«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
• The level of information required from the taxpayer to give assurance to the ATO about a particular risk.
• The frequency with which information is requested of the taxpayer.
• The likelihood the ATO will use its formal information gathering powers.
• The likelihood the ATO will seek details of decisions made by key decision makers or committees.
3.304 Lower consequence taxpayers are not subject to real-time, continuous monitoring. Rather, the ATO usually conducts compliance activities as and when risks emerge through the ATO’s internal processes. This is usually the result of the taxpayer triggering the risk filters and subsequently being the subject of a recommendation by a risk manager for review in relation to that specific risk.
3.305 Once a risk recommendation is made the taxpayer’s case is workshopped by the CSSC who decide on the pool of cases for compliance activity. These compliance activities are typically risk reviews. The process for conducting the risk review is set out in the ATO’s LBAC manual.
3.306 As already mentioned, the IGT supports best practice risk management principles as a general proposition. The application of ATO resources should be proportionate to the relative risk. This is generally adopted as an enterprise wide concept in commerce as well as many public organisations.
3.307 The IGT considers that it may be difficult for taxpayers to understand whether or not particular ATO compliance action is appropriately differentiated.
3.308 The explicit use of the RDF to categorise taxpayers may have caused taxpayers, who previously had modest ATO contact, to now receive considerably more contact. The IGT is of the view that such a change of itself does not necessarily indicate that the ATO compliance approach is disproportionate to their relative risk level where those ratings opinions have been reasonably expressed and communicated to taxpayers. Indeed, it has also been suggested that it may be better to know what the ATO perceptions are so that one has the opportunity to address them.
3.309 The IGT is of the view that one of the main sources of contention in this area is the ATO’s ability to reasonably and transparently determine and communicate their opinion of the taxpayer’s relative risk. As described in the background, the RDF only makes a distinction between key taxpayer and higher risk taxpayers for higher consequence taxpayers. Furthermore, the RDF notification letter only provides those categorisations.
3.310 Nevertheless, as indicated in the moderation panel documents, and the PCR framework guidance documents, the ATO now sub-divides the key taxpayer quadrant
into three different sections:
3.311 Whilst the ATO compliance approach may on one view be proportionate to the perceived risk level, the risk levels that the ATO are relying upon to develop these approaches are not explicitly communicated to the taxpayer.
3.312 For example, some previously higher risk taxpayers that are now key taxpayers may in fact be ‘key taxpayers with concerns/significant concerns’. However, the taxpayer is unaware of this more recent sub-categorisation and may explain why they may be receiving a level of scrutiny beyond their expectations.
3.313 The IGT is of the view that the ATO’s use of the RDF framework should be properly reflected in their various publications and communications to taxpayers. The notification letter, by way of example, should explicitly contain the key taxpayer sub-categorisation, in addition to any content addressing particular concerns. By making the sub-categorisation explicit, taxpayers will have a better understanding of the ATO’s opinion of level of relative risk and expected compliance approach.
3.314 As discussed in paragraph 3.276, there is scope to provide taxpayers with more specific information about particular risks and the relative risk as compared to other taxpayers. Such information will also assist ATO compliance teams to better understand the risk hypotheses used as a starting point for subsequent ATO compliance actions.
3.315 In this respect, the LBAC manual highlights the importance of the risk
A clear risk hypothesis is very important when involving others in the compliance activity. The taxpayer and ATO experts can contribute more efficiently through an early engagement strategy where the risk hypothesis is clearly stated.
3.316 The IGT is of the view that targeted information requests during risk reviews are one way that the ATO can tailor their compliance response to the risks posed by the
taxpayer. By ensuring that information requests are targeted only to those risk hypotheses that have been raised during the internal risk processes, taxpayer as well as ATO compliance costs can be minimised.
3.317 This is consistent with the observations made in the IGT’s LB&I Review, including Recommendation 8.2 of that review.277 3.318 The IGT understands that another source of concern arises from the fact that some key taxpayers have been the subject of audits. The ATO advises that these audits are in relation to prior year (or ‘legacy’) issues and that the RDF categorisation is relevant for the ATO’s current view of the taxpayer’s risk in real-time. Whilst the LBTC booklet highlights post-lodgment reviews for higher consequence taxpayers may take place to ‘manage a post-lodgment legacy year as part of a transition strategy into real time278‘, it does not make the same statement in relation to audits. For completeness, the ATO should update the LBTC booklet to reflect this approach.
Pre-lodgment Compliance Reviews (PCR)
3.319 In terms of higher consequence taxpayers, the ATO has indicated in their Real-time compliance engagement approach for higher consequence taxpayers in the large market fact sheet that such taxpayers will all be subject to a PCR if they do not have an ACA.
3.320 As previously mentioned, it is important for taxpayers to perceive benefits in a lower risk categorisation, such as lower compliance costs, to provide an incentive to adopt behaviours desired by the ATO. The broad application of the PCR, to all higher consequence taxpayers without an ACA, seems to taxpayers to undermine such a proportionate approach. However, the ATO intends to achieve a proportionate approach through the ‘tailoring’ of the PCR product in accordance with the LBAC manual (publicly available), and the PCR framework guide (ATO internal document).
3.321 Whilst the PCR framework guide is indicative of the spectrum of risk, including the concept of key taxpayers with ‘no concerns, some concerns and significant concerns’, the framework itself appears to place key taxpayers with some concerns and key taxpayers with significant concerns in one category. This may reduce the effectiveness of the guide in facilitating tailored PCR approaches for key taxpayers.279
… develop and implement procedures to periodically consult with relevant consultative forums and the community to review the information required on company and individual income tax returns and associated schedules as well as the information
Australian Taxation Office, Appendix 1 to Pre-lodgment compliance review framework guide for higher consequence taxpayers, 13 December 2012, see also page 8.
3.323 The ATO also agreed, as part of the above review, to publish more information about the conduct of PCRs through additional information in an updated LBTC booklet.281 The 2012 version of the LBTC booklet contains a ‘what we will do and what we expect from you’ section in relation to PCRs. Furthermore, additional information about the conduct of the PCR is available in the publicly available LBAC manual.
3.324 With respect to proportionality, the LBAC manual states:
3.325 The IGT is of the view, however, that taxpayers may gain greater confidence in the proportionality of the tailored PCR, if the ATO, among other things, made the PCR framework guide publicly available as part of the LBAC manual or LBTC booklet as appropriate.
3.326 Furthermore, the PCR if conducted appropriately represents an opportunity for the ATO to have ongoing dialogue with higher consequence taxpayers in a manner which affords natural justice, assists taxpayers to make informed choices about their risks and ensures the ATO approach is proportionate to those choices. Such benefits may only be realised if the PCR is conducted as a consultative activity and not merely as another information gathering activity.
3.327 To illustrate this view, consider the following example. As discussed above and consistent with Recommendation 3.9 above, rather than the RDF notification letter going directly to the CEO of the taxpayer, the letter can serve as an opportunity for the ATO to share its risk perspectives with the tax manager. These include an explanation of the ATO’s opinion on the taxpayer’s inherent risks, behavioural risks and information confidence and cost levels and the evidentiary basis for such an opinion.
This may include information about particular taxpayer risks, how they compare with others in the market and/or information from the risk filters. It may also include
Ibid p 102. It should also be noted that there was a PCR related Recommendation (4.
7) about capping penalties and interest for taxpayers subject to these processes. The matter was noted by the Government. ‘The Government needs to better understand how the ATO uses these tools to address risk and how they are used to enhance compliance levels and the effect on compliance more generally’. David Bradbury, Assistant Treasurer, ‘Inspector-General of Taxation review into improving the self assessment system’ (Media Release, 13 February 2013).
ATO, above n 268.
information sourced from the RTP schedule and IDS and the ATO’s views on those disclosures.
3.328 In the above example, the tax manager can test the evidence and better understand the ATO’s proposed approaches in light of those risks. Where the ATO’s primary concern is about information confidence and cost, the ATO’s subsequent PCR approach may focus on formal information gathering, unless the taxpayer opted for more real-time disclosure.
3.329 Alternatively, where the ATO is primarily concerned about the inherent risks, the ATO’s subsequent PCR would focus on ensuring the taxpayer has adequate tax risk management arrangements in place to mitigate those inherent risks.
3.330 A letter may then be sent to the CEO setting out these approaches. The taxpayer is then in a position to make an informed choice as to how they will engage with the ATO over the coming year and select the most appropriate engagement option.
3.331 The PCR may then commence on a basis of consultation and differentiation.
At the end of the PCR process, the ATO may review the year with the tax manager.
Such a consultation may form the basis of the next risk template. Figure 14: Potential integrated PCR process below outlines this approach and incorporates the approach described in Recommendation 3.9.
3.332 The IGT also notes that the PCR elements suffer the same difficulties in application that the RDF does regarding notions of sustained cooperation, level of transparency and willing participation as noted earlier in the chapter.
3.333 The ATO’s internal audit team found that there were opportunities for the template, TAP and PCR plans to be streamlined and to make the relationship between these documents clearer.283 Australian Taxation Office, Internal Audit Communications Update 14 May 2013, page 6.
Source: IGT RECOMMENDATION 3.10
The IGT recommends that the ATO:
(a) make the pre-lodgment compliance review (PCR) framework guide publicly available as a part of either the large business compliance manual or large business and tax compliance (LBTC) booklet;
(b) disclose the risk categories more fully, including any sub-categorisations of the key taxpayer segment, in RDF notification letters and in the LBTC booklet;
(c) ensure that the compliance burden of PCRs are graduated according to differing levels and mixes of inherent risk, behavioural risk and information confidence and cost factors; and (d) update the LBTC booklet to indicate that audits may still be applicable to manage legacy issues even where the taxpayer is a key taxpayer.
ATO response Agree.
4.2 It should be noted that many of the discussions in the previous chapter may become relevant in this context depending on how the application of the RDF to this market segment evolves.
• inputs into the risk categorisation process — uncertainty was expressed as to how the ATO uses quantitative and qualitative data; and
• communication of the risk categorisation — whether and how the ATO will communicate to the taxpayer their opinion of the taxpayer’s risk and whether the taxpayers would be afforded due process.
4.4 This chapter provides some background to this market segment and the ATO’s SME business line before addressing the above stakeholder concerns.
BACKGROUND4.5 The ATO’s SME business line administers SME taxpayers as well as those classified by the ATO as ‘highly wealthy individuals’ and ‘wealthy Australians’.
4.6 SME taxpayers are those entities with an annual turnover between $2 million and $250 million. This particular market segment comprises a diverse group of businesses such as closely held private groups, foreign owned multinational corporations, charities, sole traders and partnerships.
4.7 Highly wealthy individuals (HWIs) are those Australian resident individuals who, together with their associates, effectively control $30 million or more in net wealth.