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3.183 Whilst the ATO has emphasised taxpayer transparency as a key determinant for a taxpayer’s RDF categorisation, the schedule represents a movement towards more formal information gathering methods. With the shift to real-time compliance reviews for higher consequence taxpayers (in the PCR229) and to mandated disclosure of contestable and material tax positions (in the RTP schedule), the relevance of taxpayer ‘transparency’ or ‘information confidence and cost’ in terms of the RDF categorisations needs to be reconsidered once the ATO has gained more experience with the use of the RTP schedule.
A more detailed discussion of PCRs is contained later in this chapter.
Willing participation as a risk theme
3.184 The ATO’s use of ‘willing participation’ as a criterion is problematic. While the ATO may use the concept of ‘willing participation’ in its vision statement and other corporate materials, the IGT questions its use as a theme in an evidence-based template. The reason is that such a term would lead the ATO officer to make a judgement or form an opinion in relation to the taxpayer whereas the template is intended to be a record of facts, evidence and behaviours.
3.185 Furthermore, the use of a subjective and imprecise concept such as ‘willing participation’ obscures the analysis in relation to information confidence and cost which may adversely impact the ATO/taxpayer relationship. The ATO may be far more effective in influencing taxpayers’ approaches to proactive disclosures and/or response to information requests if it simply communicated facts to the taxpayer relating to their action or inaction in the provision of information and how these may result in increased compliance costs on both sides. The use of Figure 13 above is intended to provide an enhanced framework for this communication.
Taxpayer requests for formal exercise of ATO powers
3.186 While the ATO has stated in the LBTC booklet that taxpayers may request the ATO to exercise its formal powers in certain circumstances, some factors support stakeholder concerns that the ATO may be unwilling to exercise its formal powers and perceives taxpayer requests for such exercise as being uncooperative. These include the lack of internal ATO guidance on this matter, especially in the template and TAP.
Furthermore, a recent ATO speech appears to set the expectation that taxpayer disclosures during informal approaches should be of the same standard as that the ATO would be entitled to under formal approaches.230 3.187 Clearly there are exceptions to the expected standard as articulated in the LBTC booklet. Where the ATO insists on using an informal approach, despite taxpayer requests for the formal exercise of powers, then it should accept that taxpayers would redact information subject to contractual or confidentiality obligations as a likely result.
Where this occurs, the ATO should not make negative inferences about the taxpayer’s ‘lack of engagement or transparency’.
3.188 The IGT is of the view that the ATO should better support its stated position in the LBTC booklet by reinforcing these types of exceptions in its internal guidance to ensure ATO officers deal appropriately with taxpayer requests for the exercise of the Commissioner’s formal information gathering powers.
Taxpayer exercise of legal rights such as LPP and FOI or use of the Accountants’ Concession
3.189 The IGT acknowledges that the ATO must take what formal action it sees fit under the law to consider significant transactions or potentially contestable positions.
In such cases, the ATO should seek the necessary information directly from the taxpayer where it is not provided voluntarily. However, the exercise by taxpayers of their legal rights such as LPP or FOI applications, should not, of themselves, lead to perceptions of non-compliance or even a ‘lack of transparency or engagement’.
3.190 The ATO has set an administrative precedent with PSLA 2004/14 which ensures that in certain circumstances where the taxpayer does not provide corporate board documents on tax compliance risk, the ATO will not make an adverse inference about that non-disclosure.231 This is a useful illustration that it is open to taxpayers in the self assessment environment to determine the nature of their relationship with the ATO, including how information is provided, without necessarily invoking the risk paradigm.
3.191 Whilst such acknowledgements of taxpayer ‘rights’ to maintain the confidentiality of certain board documents are important, it is even more important for the ATO to make at least the same acknowledgement for legal rights such as LPP claims and FOI applications.
3.192 The LBTC booklet does makes some references to how the ATO handles taxpayer claims for LPP and the Accountants’ Concession as well as tax risk board documents concession. These references, however, are in the context of compliance activities, rather than how the ATO considers past claims when considering likelihood risk factors for the purpose of the RDF.232
3.193 The IGT is of the view that the ATO should clearly articulate when the ATO will or will not consider the taxpayer exercise of legal rights and administrative concessions when assessing the taxpayer’s risk categorisation.
Australian Taxation Office, Access to ‘corporate board documents on tax compliance risk’, PS LA 2004/14,
(a) Consider ‘willing participation’ or ‘transparency’ in terms of information confidence and cost and use them alongside, but separate from, the RDF in determining the ATO compliance approach to taxpayers;
(b) The tool for assessing information confidence and cost should consist of objective and
specific criteria such as:
(vi) How did the taxpayer respond to our formal information gathering requests?
(vii) Did the taxpayer exercise their right to legal professional privilege correctly?
(c) Update its internal guidance to ATO officers to reflect its stated position in the LBTC booklet in relation to taxpayer requests for exercise of the Commissioner’s formal information gathering powers; and (d) State, in an appropriate publicly available document such as the LBTC booklet, its position with respect to the exercise of such taxpayer legal rights as LPP and FOI as well as use of Accountants’ Concession when determining the taxpayer’s risk categorisation.
The ATO considers willing participation and transparency pivotal in forming a view as to the likelihood of a risk. We agree to separately consider “information confidence and cost” for higher consequence taxpayers, those where we would be able to form an informed professional judgement on these aspects. We note that for lower consequence taxpayers we would not normally have the information necessary to answer the suggested questions due to the infrequency of interactions.
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Chapter 3 — Large business and internationalEffective tax rates 3.194 As noted in paragraph 3.38, the ATO does consider the taxpayer’s effective tax rate, or ‘tax performance’ in the template. However, it is unclear to stakeholders what the basis is for calculating effective tax rates and the weight the ATO attributes to these rates when determining the risk categorisation.
3.195 Tax performance is essentially indicated by tax payable, whilst indicators of economic performance are variously indicated by taxable income, net income and gross income. Where the rate is below the statutory rate, there is an emphasis on the ATO understanding the reasons for this.
3.196 A difference in the tax performance and the economic performance of a taxpayer does not automatically point to an inherent risk. The difference between the effective tax rate and the statutory rate may be due to policy design (for example, accelerated depreciation) rather than being attributable to tax planning.234
3.197 The IGT considers that effective tax rate analysis, whilst not definitive, serves as a useful signpost for ATO enquiries which may assist in identifying specific tax risks. The ATO template does not provide a particular risk hypothesis for this section but asks compliance teams to consider whether they understand the reason for any ‘divergence’.
3.198 During discussions with the IGT, stakeholders expressed a desire to better understand how the ATO made its calculations and comparisons.235 The ATO acknowledged the benefit of making such additional information available to taxpayers. This could include comparisons with others in the industry and a greater degree of granularity about the types of risks that concern the ATO. This information, however, would be limited to ensure the protection of other taxpayers’ privacy, and in order not to reveal any risk thresholds (to prevent manipulation).
3.199 The ATO has also undertaken some internal review work on the notification letters. For example, it was observed by some ATO staff that there would be benefit in separating the communication to the board (CEO, CFO) which should focus on relationship management, and the communication to the tax manager, which should focus on greater detail of the risks.236
Organisation for Economic Co-operation and Development, Addressing Base Erosion and Profit Shifting (OECD Publishing, 2013) p 19.
Australian Taxation Office, Large Business RDF – Report to Large Market Committee 16 February 2012, page 1.
Australian Taxation Office, ‘2012 – bright ideas for innovation and ‘aha’ moments’ ‘Lightbulb moments for
RECOMMENDATION 3.4 The IGT recommends that the ATO share with taxpayers greater detail about how the ATO assesses particular risks, including details about how the effective tax rate is calculated.
Risk ratings based on past behaviour
3.200 Stakeholders have noted that if the ATO always took into account past compliance history, then it may negate more recent positive behaviours of taxpayers.
The result may be that, despite the taxpayer significantly improving their tax risk management and governance processes, the ATO may still regard them as higher risk due to past non-compliance. Such delays in changing ATO behaviours may adversely impact on continued taxpayer improvements.
3.201 In this respect, the ATO’s template has sections on both ‘compliance history’ and ‘real time compliance’. The compliance history section gives the following
The compliance history of the taxpayer is an indicator of future compliance performance.
3.203 The IGT is of the view that the compliance history of a taxpayer may be relevant in assessing the likelihood of the taxpayer being non-compliant. These considerations largely focus on the taxpayer’s compliance with their obligations to correctly register, report, lodge and pay. For example, where the taxpayer is regularly lodging late returns and statements, incorrectly reporting information in these returns
and paying debt late, it may be indicative of poor internal controls or an under-resourced tax function that is likely to see such non-compliance continue.
3.204 This criterion is subject to a number of considerations in the large business market. For example, aspects of compliance history may be immaterial or the underlying cause of non-compliance may have been addressed. Such factors have the potential to make analyses of past compliance behaviour an unreliable indicator of future compliance particularly where taxpayers have resolved legacy issues, improved their tax governance and are seeking a better relationship with the ATO.
The role of taxation advisors
3.205 The ATO has previously indicated that it may consider the taxpayer’s association with a particular intermediary when determining the taxpayer’s risk categorisation. For example, at the National Tax Liaison Group (NTLG), the ATO has
The ATO has signalled on a number of occasions that the use of advisors who have a history of association with controversial or contestable tax planning arrangements will be a consideration in determining the overall risk rating of taxpayers.239
3.206 Furthermore, the LBTC booklet, under the heading ‘Checklist of what will
attract our attention’ contains the following:
3.207 During the IGT’s Self Assessment Review, stakeholders raised particular
concerns in relation to the ATO’s risk approaches to tax advisors:
Many submissions from tax professionals expressed concern with the ATO’s recent approach to assessing tax advisors’ risk of non-compliance and their competence. Unlike an adverse risk rating given to a taxpayer (which may result in an increased likelihood of administrative scrutiny), an adverse risk rating for advisors may result in that advisor becoming unemployable.
It seems that, in certain circumstances, the ‘aggressiveness’ of an advisor is considered significant in determining the taxpayer’s risk rating. In this respect, the ATO considers that if tax advisors are supportive of the system and engaged with the ATO, all things being equal, this would lower the ATO’s perception of the underlying risk that their clients (taxpayers) pose to the system.
… Stakeholders, however, have outlined situations where ATO views on advisors were not necessarily based on objective evidence. In addition, they note that where the perception is incorrect, there is no recourse but to contest this. Moreover, where the Australian Taxation Office, NTLG minutes September 2011 (9 December 2011) http://www.ato.gov.au.
3.208 Stakeholders have argued that the ATO should be more concerned with the merits and correctness of the position being adopted. These tax positions, although potentially contestable, may ultimately prove to be correct.