australian Government websites as it is the only public source of accurate and reliable information on Australian Business Numbers. The ABR was accessed some 517 million times in 2014-15.^[12]Ibid, p 21.

2.16 Moreover, the ATO administers a significant portion of the superannuation system, which impacts the Australian community’s retirement savings, as well as administering excise systems, managing numerous grant schemes, collecting debt in relation to the Higher Education Loan Program and maintaining the Agricultural Land Register, to name a few.

2.17 In performing its variety of critical roles, the ATO holds one of the largest repositories of sometimes highly commercially sensitive information and data on businesses and individuals operating in Australia and elsewhere around the world. In 2014-15, the ATO reported receiving data on some 650 million transactions for data matching purposes.^[13]Ibid, p 45. In this respect, it is receiving and managing such data from a range of sources including state-based public sector agencies, share registries, land titles offices and credit card companies. In addition, the ATO has also begun a program to collect and make use of biometric data for verification purposes, reporting having collected 750,000 voiceprints in 2014-15.^[14]Ibid, p 10.

2.18 As one of the largest public service agencies with an operating budget of $3.45 billion^[15]Ibid, p iv. and over 20,000 employees,^[16]Ibid, p 85. the ATO is also undertaking a “digital transformation”, by moving away from paper-based interactions towards electronic interactions.

2.19 In the discharge of its duties, the primary one being the compulsory exaction of monies from taxpayers, the ATO is afforded significant powers including coercive information gathering and interrogation,

^[17]Taxation Administration Act 1953, sch 1, div 353.

restricting movements of individuals

^[18]Taxation Administration Act 1953, Part IVA.

and garnishee notices,

^[19]Taxation Administration Act 1953, sch 1, div 260.

 many of which are exercised without judicial oversight. In addition, it should be noted that operations of the ATO are directed by the Commissioner and three Second Commissioners all of whom are appointed for a fixed tenure of seven years, which falls outside of the election cycle.

^[20]Taxation Administration Act 1953, ss 4-5.

2.20 Moreover, through the system of responsible government, the Commissioners are responsible to the Parliament through the relevant Minister, the Assistant Treasurer. Unlike other departmental arrangements, however, Ministers are precluded from testing the basis for the Commissioners’ positions where strict secrecy provisions prevent taxpayer related information from being disclosed. Prior to 2003, the independent verification of such positions encountered significant difficulties due to this secrecy veil.

^[21]See for example: Senate Standing Committee on Economics, Operation of the Australian Taxation Office (March 2000); Senate Standing Committee on Economics, Inquiry into Mass Marketed … Continue reading

2.21 Given the magnitude of the ATO’s operations and the important role it plays in Australia, it is clear that there is a significant risk that must be appropriately managed through robust governance arrangements, including independent and effective external scrutineering functions. Such arrangements are critical to the health of the Australian tax system, and indeed the Australian community generally, as a means of guarding against large-scale systemic failure that could have long-lasting effects.

2.1 Benefits of independent external scrutiny – tax issues

2.22 Australia’s tax system is centred on the principles of self-assessment and voluntary compliance. It is not practical for the ATO to return to a system of full assessment, nor is it feasible having regard to the costs and resources that would be involved. As will be discussed below, the system depends on Australians having confidence that the system is operating with the highest levels of integrity and fairness. Within this system, independent scrutineering should be viewed as an investment to guard against large-scale systemic failures and irreparable loss of confidence in the system.

2.23 The functions of the external scrutineers, generally, deliver a range of different benefits for the Government, the Australian community and for the ATO itself. These benefits include:

1. ensuring that the tax system is operating effectively and equitably, redressing the asymmetric power imbalance between the ATO and taxpayers;
2. building community confidence in the ATO as a fair administrator and enhancing voluntary compliance;
3. advising the Parliament and Government more generally;
4. providing benefits and savings for the ATO; and
5. reducing unnecessary compliance costs for taxpayers and the broader economy.

2.1.1 Ensuring the tax system operates effectively and equitably, and redressing asymmetric power imbalances

2.24 By necessity, the ATO possesses significant resources and powers in administering the tax laws and other legislation under its purview. Such resources and power significantly outweigh those of taxpayers^[22]Binh Tran-Nam and Michael Walpole, ‘Access to tax justice: How costs influence dispute resolution choices’ (2012) 22 JJA 3, p 4. such that challenging the ATO or questioning its actions may prove daunting, difficult or impossible particularly for small business and individual taxpayers. Independent external scrutineers seek to ensure that procedural fairness is afforded in all disputes between taxpayers and the ATO and that appropriate outcomes are achieved.

2.25 In some cases, a taxpayer who may not often interact with the ATO, may find that navigating and reaching the right areas to discuss issues of concern may be a task in itself. In such cases, the scrutineer involvement may only need to extend as far as assisting taxpayers and tax practitioners to better engage with the most appropriate ATO officers to cast a fresh set of eyes on the matter. In other cases, through more in-depth understanding and experience of the processes of the ATO, their procedures, the relevant laws and the facts of the dispute at hand, external scrutineers may act as a circuit-breaker to facilitate or mediate the discussions of competing views on the issue and identify possible solutions.

2.26 Furthermore, where there are a number of different issues requiring input from multiple public sector agencies, experienced scrutineers with a clear understanding of the workings of the public sector are able to refer taxpayers and practitioners to the agencies best placed to assist with their matter.

2.27 In dealing with specific complaints or in consultation with taxpayers, tax professionals or their representative bodies, external scrutineers may also identify broader issues which require broad-based reviews. External scrutineers undertake such reviews to identify the root cause of the issues giving rise to community concerns and, through discussions with community stakeholders as well as the ATO, make recommendations which seek to minimise the risk of it recurring.

2.1.2 Self-assessment, confidence in the system and voluntary compliance

2.28 Australia’s move to a self-assessment tax system abandoned administrative assessment procedures on efficiency grounds, in favour of a more targeted approach which verifies information contained in tax returns.

^[23]Errn Chen Loo, Margaret McKerchar & Ann Hansford, ‘An International Comparative Analysis of Self Assessment: What Lessons Are There for Tax Administrators’ (2005) Australian Tax … Continue reading

 However, without taxpayers’ voluntary compliance with obligations, these efficiency gains would not be realised. Such voluntary compliance is not without cost. It is dependent on strong trust and security and independent external scrutiny is an investment towards these outcomes. As the IGT has previously said:

Independence engenders trust in dealings. Independence liberates my office from unavoidable organisational or stakeholder behavioural bias or inertia that may otherwise arise. Independence also provides for candour in communication and rigor in the consideration of issues.

^[24]Inspector-General of Taxation (IGT), Annual Report 2009-10 (2010) p 10.

2.29 There has also been significant research on the interaction between voluntary compliance, confidence and perceptions of fairness and reasonableness in the tax system. Specifically, the research finds that:

Whereas enforced compliance depends on (perceived) power of authorities to prosecute tax evaders, voluntary compliance is based on a trustful relationship towards authorities.

^[25]Stephan Muehlbacher and Erich Kirchler, ‘Tax Compliance by Trust and Power of Authorities’ (2010) 24(4) International Economic Journal 607-610.

2.30 In a self-assessment tax system, taxpayers’ perception of fairness and reasonableness has a direct impact on the trust and confidence they have in the administrator and the system itself. Where taxpayers perceive the system to be unfair or unreasonable, taxpayers are less willing to comply with their obligations.

^[26]Grant Richardson, ‘An Exploratory Cross-Cultural Study of Tax Fairness Perceptions and Tax Compliance Behavior in Australia and Hong Kong’ (2005) 31(1) The International Tax … Continue reading

 Fairness, in this regard, is often described by principles of justice and when these principles are believed to operate ineffectively, they undermine confidence in the system or the organisation.

^[27]Michelle Maiese, ‘Principles of Justice and Fairness’ (2013) <www.beyondintractability.org>.

2.31 The ATO is also conscious of the need to ensure that public perceptions of it as a fair administrator are robust as a means of encouraging voluntary compliance. For example, recent news media reports suggest that in 2014-15, the ATO expended significant sums of money to assess and improve its public perception in the eyes of the Australian community.

^[28]Nassim Khadem, ‘ATO’s research, media $8m bill’, Sydney Morning Herald (16 February 2016) p 8.

2.32 Notwithstanding the ATO’s efforts to deliver a fair and transparent service, given the large scale of its operations and the complexity of the system, some mistakes and disputes are inevitable.

^[29]Australian Taxation Office (ATO), ‘ATO response to tax enquiry report‘ (26 March 2015); ATO, ‘GST Voluntary Compliance Program – Research Phase 5‘ (2015).

 The existence of independent external scrutineers, such as the IGT, provides comfort and confidence for taxpayers and practitioners that where such mistakes or disputes cannot be addressed directly with the ATO, the matter can be escalated to an external agency for an objective investigation of the issues.

2.1.3 Advising Parliament and Government

2.33 The ultimate owners of the tax system are the Australian public and the ATO is accountable to Parliament as representatives of the Australian people. However, Parliament is often engaged in a number of different functions including setting laws and public policy and is therefore not able to devote all of its time and resources to monitor and oversee the ATO.

2.34 Given the complexity of the tax system,^[30]Evidence to House of Representatives Standing Committee on Tax and Revenue, Parliament of Australia, 24 February 2016, p 5 (Chris Jordan, Commissioner of Taxation); Commissioner of Taxation, … Continue reading specialist tax scrutineers provide vital support to Parliament in its oversight of the ATO. Through their more detailed investigation of the ATO and real-time assistance to taxpayers, they provide valuable insight to Members of Parliament who may not be subject matter experts. Such insight may be with respect to particular ATO operations, areas of concern and opportunities for improvement. This critical role of scrutineers has been recognised by the Joint Committee of Public Accounts and Audit (JCPAA):

The committee intends to use the published work of the external review bodies, their in-depth knowledge of the workings of the ATO and their collected experiences of dealing with ordinary tax payers to help the committee raise relevant issues and assess the performance of the ATO.^[31]Joint Committee of Public Accounts and Audit (JCPAA), ‘When too much scrutiny is never enough’ (Media Alert, 22 September 2011).

2.35 The ongoing involvement of the external scrutineers in the work of the Committee is also a testament to their work in assisting the Committee in its considerations of the ATO’s performance and service delivery.^[32]See for example: Evidence to House of Representatives Standing Committee on Tax and Revenue, Parliament of Australia, 18 March 2015; Evidence to House of Representatives Standing Committee on Tax and … Continue reading

2.1.4 Benefits and savings for the ATO

2.36 The work of external scrutineers can also assist the ATO to realise significant cost savings.

2.37 Through the review and investigation processes undertaken by external scrutineers, inquiries may be made about systems and processes which, without a third party perspective, may continue to progress with blind spots that an agency itself may be unable to detect. The identification of these areas, ongoing discussions and information sharing between the ATO and its scrutineers as well as the resulting recommendations assist the ATO to bring about improvements which may not have otherwise been realised.

