«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
Geoff Leeper, Second Commissioner of Taxation, Transforming the taxation experience: insights and opportunities, Speech, To the Trans-Tasman Business Circle Canberra, 13 August 2013.
Australian Taxation Office, Access and Information Gathering Manual (1st version, 2010) para [2.4.57].
Mark Konza, ‘Our compliance approach and management of risks in the energy and resources sector’, (Speech delivered at the Minerals Council of Australia Biennial Tax Conference, Brisbane, 16 April 2013).
ATO, above n 63, p 22.
business taxpayers, there is also the reportable tax position schedule (RTP schedule)
which the ATO describes as supporting:
a more contemporaneous review of, and engagement with these taxpayers, supporting increased taxpayer transparency in a targeted and efficient manner.110
2.132 It should be noted that the IGT has considered products such as ACAs, PCRs as well as IDS and RTP schedule in a previous review.111 Furthermore, the IGT has made specific recommendations about the ATO’s information gathering approaches to large businesses and SMEs and high wealth individuals in a number of other reviews.
2.133 Whilst the ATO prefers to obtain information by informal means, the ATO has strong access and information gathering powers to obtain the information it needs to increase its information confidence levels.
2.134 The ATO’s wide ranging112 access and information gathering powers may be used to improve information confidence with respect to both risk assessment as well as subsequent compliance activities. The ATO has described these powers in the
2.135 Some important exceptions to these access and information gathering powers are discussed in the ATO Access and information gathering manual.114 These
• legal professional privilege, which is a taxpayer right conferred by law;
• the Accountants’ Concession, which is an administrative concession established by the ATO; and
• the ‘corporate board documents’ concession, which is also an administrative concession established by the ATO.
2.136 Legal professional privilege is a substantive common law right, and cannot be abrogated by the Commissioner’s access and information gathering powers.
2.137 Administrative concessions are self-imposed restrictions on the ATO’s access and information gathering powers. The ATO undertakes not to compel the production of information falling within the above two categories ‘in all but exceptional circumstances’.115 Where ‘exceptional circumstances’ exist, the ATO may ‘lift’ the concession and continue to seek that information.
2.138 Despite the above exceptions, the ongoing disclosure requirement, along with expanded tax return schedules and the ATO’s formal access and information gathering powers mean that taxpayers regard themselves as highly transparent to the ATO.
2.139 The ATO’s view of transparency, however, is based on whether taxpayers provide such information proactively without being compelled to do so. The ATO uses its RDF-related communication in order to encourage taxpayers to ‘adopt a more open stance’.116 The ATO approach to seeking information directly from taxpayers in the large business market is further discussed in Chapter 3 and more generally in
Chapter 8.2.140 Other sources of data for the ATO, as noted above, are third parties such as financial institutions, who may be able to provide the ATO with large amounts of data at a relatively low direct cost to taxpayers.117 These data sources are particularly useful in relation to individual taxpayers and are explored in greater detail in another IGT review which examines the ATO’s use of data matching for individual taxpayers.118
2.141 For present purposes, it is sufficient to note that some of the information from third party providers may be available to the ATO under the law (‘legislative data’) whilst some have to be obtained by the Commissioner under his formal information gathering powers (‘special purpose data’ or ‘non-legislative data’).
Australian Taxation Office, Access and information gathering manual.
See Australian Taxation Office, Access to ‘corporate board documents on tax compliance risk’, PS LA 2004/14, 1 July 2006, para  and Australian Taxation Office, Access and Information Gathering Manual (1st version, 2010) para [7.1.1].
Bruce Quigley, ‘The power of transparency – 12 months on’, (Speech delivered at the Corporate Tax Association Conference, Canberra, 18 June 2012).
Australian Taxation Office, Data matching (22 January 2013) http://www.ato.gov.au.
Inspector-General of Taxation, Review into the ATO’s Compliance Approach to Individual Taxpayers – Use of Data
2.142 Legislative data is provided by certain third parties under a legislative regime.
For example, banks and other financial institutions are required by law to provide the ATO with the details of investors, including their names, interest and dividends paid and tax file numbers.119 Other providers of annual legislative data include Centrelink, the Department of Veterans’ Affairs, private health insurers and superannuation funds.120
2.143 The ATO has a high level of confidence in the legislative data that it receives, such as salary, interest, dividends and managed funds distribution information. For individual taxpayers who receive income from such sources, the ATO may more readily rely on this data to notify the taxpayer of a discrepancy between the data and the reported income as well as any proposed adjustments if the taxpayer does not respond to ATO enquiries.
2.144 In addition to the data matching approach to individuals described above, the ATO has also highlighted its increasing use of third party data for the
small-to-medium enterprises market:
This year, we will continue to expand sources of third party data to further enhance our data mining capability to identify risks relating to related-party transactions, disposals of capital assets and international dealings.
… Our risk models use information in income tax returns and schedules, business activity statements and a range of information we gather from government agencies, financial institutions and other third parties.121
2.145 For high wealth individuals, it is more difficult for the ATO to obtain low cost third party data about private group structures or business details. As an alternative to compliance activity such as a risk review or audit, which could be costly, taxpayers are required to complete questionnaires or expanded income tax returns in the first instance. Taxpayers may incur significant additional costs in meeting those requirements.
Other drivers of ATO information gathering approaches 2.146 As noted above, the level of confidence sought and the cost of obtaining the necessary information to assess risk as well the level of risk itself both influence the ATO’s demand for information and its approach in gathering it. Another reason for the ATO’s desire for obtaining more information at an early stage, particularly in the large business market segment or more complex cases, is Federal Court Practice Note TAX 1.
