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«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»

-- [ Page 1 ] --

Review into aspects of

the Australian Taxation Office’s

use of compliance risk assessment tools

A report to the Assistant Treasurer

Inspector-General of Taxation

October 2013

Review into aspects of the

Australian Taxation Office’s use of

compliance risk assessment tools

A report to the Assistant Treasurer

Inspector-General of Taxation

October 2013

© Commonwealth of Australia 2013

ISBN 978-0-642-74938-3

This publication is available for your use under a Creative Commons Attribution 3.0 Australia licence, with the exception of the Commonwealth Coat of Arms, the IGT logo and ATO source material. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode.

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Inspector-General of Taxation GPO Box 551 Sydney NSW 2001 Email: enquiries@igt.gov.au Level 19, 50 Bridge Street Sydney NSW 2000 Telephone: (02) 8239 2111 GPO Box 551 Facsimile: (02) 8239 2100 Sydney NSW 2001 21 October 2013 Senator the Hon Arthur Sinodinos AO Assistant Treasurer Parliament House Canberra ACT 2600 Dear Minister Review into Aspects of the Australian Taxation Office’s Use of Compliance Risk Assessment Tools I am pleased to present you with my report of the above review. The ATO’s use of risk assessment tools has been a persistent concern across taxpayer segments over a number of reviews.

Stakeholders have generally supported the Australian Taxation Office’s (ATO) risk-based approach which informs its compliance activities. However, they believed an unnecessary but significant compliance burden has been imposed on them due to inaccuracies in risk assessments, ineffective communication and disproportionate compliance action to perceived risks.

I have reviewed a range of risk assessment tools and recommended the adoption of a set of guidelines to assist the ATO design more effective risk assessment tools for the future. In addition, I have made recommendations to improve existing risk assessment tools with which taxpayers have raised most concern.

Overall, I have made 16 recommendations to all of which the ATO has agreed. Once implemented appropriately, they should result in extensive and enduring improvements to the ATO’s risk assessment processes.

I am grateful for the support and contribution of taxpayers, tax practitioners and their representatives to this review. The willingness of many to provide their time, expertise and experience in preparing submissions and discussing issues with my office is greatly appreciated. I also thank ATO officers involved in this review for their professional cooperation and assistance.

Yours faithfully, Ali Noroozi Inspector-General of Taxation Page | iii Contents EXECUTIVE SUMMARY

CHAPTER 1 — OVERVIEW

Conduct of the review

Summary of stakeholder concerns

Structure of this report

CHAPTER 2 — ATO RISK MANAGEMENT

The ATO’s enterprise risk management framework (ERMF)

Types of taxpayer compliance risks

ATO risk management approach to taxpayer compliance

How the ATO assesses risk

Inputs into ATO risk assessment tools

Outputs of risk assessment tools

Health of the system assessments — HOTSA

IGT observations

CHAPTER 3 — LARGE BUSINESS AND INTERNATIONAL

Historical context

The Risk Differentiation Framework (RDF)

ATO governance and moderation panel

ATO risk filters, risk managers and risk owners

Taxpayer notification of RDF categorisation

Additional higher consequence requirements — taxpayer assurance plans (TAPs)

ATO review of the risk categorisation template

Stakeholder concern — transparency of the risk categorisation process

Stakeholder concern — accuracy and relevance of inputs

Stakeholder concern — formal notification of risk categorisation

Stakeholder concern — proportionality of ATO compliance approach........... 92  CHAPTER 4 — SMALL TO MEDIUM ENTERPRISES

Background

Stakeholder concern — inputs into the risk categorisation process.............. 108  Stakeholder concern — communication of the risk categorisation............... 111  Proportionality of ATO compliance approach





CHAPTER 5 — MICRO BUSINESSES

Background

Risk assessment tools used in the micro business segment

IGT observations

CHAPTER 6 — INDIVIDUALS

Background

ATO risk assessment tools used in the individuals segment

IGT observations

CHAPTER 7 — TAX PRACTITIONERS AND ADVISORS

Page | v Review into aspects of the ATO’s use of compliance risk assessment tools Background

ATO approaches to tax practitioner risk identification

CHAPTER 8 — TEMPLATE FOR FUTURE DESIGN

Governance

Effective use of inputs

Transparency and communication

Proportionality of ATO compliance approach

Compliance effectiveness

Project management — balancing risk, resources and time

Conclusion

APPENDIX 1 — TERMS OF REFERENCE

APPENDIX 2 — ATO LEVEL 0 ENTERPRISE RISKS

APPENDIX 3 — LEVEL 0 AND LEVEL 1 RISK OWNERS AND DESCRIPTIONS

APPENDIX 4 — CONFIDENCE LEVELS USED IN RISK ASSESSMENT

APPENDIX 5 — PREVIOUS IGT RECOMMENDATIONS RELATED TO COMPLIANCE COSTS............. 183  APPENDIX 6 — OVERVIEW OF ATO RISK ASSESSMENT TOOLS

APPENDIX 7 — ATO ENTERPRISE LEVEL RISK MATRIX

APPENDIX 8 — RDF CHART FROM LARGE BUSINESS AND TAX COMPLIANCE 2010

BOOKLET

APPENDIX 9 — LARGE MARKET INCOME TAX RISK FILTERS

APPENDIX 10 — SME MARKET RISK FACTORS

APPENDIX 11 — TAX PRACTITIONER RDF

APPENDIX 12 — QUALITY ASSURANCE CHECKLIST FOR COMPLIANCE RISK ASSESSMENT

TOOL DESIGN

APPENDIX 13 — ATO RESPONSE

Page | vi

LIST OF TABLES

Table 1: ATO levels of risk

Table 2: ATO operational risk matrix

Table 3: The ATO Enterprise level risk likelihood rating table

Table 4: ‘Confusion matrix’

