«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
3.152 Furthermore, it was contended that a lack of engagement does not necessarily translate into an increased likelihood of non-compliance, and the ATO should not draw that inference.
3.153 Stakeholders raised two main types of concerns relating to the ATO’s
perception of taxpayer behaviour:
• those relating to a taxpayer’s level of ‘proactive disclosure’ to the ATO; and Hamish Wallace, Australia, in Global Legal Insights Corporate Tax, First Edition, Global Legal Group, London 2013, page 18 http://www.minterellison.com.
• the taxpayer’s responsiveness to ATO information requests.
Proactive disclosure to the ATO
3.154 In the large business context, stakeholders believed the ATO inappropriately uses factors such as whether the taxpayer asked for private rulings, and the personal auditors views of the taxpayer’s ‘transparency’ in assessing the taxpayer’s likelihood of non-compliance.
3.155 Some stakeholders highlighted that a taxpayer may decide not to apply for a private ruling for a variety of reasons and not necessarily be wanting to avoid detection. For example, with respect to time sensitive transactions, a taxpayer may not be able to seek a private ruling because it can be a lengthy process. In this respect, stakeholders may decide to rely on external advice rather than seeking the ATO’s view of the issue.
3.156 Alternatively, a taxpayer may not apply for a ruling if they are of the view that the matter is not contestable.
3.157 It was also suggested that simply relying on the number of rulings sought is misleading or is open to manipulation (for example, a taxpayer seeking a large number of fairly straight forward rulings to create an impression of engagement, transparency and compliance).
3.158 In response, senior ATO management have advised that the ATO does not consider mere numbers of private ruling applications as indicative of taxpayer ‘transparency’. The ATO considers that the key issue is whether the taxpayer proactively informs them of its significant transactions or perceived contestable positions.
3.159 The template used by compliance teams for risk categorisation considers aspects of proactive taxpayer disclosures in both the ‘Compliance history’ and ‘Real-time compliance’ sections of the template. Each of these sections contains a part called ‘willing participation’ and considers issues such as whether the taxpayer makes private ruling applications for contentious or material issues, and whether the taxpayer provides information outside of the ruling process. The specific questions addressing these factors are described in paragraphs 3.48 to 3.57 above.
Taxpayer responsiveness to ATO information requests
3.160 Stakeholders have also raised specific concerns in relation to the unwillingness of the ATO to exercise its formal information gathering powers (for example those under section 264 of the Income Tax Assessment Act 1936) or that the ATO draws negative inferences about the taxpayer where the taxpayer is unable to informally disclose certain information due to contractual, privacy or confidential obligations.
3.161 Other stakeholders raised concerns that the ATO may also draw negative inferences when taxpayers assert their right to LPP. They strongly disagreed ‘with the exercise of a fundamental legal right being used as a factor in the risk assessment process.’ Similar issues have also been raised with respect to use of the Accountants’ Concession and FOI requests.
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Chapter 3 — Large business and international3.162 The ATO’s TAPs for higher consequence taxpayers, though not a direct part of the risk categorisation process, considers past taxpayer behaviour including ‘the nature and extent of the taxpayer’s use of LPP/accountants’ concession claims and the extent
we have lifted/challenged the claims’ is listed. This item contains the footnote:
The use of LPP or accountants’ concession are legitimate avenues available to taxpayers.
Concerns only arise where it appears that these processes are being used outside their intent — for example, in an attempt to frustrate our active compliance activities.216
3.163 The LBTC booklet also makes reference to the ATO’s approach to taxpayer claims of LPP. Broadly, the ATO will recognise a taxpayer’s right to claim LPP and expects taxpayers to provide sufficient information to enable the ATO ‘properly assess the veracity of their claims’.217
3.164 The ATO currently considers ‘transparency’ as a significant likelihood risk factor in the LBTC booklet. It is the main consideration in determining whether a taxpayer is a key taxpayer (Q2) or higher risk taxpayer (Q1) that is a ‘lack of transparency’ will see an otherwise key taxpayer categorised as higher risk instead.218 Furthermore, the following speech highlights the ATO’s concerns with taxpayers who it considers are not being transparent and how this would result in increasing costs for
Unfortunately, it has appeared to us that some taxpayers have been engaged in ‘game playing’ when responding to information requests. I hasten to add that I’ve discussed this with many large business taxpayers and their advisors, and also with many of my compliance teams and we are talking about the approach of a minority. However, it has been our observation that game playing during our information requests has dragged out a number of reviews and audits and it must be discouraged.
Of course we prefer to work with you informally when it comes to information gathering, and it is most efficient when there is dialogue and a mutual understanding of what information is required to complete the audit in the cheapest way possible. However, we have observed that despite extensive dialogue and cooperation prior to the information request we sometimes have received information marked ‘draft’, or ‘subject to confirmation’, or culled due to the auditee’s view of its relevance, or claims are made for privilege with no information given as to the basis of the claim.
3.165 The ATO acknowledges that where a taxpayer does not proactively provide information (such as in private ruling requests or otherwise) or is generally
unresponsive to ATO information requests, it does not necessarily follow that the taxpayer is likely to be non-compliant.