2.38 In some cases, such improvements require legislative change and external scrutineers assist the ATO to highlight to Government legislative concerns that give rise to administrative costs. Addressing these issues at their root cause brings about significant benefits and cost savings.

2.1.5 Reducing unnecessary compliance costs for taxpayers

2.39 The administration of the tax and superannuation system imposes costs upon taxpayers and other stakeholders in the pursuit of their activities — be they profit or not-for-profit entities or even retirees. A certain level of compliance costs are expected to be borne by citizens.

2.40 However, when these costs are disproportionate or unnecessary, as the IGT has pointed out in a number of his reviews, they are a ‘burden that imposes a dead weight cost on taxpayers and the economy’.

^[33]Inspector-General of Taxation (IGT), Review into aspects of the Australian Taxation Office’s use of compliance risk assessment tools (2014) p 81; IGT, Report into the Australian … Continue reading

 Where costs of this nature arise there are potential implications for the self-assessment system itself given the heavy reliance upon voluntary compliance.

2.2 External scrutiny of the ATO

2.41 The Commissioner has previously argued that the ATO is subject to an extensive, and possibly unnecessary, level of scrutineering.

^[34]Commissioner of Taxation, ‘Deregulation – balancing our service delivery and regulatory roles in a real time environment‘ Speech delivered to Council of Small Business of Australia 12th … Continue reading

To support these contentions the Commissioner provided, in a supplementary submission to the Committee’s Inquiry into the Commissioner’s 2013-14 Annual Report, a diagrammatic representation of the external ATO governance arrangements existing at the time.

^[35]House of Representatives Standing Committee on Tax and Revenue, 2013 Annual Report of the Australian Taxation Office First Report (March 2014) p 42.

 The diagram identified the following such arrangements:

• Annual Report
• Australian National Audit Office
• Commonwealth Ombudsman
• Consultation arrangements
• House of Representatives Standing Committee on Tax and Revenue
• Inspector-General of Taxation
• Integrity Adviser
• Joint Committee of Public Accounts and Audit
• Office of the Australian Information Commissioner
• Senate Estimates

2.42 The diagram fails to properly contextualise the Australian Government system of scrutiny across all agencies as outlined above. Importantly, the key point to note is one that the Committee has well made recently. Simply put, the Commissioner is subject to the same scrutiny arrangements as other agencies. The Commissioner’s diagram is now specifically addressed to explain why this is the case.

2.43 Firstly, the annual reporting requirements and oversight by the ANAO, Ombudsman, OAIC, the Committee, JCPAA and Senate Estimates are those which apply to the vast majority of public sector agencies and departments. Even small Commonwealth agencies may be subject to the full gamut of such scrutiny.

2.44 Secondly, the Commissioner has included two self-originated arrangements that are completely under his control. The first such arrangement is the Commissioner’s own consultation arrangements. This is curious as they are not scrutineering functions. Their overarching purpose is to assist the ATO develop its products, particularly its guidance material, by garnering feedback from key stakeholders before they are issued in final form. It is also noteworthy that in recent years, the ATO has significantly rationalised its consultation arrangement from sixty-eight forums to eight,^[36]Evidence to the Joint Committee on Public Accounts and Audit, Parliament of Australia, 26 June 2013, p 2 (Chris Jordan, Commissioner of Taxation). with a number of additional specialist forums being established as needed.

^[37]ATO, ‘Consultation Groups‘.

 As these arrangements are not legislatively mandated, they are entirely within the control of the ATO and may be changed or reduced. Members of these forums have no power to request information or direct any action or outcome.

2.45 The other self-originated arrangement is the ATO’s own Integrity Adviser. The role was created by the Commissioner to provide him with advice on the ATO’s ethical and legal obligations in respect of fraud prevention and control, its integrity framework and certificate of assurance processes.

^[38]Commissioner of Taxation, Annual Report 2010-11 (2011) p 20, Commissioner of Taxation, Annual Report 2011-12 (2012) p 118, Commissioner of Taxation, Annual Report … Continue reading

As with the consultation arrangements, there is no legislative requirement for the ATO to appoint an Integrity Adviser and, if so appointed, the responsibilities and accountability of such a role are set and maintained contractually by the ATO and not independent. In any event, the role seems to no longer exist as no mention of it has been made in the ATO’s most recent annual report^[39]Above n 10. or anywhere on its website.

2.46 Thirdly, the transfer of the Commonwealth Ombudsman’s tax complaints handling function into the IGT office (discussed in more detail in Part 3 of this submission) has effectively removed the Ombudsman as an oversight body of the ATO on tax matters.^[40]The Commonwealth Ombudsman’s roles in relation to the ATO are now to consider complaints about the ATO’s handling of freedom of information applications and to oversee the ATO’s … Continue reading With this consolidation, the ATO, as well as taxpayers, now have only one agency dealing with taxpayer complaints and systemic tax administration issues. Moreover, the transfer of the complaints handling function is providing real-time insight into emerging issues and an opportunity to address problems before they escalate into major causes of taxpayer discontent. This could mean that in future, the IGT may undertake shorter and more targeted reviews in an expedited manner to address particular areas where significant complaints have been received.

2.47 Fourthly, the Commissioner’s diagram has characterised the formation of this Committee as an increase in scrutiny to the historical arrangements by also including the JCPAA.^[41]Commissioner of Taxation, ‘Reinventing the ATO – building trust in Australia’s tax administration’ Speech to the ATAX 11th International Tax Administration Conference … Continue reading However, the JCPAA has not required the ATO to attend any meetings or issued any reports in relation to the operation of the ATO since this Committee’s formation. It is also important to appreciate that Parliament is sovereign as the ultimate governing body in Australia, and accordingly, whatever scrutiny arrangement it believes to be appropriate at any given time must be respected.

2.48 More generally, although the Commissioner has adversely commented on the high level of scrutiny, he has at the same time accepted the wisdom in ensuring key issues are scrutinised by experienced specialists. For example, he has recently appointed a former Federal Court judge to provide assurance on the appropriateness of settlements entered into by the ATO and to provide advice on the design of a new settlement process.

2.49 Finally, it is important to appreciate that whilst there are a number of bodies that have a role in overseeing the ATO, no scrutineer, including the Parliamentary committees and Senate Estimates, can compel the Commissioner or the ATO to undertake any action or implement any changes to which they disagree.

^[42]JCPAA, Report 426 Ninth Biannual Hearing with the Commissioner of Taxation (2011) p 29.

 Only the judiciary can compel a different action or decision by the Commissioner and this only occurs where it is found that a decision or action was not in accordance with the law. This is important as it necessarily preserves the statutory independence of the Commissioner over the administration of the tax laws and of the ATO.^[43]Michael Bersten, ‘Independence and Accountability of the Commissioner of Taxation’ (2002) 12 Revenue LJ 5-39.

2.50 Importantly, the Commissioner or the ATO accepts the vast majority of recommendations made by the Government’s independent scrutineers. The IGT appreciates that there can be professional differences of opinion that can arise in relation to recommendations, therefore where the ATO expresses disagreement, their reasons and explanations,

^[44]Inspector-General of Taxation Act 2003, s 15; Ombudsman Act 1976, sub-s 8(5); Auditor-General Act 1997, s 19.

are made public in reports provided to the Government to enhance transparency of the review process. Even in those limited cases where the ATO has initially disagreed with a recommendation, these have in a number of cases been adopted and implemented by the ATO

^[45]IGT, The Management of Tax Disputes (2015) pp 118-119.

or other bodies

^[46]See for example: Australia’s future tax system: Report to the Treasurer (the Henry Report) recommendation 114; JCPAA, Report 410 Tax Administration (2008) recommendation 9.

 at a later time.

2.51 The ATO’s actions, in this respect, tend to reflect the high value that the ATO places on external scrutineers’ insights into the system and improvements that could be made by acting on such insights.

2.3 International comparison

2.52 The features of the Australian external scrutineering tax landscape are not unique. Recent information published by the Organisation for Economic Cooperation and Development (OECD) indicates that all countries surveyed had either an independent and dedicated body to handle tax administration-related complaints or dealt with these complaints through ombudsmen offices.

^[47]Organisation for Economic Cooperation and Development (OECD), Tax Administration: Comparative Series 2015 (2015) p 48.

2.53 When compared with key partner jurisdictions, such as the United States (US) and United Kingdom (UK), it is clear that Australia’s external scrutineering arrangements are on par with those that have been implemented in those jurisdictions. Specifically, it is noted that the US’s Internal Revenue Service (IRS) is subject to scrutiny and review by the Taxpayer Advocate Service

^[48]Taxpayer Advocate Service.

(which operates similarly to the IGT), the Taxpayer Advocacy Panel,

^[49]Taxpayer Advocacy Panel.

the Treasury Inspector General for Tax Administration

^[50]Treasury Inspector General for Tax Administration.

 and a number of Congressional sub-committees.

^[51]United States Senate Committee on Finance; United States House of Representatives, Committee on Ways and Means.

2.54 Similarly, the UK Her Majesty’s Revenue and Customs (HMRC) is overseen by the Adjudicator’s Office,

^[52]Adjudicator’s Office.

the Parliamentary and Health Service Ombudsman

^[53]Parliamentary and Health Service Ombudsman.

 and Parliamentary committees of the House of Lords and House of Commons.

^[54]United Kingdom Parliament, Lords Select Committee, Economic Affairs Committee; United Kingdom Parliament, Commons Select Committee, Finance Committee.

2.55 In addition to the above, the IRS and HMRC are subject to audits and reviews by the Government Accountability Office

^[55]United States Government Accountability Office.

and the National Audit Office,

^[56]National Audit Office.

 respectively. These offices have roles similar to that of the ANAO.

2.56 Furthermore, a number of key OECD jurisdictions also have oversight or advisory boards as an additional form of governance for the revenue authority. Such jurisdictions include the US,

^[57]The Internal Revenue Service (IRS) Board which was established by the IRS Restructuring and Reform Act of 1998.

the UK

^[58]Her Majesty’s Revenue and Customs Board.

and Canada.

^[59]Canada Revenue Agency, Board of Management.

 The IGT had previously recommended the establishment of a management board for the ATO as one option to improve its governance.

^[60]IGT, Tax Forum – next steps for Australia (September 2011) pp 14-15.

2.57 It is interesting to note that notwithstanding the oversight of HMRC in the UK, the House of Lords in a 2013 report recommended further Parliamentary oversight of the organisation to ensure that it was taking appropriate action in relation to corporate tax avoidance.

^[61]House of Lords Economic Affairs Committee, Tackling corporate tax avoidance in a global economy: is a new approach needed? (2013).

2.58 Having regard to the above, it is clear that, in Australia, the scrutineering arrangements with respect to the ATO are comparable to those of revenue agencies in most OECD countries. However, when compared to some OECD jurisdictions, tax scrutineers in those jurisdictions have additional powers which include compelling or directing the revenue agency to take a particular action or granting relief to taxpayers.

