«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
• ask the Federal Court to apply civil penalties;
• ask the Federal Court to issue an injunction preventing promotion of the scheme;
• accept voluntary undertakings; and
• where the Commissioner considers that the terms of the voluntary undertaking have been breached, to ask the Federal Court to make orders directing compliance with the undertaking or other appropriate orders.
7.15 The ATO has issued public guidance on how it manages the risk of non-compliance with the promoter penalty regime in April 2008 through the Explanatory Memorandum, House of Representatives, Tax Laws Amendment (2006 Measures No.1) Bill 2006,
publication of PS LA 2008/8 Application of the promoter penalty laws (Division 290 of Schedule 1 to the Taxation Administration Act 1953) to schemes involving product rulings.
7.16 Furthermore, the publication Good governance and the promoter penalty laws (Good Governance), first published April 2011, outlines the areas that currently concern the ATO and highlights the importance of a taxpayer exercising good governance to reduce the risk of non-compliance. A second edition was published in
December 2012. This publication also uses a form of ‘risk bow-tie’:
Source: ATO, Good governance and promoter penalty laws 2012, page 15.
7.17 The risk bow-tie highlights that the risk event to be prevented is the contravention of the promoter penalty laws. This can be contrasted with the usual application of the risk bow-tie to the tax laws, where the risk events relate to registration, lodgment, reporting and payment.
7.18 Importantly, the definition of the risk event focuses the ATO’s attention on the risk hypothesis that it is seeking to test when undertaking compliance activity under the promoter penalty regime.
7.19 The ATO has also indicated that it uses a risk differentiation framework with
respect to managing the risk of non-compliance with the promoter penalty laws:
Source: ATO, Good governance and the promoter penalty laws 2012, page 4.
7.20 According to the Good Governance publication, the ATO takes the following
approach with respect to advising intermediaries of their risk rating:
We notify such entities of their preliminary risk rating when we start a review or investigation of their conduct and their final risk rating at the completion of their case.351
We notify such entities of their preliminary risk rating when we start a review or investigation of their conduct and their final risk rating at the completion of their case.353 Australian Taxation Office, Good governance and promoter penalty laws (2012) p 6.
In relation to those entities which had a higher likelihood of contravening the promoter penalty laws, we undertook a mixture of promoter penalty action and audits of their personal tax affairs. We also initiated six proceedings in the Federal Court involving potential contraventions and executed a number of voluntary undertakings where less significant risks were demonstrated.
We engaged with industry, advisory firms and financial institutions about their involvement in financial products and contentious tax planning arrangements. We also undertook governance visits with 27 key intermediaries to examine how they manage
their promoter penalty risks. These engagement activities resulted in:
7.22 The IGT has received limited stakeholder representation with respect to the administration of the promoter penalty regime. This may be due in part to a much reduced level of scheme activity or ATO activity.
7.23 The ATO’s RDF approach for tax intermediaries in relation to the promoter penalty laws has been public since 2009.356 The ATO’s action in this area has been cautious with only one court case initially decided against the ATO but subsequently
Bruce Collins, ‘The promoter penalty regime - How the ATO is applying it in practice’, (Paper presented at the Tax Institute of Australia’s Annual Tax Forum, Sydney, 17 May 2012).
decided in favour of the ATO upon appeal.357 The ATO also notes that several voluntary undertakings have been provided.358
7.24 The ATO takes a differentiated approach to communicating risk categorisations to tax advisors depending on their categorisation. As such, those advisors categorised as lower-risk or medium-risk would not necessarily receive a risk categorisation on a regular basis.
7.25 The IGT understands that this approach may generate a degree of uncertainty for these intermediaries. Such uncertainty about the ATO’s view of their risk level is partly ameliorated by the publication of the risk factors in the Good Governance publication. This allows the intermediary to self-assess their risk to a certain degree.
Importantly, this is a specific legislative regime where the ATO is empowered to take action that has a high bar and is publicly transparent.
Our focus is on enhancing the ability of tax practitioners to promote proper participation in the tax and superannuation systems, and to create a level playing field for tax practitioners by dealing with those who don’t meet the high standards of the profession.
We recognise that the great majority of tax practitioners do a good job of ensuring that their clients properly participate in the tax and superannuation systems.
Our risk profiling indicates that across a range of different risks, around 90 per cent of tax practitioners have a high proportion of clients that are mostly compliant. Through our initial consultative processes with key tax practitioners we have seen best practices that support clients in getting it ‘right from the start’. On the other hand, 8–10 per cent of tax practitioners have higher proportions of clients who are struggling to meet their obligations, and a further 1 per cent have a significant proportion of clients that are at risk of non-compliance across multiple areas of their tax and superannuation obligations.359
7.27 The ATO is seeking to differentiate their approach to tax practitioners, according to the perceived ‘riskiness’ of their clients. The ATO is of the view that it can influence a larger number of higher risk taxpayers by interacting with a smaller number of tax agents. For example, in 2011–12, the ATO visited about 800 tax practitioners whose clients ‘had a high risk of under reporting cash income’.360 Commissioner of Taxation v Ludekens  FCA 142; Commissioner of Taxation v Ludekens  FCAFC 100.
7.28 The ATO has also framed this approach as an adoption of the RDF. This approach currently considers the risk of specific types of taxpayer non-compliance.
