Issues and recommendations
Introduction
4.1
In July 2015 the Inspector-General of Taxation completed a major review of the Australian Taxation Office (ATO)’s debt collection processes. The IGT’s submission to this inquiry refers to the fact that it was escalating collectable debt, with associated concerns from stakeholders that the ATO’s recovery methods were ‘not proportionate to circumstances of the affected taxpayers’, which promoted that review.
4.2
Some years later collectable debt, and the quantum of small business debt as a proportion of it, continues to escalate. The 2016–17 Annual Report provides, for instance that:
Small business owes over half of the total of all collectable debt—over 2016–17 Australian small businesses owed nearly $13.9 billion in collectable debt, comprising over 65.0 per cent of total collectable debt (at 31 December 2017).
Small business debt is trending up, and annually—to $1.5 billion, up seven per cent from the previous period as a proportion of total collectable debt, and further that:
Payment levels on small business debt are very low—small business contributed only 14.4 per cent of total payments for liabilities due in 2017–18.
4.3
These figures demonstrate why the effective management and resolution of small business debt is critical and an urgent priority for the ATO.
4.4
The ATO has extensive powers and responsibilities in its management of small business debt. The evidence received in this review indicates that there are ongoing risks to public confidence if the ATO is not scrupulous, and not seen to be scrupulous, in meeting its core commitments as a Model Litigant, that is ‘to act with complete propriety, fairness and in accordance with the highest professional standards’ in discharge of its duties.
4.5
This chapter makes recommendations designed to tangibly improve the ATO’s standing and its accountability to the Australian public both through improved reportage in its annual report, and through reforms to law practice, communication and in review and dispute resolution processes.
4.6
These subjects are addressed under the following sections which address fairness in reporting and review, ATO data and reporting practice; and measures to build confidence and trust.
Fair practice and the law
4.7
In his submission to the Treasury review, the IGT highlighted the scale and scope of the ATO’s powers and its commensurate responsibilities to taxpayers, before concluding:
Given the size of the ATO, the breadth and depth of its activities as well as the complexities of administering the tax and superannuation system, it is inevitable that mistakes will be made and/or the community, from time to time, would be dissatisfied with its decisions, actions or the manner in which it has dealt with them. The key issue is the manner in which mistakes or dissatisfaction are addressed and that the community is, and believes that it is, ultimately treated fairly and equitably on each occasion.
4.8
As set out in Chapter 3, submitters have identified the following problems which impaired their tax engagement experience, and ultimately their trust and confidence in fair treatment from the ATO:
‘Guilty, until proven innocent’—that the ATO’s auditing process and opinions were seemingly geared for revenue collection at any cost—the ATO interpretation of law would change, and a verdict ‘of fraud and evasion’ would be made, and irrespective of evidence of past and present ‘engagement’ with the process.
ATO actions were not proportionate—the auditing and objections process was not calibrated to provide confidence in fair treatment, a garnishee action would be issued irrespective of the stage of the objections process, before a payment deadline or in negotiation of payment arrangements.
The auditing and mediation processes were not independent of each other nor well administrated—the auditor’s word, once given, was never questioned internally and seemed to inform any mediation process, important records were lost, minutes not taken of key meetings, and incorrect information once recorded was never reviewed.
4.9
This chapter considers these concerns in the context of current ATO practice, as underpinned by tax law and related practice guidelines. It also considers the limits of the current frameworks and measures, and what needs to be done to better support the ATO in its bid to gain taxpayer confidence and trust, which must be the objective of our voluntary assessment system.
Determinations of fraud or evasion
4.10
Section 170 (1) of the Income Assessment Act 1936 allows the Tax Commissioner to amend a tax assessment outside of a two year time period if he has formed an opinion that a taxpayer’s behaviour amounts to fraud or evasion. In summary, the legislation provides that:
For most taxpayers with simple affairs, the amendment period for an income tax assessment is two years from the date that a taxpayer is issued with an assessment.
For taxpayers with more complex affairs, the period of review is four years. The period of review is also four years where certain anti-avoidance provisions of the tax law apply.
Where the Commissioner forms an opinion of fraud or evasion, there is no time limit for amending an assessment.
4.11
The Commissioner explained at hearings, that an underpinning consideration in his determinations on fraud or evasion was whether the taxpayer engages willingly with the ATO.
4.12
Detailed guidance on the definition of fraud or evasion is in the Fraud or Evasion Practice note—Practice Statement Law Administration ATO PS LA 2008/6 Fraud and Evasion, which provides:
Fraud
For the purposes of this practice statement, 'fraud' may be described as making false statements knowingly or without belief in their truth (including such as when made recklessly, careless as to whether it is true or false), to deceive the Commissioner.
Evasion
The threshold for an opinion of evasion is not as high as fraud. A taxpayer's behaviour may not constitute fraud but be nevertheless sufficiently blameworthy to constitute evasion.
4.13
The Practice note also states that the test legal precedent for determination on whether an act is ‘blameworthy’ (and hence constitutes evasion) ‘lies somewhere between innocent mistake and intention to defraud’, as assessed from the point of view of a reasonable person. And further, that establishment of this under the definition of evasion is by review of the ‘material facts’.
4.14
The Committee notes that the decision to limit retrospectivity in audits was introduced to preserve fairness and due process for taxpayers on the introduction of self-assessment, and hence was limited to two years. The practice note advises that the law on this matter pre-dates the introduction of self-assessment, and further observes that ‘although the meaning of evasion has not changed, the circumstances in which it arises have changed in some cases’:
Under self-assessment, taxpayers are not usually required to include detailed information in their tax returns. Consequently, evasion involving deliberate withholding of information does not usually occur at the return stage. Rather, such withholding of information might occur through a wilful or reckless failure to keep records or to supply information in the course of a tax audit. It may also occur in relation to a failure to provide information required by the Commissioner in a fuller return or schedule.
However, simpler instances of evasion will arise at the return stage; for example where income is intentionally omitted from a tax return with no credible explanation.
4.15
The Committee considers that where self-assessment relieved taxpayers of needing to provide full documentation for a tax return, digitalisation enhances rather than decreases the risk that taxpayers will not have up to date and fully documented tax records later on. In turn, they are more likely to be subject to penalties through ‘reckless failure to keep records’, even where the taxpayer has tried to be compliant.
