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2.46 With this approach, the ATO accepts a degree of uncertainty or risk as to whether a particular taxpayer has complied with their obligation to report correctly when accepting their return and issuing the assessment.
2.47 This uncertainty or risk is partially addressed through the use of third party reporting regimes. In particular, employers and financial institutions are all required to report certain payments to the ATO, for example, salary, interest and dividend details.
Once taxpayers have lodged their returns, the ATO may use available third party data to verify the data provided in tax returns (‘data matching’).
2.48 Where the ATO identifies a potential risk that a taxpayer has not correctly completed their tax return, it may seek to understand the taxpayer’s situation via an enquiry and if necessary via a formal review or audit. An audit examines the relevant taxpayer’s affairs to ensure the ATO is reasonably satisfied that the taxpayer’s tax position is correct.40 The ATO has extensive access powers to compel taxpayers and third parties to provide information, with limited exceptions.41 Since the ATO generally seeks limited information up-front in the self-assessment environment, these powers may be called upon to seek information at a later stage.
Different types of reporting risk
2.49 The risk that a taxpayer has not correctly reported required information can manifest itself in several ways, depending on the nature of the taxpayer’s Australian Taxation Office, Self-assessment and the taxpayer (7 March 2013) http://www.ato.gov.au.
IGT, above n 5, para [3.13]. The IGT noted that increased ATO information gathering activities at or before the time of lodgment represented a pendulum swing back towards full assessment ‘without any of the previous benefits available from the former full assessment regime.’ Michael D’Ascenzo, ‘Self assessment: the ATO perspective’, (Speech delivered at the Taxation Institute of Australia, 9 May 2012).
Australian Taxation Office, Taxpayers’ charter – If you’re subject to review or audit (2010).
For example, Income Tax Assessment Act 1997 ss 263 and 264.
circumstances and the applicable law. One may consider two main situations where
there is a risk that the taxpayer has incorrectly reported their tax information:
• the law is clear about the taxpayer’s obligation but the taxpayer does not make full disclosure to the ATO; or
• information is fully disclosed to the ATO but there is uncertainty as to how the law applies and the taxpayer has applied the law in a manner with which the ATO disagrees.
2.50 The first type of risk is illustrated through the following example. The law clearly requires taxpayers to report all cash income received from business activities as assessable income. If a taxpayer inadvertently or consciously omits this from their reported income, it will be inconsistent with the law. In this case, the ATO may take action to determine whether such omitted income was received by the business. If that is found to be the case, the ATO may take corrective action. Taxpayers who consciously take this course are said to be taking a ‘detection risk’, whereby they rely on the ATO not detecting their omission.
2.51 In the second type of risk, for example, the taxpayer has undertaken a business sale but the taxpayer has applied the capital gains tax and consolidation law in a manner with which the ATO disagrees. Where the area of law is uncertain, the taxpayer and ATO may find themselves seeking the final view of the courts to determine the correct meaning of the law and its application to the facts. These taxpayers are ultimately taking an ‘interpretation’ risk, whereby they rely on their view of the law prevailing over that of the ATO.
2.52 These two categories are not necessarily mutually exclusive, as a taxpayer may take an interpretation risk by adopting a contestable tax position while also taking a detection risk by not fully disclosing details of the position to the ATO.
2.53 The current taxation environment presents challenges and heightens the interpretation risk for taxpayers and the ATO alike. Taxation law is extensive, regularly changing and increasing in complexity.42 Furthermore, announced but unenacted tax law changes are likely to increase uncertainty for taxpayers and the ATO, particularly where such measures are intended to be retrospective.43
2.54 Under self-assessment, taxpayers are required to lodge their tax returns after forming a view about the correct legal treatment of the transaction. To reduce the risk of the ATO challenging the taxpayer’s view, taxpayers may seek the advice of the ATO before lodging their return. Nevertheless, taxpayers may be required to take an increased interpretation risk by lodging tax returns without the benefit of ATO advice due to commercial timing considerations and/or delays in obtaining that advice. This risk is also significant in the GST context, where taxpayers often lodge activity statements on a monthly basis, compared with annual income tax returns.