The discovery limits of this practice note essentially require the ATO to be ‘litigation-ready’ by the time the matter has reached the objection stage. This requires the ATO to have ‘full facts quickly’ during compliance activities. The IGT had raised Income Tax Regulations 1936 reg 54, requires the lodgment of the ‘annual investment income reports’.
Australian Taxation Office, Small Business Partnership meeting minutes 18 April 2012 (27 June 2012)
this issue in his Report into the Australian Taxation Office’s Large Business Risk Review and Audit Policies, Procedures and Practices122 (LB&I Review) and Self Assessment Review.123 Likelihood, consequence, information confidence and cost 2.147 Figure 8 below summarises the relationship between risk, which is composed of likelihood and consequence, on the one hand, and information confidence and cost on the other. Consistent with the ISO approach and the ATO approaches as set out in its Risk Assessment Template and HOTSA process, information confidence and cost is considered separately to the likelihood and consequence considerations. The required level of information confidence, as well as the ATO action to attain that level of confidence, may vary depending on the context.
2.148 As noted, the RDF currently does not communicate information confidence and cost separately from the risk rating. The IGT has generally observed that the ‘likelihood’ axis in the RDF is not readily understood or appreciated. This had led to some taxpayers considering that the system fails to recognise that they are highly compliant.
2.149 The interaction between risk and information confidence and cost is discussed further in Chapter 3 with reference to the use of the RDF in the large business market segment. Whilst the ATO has begun using the RDF for the small to medium enterprise market segment, and earmarked it for other areas, the ATO has been using the RDF in the large business market segment for a number of years. By addressing specific stakeholder concerns with the ATO’s use of the RDF in the large business market segment, this report seeks to identify opportunities to improve the use of the RDF more broadly.
Inspector-General of Taxation, Report into the Australian Taxation Office’s Large Business Risk Review and Audit Policies, Procedures and Practices (2011) para [3.21].
IGT, above n 5, para [3.17].
• transparency, including individual ATO officers having disproportionate influence on qualitative inputs into the process;
• relevance and accuracy of the inputs into the process;
• lack of differentiation among the categorisations and the manner in which the ATO notifies the taxpayers or their boards; and
• the proportionality of subsequent ATO compliance activity.
3.2 In order to provide context for this chapter, some background about the ATO’s Large Business and International (LB&I) governance and the RDF is included here. The stakeholder specific issues and concerns are addressed thereafter.
3.3 The nature of the risk assessment framework in the ATO’s large business market segment has been the subject of continuing evolution. It is instructive to consider certain key developments and describe the current processes as in operation more recently to provide a background to the IGT’s observations and recommendations in addressing stakeholder concerns.
3.4 During the 1980’s, the ATO did not have an organisational structure comprised of business and service lines as is currently the case. Concerned about the coverage of the large business market, the ATO initiated the large case program in 1988 which was effectively an audit program of the largest 100 businesses.124
3.5 A subsequent ATO review of the program was commissioned. It recommended that the ATO segment the taxpayer population into different markets, to ensure the large business market segment is covered using a variety of ATO compliance products.125 Pappas Carter Evans and Koop, Review of the Large Case Program: Australian Taxation Office (Boston Consulting
3.7 The ATO moved away from functional departments, such as assessment, collection and appeals. Instead, business lines were created in 1994 to match the taxpayer market segments.127 One of these was to become eventually known as LB&I.
3.8 During the 1990’s the ATO intensified its scrutiny of large business taxpayers, including increasing use of formal information gathering powers. This also led to increased taxpayer challenges for the ATO to access information, such as that protected by legal professional privilege.
3.9 In 2000, the ATO published ‘Cooperative Compliance128‘, which outlined the relationship the ATO was seeking to establish with large business taxpayers. It indicated that large businesses needed to be involved in the ATO’s risk assessment process, to reduce the likelihood of misinterpretations or misunderstandings. The booklet also provided a list of risk categories that the ATO considered relevant, enabling taxpayers to self-assess and self-manage their own risk.129 3.10 In 2004, the Commissioner wrote letters to the boards of 1500 publicly listed companies, elevating the importance of tax risk management to the board level.130 The letter included some questions the board should consider putting to their tax advisors with a view to identifying and managing tax risks.131
3.11 In 2006, the ATO issued the first Large Business and Tax Compliance (LBTC) booklet. This publication described the ATO’s approach to compliance in the large business market, including the relationship it was seeking with this market. The LBTC booklet also highlighted the ATO’s expectations with respect to the taxpayer’s corporate governance and tax risk management.
3.12 In 2010, the ATO issued a revised edition of the LBTC booklet. This edition introduced the concept of the RDF. The ATO continues to develop and refine their risk assessment approach in response to stakeholder consultation and changing circumstances in the business environment and within the ATO itself.
Peter Grabosky and John Braithwaite, Business regulation and Australia’s future (Australian Institute of Criminology, 1993) p 238.
Leigh Edmonds, Working for all Australians: A brief history of the Australian Taxation Office 1910 - 2010 (Australian Taxation Office, 1st ed, 2010) pp 199 – 228.
Australian Taxation Office, Cooperative Compliance: Working with large business in the new tax system (2000).
Australian Taxation Office, Commissioner of Taxation Annual Report 2003-04 (2004) p 139.