4.16
It would appear, then, that the current law is not adequately protecting the rights of taxpayers under self-assessment in a digitised lodgement environment. Instead, as indicated by accounts recorded in the preceding chapter, taxpayers are now routinely required to provide historical documentation beyond the statuary period of five years in very tight timeframes to prove they are not guilty of evasion.
4.17
In this regard, the Committee notes that the ATO has relatively recently established the National Fraud or Evasion Advisory Panel to assist tax office staff to adjudicate on the material evidence of evasion. This body was formed in response to concerns that in forming an opinion of fraud and evasion the taxpayer’s position is literally unchallengeable if the records required beyond the statutory period are not obtainable.
4.18
Under an opinion of fraud or evasion a taxpayer can’t appeal to the AAT on the basis of the untrue opinion per se but must only contest the substantive facts in forming the liability of a lengthy retrospective assessment. This potentially puts an innocent taxpayer in a very unfair position, suggesting a need for both refinements to the review and decision-making processes and the clarity of the law.
4.19
The Committee recommends that the ATO review the case law and practice notes governing the Commissioner’s discretion on fraud or evasion to ensure that fairness is preserved under the self-assessment system, and that the basis of the Commissioner’s determinations are both clear and accountable to the taxpayer.
4.20
The Committee further recommends that the ATO should publish in its annual report the number of taxpayers by taxpayer segment who are deemed to have engaged in fraud or evasion as a figure and as a percentage of the total audited, and how many of these receive additional penalties.
4.21
In its 2016 annual report review the Committee made recommendations to improve advice to taxpayers about changes in tax law, and recommended for improved reportage on tax redesign and on the number and timeliness of public rulings to better assess the ATO’s progress on this to improve transparency to taxpayers and reduce tax complexity.
4.22
In the Government Response to that review the ATO noted the first recommendation and advised of work with the Treasury on the redesign of tax law, making commitments to report on the public rulings issued and finalised in future annual reports.
4.23
In light of concerns raised in this review about the ATO’s model of targeted sector wide and debtor practice audits, the Committee considers there is also an urgent need to better inform affected taxpayers about the nature of changes to tax law and how they might impact on them prior to such audits. Taxpayers Alerts should therefore be more informative in this regard and information should be accessible to assist taxpayers with options and advice for fair resolution of any matters under review.
4.24
The Committee recommends that Taxpayer Alerts should provide updates on changes to law and rulings that might impact on particular taxpayer segments, and that any important changes be promptly cited and identified on the ATO website and promulgated to tax professionals.
The Committee also considers that the ATO should establish a dedicated helpline or webchat feature to assist affected taxpayers with clear understandable information about relevant tax law changes and options for resolution of any tax effects.
Proportionality in debt recovery
4.25
The context for this consideration is whether the ATO decisions are proportional to the level of risk associated with a particular tax debtor. The focus in this review, initiated by allegations in the ABC Four Corners program, was whether garnishees are being issued appropriately by that gradient, or whether internal targets are resulting in an unfair and indiscriminate use of the measure.
4.26
As previously discussed in this report, submitters to this review disputed the Commissioner’s assurances that garnishees were only issued to very few taxpayers, less than 0.5 per cent, and proportional to risk. They indicated that garnishees were being issued to taxpayers who were actively engaged in the objections process, or even establishing a debt management plan.
4.27
Asked in March 2018 about the statistics on garnishees being issued during the process of dispute Deputy Commissioner for Debt, Mr Robert Ravanello advised that:’ With 96 per cent we take no action while the dispute is underway and four per cent are a mix of what we call a fifty-fifty arrangement, where we agree the taxpayer pays 50 per cent of the primary amount under dispute’.
4.28
The ATO later updated this information indicating that of 4 323 debt cases at 5 April 2018:
4,073 (94.2%) were not subject to debt recovery action
64 (1.5%) were subject to a 50/50 arrangement and deferral of recovery
46 (1.1%) were under negotiation for settlement, compromise, payment plan or 50/50arrangement
140 (3.2%) were subject to debt recovery action, possibly including garnishee or legal recovery.
4.29
The ATO also reiterated that debt recovery during dispute occurs only when the ATO ‘perceive[s] a level of risk, eg. links to organised crime, phoenixing or other fraudulent activity, or where there is a concern of dissipation of assets’.
4.30
Notwithstanding this, the Committee notes that the IGT, in an answer to a question on notice has advised that garnishee actions were among the top three most commonly debt-related complaints made to his Office during the last four financial years—over 2014–15, 2015–16, 2016–17 and the 2017–18, accounting for 18.6 per cent, 14.9 per cent, 8.8 per cent and 11.2 per cent of complaints respectively. The submission further noted that ‘the complaints received about garnishee actions included concerns where garnishee notices have issued to taxpayers during tax disputes’.
4.31
The IGT’s written advice went on to clarify the laws governing the garnishee process, which indicate that the ATO is not obliged to wait until an objection is determined before a garnishee is issued. In particular Practice Statement Law Administration PS LA 2011/4: Collection and recovery of disputed debts, states that:
The Commissioner may initiate recovery action for collection of unpaid disputed debts at any time, even before determining an objection, based on an analysis of the risk associated with the case. This risk analysis continues during the various stages of the dispute resolution process while a debt remains unpaid…
4.32
Further, in regard to deferral of a garnishee issue, the practice note states that the Commissioner will only agree to a deferral of recovery action where:
the taxpayer has entered into a 50/50 arrangement and there is no evidence to suggest that payment of the amount deferred is at risk
the Commissioner considers that a genuine dispute exists in regard to the accessibility of an amount, or
the Commissioner is pursuing arguments which are inconsistent with a previously published ATO view or go against the weight of precedent cases (that is, the Commissioner is challenging the previously accepted position.
4.33
In relation to debt recovery during the objections process overall the ATO website provides:
As a general principle we expect you to pay all tax debts on time even if you are disputing the debt. If you don't pay the tax debt by the due date it will attract a general interest charge (GIC) for late payment (except excise debts, which are not subject to interest charges).
4.34
Evidence to the inquiry suggests this practice law is clearly not understood by taxpayers nor, based on evidence, does it appeared to be consistently applied by the ATO. Certainly, even if the respondents to this inquiry represent only those most aggrieved with the current approach, then this does not support the desired perception of fairness and trust that the ATO is following due process, even if this is the case legally.
4.35
The Committee therefore considers that more needs to be done to inform taxpayers of what they can genuinely expect during the objection process, and without recourse to detailed legal advice.