Table 5: Sample of ATO information gathering approaches

Table 6: Triple constraint applied to ITRIP

Table 7: ATO enterprise level risk matrix

LIST OF FIGURES

Figure 1: Structure of this report

Figure 2: ATO ‘Wheel of Risk’

Figure 3: ATO Compliance Model

Figure 4: Risk bow-tie for large business

Figure 5: Differentiation in intensity and visibility of ATO verification activities

Figure 6: Element status ratings for HOTSA reporting

Figure 7: Data integrity status ratings for HOTSA reporting

Figure 8: Risk and information confidence and cost

Figure 9: Large business RDF ‘quadrants’

Figure 10: Sample ATO risk filter description

Figure 11: Simplified higher consequence taxpayer risk categorisation process

Figure 12: Large taxpayers and uncertain positions

Figure 13: Risk and information confidence and cost

Figure 14: Potential integrated PCR process

Figure 15: ATO example of a kind of private group

Figure 16: RDF for small-to-medium enterprises and wealthy individuals

Figure 17: How RAPT fits into the suite of corporate risk tools

Figure 18: Risk bow-tie for promoter penalty laws

Figure 19: RDF for intermediaries — promoter penalty laws

Figure 20: ATO RDF for Tax Practitioners

Figure 21: Risk and information confidence and cost

Figure 22: SME business line compliance ‘funnel’

Figure 23: Indirect taxes business line compliance funnel

Figure 24: The triple constraints of project management

Figure 25: Applying the triple constraint to risk treatment projects

Figure 26: Overview of ATO compliance risk assessment tools

Figure 27: RDF chart from 2010 Large business and tax compliance booklet

Figure 28: Tax practitioner risk differentiation framework

–  –  –

Stakeholders have acknowledged that it is appropriate for the ATO to adopt a risk-based approach in its compliance strategy. In fact, most comparable revenue authorities take such an approach to make the best use of their resources in protecting government revenue.

There are many risk assessment tools within the ATO’s enterprise risk management framework. These tools are used to gauge risks posed by taxpayers in each market segment.

The IGT has observed that, ultimately, the effectiveness of these risk assessment tools could only be reliably evaluated if evidence-based metrics, such as random audits, were used. Such metrics could also be used to refine the associated risk assessment tools.

In the absence of evaluation metrics, the IGT has drawn on the examination of the ATO’s main risk assessment tools in this review as well as those investigated in previous IGT reviews, to create guidelines for developing effective risk assessment tools. These IGT recommended guidelines address key stakeholder concerns, such as the governance, inputs and transparency of the ATO’s risk assessment processes as well as related communication with taxpayers and the proportionality of resulting ATO compliance action to detected risks.

Furthermore, these guidelines emphasise the importance of effective project management to minimise adverse impacts on taxpayers whilst making best use of ATO resources.

The appropriate implementation of the IGT recommended guidelines should result in extensive and enduring improvements to the ATO’s risk assessment processes. In addition to these guidelines, specific recommendations have also been made to enhance aspects of those risk assessment tools with which taxpayers have raised the most concerns.

In a recent review1, the IGT examined the ATO’s small business benchmarks, one of its main risk assessment tools in the micro and small business market segments, and made recommendations aimed at increasing the robustness and transparency of inputs and methodology used amongst other things.

The IGT has also, more recently, reviewed the key risk assessment tools used by the ATO in the individual market segment.2 These tools benefit from large amounts of relatively lowcost third-party information available to the ATO. Indeed, an estimated 1.4 million individuals with simple tax affairs may not need to lodge tax returns in the near future.3 The IGT’s recommendations for improvement in this regard will be made available upon the public release of the reports of these reviews.

Review into the ATO’s use of benchmarking to target the cash economy, publicly released in October 2012.

Review into the ATO’s compliance approach to individual taxpayers – income tax refund integrity program; and Review into the ATO’s compliance approach to individual taxpayers – use of data matching.

3 Neil Olesen, ‘Reinventing the ATO – ready, willing and underway’, (Speech to CPA Congress, 17 October 2013)

–  –  –

In other market segments, the ATO does not have access to the same level or quality of thirdparty information. The quality of information at the ATO’s disposal and the cost of gathering more information to gain sufficient confidence (information confidence and cost) have a major impact on the way the risk assessment tools are used and the compliance activities that follow.

The ATO’s main risk model, which is examined closely in this review, is the risk differentiation framework (RDF). It is used in a number of market segments including small to medium enterprises (SMEs) and large business and international (LB&I) as well as tax practitioners.

The IGT has recommended that the RDF be refined to reflect recent administrative developments and related taxpayer compliance patterns. A number of opportunities have been identified to reduce overall taxpayer compliance costs and improve ATO-taxpayer interactions by distinguishing between those risk factors that can be addressed by taxpayers (behavioural risks), those factors that cannot (inherent risks) and information confidence and cost.

The most mature application of the RDF is in the LB&I market segment. Stakeholders in this segment had raised concerns with the ATO’s use of judgement-based inputs, communication of taxpayers’ risk categorisations and the costs of resulting compliance activities. In this

respect, the IGT has made a number of recommendations including:

ATO risk assessment processes, related communication and subsequent compliance • action should reflect the differing levels and mixes of inherent and behavioural risks as well as information confidence and cost;

‘willing participation’ and ‘transparency’ should be objectively considered in terms of • information confidence and cost alongside, but separate from, the RDF;

discrete transactions or presence of a number of contestable positions should not of • themselves be determinative of a taxpayer’s overall risk rating; and greater detail should be provided to taxpayers about how particular risks are assessed • and there should be an open dialogue between the ATO and taxpayers before risk ratings are finalised.



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