«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
3.209 It has also been suggested that any concerns about specific advisors are already dealt with in various statutory or professional standards governed by regulatory or professional boards. Further, advisors may be sued by their own clients for not fearlessly and frankly advising their clients of the optimal position to adopt under the tax laws.
3.210 The ATO’s template considers certain questions in relation to the taxpayer’s use of external advisors. These are described above in paragraph 3.48. However, there is little additional guidance provided as to how this information should be considered in formulating the risk categorisation.
3.211 Despite the questions in the template, during the course of this review, the ATO has advised the IGT that, with respect to higher consequence taxpayers, the ATO does not consider the taxpayer’s engagement of particular tax advisors as determinative of the taxpayer’s risk categorisation. Rather, it is focused on the actual transactions that the taxpayer undertakes as a result of that engagement.242
3.212 Further, if the taxpayer adopts a contestable tax position as a result of that engagement, the ATO would still rate them as a key taxpayer (rather than a higher risk taxpayer) where the taxpayer was forthcoming with material information about the transaction. The ATO’s concerns about the transaction (rather than the advisor) would be reflected in the RDF letter to the taxpayer.243 3.213 The ATO has also indicated that difficulties in the relationship with the taxpayer cannot necessarily be attributed to any particular personnel within the organisation. The ATO would only include in the RDF letter examples of taxpayer behaviour that were causing concern. For example, the ATO would state the time taken for the taxpayer to respond to information requests, rather than naming any particular person or imputing any motive for the delay.244 The ATO considers that since personnel themselves are not risk factors, the ATO focuses on the taxpayer’s governance and tax risk management structures.
3.214 Beyond the template and the above advice provided by the ATO, there is minimal public guidance available indicating the ATO’s approach in this area.
3.215 The ATO has also advised that where it is apparent that a taxpayer had undertaken a particular contestable position as a result of a tax advisor promoting the scheme, it may investigate other clients of the tax advisor, with a view to administering IGT, above n 5, paras [3.94] – [3.95] and [3.97].
ATO meeting with IGT, 17 April 2013.
the promoter penalty legislation.245 Such administration, however, is within the purview of the ATO’s Aggressive Tax Planning business line rather than LB&I.
3.216 The IGT has already explored the arguments for and against applying the RDF to tax advisors or practitioners in his Self Assessment Review.
3.217 Unlike assessing tax liability, ATO risk assessments of advisors and the like are not generally considered to be ‘reviewable’ through any forum such as the Administrative Appeals Tribunal. As such, in the review mentioned above, the IGT asserted that if the ATO were to persist in applying the RDF to tax advisors, the latter must have a right of review.
3.218 In response to recommendations in that review, the ATO has stated that it does not disclose the tax advisor’s risk categorisation to their clients. Therefore taxpayers are unaware of the risk rating of advisors and it follows their choice of advisor may therefore not reflect the taxpayers’ risk appetite.
3.219 The IGT is of the view that the ATO should not use the choice of tax advisor as a factor in determining the taxpayer’s risk rating. The focus should be on objective criteria to determine actual tax risks rather than using an unreliable shortcut of identifying individual advisors. This is especially so since taxpayers may use a range of different advisors for different tax matters.246
3.220 Although the ATO approach as described in paragraphs 3.211 to 3.215 above accords with this IGT view, such an approach is not reflected in current ATO guidance material.
3.221 The IGT is of the view that the ATO may reduce concerns by ensuring ATO expectations are made clear in staff guidance, such as in the template as well as public guidance, such as in the LBTC booklet regarding the role of tax advisors in the taxpayer risk assessment process. Including examples of the ATO’s approach in this area will provide further clarity on the matter.
RECOMMENDATION 3.5 The IGT recommends that the ATO update its internal and public documentation to make it clear that use of particular tax advisors is not a factor in determining a taxpayer’s risk categorisation.
We will improve existing documentation for both staff and the public about when we will follow up on tax arrangements that we view as contentious and associated with certain Advisors.
See Chapter 7 for more information about the promoter penalty legislation.
3.222 Further consideration of the ATO’s risk assessment approaches in relation to tax practitioners is discussed in Chapter 7.
ATO considerations of taxpayer governance
3.223 Stakeholders have generally supported the increased ATO focus on taxpayer governance processes, acknowledging that it enhances the ATO’s risk-based approach.
Some concerns have been expressed, however, about the capability of ATO officers to make judgements about the adequacy of the taxpayer’s tax risk management and governance processes. For example, one submission indicated that the ATO was unsure if the taxpayer had an audit committee, despite the fact that the taxpayer was a publicly listed company with pertinent information being available in its annual report and accessible via the internet.
3.224 Furthermore, stakeholders have raised concerns that how a tax manager deals with his or her own personal tax obligations has a bearing on the risk rating of the taxpayer for whom they work. The following difficulties with the current ATO
approach have been highlighted:
• employees should not be compelled to disclose their personal tax affairs to their employer;
• the ATO itself is better placed to know and deal with the personal tax obligations of tax management staff; and
• the personal tax performance of tax staff has limited correlation to their ability to carry out the corporate tax function.