4.36
The Committee recommends that the ATO should update and provide clear, succinct and accurate advice on the objections and dispute resolution process to all taxpayers subject to audit and assessment. This should include:
timelines indicating the steps in each process, including in relation to the timing and reasons for issuing of garnishees;
a clear explanation of ATO obligations to the taxpayer and what the taxpayer can expect from the ATO in the process; and
information on and contact details for the Inspector‑General of Taxation, the Australian Small Business and Family Enterprise Ombudsman and other relevant supports.
The Committee also recommends that this information should be made available on the website in an easily accessible tab, in a publication format, and that the same advice be promulgated to all relevant ATO staff.
4.37
The Committee further recommends that the annual report should include disaggregated data on the issuing of garnishees during the dispute resolution process, with annual comparisons.
4.38
The Committee notes as a final observation that the IGT has indicated in his submission to the Treasury review that there was ‘No evidence of systematic use of garnishees to meet revenue targets at end of financial year’. The terms of reference of the IGT’s review, however, will also consider measures to improve ATO policy, the procedure for the issuing of garnishees, for promulgating policies to staff undertaking review for report at finalisation.
4.39
The Committee anticipates reviewing the IGT’s recommendations, and the ATO response, during the next performance cycle.
Independence in review and mediation
4.40
The ATO in its evidence to the Committee and in its annual report has emphasised the independence of its dispute resolution and litigation processes, highlighting the good results achieved by its early engagement and Alternative Dispute Resolutions (ADR) mechanisms. At hearings in March 2018 the Commissioner reiterated this message referring to the ‘increased use of early engagement and alternative dispute resolution’ as key strategies ‘to improve the client experience and build trust and confidence in us and the tax and super systems more broadly’.
4.41
Taxpayers contributing to this review, however, having had the benefits of these processes, argued strongly that fairness in the process will not be forthcoming until objections and dispute resolution processes are genuinely separate and distinct from the ATO’s jurisdiction.
4.42
Blackwater Treatment System (BTS) alleged:
the ATO’s system of ‘self-reviews appear to provide immunities to ATO officers for “defective administration” and misuse of public funds’;
there is no independent agency able to enforce change on ATO (complaints made against ATO are referred back to the ATO or to the IGT);
the ATO is not penalised for breach of the APS Values and Code of Conduct.
4.43
BTS considered this lack of independent oversight degrades the integrity of ATO decision-making at the highest levels alleging that it ‘provides an immunity to the senior ATO staff to utilize a lie as a defence in the full knowledge that there is no mechanism available to change the self-review decision made by the ATO’.
4.44
Similarly, Mr Graeme Halperin, a tax professional appearing in the ABC Four Corners program, wrote to the Committee to critique the lack of independence of guidance under the ATO’s dispute assistance process, maintaining:
The appointment of an ATO employed guide under "Dispute Assist" means that the ATO controls that individual's representation. This is a conflict of interest. An ATO employee cannot serve two masters and given the culture of the ATO and pro-Revenue bias of ATO personnel, it is impossible to imagine that the taxpayer will receive frank and fearless advice that conflicts with a position adopted by the ATO or that the taxpayer's representation will be fervent and prosecuted to the maximum extent that is sometimes necessary.
4.45
By extension, the same principle he argued discounted the potential for independence in broader ATO decision-making:
…at a broader level, tax disputes should not be managed in-house by the ATO because this tends to reinforce partisan decision making. From my experience, even when the review of an objection against an assessment is partially allowed by the ATO, it does not typically result in any substantial change, and often the reductions are at the fringes and minor in the scheme of things. Even in the face of compelling evidence or arguments to the contrary, the ATO team determining an objection will defend and uphold the original adverse decision unless the evidence produced is effectively foolproof or the contrary argument is incontrovertible. In short, a very high bar is set in order for the taxpayer to overturn audit findings.
4.46
Outscribe transcription services supported this view:
To restore our confidence in the ATO there needs to be a truly independent body, outside of the ATO department, established to handle appeals and disputes. It is nonsensical to think that an organisation is capable of fairly reviewing its own decisions. There is naturally a bias and culture that surpasses any good intentions and the average taxpayer is justifiably suspicious of receiving a just decision.
4.47
In his report to the Treasury the IGT highlighted this ‘ongoing level of discontent’ with current arrangements as an incentive to reconsider his recommendation for establishment of a separation appeals body to be managed by a dedicated Second Commissioner,and made in the context of his 2015 tax disputes inquiry, stating:
…the IGT remains of the view that a separate Appeals area within the ATO would significantly enhance the ATO’s approach to tax disputes as well as the public perception of it. a separate Appeals area within the ATO would significantly enhance the ATO’s approach to tax disputes as well as the public perception of it. A key function of such an area would be to conduct merits-based pre-assessment reviews which would be available to all taxpayers, including small businesses and individuals, based on pre-established criteria.
4.48
As a complementary measure the IGT also recommended that independent pre-assessment reviews be extended to ‘all taxpayers, including small businesses and individuals who are least able to contest ATO decisions and ultimately proceed to litigation taxpayers’ observing:
… while a taxpayer may challenge an assessment through the objection and litigation processes under Part IVC of the Taxation Administration Act 1953, these courses of action may impose significant costs which are exacerbated by collateral debt collection action, or the risk of it, by the ATO. Accordingly, pre-assessment reviews are an important safeguard, particularly for small businesses and individuals, against such recovery action taking place based on an incorrect assessment and the cost of challenging that assessment.
4.49
The Committee notes that at Budget Estimates in May 2018 the Commissioner had announced a more limited trial of this proposal, with other initiatives to support taxpayer confidence:
We are going to trial an independent review process for certain small business audits from 1 July, with the intention over time that businesses, regardless of size, have access and rights to a fit-for-purpose review prior to the finalisation of an audit. We have asked the Australian National Audit Office to review our whole debt-collection practice. We're also encouraging ideas through groups like our small business stewardship group to ensure a good client experience for small businesses.
4.50
The ASBFEO endorsed the IGT’s proposals, calling for the immediate extension of pre-assessment reviews ‘across the whole small business taxpayer base and led by a new Second Commissioner’. Further stating: ‘we agree with Mr Noroozi that the independent appeals function must be separate from both the compliance and legal advisory areas of the ATO in order to ensure "a fresh and impartial review”’.