^[62]Internal Revenue Service, Internal Revenue Manual, section 13.2.1.6.

2.59 Similarly, some non-OECD jurisdictions, such as Mexico, also have additional powers. For example, the Procuradaduria de la Defensa del Contribuyente (PRODECON) which is Mexico’s equivalent taxpayers’ ombudsman is able to act on behalf of taxpayers in certain cases and as a public defender of taxpayers’ rights in ordinary and constitutional court actions.^[63]Paper presented by Diana Bernal Ladrón de Guevara, Procuradora de la Defensa del Contribuyente (Mexico), at the International Conference on Taxpayer Rights, Washington, D.C., November, 2015, p 4. More recent legislative amendments have also empowered the PRODECON to facilitate, monitor and mediate the ‘Conclusive Agreements’ process, which if activated, halts the action of the revenue authority and seeks to deliver a binding settlement which cannot be judicially challenged.^[64]Above n 63, p 13.

2.4 Prior comments on the external scrutiny of the ATO

2.60 The level of scrutiny of the ATO has previously been the subject of some public comment including reports of parliamentary committees and by the former and current Commissioners.

2.61 In November 2011, the JCPAA noted:

The Committee feels that the level of scrutiny of the ATO provided by the Auditor-General, the Inspector-General of Taxation, and the Ombudsman is of high quality and should provide the public with confidence in the robustness of their tax system.^[65]Above n 42 p 32.

2.62 In 2012, the ATO also acknowledged the value in collaborating with its external scrutineers. Specifically, the former Commissioner noted:

An important part of sustaining community and government confidence in our administration of the tax and superannuation systems is that we have professional and cooperative relationships with our scrutineers and with representatives of a broad spectrum of the community stakeholders whom we serve. We listen constructively to the issues they raise and the suggestions they make to improve the administration and effective operation of Australia’s tax and superannuation systems.

and

… I would also like to acknowledge the contribution made by this committee and our scrutineers to good tax and super administration.^[66]Evidence to the Joint Committee of Public Accounts and Audit, Parliament of Australia, 14 September 2012 pp 1 and 3 (Michael D’Ascenzo, Commissioner of Taxation).

2.63 In July 2013, the Australian Public Service Commission (APSC), in its Capability Review of the ATO, noted that the ATO ‘is in the fortunate position of receiving extensive external scrutiny.’

^[67]Australian Public Service Commission, Capability Review Australian Taxation Office (July 2013) p 13.

2.64 In February 2014, the Commissioner also raised the issue with the Committee in written submission and at a public hearing on the 2013 Annual Report of the ATO.

While you are in front of us, I just want to make a comment—perhaps to temper enthusiasm for more reports! You can see the document that we provided, but we are in an environment of reducing resources. We had 14 scrutineer reports last year: there were the six from the inspector-general, double-sided printing, and two of which are not yet released. But there are six reports there. There are seven Australian National Audit Office reports on performance audits and those sort of things—I do not know how big they would be. There is the one ‘own motion’ from the ombudsman—and I am pleased to hear that it is all agencies now, it is not just us, which I had not appreciated until you made that! So we have to balance the resources and issues here. I know that it is an important role of oversight for us, and I am not in any way saying that we should not have that. But maybe we could just balance it some time? As I said, that is just the inspector-general reports over the last 12 months: 14 reports in total.^[68]Evidence to the House of Representatives Standing Committee on Tax and Revenue, Parliament of Australia, 28 February 2014, p 32 (Chris Jordan, Commissioner of Taxation).

2.65 In response to submissions and comments made by the Commissioner, the Committee itself remarked in March 2014:

At the hearing, the ATO commented that it is scrutinised extensively. The Committee would note, however, that much of this scrutiny is similar to other agencies. For example, almost all agencies are subject to the Auditor-General and the Ombudsman and appear before Senate Estimates. The fact that these agencies often focus more on the ATO reflects the importance of the ATO’s role.

The main difference between most agencies and the ATO is that it has its own Inspector-General. In this respect, it is similar to the intelligence and security agencies, and defence agencies, which also have an Inspector-General. Once again, this reflects their importance.

^[69]House of Representatives Standing Committee on Tax and Revenue, 2013 Annual Report of the Australian Taxation Office (2014) p 32.

2.66 The Committee’s comments above remain true today, perhaps even more so. Since the time the above remarks were made by the Committee, the tax complaint handling function has been transferred to the IGT from the Ombudsman. Accordingly, the IGT is now a tax specialist Ombudsman with the same powers of the Ombudsman with respect to the ATO and Tax Practitioners Board (TPB).

^[70]Joint Committee of Public Accounts, Report 326 An Assessment of Tax (1993) pp 314 & 317.

 As such, and as will be discussed later in this submission, with this recent change as well as ongoing consultation between the external scrutineers of the ATO, there is even less chance of any overlap amongst the work of these scrutineers.

2.67 Notwithstanding the Committee’s comments, the Commissioner has continued to publicly comment on the level of external scrutineering including by reference to the ATO’s own self-appointed arrangements in a number of different forums:

If you think about what’s involved in all that ‘regulation of the regulator’, all that scrutiny; the number of people and hours it takes to research, write, review and respond to these committees and reports – you have to wonder, is that really cost effective for the benefit we might receive? Is the time (and therefore money) invested in creating these briefings and reports, reflective of the government’s push for efficiency improvements and reductions in red tape, and does it make things better for everybody?

Interestingly, this level of scrutiny and oversight hasn’t resulted in a perfect tax administration and it didn’t prevent loss of confidence in the ATO.^[71]Commissioner of Taxation, ‘Deregulation – balancing our service delivery and regulatory roles in a real time environment’ Speech delivered to Council of Small Business of Australia 12th … Continue reading

2.68 These comments from the Commissioner appear at odds with those he had made a year earlier in which he positively acknowledged the benefits of implementing a number of recommendations made in IGT reviews.

^[72]Commissioner of Taxation, ‘Tax, the way ahead’ Speech delivered to the Tax Institute 28^th Annual Convention (14 March 2013) <www.ato.gov.au>.

2.69 Given the Commissioner’s continued focus publicly on the nature of the Australian Government scrutiny structure and related scrutineers, the IGT believes that it is appropriate to address some aspects of the comments made by the Commissioner.

2.70 The Commissioner’s public comments continue to focus very narrowly on the resources and cost-effectiveness for the ATO in managing the inquiries of external scrutineers. As noted earlier, limiting an examination of costs to that expended by the ATO is a simplistic one-sided equation. It is an unbalanced assessment that excludes the benefits, savings and risks on the other side of the equation.

2.71 Importantly, a comprehensive analysis that seeks to weigh costs against the benefits and risks to arrive at the net benefit is not a simple one. However, even a cursory look at the ATO’s key risks, including systemic and catastrophic system failures (such as that giving rise to the establishment of the IGT

^[73]Commonwealth, Parliamentary Debates, Senate, 15 May 2002, p 1579.

) demonstrates the need to exercise extreme care in relation to scrutineering arrangements. Issues regarding benefits, savings and costs are discussed in more detail at Part 4.

2.72 It is of concern that the Commissioner’s comments do not seek to explain the function of an external independent scrutineer. This process enhances confidence in Government agency deliberations as the transparency allows the public to assure itself that areas for improvement are properly understood and genuine steps are being taken to realise those improvements.

2.73 The IGT is not aware of any scrutineer whose recommendations purport to achieve a ‘perfect administration’ be it taxation or otherwise. Although a laudable aspiration, it is unrealistic, particularly given the dynamic nature of the tax laws and changing social, political, technological and commercial environments.

2.74 Furthermore, the Commissioner’s statement that the ‘level of scrutiny and oversight… didn’t prevent loss of confidence in the ATO’ can only be reconciled by accepting that the loss of confidence in the ATO would have been much greater had it not been for the current level of scrutiny. This outcome is evidenced by the fact that the IGT’s work program has been developed solely from the complaints and concerns that stakeholders have raised directly with the IGT in their submissions.

2.75 It is regrettable that the Commissioner has considered it necessary to make such comments publicly without first approaching the external scrutineers to raise his concerns. These continued public proposals for policy change, divorced from the context and broader implications, only serve to undermine the very confidence in the administration of the tax and superannuation systems that external scrutineering, at all levels, seeks to establish and maintain. This is especially so given the significant differences in resources between the ATO and its scrutineers, which in the past has been described as David and Goliath.

^[74]Australian Institute of Company Directors, ‘David vs the Taxation Goliath‘ Company Director Magazine (1 October 2003).

2.76 These comments explicitly and unfairly criticise the function and value delivered by the external scrutineers without offering evidence or providing these respective agencies with a proper opportunity to comment, contextualise or respond.

2.77 Critically, an external scrutineer would not, and indeed could not, make such public comment about the ATO without first affording the Commissioner an opportunity to comment. Such a requirement is fundamental to fair and transparent interactions and built into the legislation governing the scrutineering functions.

^[75]Inspector-General of Taxation Act 2003, s 15; Ombudsman Act 1976, sub-s 8(5); Auditor-General Act 1997, s 19.

2.78 As an improvement opportunity for the future, the Commissioner should be subject to the same legislative requirement as external scrutineers — that is, he must provide an opportunity for them to comment on any proposed documents or presentations which contain implied or expressed criticisms of them or their functions.

3. The role and functions of the IGT

3.1 Establishment of the IGT

3.1 The IGT was established pursuant to Inspector-General of Taxation Act 2003 (IGT Act 2003) as an independent statutory officeholder to review systemic tax administration matters and make recommendations for improvement.

3.2 The IGT office was created in the wake of mass-marketed schemes entered into in the 1990s. There was also a history of such schemes prior to this time. Such schemes were often sophisticatedly marketed such that large numbers of investors bought in and were unaware of the intricate mechanics of those schemes, or the ATO’s concerns and positions in that regard.

^[76]ATO, ‘Mass Marketed Investment Schemes‘ (2012).

 The limited availability of public information on the ATO’s concerns and its subsequent crackdown of these schemes left many investors in the precarious position of owing significant amounts of tax whilst the promoters were effectively unpunished.

3.3 Whilst the ATO ultimately reached settlement in these matters,^[77]Ibid. concerns of the impact on the system and diminished confidence on the tax administration led the Howard Government to commit to the creation of the IGT ‘to identify systemic problems in tax administration, such as mass marketed schemes, and deal with those problems as they emerge’.^[78]Above n 73. The Government at the time sought input from the Board of Taxation, of which the current Commissioner was then a member, on the establishment of the IGT, and the Board responded positively.

^[79]Board of Taxation, Inspector-General of Taxation (2002).

3.4 Parliamentary Committees have noted that the IGT office should ‘impose new rigour, new standards, [and] continuous improvement’ on the ATO whilst also providing a degree of scrutiny and oversight to assure Parliament and the public that ATO actions and decisions are properly made and justifiable.^[80]JCPAA, Parliament of Australia, 9 November 2006, p 22.