3.225 As noted above, the ATO’s template specifically considers the ‘taxpayer’s tax risk management and governance process’. Furthermore, the LBTC booklet contains specific expectations regarding a taxpayer’s tax risk management arrangements at both the strategic and operational levels. Under the operational level checklist, the ATO asks
taxpayers to ensure:
3.226 Such a requirement, however, is not included in the ATO’s template.
3.227 Senior ATO management have indicated that the ATO’s interest in a
taxpayer’s tax risk management and governance stems from two risk hypotheses:
• a taxpayer may have inadequate tax risk management and governance and may be inadvertently adopting potentially contentious tax positions, or even obviously non-compliant ones, without being aware of it and therefore exposing themselves to possible compliance action due to poor tax risk management control systems; or
• a taxpayer may have good tax risk management and governance, but the taxpayer has knowingly adopted a contestable tax position as a result of management’s willingness to accept higher levels of tax risk.248
3.228 The IGT believes that it is appropriate for the ATO to consider the tax risk management and corporate governance arrangements of the taxpayer. It is important to adopt methods which seek to minimise the overall costs of taxpayer compliance and administrator costs by focusing more on the systems and structures that govern the decision-making and operations.
3.229 The ATO has elevated the importance of a taxpayer’s corporate governance in many publications, such as the LBTC booklet. Furthermore, the ATO has made ‘sound tax risk-management processes’ as a one of the pre-requisites for entering into an ACA.249
3.230 Large businesses are generally aware of and compliant with their regulatory responsibilities and obligations including taxation. Accordingly, they appreciate that they have to bear a baseline level of compliance costs. Unnecessary compliance costs, however, are a burden that imposes a dead weight cost on them and the economy.250 This market, along with other commercial markets, understandably seeks to minimise such costs.
3.231 Therefore, the ATO should ensure that its expectations of corporate governance and tax risk management are as closely aligned as practicable with the general corporate governance standards which are expected of corporate taxpayers.
Any prescription or divergence over and above general corporate governance standards has the potential to reduce flexibility of the system251 and unduly increase compliance costs.
3.232 Furthermore, the examination of tax risk management and corporate governance requires specific skills and experience. It is important, therefore, that ATO compliance staff tasked with the examination and assessment of a taxpayer’s corporate governance are adequately skilled to undertake such a task and that such an assessment is subjected to an appropriate internal assurance process.
3.233 The IGT is also of the view that it is not appropriate for the ATO to effectively impose an obligation on taxpayers to monitor their employees’ personal tax affairs.
Taxpayers have little control over how their employees manage their own tax affairs and the ATO is in better position to know if particular taxpayers are complying with their personal tax obligations.
Australian Taxation Office, Annual compliance arrangements – what you need to know (7 June 2013) http://www.ato.gov.au.
IGT, above n 122, para [3.17].
KPMG, Tax in the boardroom (2005).
(a) ensure that its LB&I compliance staff are appropriately skilled to examine and assess the adequacy of a taxpayer’s corporate governance and tax risk management arrangements and that such assessments are the subject of an appropriate internal assurance process; and (b) remove tax manager personal tax obligations as a consideration when assessing the taxpayer’s tax risk management and corporate governance.
In relation to (a), capability building is an ongoing aspect of maintaining and developing a professional workforce and we invest significantly in our learning and development programs. Our acquisition and or use of external experts also contribute to these developmental programs. Through implementation the ATO will consult with the IGT and others in relation to the specific elements of assessing tax corporate governance and tax risk management which require greater focus.
General IGT observations about inputs
3.234 Further to concerns raised by submissions in relation to the adequacy and relevance of inputs, some general observations can be made on the ATO’s use of these inputs, the risk filters, risk managers and risk owners. These are each discussed in turn below.
Distinguishing between different ATO risk factors
3.235 The ATO uses a variety of risk factors in its risk categorisation process. Each of these risk factors may be indicative of specific concerns. The way in which the ATO resolves these concerns will depend on the nature of these risk factors. Better distinguishing between these factors may ensure that the ATO adopts the most suitable approach.
3.236 The IGT considers that the ‘likelihood factors’ in the ATO template cover three
• inherent risk factors;
• behavioural risk factors; and
• information confidence and cost.
3.237 Inherent risk factors are those economic or business factors or transactions which, by their very nature, increase the likelihood of a taxpayer adopting a position with which the ATO may disagree (a contestable position). Taxpayers are essentially unable to eliminate these risks since they are a feature of the business they are in. For
example, a taxpayer may technically be able to minimise the risks associated with cross-border transactions by ceasing them altogether, but this is unrealistic.
3.238 Behavioural risk factors are those aspects of a taxpayer’s behaviour, such as a taxpayer’s tax risk management and governance and appetite for risk, which either serve to mitigate or exacerbate a taxpayer’s inherent risk. Taxpayers are more likely to have greater discretion over these risk factors and may minimise behavioural risk factors by adopting certain behaviours or approaches. This may include actions such as increasing resourcing to its tax management function, improving tax information systems or ensuring tax risk management policies are board-approved.
3.239 Information confidence and cost factors have already been addressed in the preceding sections.
Inherent and behavioural risks
3.240 The distinction between inherent risk factors and behavioural risk factors is usefully described in Her Majesty’s Revenue and Customs’ (HMRC) Tax Compliance
Risk Management Manual. The manual firstly considers seven factors:
Complexity — The potential risk in the size, scope and depth of business or tax interests.
3.241 The manual then describes the relationship between these factors: