«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
Australian Taxation Office, Consolidation risk rule workshop meeting minutes 30 July 2012.
4.41 Stakeholders expressed concerns as to whether the ATO would communicate the risk categorisation to them and, if so, how. Furthermore, where the ATO sought to notify the taxpayer of their risk categorisation, there were also concerns as to whether the taxpayer would have an adequate opportunity to have such a categorisation reviewed.
4.42 Some stakeholders indicated that communicating the ATO’s specific risk concerns would assist taxpayers and their advisors in self-managing their own compliance risks and may assist in promoting voluntary compliance. Other stakeholders appreciated that such an approach may be impractical for the entire SME market segment, but highlighted that such an approach may be justifiable for the largest taxpayers in this segment. The ATO often refers to this collective segment as ‘S4’, being businesses with a turnover of between $100 million to $250 million.
4.43 As shown in Figure 16 above, the ATO has identified 5500 SMEs, 450 HWIs and 1900 wealthy Australians as higher risk taxpayers. The ATO has indicated that not all taxpayers would receive a notification of their risk categorisation due to the numbers in this market segment. Furthermore, the ATO has indicated that it would only provide a risk categorisation to taxpayers if new compliance activity was underway.302
• 120 reviews and 50 audits of wealthy Australians.303
4.45 The ATO has previously conducted trials and pilots in sharing risk information with some SME taxpayers and their advisors. Between February 2009 and April 2012, the ATO ran the Risk Assessment Information Sharing (RAIS) project. Part of the RAIS project was jointly run with KPMG.304
4.47 One of the results of the RAIS project was the ATO’s development of two risk
communication products for taxpayers in the SME market, namely:
4.48 The intent of the Compliance Notification letter was ‘to provide earlier certainty to businesses about the conclusion of their tax affairs for that year, improving their experience with the tax system’.307
4.49 The objective of the risk report was for the ATO to influence taxpayer behaviour and ‘demonstrate their openness and transparency’ about their view of tax risk.308
4.50 Further information about these products was provided to the ATO Tax Practitioner Forum (ATPF) SME sub-group in March 2013 of which IGT officers attended as observers.309 Some practitioners raised potential issues with the intent and delivery of the Compliance Notification letters, citing potential unintended increases in uncertainty and compliance costs from undertaking a further pilot.
4.51 Since then, the ATO has informed the IGT that due to feedback from various sources, the ATO would not proceed with issuing Compliance Notification letters to
lower-risk taxpayers. The main reasons for not proceeding were that:
the initiative would require a high level of ATO resources;
the letters may not achieve the intent of providing certainty to taxpayers;
the letters may actually increase compliance costs or cause them concerns; and lower-risk taxpayers did not desire contact from the ATO for this purpose.310
4.52 For the risk reports, the ATO is continuing to develop further trials, with 500 risk reports sent in March 2013. The ATO intends to only send risk reports to higher consequence taxpayers that are the subject of new ATO compliance activity, citing resource demands given the large numbers of taxpayers in this market segment.311
Australian Taxation Office, ATPF SME sub-group June 2012 minutes, http://www.ato.gov.au.
Australian Taxation Office, Communication Strategy Risk Report February 2013.
Australian Taxation Office, ATO S&ME RDF handout for ATPF SME sub-group, 14 March 2013.
Representatives of the IGT were present as observers.
ATO communication to IGT, 27 March 2013.
4.53 The IGT recognises the usefulness of the SME business line approach in communicating the risk assessment process to the general SME population through the Tax Compliance guide as well as aspiring to make more personalised communication with taxpayers about their particular risk profile, such as through the risk report pilot.
4.54 In this respect, the Tax Compliance guide reflects the same consideration of transparency to that described in the Large business and tax compliance (LBTC) booklet
targeted at the large business market:
We believe that being transparent, accountable and willing to engage constructively with us reflects good corporate citizenship and a positive attitude to compliance with tax law.
By taking this approach, you are likely to lower your tax-risk profile and enjoy the benefits of good reputation that follow.312
4.55 However, due to the large numbers of taxpayers in this market segment, a different approach to that taken with large business taxpayers is required. This will require a different balance to be struck between providing due process for taxpayer risk categorisation notifications and the ATO’s use of resources for such a large number of taxpayers.
4.56 Where the ATO is intending to conduct compliance activity, such as a risk review or an audit, it is vital the ATO and the taxpayer have an opportunity to discuss the taxpayer’s risk categorisation. This may address certain taxpayer concerns about receiving due process as part of the risk categorisation process.
4.57 It is apparent, however, that the ATO currently categorises more taxpayers as higher risk than it plans to risk review or audit. Presumably that means those selected for further compliance activity pose an even higher risk and should perhaps be placed in a different risk category. Whilst adding a further category to the RDF may not necessarily change taxpayers’ relative risk positions in terms of the ATO’s perceptions of likelihood and consequence, it better identifies the highest risk taxpayers and better supports the ATO’s actual resource allocation choices and initial taxpayer engagement stance.313
4.58 With respect to the risk reports, the IGT observes that it is desirable for taxpayers to have a better understanding of what the ATO considers to be risk factors and to have the opportunity to change their behaviour if they so desire.
4.59 The SME business line has also indicated that its risk reports are ‘indicative and not definitive’.314 This is due to the reliance on quantitative data and the lack of a qualitative moderation process as per the LB&I process. Therefore, the risk report arguably represents a lower ‘reputational risk’ to the taxpayer and perhaps a lower reputational risk for the tax manager of the taxpayer.