4.51
The Committee reported on the establishment of the current framework for review of objections and appeals in its review of the 2016 annual report review, noting the Commissioner’s conviction that this would provide ‘a fresh, independent set of eyes for disputes’.
4.52
The merit of the current model and its distinctions from the IGT’s proposal for governance restructuring to support independence in objections and appeals is discussed in detail in Chapter 6.
4.53
In relation to proposals for the availability of pre-assessments, the Committee supports their broad expansion to all small businesses in the medium term, and also sees merit in the proposal to support unrepresented taxpayers though a more independent process.
4.54
The Committee recommends that the ATO report on the anticipated timeframes for expansion of independent review and pre-assessment process for small business, and potentially to all taxpayers, and present budget estimates for that process to the Committee.
4.55
More broadly, the Committee notes with concern that according to accounts in this review the current measures for impartial assistance to support taxpayers are not perceived to be well informed, objective, fair nor efficient. There are also cost considerations should a taxpayer determine to take the matter through to appeal.
4.56
In regard to supports for unrepresented taxpayers needing to progress matters to appeal, the Committee investigates the IGT’s proposals for establishing an alternative external body, along the lines of the Low Income Taxpayer Clinics (LITC) program operating in the United States in Chapter 6.
4.57
The Committee considers that, in the shorter term, introducing greater independence and equity in ATO’s current service model for in-house mediation and dispute assist services is a priority. The Committee recommends that the ATO should therefore conduct, as a preliminary, an internal review of these services to improve current models.
4.58
The Committee recommends that the ATO review its in-house service model for mediation and dispute assist services to improve their independence and transparency, and to ensure ATO staff and taxpayers are fully aware of their mutual rights and obligations under the process.
Review of compensation claims
4.59
Another concern expressed in evidence to this Committee was a perceived lack fairness and independence in consideration of compensation to aggrieved taxpayers.
4.60
The Committee notes that successful compensation claims for defective administration must be funded out of the ATO’s budget. Taxpayers cited in the previous chapter perceived a conflict of interest in the ATO’s administration of their claim and in its determinations on the right level of compensations to be offered, suggesting that the ATO was not following legislative requirements.
4.61
The IGT has recognised compensation as a ‘difficult issue for the ATO’, with the ATO’s admission of fault and the level of compensation awarded a ‘sticking point’ for resolution of these claims.
4.62
As noted in the previous chapter, the IGT has made a recommendation to Treasury to review the Compensation for Detriment caused by Defective Administration (CDDA) Scheme or establish a new and dedicated scheme for tax matters to address matters of concern.
4.63
The issue was also considered as a key consideration for fairness and improvements to the ATO’s standing with taxpayers in the IGT’s 2016 review of the Taxpayers’ Charter. Of note in this consideration was that Recommendation 2 of that report called for improvements to the ATO’s website ‘to provide more up to date public information about the administration of the CDDA Scheme, including its decision-making and review processes’.
4.64
The Committee heard from the ATO at hearings that the information about compensation has long been launched on the ATO website but that the site is ‘uniquely problematic’ for term searches, making the information difficult to access. The Committee considers this should be urgently addressed.
4.65
The Committee recommends that the ATO improve the web access and presentation of information on the administration of the CDDA, its decision-making and review process and any information on planned review of that process.
4.66
The Committee also considers that the Government should, in the medium term, give consideration to IGT recommendations to establish a new and dedicated compensation body for adjudication of tax matters, in view of widespread perceptions that there is a conflict of interest in ATO adjudications of tax claims.
4.67
The Committee recommends the Government should review and publicly consult on proposals to establish a new and dedicated scheme for consideration of compensation claims against defective tax administration to reduce perceptions of conflicts of interest and improve taxpayer confidence in the fairness and probity of decisions made.
Small business debt—improving accountability
4.68
The ATO’s compliance and taxation services now deploy sophisticated data analysis to identify noncompliance and boost review collection. In the Committee’s view, the ATO has a commensurate responsibility to report candidly and accurately on what it learns from that analysis to promote public understanding and to support analysis and debate of public policy, as well as ATO processes and outcomes.
4.69
In its last annual report review the Committee made recommendations for the ATO to report on collectable and non-collectable debt and to provide comparative data in its next report. In its response in October 2017 the ATO agreed to provide this information in the following reporting period, in 2017–18.
4.70
In review of the debt data presented in the 2016–17 report, the IGT had remarked a notable decline in the quality and utility of the information provided by the ATO on tax debt overall, highlighting deficiencies in the annual report compared with previous years, as indicated on the following table.
Table 4.1: Amount and comparison of tax debt between 2011–12 and 2016–17
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|
|
|
|
|
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Total debt
|
$34.2 billion
|
$35.1 billion
|
–
|
–
|
|
Collectable debt
|
$19.5 billion
|
$19.2 billion
|
$19.2 billion
|
$20.9 billion
|
|
Disputed debt
|
$8.5 billion
|
$9.6 billion
|
–
|
–
|
|
Insolvency debt
|
$6.2 billion
|
$6.3 billion
|
–
|
–
|
|
Debt irrecoverable at law
|
$2.3 billion
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–
|
–
|
–
|
|
Uneconomic to pursue
|
$1.1 billion(b)
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$1.4 billion
|
$1.7 billion
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– (a)
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|
|
|
|
|
|
Source: IGT Submission 1, Table 2.1 Tax Debt and Collection and Reporting, p. 3 with Committee analysis.
While the quantum of debt uneconomical to pursue is not separately reported, it is expressed as a ratio of net tax collections being 0.4 per cent. See Commissioner of Taxation Annual Report 2016–17, p. 227.
Included in this table is the amended figure for the period as shown in the ATO’s 2016–17 Annual Report. See Appendix 13: Corrections, p. 245.
4.71
The IGT further observed a trend in the report for ‘high level information without clearly showing the total level of debt in the system and whether the ATO’s strategies are proving effective’, and calling on the Committee to require greater comprehensiveness in ATO reportage on total debt, including by taxpayer category and the duration of debt.
4.72
In answer to a question on notice taken in March 2018, the ATO committed to provide more thorough quantitative reporting in the 2017–18 tax year, including comparative data for:
total debt holdings by collectable debt, disputed debt and insolvent debt;
collectable debt into activity statement collectable debt, income tax collectable debt and superannuation guarantee charge collectable debt; and
non-pursuit by irrecoverable at law and uneconomic to pursue.
4.73
Following this commitment in the 2017–18 Annual report, the ATO provided comparative data for the years 2015–16 and 2016–17. However, instead of reporting the promised disaggregation and quantum of debt in each category it provided only a ratio indicating that total collectable debt was 5.7 per cent of net tax collections in the 2017–18 period. While this was positive, in that the figure exceeded the ATO target by 0.1 per cent, the ATO also reported that the total of collectable debt had also trended up by the same amount over 2016–17, and this in turn was up by 0.3 per cent on the previous 2015–16 tax year.
4.74
As noted previously, small business debt is growing more dramatically as a proportion of total collectable debt—up seven per cent on the previous period. The Committee reiterates its call for more comprehensive disaggregated data on this core business outcome—to be truly transparent and accountable for performance in managing small business debt, and to better understand its drivers, the ATO must endeavour to present the quantum of debt as a proportion of total tax debt, as well as comparable data for both collectable and non-collectable debt.
4.75
For instance, the Committee notes that the 2017–18 Annual Report gives the total figure of $238.8 million for debt irrecoverable at law or uneconomical to pursue for the superannuation guarantee scheme (as promised to the Committee) which is almost double the figure in 2016–17, and twice the current target. This is a striking result—immediately raising questions about policy, program effectiveness, priorities etc.
4.76
In terms of small business debt, the Committee supports in particular the IGT’s calls for ‘deeper analysis’ of the taxpayer population to provide a breakdown of the debts owed by small business, by micro businesses and the age of tax debts.
4.77
The Committee recommends that the ATO differentiate between large, small and micro-business debt and report on the quanta of tax debt, the age of debts and on comparative trends in both collectable and uncollectable debt for each business segment.
4.78
The Committee considers that greater disaggregation of this key data is essential to better interrogate the outcomes discussed in the previous section; to determine policy impacts on different client sectors, and what they mean for both fairness and revenue collection.
4.79
The Committee also anticipates that the ATO will in due course provide tax gap estimates as recommended in the previous annual report review.
Data on dispute resolution
4.80
The Tax Commissioner’s overview in the 2016–17 recent annual reports has highlighted the ATO’s success in dispute resolution in terms of:
the reduction in the number of tax dispute cases that have gone to the Administrative Appeals Tribunal (AAT) or into litigation; and
the increase in the number of cases gone to litigation in which the ATO has been successful.
4.81
Data from the preceding and current annual report for 2016–17, for example, records:
the decrease in appeals to the AAT down by 61 per cent from 922 to 357 appeals in 2016–17; and
the increased success in litigation with 89 per cent of Part IVC cases (objection cases) partially or fully favourable, up from 85 per cent in 2015–16.
4.82
In his overview to the 2017 Annual Report, the Commissioner discussed Dispute Assist and Fast Intensive Triage initiatives as key contributors to the reduction in appeals, stating:
We introduced Dispute Assist and Fast Intensive Triage initiatives to streamline, fast‑track and support the resolution of objections. This had an immediate positive impact, resolving disputes more quickly. Our alternative dispute resolution approaches are an excellent example of supporting our clients – reducing time, money and angst.
4.83
For litigation, the Commissioner highlighted the role of the Independent Review process for large market cases with only one of 41 cases going to litigation since 2013. A further initiative in reducing litigation is the ATO’s Test Case Litigation Program, which completes test cases to clarify the law and provide precedential certainty.
4.84
The 2017 Annual Report elaborated:
In 2016–17, almost 460 cases proceeded to litigation. This is a decrease on previous years, with 750 cases in 2014–15 and 480 cases in 2015–16. The largest decrease has been in appeals to the AAT. This shows the continued success of earlier resolution of dispute approaches leading to better direct engagement with taxpayers earlier in the dispute process without the need for litigation. Litigation in both the AAT and courts is now inherently complex, often including interlocutory proceedings and related recovery matters. This shows our commitment to both strategic litigation and maintaining the integrity of the tax system.
4.85
The information on the table below is provided by the ATO to highlight the cited improvements in timeliness of dispute resolution. It illustrates the point at which a matter is resolved or that the dispute ceases prior to an objection being lodged, or proceeding to appeal or litigation.
Table 4.2: ATO past disputes 2014–15 to 2016–17
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|
|
|
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Returns Lodged
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35 366 573
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34 561 234
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35 540 854
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|
Adjustments arising from audits
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453 447
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338 000
|
253 000
|
|
Objections(a)
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26 143
|
26 690
|
24 490
|
|
Cases lodged to courts/tribunals
|
697
|
481
|
456
|
|
Cases proceeded to decision
|
154
|
151
|
141
|
|
Note: (a) Objection Figures are cases completed
|
Source: Table 2.2, Commissioner of Taxation Annual Report 2016–17, p. 66.
4.86
However, as the IGT has observed, this information does not indicate taxpayer satisfaction with the ATO’s processes for dispute resolution. Instead:
The primary observation from the table above is that despite there being less audit adjustment, with fewer complaints moving beyond the objections stage, there is proportionally more disputation at the objection phase even though fewer cases were moving through to the AAT or other courts.
Interrogating the outcomes
4.87
As illustrated by evidence recounted in the preceding chapter, at least some taxpayers in the dispute resolution process feel that the ATO is not acting in good faith when seeking early resolution of their objections to an ATO assessment. Moreover, the impression was that larger businesses are receiving a fairer hearing, for instance, in being provided with independent review processes, despite having greater resources to defend an objection.
4.88
The Committee considers that a rise in the proportion of taxpayers who are in dispute with the ATO combined with a reduction in the number going to appeal or litigation does not necessarily indicate taxpayers’ confidence in the ATO is increasing. Further, the data in the report on the take up of dispute resolution services, while positive in itself, does not confirm that conclusion.
4.89
The data on Dispute Assist, which is reported with data on appeals reduction in the Commissioner’s overview, shows the pilot program dealt with a total of 64 ‘vulnerable unrepresented taxpayers’ by June 2017. For fast tracking objections, the other measure highlighted the number of cases benefited is not quantified, however the Annual Report provides that the measure ‘reduced average cycle times for the objections over 2016–17 by more than 30 per cent compared with 2015–16’, and further that: ‘The objective is to assess all cases to determine if the matter can be resolved quickly and to make that happen’.