3.166 However, the ATO is concerned that, where the taxpayer does not proactively make full disclosures and promptly respond to ATO information requests, it would be unable to quickly gather all the facts to form a view as to whether the tax position accords with the ATO view.220 The LBTC booklet contains a relatively limited articulation of this important transparency issue. It briefly refers to information provision and transparency as factors in assessing likelihood. These factors are
The level of engagement and disclosure around significant transactions you undertake.
The fullness of disclosure and cooperation demonstrated in response to any enquiries.
The level of transparency demonstrated by you in keeping us informed about proposed significant transactions or potentially contentious issues.221
3.167 There is some additional discussion in speeches by ATO officials about the importance of these factors for higher consequences taxpayers but these are relatively limited.
3.168 During this review, the ATO also indicated that, for a given large business taxpayer population, the ATO is initially uncertain as to which taxpayers are adopting contestable tax positions which may need to be scrutinised and challenged. Real-time engagement by the ATO and information disclosure by taxpayers is the primary means by which the ATO is able to assess the presence of these risks.
3.169 For those taxpayers that are ‘transparent’, the ATO states that it can be more confident that these taxpayers do not have contestable tax positions. For taxpayers that are not as transparent, the uncertainty remains. As the uncertainty about contestable tax positions now applies to a much smaller population, the ATO regards that the likelihood of non-compliance is now higher for these taxpayers (a statistical principle known as ‘Bayes’ Theorem’). The ATO dedicates resources to reduce this uncertainty with respect to those taxpayers. In summary, the ATO regards the use of transparency as a likelihood factor.222
3.170 Whether taxpayers’ willingness to proactively make full disclosure or be ‘transparent’ continues to be a helpful risk factor needs to be examined in the light of the relatively recent use of the reportable tax positions (RTP) schedule which effectively compels higher consequence taxpayers to be transparent. The RTP schedule is explored further in the next section.
Australian Taxation Office, Large business active compliance manual – income tax (9 July 2013)
3.171 For higher consequence taxpayers, the ATO has also mandated a particular information gathering approach called the RTP schedule.
3.172 The ATO has piloted the RTP schedule for some higher consequence taxpayers for the 2011-12 income year.223 The schedule requires the taxpayer to disclose
three types of reportable tax positions:
3.173 The RTP schedule ‘requires large businesses to disclose their most contestable and material tax positions’.225 Taxpayers do not need to disclose positions outlined in private ruling applications, a company tax return, an RTP early disclosure form, or is subject to an advance pricing arrangement. The ATO will then use the disclosures in
the RTP schedule to:
• better understand tax risk for taxpayers, industries and the large market
3.174 For the 2012-13 income year, all higher consequence taxpayers will be required to complete an RTP schedule. Taxpayers who have an ACA with the ATO for that year will not be required to complete the schedule.227 Australian Taxation Office, Reportable tax position schedule (30 August 2012) http://www.ato.gov.au.
Australian Taxation Office, Guide to reportable tax positions 2012 (15 June 2012) http://www.ato.gov.au.
Information confidence and cost
3.175 The IGT acknowledges that a taxpayer’s approach toward information provision may directly affect the ATO’s ability to gather facts and develop a fully informed view on a timely basis. The IGT believes, however, that invoking the ‘likelihood of non-compliance’ paradigm to frame these information confidence concerns can unnecessarily raise negative or even pejorative connotations. Such connotations may impede the ability for the ATO and taxpayer to cooperatively identify the contestable positions and how they can be addressed.
3.176 The IGT considers that a more refined use of the RDF would assist the ATO to identify and communicate the specific factors causing ATO concerns and select the most appropriate treatment activity. Such treatment activities would primarily consist
• reviewing those specific issues causing concern with an intensity commensurate with the level of ATO confidence in the information; and
• differentiating ATO activities based on the following taxpayer behavioural risk
3.177 The IGT acknowledges that, when deciding upon its compliance approach to a taxpayer, the ATO should consider both risk and information confidence and cost.
Although useful as a high level pictorial representation, the two dimensional nature of the RDF (likelihood and consequence of non-compliance) means that factors such as information confidence and cost are bundled into the likelihood consideration. Other speeches from the ATO highlight this entanglement.228
3.178 The IGT believes that, although the ATO seeks to apply Bayes’ Theorem to use transparency or information confidence and cost issues as a likelihood factor, it should consider them separately from likelihood risk factors listed in the LBTC booklet and risk template. This would be consistent with ATO’s enterprise approach to risk and the ISO approach as set out in Chapter 2.
3.179 The disentangling of information confidence and cost from risk considerations
is depicted in Figure 8 in Chapter 2 and is reproduced below for convenience:
3.180 Both the LBTC booklet and risk template should be updated to reflect that information confidence and cost, whilst legitimate considerations in determining the ATO compliance approach, do not necessarily indicate a higher likelihood of non-compliance or contestable tax positions.
3.181 The IGT acknowledges that at this time information confidence and costs concerns can only be effectively articulated for higher consequence taxpayers, since these taxpayers have an ongoing relationship with dedicated ATO compliance teams.
However, as stated earlier, whether information confidence and cost remain a legitimate factor in determining the compliance approach for these taxpayers is in doubt given the use of the RTP schedule.
3.182 The ATO requirement that all relevant higher consequence taxpayers disclose their ‘most contestable and material tax positions’ through this schedule appears to run counter to the intent of the RDF to foster taxpayers proactively making disclosures through their day-to-day relationship with the ATO.