3.5 The establishment of the IGT office has received strong Parliamentary support over the years as well as receiving recognition for the value it adds to the system. For example, both Coalition and Labor Governments have directed the IGT to undertake particular reviews

^[81]For example: Inspector-General of Taxation, Review into the ATO’s Change Program (2011); Above n 45.

as, under the IGT Act 2003, the Minister may request or direct the IGT to undertake a systemic review on particular areas or issues. Requests may also be made by the Commissioner, the TPB, by resolution of either or both Houses of Parliament or by resolution of a Committee of either or both Houses of Parliament.

^[82]Inspector-General of Taxation Act 2003, sub-s 8(3).

Indeed, Commissioners

^[83]Examples of such reviews include: IGT, Review into the ATO’s use of early and alternative dispute resolution (2012) and IGT, Review of aspects of the Australian Taxation … Continue reading

 and the relevant Parliamentary Committees have done so.^[84]Above n 45.

3.6 The Rudd Government initially considered options to amalgamate the IGT office with other agencies. However, following consultation with stakeholders, it ultimately decided to maintain the office as a separate agency. The then Assistant Treasurer, the Hon Chris Bowen MP, stated:

The Inspector-General of Taxation plays an important role in ensuring high standards of tax administration for Australian taxpayers. The best way to ensure the Inspector-general’s work is not hampered in any way is to retain the Inspector-General’s status as a separate stand alone body.^[85]Chris Bowen MP, ‘Inspector-General of Taxation to be retained as a stand alone office’ (Media Release 22, 9 April 2008).

3.7 When the current Government was in opposition, the then Shadow Treasurer, the Hon Joe Hockey MP, reaffirmed the confidence that the Government had in the IGT office, noting:

I am referring to the Board of Taxation and the Inspector-General of Taxation.

Each institution commands wide respect for the work they perform and independent advice given to government.

…

The Henry Review also recorded the Inspector-General of Taxation’s great work despite limited resources of an annual budget of only $2.2 million a year and a staff of only seven.

The professional bodies, including the Institute, voiced their concerns, arguing that the Inspector-General’s independence should not be compromised.

These two institutions have proved to be a counter-weight to what can be an inwardly focused, Canberra centric view of the world.^[86]Joe Hockey MP, ‘Address to the Institute of Chartered Accountants’ (23 November 2012).

3.8 In addition to the public expressions of support, the current Government’s ongoing confidence in the IGT is reflected in its 2014 Federal Budget where it announced its decision to transfer the tax complaints handling function from the Commonwealth Ombudsman to the IGT

^[87]Australian Government, Budget 2014-15 Budget Paper No 2 (13 May 2014) p 217.

to enhance ‘the systematic review role of the Inspector-General of Taxation and provide taxpayers with more specialised and focused complaint handling for tax matters.'^[88]Above n 87. The Budget announcement further expanded the IGT’s scrutineering function to include the TPB.

3.9 Accordingly, the IGT Act 2003 was amended to provide the IGT with the same powers of investigation and reporting as the Ombudsman by incorporating those provisions from the Ombudsman Act 1976. As a result, the IGT now operates as a specialist Ombudsman with respect to the ATO and TPB. This Government decision took effect from 1 May 2015 and empowered the IGT to assist taxpayers and tax professionals resolve their issues with the ATO and TPB. As the then Assistant Treasurer stated:

…the transfer would concentrate scarce tax expertise in a single agency, enabling more efficient use of that expertise and improved customer focus. The change will also simplify the scrutiny landscape.

^[89]Commonwealth, Parliamentary Debates, House of Representatives, 25 February 2015, p 1253 (Josh Frydenberg MP)

3.10 The transfer of the function was also supported by other members of Parliament who noted the widely-held support for the IGT office,^[90]Ibid, pp 1237-1238 (Scott Buchholz MP). the efficiency benefits of the consolidation

^[91]Commonwealth, Parliamentary Debates, House of Representatives, 4 December 2014, pp 14246-14247 (Steven Ciobo MP); Commonwealth, Parliamentary Debates, Senate, 3 March 2015, p 1025 (Senator … Continue reading

and who characterised the transfer as an ‘important step forward’.^[92]Above n 89, p 1244 (Tony Smith MP). As noted by one member of Parliament in his speech on the issue:

The role of external scrutiny is to provide independent assurance that ATO services are well managed and fit for purpose and that public money is being used properly. The current external scrutiny systems for the Australian Taxation Office include the Commonwealth Ombudsman, the Inspector-General of Taxation, the Auditor-General, the Board of Taxation, the Administrative Appeals Tribunal, the courts and the parliament. So in no way is this a dilution of anyone’s right to make a complaint; there are many vehicles for that. This is just about trying to streamline the complaints department so that customers of the Australian Taxation Office are able to get quicker and accurate resolution of their issues. The transfer of tax complaints to the Inspector-General of Taxation will also enable earlier flagging of emerging issues that require more general review, and this ensures better customer outcomes for both individual complaints and the government.^[93]Ibid, pp 1237-1238 (Scott Buchholz MP).

3.11 This decision was also well received by stakeholders. The IGT had publicly advocated the creation of a single port-of-call for concerns with tax administration matters for some time to improve outcomes for taxpayers and the system more generally. As the IGT said at a recent hearing before the Committee:

We work hard with the ATO and the Tax Practitioners Board to ensure tax complaints are resolved promptly, such that extended time frames only occur in more complex cases. We are committed to a process of continual improvement for the taxpayer and tax practitioner experience, whilst at the same time aiming to provide efficiencies for the ATO and the Tax Practitioners Board. We are pleased to report that the IGT has continued to receive substantial positive feedback from complainants. We are facilitating greater real-time interaction for people who are experiencing difficulties with the administration of the tax and superannuation systems. While there is a broad range of complaint issues, the main issues relate to ATO’s debt collection, lodgement, processing and audits.^[94]Evidence to the House of Representatives Standing Committee on Tax and Revenue, Parliament of Australia, 24 February 2016 p 2 (Ali Noroozi, Inspector-General of Taxation).

3.12 The IGT’s comments are elaborated further below together with further details of functions and benefits arising from the IGT’s single complaints handling and broader review work.

3.2 Single taxpayer complaints

3.13 The transfer of the complaints handling function to the IGT in 2015 has enhanced the agency’s overall tax scrutineering capability and facilitated a more co-ordinated approach, minimising duplication and overall costs. The benefits of consolidating the complaints handling and systemic review functions within the IGT may be summarised as follows:

• reduction of overlap between the scrutineer agencies and realising economies of scale and scope in centralising the separate scrutineer function;
• greater synergistic benefits for the ATO in only having a single tax administration scrutineer agency;
• minimised scrutineer resource allocation concerns as only the ATO is being scrutinised and not a broad range of Government entities;
• a single port-of-call for considering taxpayers’ administration issues and simplifying and improving access;
• a more holistic understanding of taxpayer issues arising in relation to their dealings with the tax system;
• a specialist technical skills base, attracting specialist staff more effectively from a career perspective;
• better understanding of the subject matter and the tax environment;
• stronger trust with internal and external stakeholders through effective and reciprocated consultation; and
• prompt systemic issues identification that emerges from handling a significant number of similar complaints.

3.2.1 Improvements in IGT/ATO complaints handling process

3.14 The transfer of the complaints handling function afforded both the IGT and the ATO an opportunity to consider and redesign a complaints handling process which minimised costs for both agencies as well as for taxpayers and their representatives.

3.15 The redesigned complaints process improved both the interaction between the ATO and the IGT, as well as provided a singular channel of access for taxpayers and their representatives to reduce cost and minimise duplication. The key features of the process giving rise to these improvements are briefly set out below.

3.16 Firstly, the IGT aims to provide a high degree of assurance that complaints have been received and will be managed by the relevant officer. This is done through acknowledging all complaints received within a 24 to 48 hour window

^[95]IGT, ‘Frequently asked questions‘.

 and providing direct telephone contact details of the officer managing the case. Moreover, messages left on the IGT complaints voicemail are returned on the next business day with IGT officers assisting taxpayers to take the details of their complaints and, again, providing direct contact details so that taxpayers are able to follow up on enquiries being managed by the IGT.

3.17 Secondly, all complaints received by the IGT are captured together with any supporting documentation, synthesised and analysed for resolution. This minimises the resource impacts on the ATO whilst also reducing the need for the taxpayer to provide the same material multiple times particularly where the taxpayer re-approaches the IGT.

3.18 Thirdly, the taxpayer or tax practitioner is provided with an option to have the matter addressed directly by the ATO where the complainants have not availed themselves of the ATO’s own complaints resolution processes. If this option is undertaken, the complaint is referred to the ATO Complaint section in form of a Complaint Investigation Notice (CIN) from the IGT. Such complainants are informed that if they remain unsatisfied with the ATO’s handling of their matter, they can re-approach the IGT.

3.19 Fourthly, the IGT formally tracks all complaints including those which are referred to the ATO. This provides independent assurance to taxpayers and tax practitioners that their matters have been registered and will be dealt with by an identifiable officer who is accountable for the management of their complaint.

3.20 Fifthly, pursuant to the amended IGT Act 2003, the IGT is empowered to ask taxpayers to provide their Tax File Numbers (TFN) when lodging complaints,

^[96]Inspector-General of Taxation Act 2003, s 37B.

 which was not previously available to the Ombudsman. The ability to request and provide TFNs enhances the ability of the ATO to quickly identify taxpayers on their systems to correctly pinpoint issues and identify options to resolve the matter.

3.21 Sixthly, as the IGT Complaints and Review team is composed of tax specialist staff, we are able to engage meaningfully with taxpayers and ATO officers to identify the key issues for attention and highlight opportunities for resolution. This also manifests itself through the IGT areas of focus on the CIN which sets out the key questions and, at the outset, issues needing to be addressed by the ATO. The latter has helped the IGT and the ATO to focus discussions, minimise the work needing to be undertaken by ATO officers and ensuring that issues critical to the resolution of the matter from the taxpayer’s perspective are addressed.

3.22 Seventhly, the IGT and the ATO instituted ‘Early Assessment Meetings’ or ‘EAMs’ which are 15 minute discussions held within three to five business days after an investigation notice has been referred to the ATO. The purpose of the EAM is to narrow the areas of focus in the CIN, provide an opportunity for the ATO to surface additional facts or issues from their own review of the matter and to agree on actions to be taken, by whom and the relevant timeframes. The EAM seeks to ensure that only necessary inquiry and investigation aimed at resolving the matter are undertaken to minimise unnecessary actions, duplication of work and related costs for the ATO. Such a process has significantly reduced the average timeframes for complaints cases with approximately 85 per cent of matters being resolved or finalised within 15 business days.

3.23 Eighthly, through ongoing discussions between the IGT and the ATO, common areas of complaints are identified. Examples of such areas include delays in issuing Australian Business Numbers or delayed refund issues. These areas of complaint are generally capable of streamlined resolution processes. In such cases, the IGT and the ATO have developed pre-agreed processes against which these matters are handled effectively and efficiently and it is only in exceptional cases that the IGT has had to intervene further.