Joint Committee of Public Accounts and Audit, Parliament of Australia, Report No 410 — Tax Administration (2008) paras [3.9] to [3.39]. See also, Inspector-General of Taxation, Review into improving the self assessment system (2013) paras [5.3] to [5.6].
The Tax Institute, Submission to the Treasury (Cth), 2013-14 Federal Budget (13 February 2013) p 5.
2.55 In relation to interpretation risk, the ATO, as the administrator of the tax law, may provide advice as to its interpretation of the law. This advice is only the ATO’s view of the law and not the law itself.44 A court may find such interpretation to be incorrect.
2.56 Some aspects of the ATO’s advice and guidance framework seek to protect taxpayers from adverse tax outcomes should they rely on certain ATO advice that a court ultimately determines to be incorrect. Such protections only exist for ‘binding’ ATO advice. Further discussion about the ATO advice and guidance framework can be found in the IGT’s Review into Improving the Self Assessment System (Self Assessment Review) and Review of the Tax Office’s Administration of Public Binding Advice.45
2.57 There may be a number of factors which increase the interpretation risk for the ATO. For example, an interpretation put forward in court by the ATO may not succeed
• the collection and management of evidence;47 and
• how and which arguments are put forth to the court.48
2.58 The ATO’s management of interpretation risk is undertaken at the enterprise level through ‘Enterprise Risk ER-11 — Law interpretation’. Further details about this enterprise risk can be found in Appendix 3.
ATO RISK MANAGEMENT APPROACH TO TAXPAYER COMPLIANCE
2.59 Traditionally, compliance risk management may be understood as a form of risk analysis focussing mainly on better selection for tax audits49, with an emphasis on increasing the ‘detection’ capability of the revenue authority. Audits, however, are comparatively costly activities for both the taxpayer and the ATO.50
2.60 There is ongoing recognition that compliance risk management goes beyond making the best audit selection decisions. The goal is ultimately optimising taxpayer compliance.51 In a self assessment system, this means understanding and influencing IGT, above n 5, para [2.20].
Inspector-General of Taxation, Review of the Tax Office’s Administration of Public Binding Advice, publicly released 7 August 2009).
Inspector-General of Taxation, Submission to the Australian Government, Tax Forum – Next steps for Australia (September 2011) p 17.
The Senate, Economics Legislation Committee, Parliament of Australia, Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 [Provisions], May 2013, paras [2.10] and [2.14].
Commonwealth, Estimates, Senate Economics Committee (30 May 2012) p 99.
Fiscalis Risk Management Platform Group, European Union, Compliance Risk Management Guide for Tax Administrations (2010) para [1.3] Inspector-General of Taxation, Review into Tax Office Audit Timeframes (2008) para [3.7].
Michael D’Ascenzo, ‘Optimising voluntary compliance’, (Speech delivered to the Australian Securities and Investment’s Commissioner Summer School, Sydney, Tuesday 14 February 2006). http://www.ato.gov.au.
taxpayer behaviour. An example is the ATO’s research into taxpayer behaviour in the 1990’s, culminating in the Cash Economy Taskforce Reports. The Improving Compliance in the Cash Economy April 1998 Second Report52 (Second Report of the Cash Economy Taskforce) led to the ATO’s adoption of the ATO Compliance Model shown in Figure 3
Source: ATO Compliance Program 2012-13, page 1.
2.61 Importantly, the ATO Compliance Model emphasises the need for the ATO to address the underlying drivers of taxpayer behaviour.53 This is illustrated by the left side of Figure 3 above, known as ‘BISEP’ which encourages the ATO to understand the Business, Industry, Sociological, Economic and Psychological factors affecting taxpayer behaviour.
