«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
3.267 The ATO’s position is that the RDF notification letter provides an ‘initial stance’, or opinion of the taxpayer.264 A senior executive contact officer is available to discuss the categorisation. Furthermore, the ATO has advised that compliance officers should be discussing the risk factors with tax managers before the notification letter is sent to the taxpayer such that there should be ‘no surprises’ in the letter.265 3.268 Notwithstanding this ATO ‘initial stance’ approach, the IGT considers that there are a number of factors that undermine this characterisation, giving the RDF letters a sense of finality.
3.269 First, the risk categorisation process, which includes the moderation panel, indicates that significant ATO resources are used to determine the risk categorisation as well as aspects of the notification letter’s potential tone and content.
3.270 Second, the ATO undertakes an internal forty-step process in drafting the RDF notification letter, indicating significant ATO resources are used to produce the letter itself. However, concerns were expressed that taxpayers are not consulted during either of these two stages of deliberation.
3.271 Third, the ATO’s expectation that compliance officers discuss with tax managers the impending notification letter appears to be a general one. Accordingly, it is understandable that taxpayers and tax managers may feel surprised by its content.
3.272 Fourth, sending the letter to the board members (such as the CEO) of higher consequence taxpayers elevates the importance of the letter well beyond that of ‘initial
stance’ and this is essentially by design:
Our advice has focused the attention of senior executives and Boards on tax matters and has heightened interest in the ATO’s view of their relative tax risk. Taxpayers identified as ‘higher risk’ are talking to us about things they can do differently and ‘key’ taxpayers want to know how they can maintain their ratings.266 3.273 Fifth, tax managers have indicated that they had little opportunity to have the letter or categorisation revisited before they are sent to the CEO or the board. Some reported that the notification letter was sent to the tax manager as a courtesy, shortly before being sent to the board, and that the tax managers had insufficient opportunity to address their concerns or correct factual errors in the letter.
3.274 The IGT considers that the current features of the notification process suggest that the letter is effectively a form of administrator’s opinion of the taxpayer which goes beyond an ‘initial stance’.
3.275 In the IGT’s view, some changes to the ATO approach would engender greater mutual transparency and assist taxpayers to better understand the reasons for the ATO’s concerns. A more effective consultation process would provide a better basis to identify risks and develop appropriate compliance action. Affording due process to
tax managers may be better achieved by greater consultation before the issuance of the RDF notification letter, rather than after it.
3.276 Firstly, the IGT believes that the completion of the template should be a point at which the ATO compliance team develops and sends a risk report to the taxpayer.
Such a risk report would be the template itself or one that effectively mirrors the contents of the template. The risk report should share the ATO concerns with respect to inherent risks, behavioural risks and information confidence and cost. The report would include the evidentiary basis for these risks including relevant risk filter output.
3.277 Second, the tax manager should be given an opportunity to correct any factual errors within the report and to discuss the ATO’s concerns. During this dialogue, the ATO should explain how the risks relate to any potential ATO compliance activity.
Even where there is disagreement about a particular risk issue, there should be sufficient engagement to enable the taxpayer to fully understand the ATO’s opinion and the reasons and evidence for it.
3.278 Third, once the ATO and tax manager have reached a shared understanding of the evidentiary basis for the risk assessment and its implications, the risk categorisation is subject to the moderation panel process.
3.279 Fourth, the ATO may undertake an internal development process to author and send the RDF notification letter to the CEO. Such a letter would be the product of thorough taxpayer consultation, rather than a purported initial stance.
3.280 This proposed process offers the following advantages:
• tax managers are given adequate notice about the ATO’s concerns and provides an opportunity to address them in real-time;
• the ATO can take into account tax managers’ concerns before finalising and communicating the risk categorisation;
• it removes potential errors from the template;
• it provides early agreement on facts and narrows the scope of potential disagreement;
• improved relationships through open dialogue;
• distinguishing between ATO perceptions of inherent risk factors and behavioural risk factors of the taxpayer avoiding unnecessary perceptions of a lack of professionalism or competence of the tax manager or indeed of the ATO itself;
• it builds on the ATO’s expectation that compliance teams communicate with tax managers in the lead up to the RDF categorisation process to ensure ‘no surprises’;
• it addresses timeliness concerns, since the ATO has engaged the taxpayer throughout the process, before the letter has been issued.
3.281 This consultative approach could also take into account the various communications and activities that the ATO already undertakes. For example, the
• align the ATO’s specific taxpayer compliance concerns with those expressed in the ATO’s Compliance in focus 2013-14 publication;
• reflect any recent activity from current or concluded PCRs or ACAs; and
• align with any protocols, frameworks or communication that were generated as part of implementing the TAP.
3.282 A transparent risk assessment system would enable the ATO to communicate its concern at an early stage and allow the taxpayer to understand the risk hypotheses more readily. Unnecessary or unduly onerous escalation by the ATO to CEOs or boards may be seen as an inefficient use of resources.
3.283 If the taxpayer and ATO together are able to address concerns collaboratively, then the IGT considers this to be a desirable outcome of the process.
3.284 The increased level of interaction between higher consequence taxpayer and the ATO is conducive to the above approach. In relation to lower consequence taxpayers, it may not be possible to strictly follow such an approach because of the less intensive level of ATO/taxpayer engagement. However, the underlying principles remain the same in both scenarios and should be observed.
