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«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»

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3.47 Tax risk management and governance is also discussed in the LBTC booklet, with a chapter focussing on the ATO’s expectations with respect to sound tax risk management and governance arrangements.152 The ATO’s access to documents relating to tax risk management is discussed in a specific section later in this chapter.

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3.48 The compliance history section of the template has two parts, ‘voluntary compliance’ and ‘willing participation’.

3.49 The voluntary compliance part has compliance teams considering the taxpayer’s historical compliance with their registration, reporting, lodgment and payment obligations. It also considers the outcomes of any previous compliance activities, such as client risk reviews and audits and whether adjustments were

sustained in either. The part also considers the taxpayer’s use of external advisors:

• How much does the taxpayer rely on external advisors?

• What kind of issues do they seek advice on and how risky are they?

• Does the use of external advice go towards the taxpayers risk appetite?153

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3.51 The ‘willing participation’ part of this section, has itself several sub-sections to

consider, being:

• objection and litigation history;

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CGT and Losses does not have a risk hypothesis;; TOFA has only a basic risk hypothesis; Private equity has no risk hypothesis; Transfer pricing does not have evidence gathering questions; R&D Concessions do have not evidence gathering questions; Tax havens has limited guidance.

ATO, above n 63, p 11.

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3.52 Included in the Rulings History sub-section is the question: ‘Does the taxpayer apply for rulings on contentious tax issues?’

3.53 Included in the ‘Previous interaction with the ATO’ sub-section is the question: ‘Does the taxpayer make self-disclosures?’

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3.54 The LBTC booklet describes the ATO’s transition to a ‘real-time’ compliance approach towards certain large business taxpayers and its emphasis on ACAs and PCRs for higher consequence taxpayers. A separate fact sheet published after the booklet, Real-time compliance engagement approach for higher consequence taxpayers in the large market, indicates that all higher consequence taxpayers who do not have an ACA will be the subject of a PCR.

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3.56 The ‘voluntary compliance’ section then asks compliance teams to consider the taxpayer’s responsiveness to ATO information requests, and whether their behaviour is in line with the Taxpayer Assurance Plan (TAP). The TAP is discussed in a separate section later in this chapter.

3.57 The ‘willing participation’ section then considers the taxpayers’ proactive disclosures and explanations, such as applying for tax rulings for material issues, or disclosing major transactions or potentially controversial tax positions. Some of the

important questions posed in this section include:

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3.58 It should be noted that both the ‘compliance history’ and ‘real time compliance’ sections have identically titled sub-sections called ‘voluntary compliance’ and ‘willing participation’. An ATO internal audit of the RDF made similar observations and concluded that such an overlap be resolved to minimise the potential for facts or evidence to be given undue weight in the risk categorisation process.156 Tax risk management and governance — ATO access to board documents 3.59 In 2004, the Commissioner sent letters to the boards of 1500 large business taxpayers, drawing their attention to the increased importance the ATO was placing on companies having adequate tax risk management and corporate governance. The letters included 10 questions that boards should ask of their tax management team.

3.60 Stemming from the likely activity this would generate, the ATO issued Practice Statement PS LA 2004/14 Access to ‘corporate board documents on tax compliance

risk’, to recognise in part:

… that those responsible for managing a company’s tax compliance risks need to be able to undertake broad ranging and candid communications. Those persons would include the company’s employees, its external advisors and its directors undertaking governance of tax compliance issues.157 3.61 As a result, the ATO made an undertaking in this practice statement that:

Access to corporate board documents on tax compliance risk will not be sought by the Tax Office during a compliance risk review or an audit of a corporate taxpayer except in exceptional circumstances and the access will need to be approved by an appropriate

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Australian Taxation Office, Internal Audit Communications Update 14 May 2013, page 5.

Australian Taxation Office, Access to ‘corporate board documents on tax compliance risk’, PS LA 2004/14,

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Senior Executive Service officer, as described in the Tax Office’s Guidelines to Accessing Professional Accounting Advisors’ Papers (the Accountants’ Guidelines).158 … During a compliance risk review or audit the Tax Office will, in the first instance, ordinarily seek information from documents prepared in connection with the conception, implementation and formal recording of a transaction or arrangement, and which explain the setting, context and purpose of the transaction or arrangement.159

3.62 It should be noted, however, that the class of documents described in this practice statement as falling under this administrative concession are only those

documents that are:

• created by advisors (being suitably qualified in-house or independent advisors);

• created for the sole purpose of providing advice or opinion to the board of directors (including properly constituted sub-committees) on tax compliance risks and their likelihood and impact; and

• that address tax risks associated with major transactions and arrangements and/or tax risks arising from corporate systems and processes.160 3.63 In the LBTC booklet, the ATO’s expectations about tax risk management and corporate governance go beyond the creation of documentation as described above.

The ATO is also concerned about the policies and structures that support robust internal reporting and decision-making. The practice statement notes that ATO officers will at first instance seek documentation with respect to transactions. Nevertheless, it is open for the ATO to seek documents related to the policies and structures in place that support the taxpayer’s tax risk management and governance, in contrast to the corporate board documents on tax compliance risk, which is the product of these policies and structures.

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3.65 In LB&I, the main group responsible for risk management is the LB&I Risk and Intelligence Committee (RIC). The RIC is accountable to the LB&I Executive and reports its outcomes to it.162

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3.67 The CSSC is also responsible for the RDF categorisations of lower consequence taxpayers. The CSSC uses the concerns raised in the case selection process to assist in determining whether a lower consequence taxpayer is a lower risk taxpayer or a medium risk taxpayer.163

3.68 The RDF categorisation process for higher consequence taxpayers is performed by the Large Market Income Tax RDF Moderation Panel (‘moderation panel’). The moderation panel reports to the LB&I Operations Committee, the LB&I Executive, and the Large Market Committee. The moderation panel is chaired by the Assistant Commissioner, LB&I Risk Intelligence & Systems Support.164

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… manage the arrangements for categorising large businesses (economic groups and single entities) in the large market, for income tax purposes.

… (the Panel) provides a level of independence and assurance that we have consistency in risk categorisations across large businesses, and that categorisations are supported by appropriate evidence.165 3.70 For lower consequence taxpayers, the panel reviews and endorses the process by which lower consequence taxpayers are categorised as either lower risk or medium risk taxpayers, but does not undertake the categorisations itself.166 As indicated above, this is done through the CSSC.

3.71 For higher consequence taxpayers, the moderation panel is responsible for settling on risk categorisation recommendations via two-thirds agreement, before referring them to the LB&I Executive for final approval.167 The main input into this process is the higher consequence taxpayer risk categorisation template (the template discussed above). The template requires an overall recommendation by the team to Australian Taxation Office, LB&I Risk and Intelligence Committee Charter, January 2012.

Australian Taxation Office, LB&I Case Selection Process August 2012.

Australian Taxation Office, Large Market Income Tax RDF Moderation Panel Charter October 2012.

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categorise the higher consequence taxpayer as either a key taxpayer or a higher risk taxpayer.

3.72 The moderation panel is convened annually, with sessions lasting approximately one day (but may be spread out over several days) during the June/July period.168

3.73 The moderation panel’s charter makes reference to a broader range of higher consequence taxpayer categories, being higher risk taxpayers, key taxpayers with significant concerns, key taxpayers with little concerns, and key taxpayers with no

concerns. The ATO notes that:

For large businesses considered to be of perceived higher risk or key taxpayers with concerns, the moderation panel will examine the data and analysis to ensure consistency, objectivity and transparency. Panel discussions for these businesses, and others where warranted, will generally involve compliance teams or other relevant stakeholders.

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3.74 Whilst not explicit in the moderation panel’s charter, the panel is also responsible for making recommendations about the content and tone of the notification letter that is eventually sent to the taxpayer’s Chief Executive Officer (CEO).170 The drafting of this notification letter is described in greater detail in a later section.


3.75 The ATO uses a range of ‘risk filters’ to identify or exclude potential risks. The ATO large business market segment is no exception. All LB&I taxpayer returns and related data are passed through these risk filters to detect patterns or anomalies which may indicate a risk of non-compliance. The approach in the large business market segment uses a range of quantitative data to do so.

3.76 Risk filter information may assist in directing the ATO’s enquiries of the taxpayer in various ways. For higher consequence taxpayers, the main risk input is the template, which largely considers qualitative factors described above.

3.77 For lower consequence taxpayers, risk managers make recommendations for case selection. These recommendations are based on risk filter output and other intelligence or research. The section below considers risk filters and the section thereafter the risk manager and risk owner roles.

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Risk filters

3.78 The ATO uses ‘risk filters’ to scan income tax return and related schedule information for all 1400 economic groups and entities in the income tax large business

market. The filters are used to:

… detect financial patterns that may indicate potential non-compliant positions, for example, abnormally low tax payments compared to industry peers or high-risk transactions or arrangements that have not been disclosed.171 3.79 The risk filters are quantitative computer based assessments, and is the ‘first cut’ of the risk assessment process on data drawn from large business income tax returns. A description of such a filter is shown in Figure 10 below. Each risk filter contains the risk area, the risk description (being a basic form of risk hypothesis), and the risk filter description — which describes the tax return or other data that the filter is relying upon.

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3.80 These ‘Large market income tax risk filters’ have been published on the internet in implementing Recommendation 3.5 of the IGT’s Self Assessment Review.173 A list of the published ATO risk filters has been included in Appendix 9. Importantly,

the ATO website from which Figure 10 is drawn also notes:

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3.81 The risk filters may be used to detect specific instances of potential non-compliance, which may indicate a need for verification activities. Alternatively, it may be used to select taxpayers who may be affected by a new law, so as to assist the ATO to understand how the law is being applied in that industry for assurance purposes.

3.82 The ATO has also advised the IGT during the review that in relation to risk


We are now ensuring that we record more details about the purpose of reviews which are undertaken so that we can better measure our results. For example some reviews are undertaken to provide assurance around the implementation of legislative change. In these instances we may not expect to proceed to audit but that does not mean the filters were ineffective. By understanding our reasons for identifying a group using particular filters we will be better able to measure the effectiveness of these.175 Risk managers and risk owners

3.83 The actual risk areas of the ATO’s LB&I business line are designated to ‘risk owners’ (being senior executive officers) and ‘risk managers’ (operational officers).

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