4.90
In relation to in-house facilitation, another important initiative for small business to achieve ‘timely and cost effective outcomes’, no data is provided. The report does state however that the ATO has had positive feedback on the measure which ‘confirms that this service is making a difference in dispute management and resolution’, even though there is no indication on how the feedback was obtained. The report also cites in-house facilitation as an efficiency measure in dispute resolution, ‘which saves taxpayers, on average, more than $50 000’per dispute resolved. None of this information is definitive nor explained.
4.91
By contrast, the data on measures for early resolution of large business cases, such as the Independent Review process introduced in 2013, and associated Test Litigation measures, clearly indicates their effectiveness in reducing the number of more complex cases going through to the AAT and to litigation. The annual report records that the number of review applications referred to the AAT was down to 357 applications in 2016–17, from 396 applications in 2015–16; and 533 applications in 2014–15. Further, in 2016–17 only 460 cases proceeded to litigation, down from 480 cases in 2015–16, and from 750 cases in 2014–15.
4.92
The Committee concludes, therefore, that while the ATO is to be commended for aiming to reduce time and cost associated with the objections process for taxpayers in general and people in dispute in particular, the current reportage in the Annual Report on the utility of assistance to most taxpayers is yet to demonstrate that the ATO’s dispute resolution processes meet taxpayer expectations or improve their trust in a fair and equitable ATO.
4.93
To improve transparency in this area, the Committee first recommends that the ATO tabulate data on the number of appeal applications lodged and on the number of litigated cases for each taxpayer segment, and also reports on the point at which disputes are resolved along with the proportion of affected taxpayers in each taxpayer segment.
4.94
The Committee recommends that to improve transparency and support taxpayer confidence in the fairness of ATO dispute resolution processes annual reports should provide comparative data showing:
the total number of appeal applications lodged to the AAT and the total number of litigated cases for each taxpayer segment;
the total number of taxpayers using dispute resolution services by segment; and
the point at which disputes are resolved, with the proportion of affected taxpayers reported for each taxpayer segment.
Consideration of settlements
4.95
Settlement figures add another dimension to this consideration of how well dispute resolution services are meeting taxpayer expectations. The Annual Report advises that only six per cent of large corporate cases were resolved by settlement with a variance of 49 per cent, which is 51 per cent of owed tax received. High wealth individuals (HWI), additionally, accounted for 12 per cent of settlement cases, with only 40 per cent of tax owed received.
4.96
In relation to small business the annual report advises: ‘we are engaging with small businesses more frequently and using settlements as an effective means of resolving disputes’:
A number of strategies have been implemented to ensure we deal with disputes with small businesses in an open and transparent manner. For example, we are resolving disputes earlier and without the need for litigation. Settled disputes with small businesses accounted for 50% of all settlements – overall we are engaging with small businesses more frequently and using settlements as an effective means of resolving disputes.
4.97
The ATO is to be commended for providing data on settlements for each taxpayer segment. The table shows that small and micro‑businesses account for the majority of settlements, and that the ATO receives significantly more revenue from them proportionally than from the large and HIW sectors.
Table 4.3: Settlements registered in 2016–17, by market segment
|
|
|
|
|
|
|
|
|
Individuals
|
127
|
20%
|
402.8
|
178.4
|
224.4
|
56%
|
|
High wealth individuals
|
77
|
12%
|
237.2
|
95.5
|
141.7
|
60%
|
|
Micro-business
|
326
|
50%
|
236.6
|
162.7
|
74
|
31%
|
|
Small/ medium Business
|
77
|
12%
|
926.7
|
850.8
|
75.9
|
8%
|
|
Large Business
|
36
|
6%
|
2 773.6
|
1 411.2
|
1 362.4
|
49%
|
Source: Commissioner of Taxation's Annual Report 2016–17, p. 67.
4.98
Settlement-making is reported by the ATO as a positive example of its early engagement approach to resolve disputes in a timely and cost effective manner. This data indicates in particular the success of the measures described above as facilitators of perceptively fair outcomes for large business. However, the data could equally support small business owners’ perceptions that they are being denied their right to object, or are even being coerced into an unsatisfactory settlement.
4.99
The Committee notes that the ATO has a Code of Settlement that sets out its policy in relation to the settlement of tax and superannuation disputes, including disputes involving debt. The ANAO conducted a review of the ATO’s use of settlements in 2017 which found the ATO was using the mechanism appropriately, and had ‘one of the highest levels of reportage around settlement activities’, compared with other national revenue authorities.
4.100
In this regard, the Committee notes with concern the ATO’s advice in the 2017 Annual Report that it intends to move from the current analysis of ATO settlements by both market segment and client groups, to client only groups in future annual reports. This will mean that settlement trends for micro‑businesses will be rolled into small business, reducing transparency in outcomes. Given the policy focus and concerns expressed in this review, the Committee considers the current approach should be retained
4.101
The Committee recommends that the ATO retain the current differentiation of settlement data for small and micro-businesses to ensure transparency in outcomes for each group.
The ATO should otherwise explain the reasons for the shift in methodology, including projected benefits.
The importance of test litigation
4.102
The Committee has concerns that the ATO’s commitments to resolve an objection process early may be perceived to be against the interests of at least some taxpayers, including those who may have been subject to an automated or audit error.
4.103
At the same time, evidence to this review clearly demonstrates that the appeals process can be both a personally and financially devastating process for the ordinary taxpayer, as well as an expensive option for the ATO. Accordingly, the ATO Annual Report advises:
Litigation in both the AAT and courts is now inherently complex, often including interlocutory proceedings and related recovery matters. [Hence] … our commitment to both strategic litigation and maintaining the integrity of the tax system.
4.104
As mentioned, the ATO has a test litigation program in which it seeks to clarify complex areas of law through the court system. As well as reducing the number of cases going to appeal, it is also vital to refine and clarify case law which presumably makes for more consistent judgments and a fairer more efficient appeals process. The Annual Report states:
We engage with taxpayers at all stages in the process, to see if we can resolve the dispute or narrow the issues that proceed to litigation. We focus on ensuring we are litigating the right cases, including through our Test Case Litigation Program. Completed test cases clarify the law and provide precedential certainty.
4.105
Despite this emphasis, the Annual Report indicates that only five test cases were funded by the ATO in the 2016–17 financial year and this, as the Inspector-General’s submission notes, is less than a quarter than that supported in the 2012–13 financial year, with a steady decline in the number of test cases in the intervening years.
4.106
The Committee has concerns that the reduction in test cases could be having a negative effect on the very process that the ATO highlights as a lynchpin for fairness and efficiency in its appeals and litigation program. The Committee also notes that the submission from ASBFEO supports the need for the immediate expansion of the ATO's Test Case Litigation Program, as companion to further consideration of the need for a fully independent low‑cost external review mechanism.
4.107
Accordingly, the Committee recommends that the ATO review and report to the Committee on its litigation decision processes, including the use of its test case litigation program, and that the Government dedicate more funding to the ATO to increase and improve the test case litigation process.
4.108
The Committee recommends that the ATO review and report to the Committee on its litigation decision-making processes, including the role of its test case litigation program, and that the Government dedicate more funding to the ATO for this purpose and to improve capacity for test case litigation.
Measuring fairness in disputes
4.109
The Committee has in this chapter made recommendations to anchor data to measurable outcomes for key services and functions within the ATO’s dispute resolution framework. This data will, the Committee believes, improve the credibility and accountability of the ATO to taxpayers, while also providing a more accurate picture of the outcomes for different taxpayers segments.
4.110
In its review of the 2015–16 Annual Report, the Committee called specifically for improved reporting against fairness measures per se on the basis of taxpayer and tax agent experience of the outcome; the process; the information provided; and interaction with staff-for specific business lines, including audit, advice and debt work, in its next annual report.
4.111
The ATO agreed to report the results of its fairness survey in the current report. The 2017Annual Report provides the following overview of outcomes for fairness over the reporting period:
The most recent findings show that more than half (68%) of individuals surveyed think the ATO is fair and professional in administering the tax and superannuation systems. Similarly, 56% of taxpayers who were involved in a dispute with the ATO agreed that the dispute process was fair. This is a slight increase from the previous year’s results (55%). In addition, a higher proportion of audited taxpayers thought the audit process was fair, 71% in 2016–17 compared with 66% in 2015–16.
4.112
In explaining performance outcomes for fairness in disputes, the ATO further advises:
The results for the perception of fairness in disputes criteria are slightly higher compared to 2015–16 [from 55 per cent in 2015-16 to 56 per cent in 2016–17] Our commitment to maintain and continuously develop a better client service environment in all our interactions and to improving the client experience is central to our objective of resolving disputes as early as possible, while ensuring we treat taxpayers fairly and in a consistent way.
With the aim of preventing and managing disputes effectively, during 2016–17 we continued to increase our level of early engagement with taxpayers. This has led to improvements in three key areas of influence:
time taken to make a decision
ease and helpfulness of information provided by our officers to clients.
4.113
The IGT’s submission discussed the breakdown of ATO data on taxpayer perceptions of fairness indicating that less than half of taxpayers in dispute with the ATO thought they were kept well informed about the progress of their dispute, and 45 per cent did not think that the time taken to resolve their dispute was reasonable.
4.114
While the Committee commends the ATO for this incremental reportage the Committee also believes that, given the fact that just under half of all individuals in dispute are not satisfied, there is an urgent need to review and refine criteria to measure fairness across the spectrum of ATO functions and particularly for compliance, debt management and dispute processes.
4.115
The Committee recommends the ATO further refine its measurable criteria for fairness across ATO programs based on operations and outcomes, with targeted measures developed for staff involved in audit, compliance and dispute resolution processes.
4.116
The Committee further notes that while the reporting of the 2017–18 result of fairness surveys now provides disaggregated data, the report does not indicate outcomes for the key ATO stakeholder groups at the various decision-making points and in the different business lines as requested by the Committee.
4.117
The Committee also recommends that fairness survey outcomes at different decision-making points for the two main stakeholder groups—taxpayers and tax professionals, be reported in the annual report, and not just top level data.
4.118
The Committee anticipates that recommendations made in this chapter will aid interrogation of the ATO’s adherence to fairness across its compliance and dispute resolution model, over and above the generalised fairness measures included in the current annual report.
Building confidence and trust in the ATO
4.119
In his evidence to Senate Estimates in May 2018 the Commissioner of Taxation Mr Chris Jordan addressed media allegations that the ATO was not honouring commitments to taxpayers for fairness and due process, and particularly in its treatment of small business.
4.120
While on one hand he sought to demonstrate that the ATO is listening to taxpayers –saying the ATO could ‘probably be better at acknowledging our real mistakes, apologising, compensating for any actual financial loss and moving on’, he was also resolute in in dismissing the claims of participants in the ABC Four Corners Program, in particular, saying:
Let me just explain some of the behaviours we saw in this group of mainly old cases. Some people claimed significant expenses and did not provide proof of their expenditure, in one case saying the invoices were secret, even though they were given the opportunity a number of times to show the necessary paperwork over a period of time. It would be all too convenient if invoices were secret from the tax office. In the same case, they couldn't show us the assets that related to these expenses. The assets had apparently been destroyed. They did not respond to repeated attempts by us to contact them or their agent. There was abuse of company and trust structures so that they did not pay tax on their income, and expenses were simply concocted and false invoices created.
4.121
The tendency of these last remarks was, however, roundly rejected by program participants in submissions made to this inquiry.
4.122
Outscribe defended its participation in the ABC program saying: ‘We felt compelled to engage in a media campaign to highlight the injustice we had experienced to date and participated in a 4Corners/Fairfax report’, and suggested the Commissioner’s rejection of any legitimacy in their claims suggested the ATO has a punitive compliance culture that starts at the top:
OutScribe has been subjected to blatantly unfair treatment by a sector within the ATO, something which seems to be an entrenched culture emanating from the highest level. Surely it is the right of a taxpayer to appeal a decision and expect an independent reassessment, rather than be confronted with the toxic attitude that we have been subjected to. This treatment by the ATO would certainly not pass the pub test.
4.123
Blackwater Treatment Systems (BTS) objected to the Tax Commissioner’s ‘misleading statements’ about his and other cases. Self-Employed Australia (SEA) submitted a detailed response to the Commissioner’s comments in various contexts in an Appendix to its submission. It further maintained that SEA’s intention had been to work collaboratively with the ATO for improvement by ‘testing ATO systems from a user’s perspective’. However:
Instead of acknowledging this cooperation with the ATO while maintaining privacy for individual cases, the ATO’s Acting Commissioner rebuked us to the Parliamentary Committee. That rebuke, regrettably, has come to typify what we see as the ATO’s approach to criticism. It seeks to close down criticism rather than accept it, take it on board and investigate if lessons can be learned. The rebuke was an expression of the culture of the ATO from someone at the highest level of the ATO. It is not a good culture.