RECOMMENDATION 3.9 The IGT recommends that the ATO improve the RDF notification letter process for higher
consequence taxpayers by:
(1) providing tax managers with a draft risk report;
(2) having a dialogue with tax managers to address any factual errors and discuss the ATO’s concerns;
(3) having the risk report subject to a moderation process after this dialogue;
(4) preparing the RDF notification letter by:
The ATO’s large business RDF approach continues to evolve and we continue to consult with business each year with a view to enhancing the RDF process.
STAKEHOLDER CONCERN — PROPORTIONALITY OF ATO COMPLIANCE
3.285 Stakeholders have raised concerns that, despite their lower risk categorisation, they have experienced ATO compliance activities whose intensity and frequency were more commensurate with higher risk taxpayers. Several stakeholders observed that, although they were categorised as a key taxpayer (Q2), they appeared to be treated as if they were a higher risk taxpayer (Q1).
3.286 A similar sentiment was expressed in relation to a taxpayer who had been given a medium risk (Q3) rating. Another view expressed by a professional advisor was that Q1 taxpayers appeared to receive consistent treatment, but Q2 clients appeared to receive inconsistent treatment as between themselves.
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3.287 Certain professional advisors observed that, in their opinion, the ATO did indeed treat Q1 and Q2 taxpayers differently in an overall sense. However, there were situations where the level of compliance intensity appeared to be inconsistent with that suggested by the original framework. There seemed to be changes in the ATO’s approach from the original model that were not communicated. Some argued that the ATO needs to explicitly sub-divide the key taxpayer quadrant (Q2) to allow for a meaningful differentiation in that segment and communicate this properly to reflect what the ATO actually do in practice.
3.288 Additional concerns include that the ATO has been moving some taxpayers from higher risk (Q1) to key taxpayer (Q2) as a means of allaying those taxpayers’ concerns, but are in fact still treating some of these taxpayers as higher risk taxpayers.
3.289 The overarching concern for stakeholders appears to be that, if the taxpayer did not perceive that a lower risk rating would result in a less intense ATO activity (and hence lower overall taxpayer compliance costs), the purported incentives that the ATO were offering in relation to the taxpayer were at best illusory and at worst misleading.
3.290 The extent to which the taxpayer’s risk categorisation is seen to follow the ATO’s stated intentions regarding a specific compliance approach is vital in creating incentives for taxpayers and for them to make informed choices.
3.291 Stakeholders have also observed that risk reviews and audits are two distinctly different compliance activities, requiring different skill sets from ATO officers. Concerns were expressed that compliance staff often took an ‘audit approach’ when undertaking risk reviews. By way of example they would seek to vouch for transactions or facts, rather than taking a risk-based approach and asking the right questions. The result being that risk reviews continued longer than required and with an intensity that went beyond that of a risk-based approach, which was more akin to an audit.
3.292 Stakeholders have also perceived that the ATO does not use a ‘funnelling’ approach to information gathering, but rather adopts a ‘gather all evidence’ approach early in the risk review process, driving up compliance costs. The suggestion is that the gathering of all evidence upfront is inconsistent with a risk-based approach and is not a proportionate compliance approach.
3.293 It is useful to consider the relevant ATO material against the above stakeholder concerns.
3.294 The ATO has indicated that the LBTC booklet and the LBAC manual are the main guidance materials when determining what compliance approach to take. In
particular, the LBTC booklet states:
For income tax, we support the real‑time compliance approach applied to higher consequence taxpayers through the use of a pre-lodgment compliance review.267
3.296 With respect to lower consequence taxpayers, the LBAC manual states:
For most lower consequence taxpayers (those categorised as lower or medium risk), the ATO undertakes internal review processes, monitoring, questionnaire, risk reviews or where we are more certain a risk exists, audit activity. For taxpayers categorised as medium risk we generally undertake targeted activities to confirm (detect) and deal with identified tax compliance concerns. These activities are more likely to be reviews and audits than questionnaires.
3.297 Additionally, the ATO has published a fact sheet called Real-time compliance engagement approach for higher consequence taxpayers in the large market.270 This publication and the LBAC manual indicate that all higher consequence taxpayers should expect a PCR if they are not in an ACA. This is regardless of their ATO assessed likelihood rating, that is, whether they are key taxpayers or higher risk taxpayers.
3.298 For higher consequence taxpayers, therefore, the ATO takes a compliance approach which is consistent with the taxpayer’s risk profile, resulting in the ‘tailoring’
of the PCR product. The LBAC manual states:
3.299 Furthermore, the ATO has additional internal guidance material for ATO officers when conducting PCRs, the Pre-lodgment compliance review framework guide for higher consequence taxpayers.272
3.300 This guidance indicates that the PCR is to be implemented with a level of engagement and intensity commensurate with the taxpayer’s level of relative risk.273
3.301 The guide’s framework for intensity makes a distinction between four types of
3.302 The guide makes the following observations about these groups of taxpayers:
Higher consequence taxpayers that fall into the first two categories will generally find similarities in terms of our approach to engagement and intensity. Higher consequence taxpayers that fall into the last two categories will generally find similarities in terms of our approach to engagement and intensity.
Numbers are from IGT analysis of ATO Moderation Outcomes for 2012-13. Numbers of ACA taxpayers are noted where ACAs for income are mentioned in the Moderation Panel Outcomes field.
ATO, above n 272, page 7.
3.303 The guide’s appendix sets out how these four groups would be approached by
the ATO in terms of: