«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
• adequate record keeping regarding the evidence presented by the compliance teams to the moderation panel; and
• consistent presentation of considerations and evidence as amongst other taxpayers, assisting the moderation panel to make recommendations with respect to relative risk.
Australian Taxation Office, Higher Consequence Taxpayer Risk Categorisation 2012, PowerPoint File provided to Internal Audit under Test 1.3.
Australian Taxation Office, Final Report - Compliance Intelligence & Risk Management Internal Audit,
STAKEHOLDER CONCERN — ACCURACY AND RELEVANCE OF INPUTS
3.122 As noted, stakeholders generally recognise that a purely quantitative approach to assess risk in the large business market segment is impractical and accept that qualitative factors have a role to play.
3.123 Stakeholders did, however, express a number of concerns about the ATO’s use of these qualitative inputs. For example, stakeholders submitted that the ATO’s use of
these inputs would have potential shortcomings in the following areas:
• Taxpayer risk rating disproportionately influenced by one transaction — concern that the ATO may perceive the taxpayer to be risky on the basis of one transaction.
• Non-compliance and contestable tax positions — concerns that the ATO may incorrectly infer taxpayer non-compliance in the presence of a contestable tax position.
• Taxpayer engagement, transparency and access to information — concerns with ATO emphasis on concepts such as ‘taxpayer engagement’ with potential negative
inferences drawn from taxpayer behaviours such as:
– claiming legal professional privilege (LPP); and – taxpayers making Freedom of Information (FOI) requests.
• Effective tax rates — concern that the ATO sees low effective tax rates as a higher risk even though they may be explicable.
• Risk ratings based on past behaviour — concern that ATO perceptions of riskiness may be too reliant on past taxpayer behaviour without due acknowledgement of changes or improvements.
• The role of taxation advisors — concern that engaging a tax advisor that the ATO perceives to have a higher risk profile increases ATO perceptions of taxpayer riskiness.
• ATO considerations of taxpayer governance — concern that the ATO does not have the adequate capability to make judgements about a taxpayer’s tax risk management system.
3.124 These stakeholder concerns are each addressed in turn below.
Taxpayer risk rating disproportionately influenced by one transaction
3.125 Stakeholders were concerned whether the ATO’s focus on a small part of a taxpayer’s business or a particular transaction may effectively drive up the risk rating
of an otherwise low risk taxpayer. The result would be unnecessary increases in the compliance costs for the taxpayer by exposing them to enquiries broader than the transaction of concern.
3.126 The ATO’s template allows compliance teams to make observations about a particular area of tax law where the taxpayer may have interpreted or applied it
incorrectly. For this section of the template, the compliance team is asked:
3.127 Compliance teams have an opportunity to qualify the extent to which a transaction or issue of concern should impact the taxpayer’s risk categorisation.
3.128 The IGT is of the view that where the ATO has a concern about a particular taxpayer transaction or interpretation issue, ATO enquiries should be focused on that concern. Such a focus also assists in narrowing the scope for information requests and in minimising compliance costs for both the ATO and the taxpayer. Internal guidance such as TAPs should ensure that the ATO’s enquiries of taxpayers are targeted accordingly.
3.129 If the above approach is not adopted, there is potential for an otherwise model taxpayer to have their risk categorisation disproportionately influenced by one particular concern. This is particularly so since the RDF as currently framed is a risk categorisation of the taxpayer itself, rather than a risk categorisation of individual transactions or positions.
3.130 Classifying an otherwise compliant taxpayer as having a higher likelihood of non-compliance because of a limited number of concerns can have significant ramifications for the ATO/taxpayer relationship. It may be interpreted as the ATO not giving due weight to the taxpayer’s levels of compliance in the rest of its affairs.
3.131 There may be exceptions to the above approach such as where the ATO has concerns about a single taxpayer transaction or position and the latter is substantial compared to that taxpayer’s tax base. In these circumstances, the influence of such transaction or position on the taxpayer’s risk rating may be justified. Other exceptions may include situations where the ATO suspects fraud, or where the particular transaction is indicative of poor internal governance whereby the taxpayer is unable to detect or manage non-compliance.
RECOMMENDATION 3.1 The IGT recommends that discrete transactions or business activities of a taxpayer that cause concern for the ATO should not be determinative of the taxpayer’s overall risk rating unless they are substantial compared to the taxpayer’s tax base or are indicative of poor internal governance or fraud.
Non-compliance and contestable tax positions
3.132 Examples of the above concern include the ATO not acknowledging that its view is not always correct, especially in relation to adverse court decisions. Put another way, stakeholders perceive that the ATO does not distinguish between taxpayers who take a detection risk as opposed to an interpretation risk.
3.133 Taxpayers who take a detection risk have not complied with the law, and ultimately rely on the ATO not discovering any tax shortfall. These taxpayers may be less than forthcoming with information as part of their strategy. Importantly, this is not considered to be a significant risk by the ATO in this market segment.205 3.134 Taxpayers who take an interpretation risk on the other hand and rely on the merits of the interpretation of the law adopted are entitled to do so under the legal system. Provided that the taxpayer meets all of the legal obligations, this is a choice that is open to them. It has been acknowledged in various quarters that the tax laws are becoming even more complex and as a consequence there is significant room for uncertainty in application.206
3.135 Stakeholders have highlighted that by not adequately distinguishing between these types of taxpayer behaviours, and describing both as having a higher likelihood of ‘non-compliance’, the ATO may be undermining efforts to improve taxpayer engagement with the system or driving inappropriate ATO officer behaviours.