3.24 Ninthly, in more complex cases, the IGT engages directly with ATO senior management to provide ‘early warning’ of emerging risks and opportunity to address cases with sensitive issues through an escalation process that seeks to promptly explore options for resolution.

3.25 Finally, the IGT and the ATO continue to engage on a weekly basis in discussions and feedback on how each agency can improve their side of the process to deliver optimal outcomes to the community while minimising costs. The discussions have served as informal opportunities for continuous improvement, increased efficiencies and more effective outcomes for taxpayers and tax practitioners.

3.2.2 Impact and outcomes of IGT complaints handling function

3.26 At its core, the IGT complaints handling function acts as an intermediary to promote procedural fairness, transparency and accountability by assisting taxpayers to direct their enquiries or challenges, at first instance, to the most appropriate areas of the ATO. In doing so, the IGT is not exercising decision making power of the kind conferred on the Commissioner but, rather, the IGT is facilitating discussions between taxpayers who have issues or complaints and the most appropriate officers within the ATO to address or resolve the matters.

3.27 The IGT is an advocate for the fair administration of the tax and superannuation system.^[97]It should be noted that the IGT does not resolve substantive tax matters nor does the IGT represent taxpayers in respect of audits, objections or any subsequent litigation action. Importantly, the IGT’s role in maintaining confidence in the administrative processes is most valuable when taxpayers raise concerns that the ATO has acted unfairly in pre-assessment or prior to formal litigation action being taken. In this respect, the IGT engages closely with the complainant and the ATO to ensure that the taxpayers and the ATO’s rights on substantive issues, which are more properly the ambit of the courts, are respected.

3.28 The feedback received directly from taxpayers and tax practitioners indicates that often, the IGT, as an independent third party, delivers a high degree of comfort that their matters were appropriately considered and actioned where they may have otherwise been delayed or remain unresolved in some cases. Examples of such feedback are set out below:

• Thank you very much, ATO said there was nothing that they could do but she gave them a push. Thank you very much again for your help.
• Your willingness to listen and your advice and professionalism was very much appreciated at the time. We are now confident that our complaint will at least proceed to the next level and have a chance to be addressed by the relevant body.
• The original complaint, made at a time when our client had no access to an interpreter, had as its subject the refusal of the ATO to engage … and in particular to have the Commissioner participate in in-house facilitation. IGT’s involvement brought the facilitation about.
• I am very grateful for the way you helped me and the instant action that followed.
• I congratulate your office on its procedures and approach, and thank you for your involvement, which unfortunately was necessary to resolve what was though really a minor issue for ATO, would have required me to ignore its assessment, and I did not want to do that.
• I cannot thank you enough for your time and effort. I have been contacted by the ATO, and the issue has been resolved… I am so very pleased that I have found favour in the eyes of the ATO and that is all thanks to you.
• I would like to offer my sincere thanks and appreciation for the customer service offered by [IGT officer] whom handled the above complaint. [IGT officer] was an extremely friendly, concerned, caring and professional operator who upheld the high standards of customer service. Her responses were accurate, articulate and extremely rapid. I believe [IGT officer] should be congratulated on her outstanding commitment to the Inspector Generals Taxation Department [sic] and her customers. [IGT officer is the type of operator you would wish to encounter in all government offices and her operating procedure should be exemplary practice to all.
• Thank you for being so generous with your time to go through in full detail all the issues you are following through on my behalf and evidently on behalf of other concerned professionals. Your attention to detail is brilliant and I thank you. You are making a real different and it is great and assuring to have such a dedicated individual in such an important and influential job!

3.29 The feedback above, which is a reflective sample of those received by way of return email or correspondence, highlights the important role of the IGT in assisting taxpayers and tax practitioners to navigate through the ATO which, for many taxpayers, may seem like a daunting and fruitless task given the size and impersonal interactions.

3.30 Similar feedback was recently provided to the Committee with a key stakeholder noting that generally better outcomes have been produced as a result of a fresh set of eyes looking at the dispute.^[98]Evidence to the House of Representatives Standing Committee on Tax and Revenue, 10 February 2016, pp 13-14. Similarly, the Committee through one of its members has also related an instance in which his constituent was positively assisted by the IGT:

It was a GST return, a figure of around $230,000. The case was settled 12 months ago but he spent 14 months dealing with just about every ATO office in every capital city in Australia, dealing with different people over that period of time. He presented all the evidence to me. I asked Mr Noroozi to comment on this as well. I contacted Mr Noroozi’s department and within 12 days his cheque—the GST that was owed to him—was returned to him.

…

I would like to comment in regards to why would Mr Noroozi’s department take 12 days to get the cheque when as an individual he could not get it done in 14 months?^[99]Ibid, p 8.

3.31 The IGT’s role in assisting taxpayers and tax practitioners in this way is particularly important as Australia does not have a taxpayer advocate service like the US and there is limited opportunity for free independent advice or assistance in engaging with the ATO on disputes or other complaints.

3.32 This IGT function is critical for Australia’s most vulnerable taxpayers who may require assistance with simple matters but have trouble, for a range of reasons, accessing the services delivered by the ATO.

3.33 In some long-running dispute cases between taxpayers and the ATO (many of which had arisen a number of years before the complaints handling function was transferred to the IGT), the IGT has been able to engage with both the taxpayer and the ATO to identify opportunities to bring those matters to finality. In such matters, the IGT has persuaded both parties to accept a number of different approaches including the use of external mediators.

3.34 In addition to the above, a significant part of the IGT’s handling of single taxpayer complaints relates to providing independent assurance to taxpayers and their representatives that the ATO has undertaken appropriate action, even in instances where the ATO is bound by strict secrecy and confidentiality requirements not to disclose any information. Such instances include where taxpayers complain that they were not given any information despite having approached the ATO regarding possible instances of potential fraud and evasion perpetrated by other taxpayers or employers not paying their employees’ superannuation.

3.35 In such cases, the IGT assists the ATO by providing an independent third party assurance to the taxpayer that whilst the ATO is unable to disclose the specific details of its actions, it has nonetheless received the taxpayer’s complaint and properly actioned it in accordance with existing policies and procedures. In the majority of instances, such assurance is sufficient for the taxpayer who is then able to appreciate the limitations of the ATO’s ability to disclose further information.

3.36 Similarly, through the IGT’s complaints referrals, the ATO Complaints section has identified certain work processes which could be improved through better contact and communication to manage expectations. For example, where a taxpayer raises complaints regarding human resources, those complaints are forwarded by the ATO Complaints to the ATO People section, without notification to the taxpayer. This transfer process and the absence of contact by either section of the ATO led to a complaint being lodged with the IGT. Through discussions with the IGT, the ATO agreed to update its processes to ensure that where transfers are made between different areas of the ATO, appropriate notification is given so that taxpayers were able to follow up their enquiries.

3.37 Finally, in some instances, the role of the IGT has involved keeping taxpayers well-informed and managing their expectations when the ATO is experiencing difficulties as well as assisting both parties where possible. For example, in 2015 the ATO implemented a new complaints re-routing system which was designed to ensure that complaints were directed to those officers who were best placed to manage them. However, a number of teething issues resulted in cases being incorrectly diverted which caused delays in response times to taxpayers. In managing taxpayer complaints on these matters, the IGT kept the relevant taxpayers well-informed and provided the ATO with early notice for remedial action to be taken so that those taxpayers did not escalate matters further.

3.38 The IGT complaints handing role has become even more critical due to the increase in the number of complaints received by the IGT when compared to those that were received by the Ombudsman in prior years. We also understand that with respect to complaints made directly to the ATO, the number that it has received in the 2015-16 financial year to date has been significantly higher than for the same periods in the 2013-14 and 2014-15 financial years.

3.3 Broader reviews

3.39 From its inception, the IGT has conducted reviews into broader or systemic tax administration issues covering a wide range of topics that are relevant to all taxpayers from the very large businesses to micro businesses and individuals, as well as tax practitioners. Through extensive consultation with stakeholders, research and analysis, these reviews have significantly shaped the tax administration landscape for the benefit of all Australians.

3.40 Over the last thirteen years, since its inception, the IGT has completed 42 reviews with two others currently in progress, namely, the review into the ATO’s employer obligations compliance activities and the review into the Taxpayers’ Charter and taxpayer protections.

3.3.1 Impact and improvements of IGT systemic reviews

3.41 Many of the recent positive changes to the administration of the tax system in Australia have their genesis in IGT reviews as well as other related IGT activities.

^[100]IGT, Tax Forum – next steps for Australia — A submission to the Tax Forum (2011).

They have, collectively, generated a significant number of improvements within the ATO to enhance transparency, fairness and certainty for taxpayers

^[101]See for example: IGT, Annual Report 2011-12 (2012) pp 7-8; IGT, Annual Report 2006-07 (2007) pp 6-7.

 and delivered practical benefits and cost savings for both the ATO and taxpayers.

3.42 It is useful to consider select examples of IGT reviews and the benefits that they have delivered in relation to a wide range of situations.

3.43 The IGT’s review into the ATO’s use of early and alternative dispute resolution (ADR Review), which was undertaken at the request of the former Commissioner, examined the ATO’s approach to resolving disputes throughout its compliance process. The report made a number of significant recommendations which were later adopted and implemented across the ATO. One such recommendation was making available an in-house facilitation process to resolve smaller, less complex disputes.

^[102]IGT, Review into the Australian Taxation Office’s use of early and alternative dispute resolution (2012) p 44.

The ATO’s Annual Report has stated that in 2014-15, 53 such facilitations were reported which, in conjunction with other ADR activities, led to participants providing feedback of ‘considerable savings of time and money.'^[103]Above n 10, p 61. The current Commissioner has also publicly acknowledged the value of this review:

Last year we asked the Inspector General of Taxation to look at our approach to alternative and early dispute resolution. He made a number of recommendations, many of which we have included in our first Dispute Management Plan. The ATO was the first Commonwealth agency to release a Dispute Management Plan, which along with our supporting Disputes Policy is our guide to early and better dispute resolution. This shift recognises the benefits and commits us to actively pursue timely, cost effective dispute resolution.

One of the recommendations by the Inspector General, which I believe will be of particular interest to Tax Institute members, was for the ATO to pilot the use of specially trained ATO facilitation officers to conduct and process smaller, less complex disputes.^[104]Above n 72.

3.44 The IGT’s Management of Tax Disputes review,

^[105]The review was conducted to assist the Committee in its Inquiry into Tax Disputes.

which was conducted at the request of the Committee, identified a range of concerns but focused on the governance arrangements within the ATO and made a single integrated recommendation to ensure that disputes were more independently considered and addressed. The recommendation was designed to deliver the highest degree of independence whilst ensuring that the dispute or appeal function remained within the ATO.^[106]Above n 45, p 120. This review as well as the aforementioned ADR review provided a catalyst for the ATO to undertake its own internal changes by moving the objections from the compliance group to the law group as a means of providing greater transparency and independence of decision making.

3.45 The IGT’s Review into the Change Program was conducted at the direction of the then Assistant Treasurer to address the community’s concerns.^[107]Above n 81. The key impact or focus of this review was to inform the public about events that had adversely affected them. The Change Program was an enterprise-wide upgrading of the ATO’s Information and Communication Technology platform whose troubled implementation history gave rise to increased costs and significant delays for both taxpayers and the ATO. The review acted as a ‘safety valve’ which diffused much of the tension and disquiet within the tax practitioner community, as well as affected taxpayers, by clearly and transparently presenting the facts and issues which had given rise to the concerns and dissatisfactions. Moreover, the ATO’s commitment to address those concerns through agreement with the IGT’s recommendations further re-assured the community. The report also assisted the Government by providing necessary third party assurance of the ATO’s intended processes moving forward to minimise further adverse impact on taxpayers.

3.46 The IGT review into the ATO’s management of transfer pricing matters explored another topical issue which continues to be of concern to the community. The review was undertaken at a time when the global community expressed concern with the erosion of sovereign revenues and revenue authorities’ ability to address the potential for large corporations to avoid their tax obligations by shifting profits offshore, including through intra-group trading known as ‘transfer pricing’. The review examined the ATO’s management of transfer pricing matters and made a suite of recommendations aimed at developing sufficient organisational capability to address the risks and give priority to measures posing the highest risks to protect Australia’s tax revenue.

3.47 Recommendations were also made to improve the ATO’s project management of compliance activities to reduce costs for both the taxpayers and the ATO. The work that the ATO had already undertaken in this area was also acknowledged and set out in detail in the IGT’s resulting review report, providing assurance to the Government and the community that the ATO was aware of the improvement opportunities and work was being undertaken to address the risks.

3.48 In addition to delivering improvements to the taxpayer and the ATO as well as providing assurance to the Government and the public with respect to the administration of the tax system, IGT reports may be directly beneficial to the ATO in terms of resourcing and cost savings. Some of these areas have been indicated above, including the implementation of in-house facilitation following the ADR Review. A similar initiative was implemented in the form of the ‘Independent Review’ process for large businesses which followed a recommendation in the IGT’s large business review.^[108]Above n 33, p 149. The current Commissioner has positively acknowledged the IGT’s recommendation in this regard.^[109]Above n 72.

3.49 Similarly cost savings were derived by the ATO as a result of the IGT’s review into the ATO’s use of benchmarking to target the cash economy.

^[110]IGT, Review into the Australian Taxation Office’s use of benchmarking to target the cash economy (2012).

 In that review, stakeholders had raised concerns that the ATO’s use of industry benchmarks to identify small business taxpayers for compliance activity had yielded low strike rates with unnecessary high costs imposed on both the taxpayer and the ATO.

3.50 Following the implementation of the IGT recommendations from that review, the ATO reported that the strike rates of compliance activities based on benchmarking had increased from 24 per cent to 50 per cent,^[111]ATO, ‘Commissioner and Minister Senate estimates briefing — October 2012 Cash Economy — Benchmarking, data matching and e-marketing’ (CCH Parliament, Political Alert, 23 January 2013) … Continue reading effectively doubling the outcomes of more than 400 ‘full-time equivalent’ staff that the ATO had allocated to benchmarking compliance work.^[112]ATO communication to the IGT. The significant increase in strike rates indicated that fewer taxpayers were being incorrectly targeted, thereby reducing their compliance costs as well. For the ATO, the recommendations enabled it to better apply its resources to those taxpayers with a higher risk of non-compliance, thereby increasing the chances of tax recovery whilst reducing the ATO’s administrative costs.

3.51 The IGT’s reviews have also effected significant changes in relation to individual taxpayers and small business. One such example is the IGT’s review into the ATO’s administration of the superannuation excess contributions tax.

^[113]IGT, Review into the Australian Taxation Office’s compliance approach to individual taxpayers – superannuation excess contributions tax (2014).

 Individual taxpayers considered the tax to be unfair and, in effect, a very harsh penalty. Much of that perception of unfairness was directed at the ATO who was bound by strict legislation to apply the high rates of tax on those contributions and unable to exercise sufficient discretion to address the dissatisfaction of a large number of taxpayers. This led to ongoing complaints with the ATO, the Commonwealth Ombudsman and members of Parliament, as well as disquiet in the media and superannuation and tax industry publications.

3.52 The IGT highlighted that the short-comings and harsh impact on individual taxpayers was due to the legislation itself rather than the administration of it and recommended a law change. The Government accepted the IGT’s recommendation and amended the legislation to provide taxpayers with an option to withdraw excess contributions without incurring the tax.^[114]Senator the Hon Matthias Cormann, ‘Superannuation excess contributions tax’ (Media Release, 13 May 2014). The measure was seen to be fairer and more reasonable

^[115]Trish Power, ‘Excess contributions: Happy ending to a super horror story’ Superguide (3 February 2016) <www.superguide.com.au>.

 and, anecdotally, has resulted in fewer complaints being raised in this regard.

3.53 The IGT’s systemic reviews have also assisted the ATO to identify structural and capability issues which may prevent it from meeting its administrative obligations in the future.

3.54 For example, in the review of the ATO’s compliance approach to small-to-medium enterprises (SME) and high wealth individuals (HWI), the IGT highlighted inadequate technical capability and support for ATO officers to deal with the often highly complex nature of compliance work in relation to larger SMEs and HWIs.

^[116]IGT, 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 (2012) pp 1-2.

 As a result of that report, ‘the ATO [gave] significant attention to structures that should support the development and maintenance of staff capability’ within those areas.

^[117]IGT, Annual Report 2011-12 (2012) p 7.

3.55 Overall, as the above examples demonstrate, IGT reviews have collectively delivered significant improvements and reshaped the Australian tax landscape. They have also operated as a safety valve for the administration of the system, enabling the community’s concerns to be ventilated, discussed, analysed and where necessary remedial action has been recommended which in the vast majority of cases has been implemented. This process has fostered increase confidence in the system and no doubt enhanced voluntary compliance.

3.3.2 Conduct of broader reviews

3.56 The conduct of broader reviews continues to be important for the IGT. With the recent changes to the IGT Act 2003 and the specialist ombudsman role of the IGT, the goal going forward is to gain real-time insight into emerging issues and moving quickly to address problems before they escalate into major system failures or causes of taxpayer discontent. This may mean that in future, more targeted reviews are undertaken in an expedited manner to address particular areas where significant complaints have been received.

3.57 Previously, the IGT consulted widely with all stakeholders including the Government and its agencies, particularly the ATO, as well as taxpayers, tax professionals and their representative bodies to identify the issues of most concern to the tax system. As part of this process, the IGT also consulted with the ANAO and the Ombudsman to ensure that there was no overlap in the work program of these agencies as far as the ATO was concerned. Where another agency announces or considers a review that may have a degree of overlap with a proposed IGT review, that review may be deferred to take advantage of other agency outputs or insights and maximise resource efficiencies.

3.58 The IGT has periodically refreshed or set a new work program to ensure it remained focussed on the community’s main concerns as well as those high-risk operational or strategic issues to ensure that the value of any IGT review is maximised. It should be noted that the IGT has not necessarily undertaken full-scale reviews of all topics that are brought to his attention. Due to the need to manage resources, focus was given to those issues the reviews of which were likely to generate the highest degrees of benefit to the Australian community as a whole.

3.59 The identification of potential issues, even where they do not lead to a particular review being conducted, has on occasions led the ATO to undertake action of its own volition to address the matter. For example, as early as 2005, the IGT identified concerns with the ATO’s tax technical decision making and providing taxpayer access to experts. Similar concerns were identified in subsequent reviews though not specifically examined. However, in line with these concerns ‘the ATO embarked on a number of initiatives to deliver more effective and efficient use of tax technical resources through earlier engagement of tax technical expertise.'^[118]Above n 117, p 8.

3.60 Notwithstanding the recent changes to the IGT Act 2003 and the specialist Ombudsman role of the IGT, the IGT will continue to consult widely with the community to identify issues of concerns. However, the subjects of his broader reviews are likely to be increasingly guided by the complaints handling function.

3.61 In conducting broader reviews, the IGT engages with the community again by inviting submission and consulting with taxpayers, tax professionals and their representative bodies. Input from these stakeholders has continually increased as they become aware of the confidential nature of their dealing with the IGT as well as the fact that their issues are being heard and actioned through collaborative and robust engagement with the ATO.

3.62 Following the receipt of submissions, issues are distilled and communicated to the ATO. Relevant pre-existing information is requested from the ATO, followed by an initial workshop with relevant ATO officers to further narrow the issues of enquiry and pinpoint additional relevant documentary evidence. Such a process also gives ATO officers an opportunity to better understand the concerns that stakeholders have raised with the IGT with minimal resourcing impact.

3.63 Reviews are conducted in a manner which minimises the risk of surprise and unnecessary workloads for the IGT and ATO. There is significant reliance on ATO officers having a sound knowledge of relevant ATO policies, processes and practices and proactively raising relevant information which narrows issues under review. To minimise unnecessary work for both the IGT and ATO, ATO officers are asked to discuss with IGT staff all information requests before time and effort is directed at preparing responses. This ensures a common understanding of the expectations and provides opportunities to explore alternative material that advances inquiries where it would be able to be more quickly provided.

3.64 Views and evidence are shared with the ATO and other interested parties to reach a mutual understanding of issues which serves to better inform practical and evidence based outcomes. ATO officers involved in the review are encouraged to provide their perspectives, particularly where they may have reason to provide alternative views, ideas or opportunities for improvement. By taking this overall approach and encouraging a two-way dialogue with the ATO, the IGT seeks to ensure that recommendations for improvement are tested and transparently address valid concerns.

3.65 The IGT review reports themselves generally sets out how the ATO currently handles the issues in question and highlights the relevant stakeholder concerns. There are also comparisons made with the work and practices of revenue authorities in other jurisdictions as well as further independent research drawing on submissions made to the review. Relevant ATO policies, procedures and practices are also set out as well as any competing views on the issues.

3.66 The report sets out the IGT’s observations on the concerns raised as well as practical options for improvement. This is followed by recommendations for improvement made to the ATO or, on occasion, to the Government, depending on whether the recommended changes are within the scope of the ATO’s power or legislative change is required. In this respect, the IGT maintains an active working relationship with the Treasury as well as the ATO on tax administration and related policy issues. Protocols are in place to guide interactions between the three agencies.

^[119]Protocol between the IGT and the ATO; Protocol between the IGT and Treasury <www.igt.gov.au>.

3.67 As noted above, whilst the IGT may express views and findings as part of the review process as well as make recommendations for improvement, his role has always been purely advisory. The IGT does not have the power to compel the Commissioner to accept any recommendations or implement any changes with which he disagrees.

3.68 Moreover, even where the Commissioner agrees with the IGT recommendations, he retains autonomy over how they should be implemented. The IGT considers that this is entirely appropriate as the ATO is in the best position to implement the recommendations most efficiently as part of the broader deployment of its resources. However, in many instances, the ATO will seek the IGT’s input on proposed implementation plans to assure itself and its audit committee that the intent of the recommendation has been addressed.

3.69 As IGT reports must be made public, the recommendations have to withstand public scrutiny as would the corresponding ATO responses. The risk of adverse public opinion on the scrutineer can be much more severe than on the entity being scrutinised.

3.70 It is noteworthy that the vast majority of the IGT’s recommendations to the ATO have been accepted and implemented. Even where recommendations are not initially accepted, experience has shown that they may be subsequently taken on board and implemented.^[120]See for example: Above n 45, pp 118 and 119.

4. Removing inefficiency, duplication and costs

4.1 The IGT supports the removal of inefficiency and duplication in any administrative process. It is a key consideration in all IGT reviews and other work of the IGT office.

4.2 In discharging his statutory function, the IGT is required to ensure that budget funding is appropriately applied and costs are minimised in a manner that delivers maximum benefit for the Government and the Australian community. This requirement is set out in the Public Governance, Performance and Accountability Act 2013 (PGPA Act 2013).

^[121]Public Governance, Performance and Accountability Act 2013, s 15.

4.3 The Government’s policy decision to transfer the tax complaints handling function, discussed earlier, has increased efficiency and streamlined the work of the agencies who oversee the ATO’s approach to tax administration.

4.4 The Australian Governmental scrutiny arrangement has a strong foundation and is designed to ensure there are no gaps and minimal overlaps. The oversight and scrutiny of the ATO is consistent with this approach with each of the agencies, the ANAO, Ombudsman and IGT, performing different functions and providing assurance to Parliament and the Australian community on different aspects of the ATO’s operations. The risks associated with gaps and overlaps can be very significant and very different. These risk issues are discussed further in Part 5.

4.5 The Commissioner has and continues to refer to external scrutiny, a key component of robust governance arrangements, as ‘red tape’ to fit into a narrower debate.^[122]Commissioner of Taxation, ‘Deregulation – balancing our service delivery and regulatory roles in a real time environment’ Speech delivered to Council of Small Business of Australia 12th … Continue reading It is worthwhile noting that Commissioner’s audit requests and other actions and decisions, as they impact on taxpayers, are often characterised as ‘red tape’ but that does not take away from their need or importance.

^[123]See for example: Andrew Sadauskas, ‘Uber hits out at red tape nightmare as ATO rules Uber drivers are small business owners and have to charge GST’, SmartCompany (20 May 2015).

 Appropriate levels of governance and external scrutiny, exist throughout the Government and the public sector to act as a safety valve, minimise the risk of major system failures and provide transparency and accountability.

4.6 The IGT believes that a major policy change to reduce or remove external scrutineer functions needs to be considered at a whole-of-government level if at all. This is necessary as the current scrutineering arrangements for the vast majority of public service agencies have the same foundation across all of Government.

4.7 The primary scrutineers for public service agencies are the ANAO and the Ombudsman. Similarly, the ATO’s primary scrutineers are the ANAO and the IGT which effectively performs a specialist Ombudsman role with the recent legislative changes. Therefore any reduction in the level or scope of oversight these scrutineers have in relation to the ATO would need to be carefully considered as it would be inconsistent with the level of oversight or scrutiny to which other public service agencies are subjected.

4.8 It should also be noted that comparable private sector organisations that handle significant funds and employ considerable numbers of personnel also have a broad range of governance and external oversight. This will be discussed in more detail in the next part of this submission.

4.1 Consultation to avoid duplication

4.9 The IGT maintains strong consultative arrangements with the Ombudsman and the ANAO. This relationship was built upon a legislative requirement for the IGT to consult with both the Ombudsman and the ANAO in the development of his work program.

^[124]Inspector-General of Taxation Act 2003, sub-s 9(2) [Repealed].

 For example, the IGT’s consultations with both the ANAO and the Ombudsman in the development of his 2011-12 work program avoided potential duplication as set out below:

A major area of concern raised with the IGT was Project Wickenby (which involves a number of member agencies). The IGT consulted with the Australian National Audit Office (ANAO) and the Commonwealth Ombudsman on this matter. The ANAO recently announced a cross agency review into Project Wickenby, the objectives of which are available on the ANAO website. The Ombudsman is also considering a cross agency review into Project Wickenby.

The ANAO and the Ombudsman have much broader jurisdiction to investigate matters across various agencies, whilst the IGT is limited to those relating to the ATO. Accordingly, these agencies are better placed to conduct a review of this kind. The IGT will await the results of the ANAO review as well as a decision from the Ombudsman before considering whether the IGT should also conduct a review into the area. Should the Ombudsman conduct a review into Project Wickenby, the IGT would be pleased to provide appropriate assistance as required.

^[125]IGT, Review into the Australian Taxation Office’s use of early and alternative dispute resolution (2012); IGT, ‘New IGT Work Program for 2011-2012’ (2011).

4.10 Those consultation arrangements were further enhanced following a recommendation of the JCPAA that:

…the external review agencies investigate and report on opportunities for more strategic planning and improved information sharing as they undertake their reviews to avoid duplication of their efforts and the Australian Taxation Office’s resources.

^[126]JCPAA, Report 426 Ninth Biannual Hearing with the Commissioner of Taxation (2011) p 32.

4.11 In line with the JCPAA’s recommendation, the IGT, the Ombudsman and the ANAO signed an agreement ‘to meet collectively as part of their annual planning processes to share information and consider more broadly the overall ATO review activity’.

^[127]IGT, Commonwealth Ombudsman and ANAO, Executive Minute on Joint Committee of Public Accounts and Audit Report 426 Ninth Biannual Hearing with the Commissioner of Taxation (30 May 2012).

4.12 The three agencies continue to maintain a close ongoing working relationship to maximise efficiencies and benefit from each other’s work and experience. In this respect, the three agencies have reflected on the changes in the IGT Act 2003 and the Ombudsman Act 1976 and have recently recommitted to collaborating to minimise any potential overlap.

4.13 It should be noted that, the IGT also works closely with the Ombudsman to ensure that complaints about the ATO are received, transferred and actioned seamlessly.

4.14 In addition to the above, the IGT also consults with the Treasury and the ATO on proposed areas for review. For example, as a result of such consultations, the IGT has previously taken on board suggestions by the ATO to review certain areas of concern, as was the case with the IGT review into Private Binding Rulings

^[128]IGT, Review of aspects of the Australian Taxation Office’s administration of private binding rulings (2010).

as well as the ADR Review mentioned earlier, or not conduct a review where the ATO had advised that it was undertaking its own internal review and improvements.

^[129]See for example: IGT, ‘New IGT Work Program for 2011-2012‘ (4 April 2011).

Similarly, the IGT has also conducted reviews based partly or wholly on suggestions from the Treasury. Such examples include the IGT reviews into improvements to the self-assessment system and the ATO’s management of transfer pricing matters discussed earlier.

^[130]IGT, Review into Improving the Self Assessment System (2013); IGT, Review into the Australian Taxation Office’s management of transfer pricing matters (2014).

 The latter assisted Treasury in providing advice to the Government and resulted in legislative changes to improve certainty for taxpayers.

^[131]Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013.

4.2 Improving project management to reduce costs

4.15 In the conduct of both systemic reviews and single complaints, the IGT has observed that the choices made by the ATO in engaging on these matters may be giving rise to higher costs for the ATO. In that respect, the IGT considers a number of the observations set out below as opportunities to work with the IGT, and indeed other scrutineers, to enhance the method of engagement to realise efficiencies and enhance the effectiveness of the interactions.

4.2.1 Broader reviews

4.16 Firstly, due to the ATO’s large-scale operations, knowledge and expertise are centralised and, as a result, large projects such as IGT reviews are managed or involve numerous internal ATO stakeholders. The IGT has observed that this approach often results in a large number of people attending meetings, phone conferences and other discussions with many merely observing the discussions rather than having direct input on the issues or specific areas of inquiry. The IGT believes that the ATO could examine its approach in this regard as a way to minimise its time and cost commitment.

4.17 Secondly, the IGT has consistently encouraged more effective and open dialogue between the two agencies on broader reviews to avoid the risk of unnecessary work or duplication. However, we are still made aware of instances where the ATO’s uncertainty in responding to IGT enquiries have led to lengthy internal discussions and a number of different officers being involved. The IGT believes that more direct and frequent engagement between ATO and IGT contact officers should provide the necessary clarity without the ATO expending unnecessary time internally discussing how best to deal with IGT requests.

4.18 Thirdly, the ATO has on occasion undertaken its own parallel reviews to that of the IGT’s as a means of ‘fixing’ identified issues before the IGT is able to properly examine, consider and make recommendations. In doing so, the ATO is expending costs unnecessarily where those resources could have been better utilised by working with the IGT to arrive at optimal outcomes. These parallel reviews also do not benefit from candid, external and independent perspectives to assess the impact of its resulting actions which may lead to a situation where the ATO essentially has to re-do or fix its intended improvements following IGT consideration.

4.19 Fourthly, the ATO often feels the need to justify or contextualise the information requested by the IGT before it is provided. This is arguably unhelpful and creates additional work for the ATO as well as unnecessary delay in the provision of that information to the IGT.

4.20 Finally, the IGT has also experienced instances of uncertainty by some ATO officers in delivering information to the IGT which has led to unnecessary delay and inconsistent information being provided. It would be helpful if information was provided expeditiously without hesitation and where there is inconsistency that the matter is promptly escalated to more senior officers for transparent resolution.

4.21 Moreover, where the ATO has strongly-held views about particular projects or areas of improvement, significant effort, time and resources may be applied debating the need for improvement before it is ultimately accepted. Similar views were highlighted in the APSC’s Capability Review of the ATO in which it noted:

Some scrutineers and members of consultative forums advised that the ATO can be dismissive of feedback, particularly where it conflicts with a strongly entrenched view that the ATO holds about its own performance or client expectations.^[132]Above n 67, p 31.

4.22 Such was the case during the aforementioned review of the Change Program. Given the limited time and resources available to the IGT at the time, and the need to put another review on hold, the IGT provided the ATO with a draft report based upon existing information provided by the ATO as well as information from ATO’s own contractors. However, discussions on the draft report with the ATO saw significant disagreement on IGT conclusions and recommendations albeit that there was agreement with the material facts. Large numbers of ATO senior officers were brought into meetings to argue their point of view and more time devoted by both offices to arrive at agreed positions which ultimately were not materially different to those in the draft report.

4.23 The above scenarios may be indicative of a risk adverse approach to reviews, such as those undertaken by the IGT, which in turn can give rise to increased time and costs for both agencies as well as creating unnecessary tension in the relationship.

4.24 The IGT believes that through better project management, commitment to engage and openly share information and views, the ATO and IGT could better streamline the review process to reduce the risk of duplication and inefficiencies, thereby minimising the impact on costs and resources. To this end, and given the recent changes to the IGT Act 2003 and its core functions, both agencies are looking to refresh the IGT-ATO Protocol that had previously guided the conduct of systemic reviews.

4.2.2 Single complaints

4.25 As noted earlier, the transfer of the tax complaints handling function to the IGT has yielded significant efficiency gains for the ATO by having tax specialist IGT staff receive, consider, synthesise and refer complaints to the ATO with succinct areas of focus in the CIN.

4.26 Moreover, over 35 per cent of all complaints received by the IGT are managed internally without the need for referral to or intervention by the ATO and approximately another 50 per cent are resolved with minimal IGT-ATO interaction.

4.27 In addition to the above, the IGT has observed that there are further opportunities for improving efficiencies and avoiding unnecessary work. These relate to a number of areas of ATO/IGT interactions in relation to complaint handling.

4.28 Firstly, as with the management of broader reviews, there have been instances where the ATO appears to adopt an unnecessarily defensive approach by having significant numbers of people present to discuss a single case. By way of example, a recent case was discussed by telephone conference involving two IGT officers and twelve ATO officers. Whilst the IGT considers it is important for key officers to attend such discussions to ensure that matters are appropriately addressed, the attendance of twelve people for the ATO to discuss a single case appears excessive with many people in attendance not having responsibility for the issues in contention or not contributing to the discussion.

4.29 Secondly, whilst the ATO often has large contingents of officers attending discussions on larger more complex cases, there appears to be a reticence on the part of the ATO to involve senior decision makers within the ATO despite the ATO Second Commissioners indicating to the IGT that they would prefer early warning where a complaint is likely to escalate into a major issue. The IGT believes that where the ATO is willing to engage senior staff early in complex matters, this would reduce the need for detailed internal briefings and referrals and enable prompt decisions to be made and followed by action to resolve the matter expeditiously.

4.30 Thirdly, there have been instances in which the management of complaints has been drawn out unnecessarily due to lack of information or clarity of the information initially provided by the ATO. In one example, the case concerned allegations that the ATO had not appropriately followed audit procedures in respect of communications with the taxpayer. The case was delayed for some weeks due to the business line not being upfront with the ATO’s own complaints section as to the nature of the audit that had been conducted leading to the provision of incorrect procedures and information to the IGT.

4.31 Fourthly, in some cases the ATO business line’s actions in ongoing investigations have taken the complainant, the IGT and ATO complaint officers by surprise. This failure of proactive and adequate internal ATO communication has, in such cases, led to significant escalation and expansion of complaints which may have been avoided if the information was proactively provided to the IGT so that expectations could be managed at first instance.

4.32 Finally, the resolution of complaints are generally most efficient where, at the outset, both the IGT and the ATO have a clear understanding of the areas of focus and issues that need to be addressed in order to bring a matter to finality. To this end, IGT officers work hard to clearly identify these areas of focus in the CIN which are provided to the ATO. On occasions, we have noticed that ATO officers have attended discussions with the IGT having not considered, or been provided with, the notice and therefore discussion was not sufficiently directed at addressing the issues of concern. Ongoing feedback has been provided to the ATO in this regard to ensure that such occurrences are minimised and the resolution of these cases are not unnecessarily delayed.

4.33 As set out earlier in this submission, to ensure the seamless transition of services delivered to the taxpayer in relation to complaints handling, the IGT and the ATO have collaborated to identify and streamline areas of frequent complaint to ensure a consistent and quick response is possible. The continued use of such pre-agreed processes assists to minimise the need for unnecessary duplication and effort by the ATO.

5. Earned autonomy

5.1 The concept of ‘earned autonomy’ (or ‘differential regulation’ as it may now be known)

^[133]Department of Finance ‘Differential Regulation‘.

 was previously implemented in the English National Health System in 2000.

^[134]OECD, OECD Reviews of Health Care Quality: Australia Raising Standards (2015) p 201; Russell Mannion, Maria Goddard and Angela Bate, ‘Aligning incentives and motivations in health … Continue reading

5.2 Based upon the information available to the IGT, at a Commonwealth level, the earned autonomy model is intended to apply to financial oversight and regulation of Commonwealth entities as part of Stage 2 of the Public Management Reform Agenda. It has been noted:

One of the common complaints about the current framework requirements concerns the one-size-fits-all approach to the imposition of obligations on agencies. This approach is not sustainable and can impose unnecessary requirements on entities. A more nuanced and proportionate approach to risk could contribute to more effective monitoring and oversight arrangements. The aim would be to improve accountability and performance through managing risk not through increasing control.

^[135]Department of Finance, ‘Earned Autonomy‘.

5.3 As a result of concerns regarding the ‘one size fits all approach’ the PGPA Act 2013:

…provides the framework for a more risk-based approach in regulation and policy setting, to contribute to more effective governance, monitoring and oversight arrangements. It does this in two ways. The first is to provide Accountable Authorities (entity heads) with greater autonomy, and indeed a requirement, to establish and maintain appropriate systems of internal control within their entities, taking into account entity risk. The second is to allow the Finance Minister to apply some PGPA Act requirements differentially.

The aim of both statutory mechanisms is to improve accountability and performance through considered and appropriate risk management practices at the entity level, rather than through centrally imposed detailed controls and oversight requirements.

^[136]Department of Finance, ‘Differential Regulation‘.

5.4 It is axiomatic that an appropriate level of oversight for any public sector agency is required. However, a differential regulation approach could see regulatory and oversight requirements being raised or lowered based on a number of different factors including:^[137]Above n 136.

• the risk profile of the entity;
• the Government’s preferred approaches to achieving efficiency, agility and Australian Public Service transformation;
• particular policy objectives of the Government; and
• necessary standards of accountability to responsible ministers, the Parliament and the public, including the legislative requirements and the information needed to inform ministerial, Government, and Parliamentary decisions and enable discharge of oversight responsibilities.

5.5 The development of this ‘differential regulation’ or ‘earned autonomy’ approach is in its early stages. However, some commentators have cautioned against losing sight of the importance of accountability by reducing disclosures under the concept of ‘earned autonomy'^[138]Sue Newberry, ‘Public sector accountability and earned autonomy: accountability lost?’ Allan Barton Memorial Lecture (16 October 2013). whilst others expressed uncertainty as to the requirements or specifics of how the earned autonomy model would operate. They noted that further comment could not be provided until these aspects were clarified.^[139]Australian Council of Social Service, Submission to Commonwealth Financial Accountability Review (February 2013); Chartered Secretaries Australia, Submission to Financial Accountability Review (19 … Continue reading

5.6 As the matter falls under the remit of the Department of Finance, they would be best placed to advise the Committee on the relevant issues.

5.7 However, the IGT believes that it would be useful for the Committee to consider the full range of benefits and risks outlined at paragraphs 2.70 to 2.71 of this submission, that are missing from the Commissioner’s public commentary. In addition the Committee may wish to also consider the range of oversight to which Australia’s largest financial institutions are subjected. It would provide a useful analogy when the specific risks, size, power and resources of the ATO are considered together with the amount of revenue that it manages. In this regard, the ‘too big to fail’ theory often applied in relation to financial institutions could apply to the ATO given its importance to the Australian economy and its monopoly nature.

5.8 The ‘too big to fail’ theory posits that certain institutions are so deeply interconnected with the fabric of society that governments will implicitly (or explicitly, in some cases) guarantee their support in the face of potential failure.

^[140]Commonwealth of Australia, Financial System Inquiry Final Report (2014) p 49.

 Such an approach may create a moral hazard in which the institution adopts increasingly higher risk and inefficient positions.^[141]Ibid.

5.9 In considering the range of oversight and governance arrangements of financial institutions in Australia, a cursory examination indicates that the nature of oversight and scrutiny is broad and includes:

• the Australian Securities and Investments Commission;
• the Australian Prudential Regulation Authority;
• the Reserve Bank of Australia;
• the Australian Securities Exchange;
• the Foreign Investment Review Board;
• the Treasury;
• the Australian Competition and Consumer Commission;
• state-based Fair Trading offices;
• Parliamentary committees;

^[142]See for example: Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Impairment of Customer Loans.

Annual General Meetings;annual reporting requirements;board of directors (often largely independent and non-executive);

^[143]See for example: Commonwealth Bank of Australia, ‘Corporate Governance‘; Westpac, ‘Board of Directors‘; ANZ, ‘Board of Directors‘.

audit committees;

^[144]See for example: Commonwealth Bank of Australia, ‘Board Audit Committee Charter‘; Westpac, ‘Board Audit Committee Charter‘; NAB, ‘Principal Board Audit Committee … Continue reading

 andexternal auditors.

5.10 In addition, where these institutions operate or seek to operate in other jurisdictions, they are also subject to oversight of the relevant regulatory bodies in those jurisdictions.

5.11 It is interesting to note that even with the vast resources and extensive oversight, both statutory and otherwise, financial institutions still acknowledge that there will be instances where complaints will arise and the need for independent complaints resolution options outside of the institutions themselves. In this latter respect, financial institutions have collectively established and agreed to have complaints externally addressed by the Financial Ombudsman Service.

^[145]Financial Ombudsman Service, ‘What we do‘.

5.12 Importantly, the ATO also extensively audits these institutions and indeed all other large corporate entities. In fact, all large entities with revenues of over $5 billion are under comprehensive review every year^[146]Commonwealth, Senate Economics Legislation Committee, 10 February 2016, p 51. irrespective of how compliant they may have been in the past or the present. As the current Commissioner notes ‘they can be very cooperative and very compliant’ but they are just too large to fail.^[147]Ibid, p 50.

5.13 It is perhaps appropriate to reflect on the adage ‘what’s good for the goose is good for the gander’ in this case. Any diminution of the external scrutiny of the ATO would give rise to allegations of double standards, a lack in transparency and accountability, particularly given that the ATO handles funds which are many folds over $5 billion and is able to exercise extensive and often costly investigative powers when scrutinising the affairs of taxpayers. It should be recalled that the Commissioner himself has stated that the ATO handles gross collections of $432.3 billion and refund payouts of $95.5 billion.^[148]Above n 10, pp 21 and 24.

5.14 The IGT notes that the concept of ‘earned autonomy’ aims to develop a model that ‘will see a targeted and risk-based approach taken to financial framework regulation.'^[149]Explanatory Memorandum to the Public Governance, Performance and Accountability Bill 2013, para [57]. In contrast, the role of external scrutineering such as that performed by the IGT is to ensure that, in its administration of the tax system, the ATO and its officers are acting in accordance with accepted standards of fairness, natural justice and due process.

5.15 In summary, there must be effective and independent oversight to ensure that the ATO is administering the tax and superannuation systems and other responsibilities effectively and efficiently. The integrity of the Australian Government scrutiny arrangements must be maintained through an independent process for all Australians to raise concerns where the ATO’s actions, policies or practices lead to adverse outcomes or impacts.