4.124
In his submission to the Treasury (which had been accessed by the media under Freedom of Information laws in July 2018), the Inspector-General of Taxation had urged the ATO to update its media strategy at risk of losing credibility in the modern media environment. Specifically, that:
In the IGT’s view, the [ATO’s] media strategy does not only fall short of public expectations of institutions, such as the ATO, but recent events have demonstrated that it is becoming increasingly irrelevant in our modern society. Firstly, it is now easier for citizens to publicly respond to such strategies where the administrator’s reaction does not accord with their personal experience. Secondly, improvements in technology have enabled people to evidence their experience and disprove the ATO’s response as well as providing a means to connect with others having similar experiences and coordinate responses for broader impact. Continuing to adopt such strategies runs an increasing risk of eroding public confidence as information is brought to light that discredits the ATO’s actions and how it chooses to treat disaffected taxpayers.
4.125
At the Committee’s hearings on 22 August 2018 Commissioner Jordan dismissed this view. He explained that the strategy adopted was to show strength and build confidence in the taxpayer who has done the right thing, and went on to highlight feedback from key stakeholders to indicate that the allegations of systemic abuse were false:
The strategy we had was to come out and say that that story did not represent the overall performance or view of credible stakeholders in the small business community of what we're doing. I think that's a legitimate thing to do. The small business stewardship group that comprises Kate Carnell, Peter Strong from COSBOA, all the state small business commissioners, the Real Estate Institute, the Restaurant & Catering Industry Association, the vet association, direct selling—we have organisations that represent an enormous amount of business. Not once in any of the stewardship group meetings, which are there for the purpose of raising any concerns, did any of those people raise a concern. The Inspector-General himself said he had no evidence of systemic abuse. So I think it's fine for us to come out and say that those cases don't represent the small business interactions. We've done an extraordinary amount of work to have a better, more streamlined, compassionate service to small business. That's the fact.
4.126
During this inquiry, industry stakeholders reiterated support for the ATO’s position. COSBOA’s CEO Peter Strong stated that the ATO is ‘not the worst’, as suggested in ABC Four Corners program, emphasising that he had no complaints from industry members. He conceded, however, that there are concerns about garnishees and bankruptcy, and a need for the ATO to do better. CAANZ’s Ms Franks also reported minimal complaints from members, while recommending improvements to high level review and security processes to improve ATO transparency.
4.127
Notwithstanding this show of support for the ATO, others agreed with the IGT that a review of the ATO’s media strategy and stance would be timely. This included Professor Valerie Braithwaite, an expert on governance whose work has contributed to the refinement of the self-assessment compliance model.
4.128
In her submission Professor Braithwaite highlighted the risk entailed if taxpayer confidence in the probity, integrity and fairness of the regulator in its management and deliberation on tax judgements should be lost:
Contesting tax is as important a way to engage democratically as supporting a candidate in an election. All indications are that democracies are struggling to preserve their previously unquestioned status as the best form of government. It seems reckless in current circumstances to add to the public’s sense of disempowerment and unimportance through constraining tax contestation for the ordinary taxpayer.
4.129
In discussion of these matters at hearings, the Professor referred as context to the development of the self-assessment model by the OECD, and its underpinning commitments:
…to introduce procedural justice…not just in the legal sense of administrative law but also in the sense that people felt that they were respected, that they were listened to and that they have a say.
4.130
Dr Braithwaite maintained that while the ATO’s annual report suggests the ATO’s structures are honouring its commitments, there is a need to recognise that community concerns exist (as exemplified by the ABC Four Corners program)’.
4.131
The Committee also heard from Dr Johnathan Aleck of the Civil Aviation Safety Authority (CASA) who was involved in the design and implementation of the CASA’s regulatory philosophy document. He emphasised the importance of having measurable performance targets and strong leadership to consolidate confidence in the vision both internally and to the public. Dr Aleck advised at hearings:
At the time [the CASA Regulatory Philosophy} was promulgated in 2015…the director made it very clear: 'It is my expectation as your director that you'll do this in everything that you do and that these values and these behaviours, I should say, will be reflected.' We're talking here implicitly about culture. Altering, changing and adjusting culture is something about which people wax quite eloquent. It's hard work.
4.132
The Committee recommends that the ATO should develop a high level leadership and communication strategy to ensure agency commitments to fairness and respect to all taxpayers, including during compliance activities, are fully and clearly promulgated and endorsed by ATO leaders and staff all levels.
4.133
The Committee also recommends the ATO should conduct a review of its communications material in hard copy and on its website to ensure that it is communicating taxpayers rights and obligations clearly, simply and meaningfully, including by :
refining and updating guidance on determination of fraud or evasion so that taxpayers are fully cognisant of their mutual obligations and commitments under the law;
articulating ATO commitments to fairness during the audit and objections process, with further investment in-house training for audit staff to raise standards; and
ensuring performance benchmarks for fairness are clearly articulated in the Taxpayers’ Charter and corporate documents, and measured in the Annual Report.
4.134
Finally, a number of submissions to this inquiry alleged that the ATO had failed to honour its obligations taxpayers under Model Litigant Obligations legislation, amendments to which were considered in Parliament earlier in 2018.
4.135
In the light of questions raised in submissions about the ATO’s compliance with MLOs, the Committee notes the IGT has recommended in his review of the Taxpayers’ Charter that the ATO, as Australia’s largest litigant, should be required to report, and report publicly, on its compliance with the MLOs and any remedial actions taken to address omissions.
4.136
At hearings in June 2018, the then IGT Mr Noroozi recommended that this matter should be considered as part of the broader consideration of the scrutiny and corporate management structures within the ATO, including his proposal for consideration of introducing a management or advisory board for the Tax Office.
4.137
The Committee recommends that the ATO report publicly on its commitments to Model Litigant Obligations—including on measures to ensure staff ‘act honestly and fairly in handling claims’ and to reduce costs and delays in litigation.
4.138
The Committee notes that the ANAO has listed a potential audit of ATO adherence to the MLOs, and of assistance provided by the Attorney‑General’s Department to Commonwealth entities in adherence to these obligations, as part of its potential work for 2018–19.