These areas are:
• income tax lodgment performance (non-lodgment and late-lodgment);
• income tax return integrity issues;
• work-related expenses behaviour;
• under reporting of income in cash-based industries; and
7.29 After the above analysis, the ATO has identified 1-2 per cent of tax agents as being higher risk tax agents. These agents account for 6-10 per cent of represented taxpayers. The figure below highlights this division (a larger version is reproduced in Appendix 11). The ATO’s Compliance in focus 2013-14 document states that it plans to engage with 100 tax practices in 2013-14 using the risk differentiation approach.361
7.30 The ATO has also communicated aspects of the tax practitioner RDF at various tax agent consultative forums in 2012.362 The tax practitioner RDF is also briefly mentioned in the September 2012 issue of the ATO’s TAXAGENT magazine.363
7.31 The ATO’s approach to risk differentiation for tax practitioners is relatively new and their compliance approaches are currently developing. In his Self Assessment Review, the IGT expressed some reservations about the application of an RDF to tax
practitioners and proceeded to recommended that:
The ATO should continue consultation with the tax profession to identify strategies to achieve a more constructive relationship. Such consultation should include discussions on whether the use of a risk differentiation system is appropriate and if so how it should be implemented.364
7.32 Once the ATO’s Tax Practitioner Action Plan 2011-15 has been further bedded down, the above fundamental issue, of whether an RDF should be applied to tax practitioners, may be further explored in a potential review on the current IGT work program, namely: the Review of the ATO’s Services and Support for Tax Practitioners.
7.33 The discussion that follows, therefore, focuses on improvements that can be made to the tax practitioner’s RDF as it currently stands. Once fully developed, further improvements to it may be considered in the above potential review.
7.34 The IGT notes that the ATO has communicated generally among tax practitioners about the use of the RDF. The minutes to the NSW Regional Tax
Practitioners Working Group (RTPWG) April forum indicate that the ATO:
… is introducing a risk differentiation framework for registered agents to assess the perceived risk posed by registered tax and business activity statement (BAS) agents. As part of this framework, the ATO will design a corporate engagement strategy, aligning resources to the perceived risk of the registered agent.
7.35 The IGT observes, that where the ATO is assessing the risk of the registered agent as a taxpayer, the risk hypothesis it is seeking to test should be clear and related
7.36 Where the ATO is assessing the risk of the registered practitioner’s practice, the ATO also needs to clearly articulate the risk hypothesis. By way of example, the risk bow-tie used in the promoter penalty regime describes the risk event in the centre of the bow tie, along with measures to deter and deal with potential non-compliance.
7.37 As noted in other contexts, it may be helpful for tax practitioners, as well as ATO staff, to ensure the risk event under the tax practitioner RDF is clearly articulated, so as to focus the nature of the ATO’s enquiries.
7.38 The tax practitioner RDF primarily differentiates their approach to tax practitioners based on the risk profile of their clients. This seems to be the reverse of the perception that the risk rating of taxpayers (particularly those in the large business segment) is partly influenced by the advisors they choose as explained in Chapter 3.
This does seem to be circular and supports Recommendation 3.6 of this report, that is the choice of advisor should not impact on a taxpayer’s risk rating.
7.39 Whilst the risk inputs, being the risk profile of the clients of the tax practitioners, may be a useful method of initial identification of higher risk practitioners, the IGT believes that care needs to be taken to ensure risk modelling is appropriately augmented by follow-up and qualitative analysis. This is because the risk assessment of clients themselves may have a degree of inaccuracy. For example, in
the ATO’s Compliance Program 2011–12, the ATO said:
Most businesses are within benchmark and most registered agents have clients operating within benchmark. We have identified that about 50 per cent of those businesses falling outside benchmark are represented by about 1,900 registered tax agents.
7.40 As part of his Review into the Australian Taxation Office’s Use of Benchmarking to
Target the Cash Economy, the IGT made the following observation:
As correspondence audits have a strike rate of 24 per cent this may suggest that a higher variance from the benchmark does not necessarily, of itself, indicate likely underreporting of income. This is not to say that the variance from the benchmark is ineffective at targeting a proportion of underreported income. As a starting point for risk hypothesis testing, benchmarks have identified non-compliant taxpayers.
7.41 Unless the risk hypothesis has been adequately tested, either via a campaign of compliance activity such as the small business benchmark audits or through a form of pilot or sampling, the actual level of risk is untested. In the above example, the risk hypothesis was that significant variance from the benchmark is positively correlated with a higher probability of underreporting cash income. The IGT’s analysis of the results indicated that the level of risk (both in terms of probability and consequence) was lower than that originally expected by the ATO.368
7.42 To base a risk rating of an agent upon the purported, rather than confirmed, risk level of their clients increases the chances that the risk rating of the agent is also inaccurate. It is important, therefore, that the ATO, in determining the level of risk presented by a tax agent, take into account additional qualitative analysis to better understand the preliminary position. The use of confidence levels, as described in Chapter 2, may also be helpful in this regard.
7.43 In addition to improving the inputs and the risk modelling, there is a need for more transparency and communication in relation to the tax practitioner’s RDF. The IGT believes that public information should be available about how the Tax Practitioner RDF operates. Such information or guidance would be in addition to the information in the Compliance Program and TAXAGENT magazine. A starting point may be the depiction of the RDF in Figure 20 above and tax practitioners should be consulted on the further development of these guidance materials.