The ATO does make reference to ‘a tax position that we disagree with’ regarding
non-compliance in their LBTC booklet in the following terms:
‘likelihood of you having a tax position that we disagree with or having through error or omission misreported your tax obligations …’207 [emphasis added]
Australia’s Future Tax System (Ken Henry, chairperson), The Treasury (Cth), Final Report 2(2) (AGPS, 2009) pp 651–652 and Margaret McKerchar, ‘Tax Complexity and its Impact on the Tax Compliance and Administration’ (Paper presented at the IRS Research Conference, Washington, 13-14 June, 2007) pp 190–191.
ATO, above n 63, p 25.
3.137 In the main, however, the LBTC booklet refers to ‘non-compliance’ as the risk event of concern to the ATO, rather than the taxpayer taking a contestable position. For
3.138 In a range of other ATO materials, including the LBTC booklet, taxpayer positions are referenced to variously as ‘controversial’ or ‘contentious’.210
3.139 The IGT is of the view that, in the large business market segment, the key risks are generally associated with taxpayers adopting a contestable tax position. The outcome may be non-compliance where the taxpayer is incorrect. Conversely, where the ATO is incorrect, the taxpayer is compliant with the law.
3.140 As already mentioned, the taxpayer accepts some interpretation risk even if it accepts the ATO view. The reason being that such a view, if challenged by another taxpayer in court, may prove to be incorrect. Taxpayers are shielded from this interpretation risk to a certain extent. Legally binding ATO advice allows the taxpayer to receive the most advantageous treatment where such advice is ultimately found to be incorrect. The ability to receive such treatment, however, is subject to statutory time limits that is where the taxpayer is found to have overpaid, they are limited by the amendment period.211
3.141 Contestable areas are often where there may be a high degree of uncertainty about the interpretation or application of law in a particular area, or where opposing taxpayer and ATO views are yet to be tested in relation to specific or unusual facts.
3.142 The ATO has drawn upon certain academic research in support of its original Compliance Model as shown above in Figure 3 in Chapter 2. This includes the BISEP factors and the ‘pyramidal’ relationship between taxpayer attitudes to compliance and the ATO’s methods of dealing with non-compliance.212 3.143 It has also been suggested that such a pyramidal representation may not be reflective of the large business market in light of the uncertainties of the tax law which affect them, or ‘grey areas’. Taxpayers may be thought to ‘play for the grey’ in areas of
ATO, above n 189; D’Ascenzo, above n 145; ATO, above n 63, p 25.
Australian Taxation Office, Taxpayers’ charter – helping you to get things right (2010).
The ATO’s adoption of the Compliance Model is reflected in Australian Taxation Office, Improving Tax Compliance in the Cash Economy (1998).
Source: Taxing democracy, Braithwaite, page 180.
3.144 As noted above, the ATO regards the majority of large businesses as compliant, with its concerns focussed on ‘opportunistic tax planning’ and ‘contestable
positions’ (the grey area in Figure 12 above). Furthermore, the ATO notes:
3.145 The IGT observes that it is important for the ATO to acknowledge that a contestable tax position does not necessarily result in non-compliance. This can be frequently attributed to the complexity of the applicable legislation and the associated uncertainty that can arise from its application to arrangements in this market segment.
3.146 As mentioned in Chapter 2, taxpayers as well as the ATO bear risks. The ATO or the taxpayer may be proven compliant or non-compliant as the case may be when matters are litigated. Often these matters are finely balanced and turn on specific facts.
3.147 Furthermore, higher consequence taxpayers that are public companies have legal corporate governance requirements, directors’ duties and obligations to
John Braithwaite, ‘Large Business and the Compliance Model’. In Valerie Braithwaite (ed), Taxing Democracy:
Understanding Tax Avoidance and Evasion (Ashgate Publishing Ltd, 2003) 177-202, p 179.
Australian Taxation Office, Large Business Advisory Group minutes 4 March 2010 (9 July 2010) http://ato.gov.au/Business/Consultation: Business/In detail/Large Business Advisory Group/Minutes/Large Business Advisory Group minutes - 4 March 2010/; For the avoidance of doubt, the reference to ‘going to the umpire’ should be taken as referring to going to the courts as the umpire for independent judicial interpretation of the law.
shareholders. These obligations and the accompanying civil penalties mean that taxpayers already have a strong incentive to avoid unreasonable tax positions.215
3.148 It would be helpful if both ATO internal staff guidance and public guidance acknowledged the complexity and the regulatory landscape to discourage ATO officers from approaching taxpayers with a broader notion of non-compliance when contestable positions are encountered. Such an approach would foster better relationship with taxpayers.
3.149 Currently, the use of the generic term ‘likelihood’ which is applied as ‘likelihood of non-compliance’ in documents such as the LBTC booklet obscures the specific nature of the ATO’s concerns and its ability to effectively communicate them to taxpayers.
3.150 In addition, the references to ‘controversial’ or ‘contentious’ should be replaced with ‘contestable’ which is a more appropriate reflection of the actual risk in the large business market segment context. These former terms may also be considered unhelpful or even pejorative.
The IGT recommends that the ATO revise its internal and public documentation to:
(a) acknowledge that, for the purpose of the RDF, the presence of a number of contestable tax positions does not of itself render a taxpayer as non-compliant; and (b) replace references to ‘controversial’ or ‘contentious’ tax positions with ‘contestable’ tax positions.
Agree and point (b) will be adopted over time as documents are recast.
Taxpayer engagement, transparency and access to information
3.151 Concerns were raised as to what the ATO considered to be ‘engagement’ by taxpayers, and whether perceptions of engagement were influenced by the personal judgements of ATO officers.