2.62 By addressing these behavioural drivers, the ATO may be able to prevent and deter non-compliant behaviour in the first place, rather than solely relying on sophisticated audit selection techniques to detect the risk of non-compliance after it has occurred. The right side of the ATO Compliance Model also describes a series of regulatory responses to non-compliance, ranging from education through to penalties or prosecutions, depending on the taxpayer’s attitude to compliance. The BISEP factors assist ATO officers in understanding the taxpayer’s attitude to compliance.54
2.63 Such models or approaches are applied by other revenue authorities overseas55, with publications from the European Union and the OECD providing Australian Taxation Office, Improving Tax Compliance in the Cash Economy (1998).
Rob Whait, ‘Developing risk management strategies in tax administration: the evolution of the Australian Taxation Office’s compliance model’ (2012) 10(2) eJournal of Tax Research 436-464, p 446.
For example, the UK’s HMRC Risk and Intelligence Service drives risk-based compliance activity. See Fiscalis Risk Management Platform Group, European Union, Compliance Risk Management Guide for Tax Administrations (2010) p 108.
additional guidance on compliance risk management for tax administration in this regard.56
2.64 The ATO Compliance Model as originally conceived and recommended in 1998 in the Second Report of the Cash Economy Taskforce was not strictly a risk management or resource allocation model. It was a model originally designed to support voluntary compliance by, in part, increasing a taxpayer’s perceptions of fairness of the system.57 Such perceptions of fairness could be enhanced by the ATO not routinely applying penalties when faced with non-compliance, forgiving past poor behaviour, and recognising good behaviour.58 The ATO should take into account the taxpayer’s different circumstances and respond appropriately.59
2.65 Broadly, risk detection assists in helping the ATO prioritise ‘who’ it should review or audit, and the Compliance Model guides the ATO ‘choice of remedy’ if a risk of non-compliance is identified.60
2.66 The ATO Compliance Model approach of seeking to positively influence taxpayers through differentiated ATO responses, is an indirect form of risk
management that recognises the ATO’s finite resources:
2.67 The ATO employs a range of activities aimed at preventing, deterring, detecting and dealing with the risks of non-compliance. The relationship between these activities can be understood in terms of the ‘bow-tie’ risk assessment technique. This technique, included in ISO 31010:2009 Risk Management — Risk Assessment Techniques62, has been implemented by the ATO and is represented in its Large Business and Tax Compliance (LBTC) booklet:63 See for example, Fiscalis Risk Management Platform Group, European Union, Compliance Risk Management Guide for Tax Administrations (2010) and OECD, above n 31.
ATO, above n 52, pp 57 and 59. Other parts include building community partnerships, making it easier to comply, improving detection capability and enforcing record keeping obligations.
ATO, above n 52, p 41.
Stuart Hamilton, ‘New dimensions in regulatory compliance – building the bridge to better compliance’ (2012) 10(2) eJournal of Tax Research 483-531, p 483.
ATO, above n 52, p 19.
International Organization for Standardization, ISO 31010 Risk management – risk assessment techniques (2009) para [B.21].
Australian Taxation Office, Large business and tax compliance publication (2012) p 24.
Source: ATO, Large business and tax compliance 2012, page 24.
2.68 The ‘detect’ column in Figure 4 above shows that the risk event is ‘non-compliance’ with the four main taxation obligations described above as ‘compliance obligations’. Recognising that detection is part of a broader picture of compliance risk management, attention is now directed towards how the ATO’s uses a risk management approach to detect non-compliance.
ATO detection of taxpayer risk of non-compliance 2.69 The ATO takes a risk management approach to its compliance activities, directing its resources to areas of greatest risk.64 The ATO chooses which taxpayers it will audit. The ATO’s Strategic Statement 2010–15 says ‘we use a risk-based approach
to prioritise our work’.65 The ATO has also indicated:
Australian Taxation Office, Strategic Statement 2010-15 (2010).
Michael D’Ascenzo, ‘Risk: The framework, the vision, the values’, (Speech delivered at the CPA Public Sector Finance and Management Conference, Barton, 12 August 2010).