4.60 In this context, the IGT is concerned that it may be difficult for large numbers of taxpayers to have a one-on-one meeting with ATO staff to discuss the issued risk reports. Accordingly, great care needs to be taken to ensure the process is reliable and robust in this market segment. If not, costs and related consequences may blow out for both taxpayers and the ATO.
4.61 The IGT notes the importance of stakeholder consultation as seen in the case of the now discontinued Compliance Notification letters. Consultation through the ATPF surfaced important feedback about the potential unintended consequences of the proposed letters. Such consultation ensured that the ATO did not undertake a potentially resource intensive project that may have resulted in more uncertainty and higher compliance costs for taxpayers.
4.62 The IGT also sees an opportunity for the ATO to provide greater certainty through publishing more information about the risk flags. As noted in the previous section, risk managers are responsible for developing risk guides for each risk rule. The guides should contain information for compliance officers to consider when
undertaking reviews, namely :
4.63 It is the IGT’s view that all risk guides should contain at least the above three elements. The risk hypothesis will assist compliance officers in their information gathering activities. Furthermore, when the risk hypothesis is communicated to the taxpayer, the taxpayer will understand why the ATO officer is asking for related information.
4.64 Currently, all risk areas published in the Tax Compliance guide are listed by name only. These are reproduced in Appendix 10. The IGT believes that these risk areas should be accompanied by risk hypotheses and factual situations which should attract the attention of the taxpayer and the ATO. Such approach can be seen in the LB&I income tax risk filter depicted in Figure 10 in Chapter 3.
4.65 Providing the risk hypothesis, along with the relevant risk factor assists taxpayers in understanding the nature of the ATO’s concerns. For example, one of the characteristics on the ‘What attracts our attention’ list is a specific reference to ‘accessing business assets for tax-free private use’. For this risk factor, it may be useful for taxpayers themselves to understand that the tax-free private use of business assets
has certain tax implications. The risk hypotheses in this instance may be:
Australian Taxation Office, Risk Guide for FBT and Available Fraction.
Taxpayer may not have correctly reduced their deduction for decline in value for depreciating assets, due to the private use increasing the non-taxable use percentage (s40-25 Income Tax Assessment Act 1997 [ITAA 1997]).
4.66 Expressing the risk hypotheses with the risk factor in the manner outlined above assists taxpayers and their tax advisors to better understand their own risk, by checking to see if those risk factors match their circumstances.
4.67 It should be noted that the IGT uses the term ‘risk hypothesis’ in the same way it is used in his LB&I Review316 and in the large business active compliance manual.
The large market income tax risk filters317 and other ATO documents refer to the risk hypothesis as the ‘risk description’.
(2) publish additional information on the risk factors currently listed in the publication Tax compliance for small-to-medium enterprises and wealthy individuals such as the risk hypothesis and the indicators used to determine the presence of risk.
The ATO supports greater transparency in respect of what attracts our attention and will also look at other publications to provide this information, for example, placing links in the online Compliance in Focus publication.
PROPORTIONALITY OF ATO COMPLIANCE APPROACH
4.68 Stakeholder representations from this market segment were largely focused on the inputs that the ATO uses to arrive at risk categorisation and the manner in which the ATO would communicate such a categorisation. Whilst the ATO’s compliance approach is generally articulated in their Tax Compliance publication, taxpayers are yet to experience the full effect of the RDF since its use in this market segment is at an earlier stage than in the large business market.318
4.69 The IGT also observes that there are significant differences between the large business market and the SME market and as such this will require different ATO approaches.
4.70 Nevertheless, the IGT’s observations in Chapter 3 highlight the importance of ensuring that the ATO’s compliance approach is proportionate to the perceived or actual risk. This includes not only the level of risk, but the type of risks which concern the ATO. These include inherent risk factors, behavioural risk factors and information confidence concerns. Clearly articulating these concerns separately ensures that ATO officers make targeted inquiries and use approaches that are proportionate to the differing mixes of these risks and concerns. Furthermore, such an articulation ensures that taxpayers better understand the ATO’s concerns and the specific means by which to address those concerns.
4.71 The IGT acknowledges, however, that unlike the higher consequence taxpayer segment in the large business market, the ATO cannot make the same in-depth qualitative assessment of the taxpayers’ behavioural risks for SMEs. For example, since many SMEs are privately-held, there would be less publicly available information on the taxpayer’s tax risk management and corporate governance systems.
4.72 As noted above, the ATO currently takes into account three ‘contextual attributes’ when using the risk rules. The contextual attributes can be considered as types of behavioural factors. Other behavioural factors may need to be inferred from the taxpayer’s compliance history, such as timely lodgment of returns and making of payments.
RECOMMENDATION 4.3 The IGT recommends that the ATO, in consultation with stakeholders, test the distinction between inherent factors, behavioural factors and information confidence and cost for this market segment.
4.73 The IGT makes more general recommendations regarding proportionality in Chapter 8 of this report.
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CHAPTER 5 — MICRO BUSINESSES
5.1 The vast majority of stakeholder concerns that the IGT has received in the past with respect to the ATO’s risk assessment tools from this market segment relate to the ATO’s use of benchmarks to risk assess business operating in the cash economy. The IGT has already conducted a specific review319 into this area, the findings and recommendations of which were well-supported by affected stakeholders and from which conclusions will be drawn in the final chapter of this review.
5.2 The ATO does use other risk assessment tools in this market segment;