Proposals for internal and external reforms
As discussed in previous chapters, public confidence in the fair administration of the tax system is fundamental to the functioning of a system which relies on taxpayers entering the system and remaining informed and honest participants. If taxpayers start to perceive disincentive, or at worst, retributory punishment for their willing participation in the system, they may fully or partially disengage.
As the Inspector-General of Taxation recently noted, confidence in the fairness of the administration of the tax system is one of the ‘critical factors for the efficient and effective operation of a self-assessment regime’. It is therefore important that safeguards exist to maintain good governance both within and outside the ATO and that reporting on the ATO’s performance and plans is clear, thorough, consistent, comparable between periods and informative.
This chapter considers the integrity of the ATO’s reporting and governance structures and arrangements and to what extent they are accountable to the Australian community and to government. Information in this Chapter reflects the perspective of both statutory scrutineers—who have direct access to the ATO and data—and the evidence of experiences of taxpayers and tax professionals, who do not.
ATO capability and direction
In this report the Committee has discussed the value of the Taxpayers’ Charter in providing guidance on the values, rights and responsibilities of the agency and taxpayers in the tax engagement process. The ATO’s Corporate Plan, meanwhile, outlines key performance targets for a projected four year period, which are reported on in the Annual Report, and releases an annual version during the cycle.
On its website the ATO lists a wider range of corporate governance and assurance frameworks which help monitor and support the maintenance of its integrity. These include:
Corporate governance framework;
APS Values and Code of Conduct;
ATO Audit and Risk Committee;
Internal Audit and assurance;
Fraud Prevention and Internal Investigation;
Financial management and assurance;
Information management and security; and
Performance measurements of integrity, including integrity (or fairness) indicators.
The strategic direction of the agency is set by the ATO Executive Committee, which is composed of the Commissioner, three Second Commissioners, the Chief Operating Officer, Chief Finance Officer and Chief Service Delivery Officer. The ATO created the new senior executive position of Chief Operating Officer in 2015–16, the same year the Chief Information Officer position was created.
The Chief Operating Officer heads the agency’s Corporate and Enabling Services functions which covers finance, governance and people management. This signals the importance of the strength of these functions to the agency. The Annual Report states this position ‘plays a lead role in managing relationships with key stakeholders, including scrutineers.’
The Internal Audit area and the Fraud Prevention and Internal Investigation area are dedicated separate internal control functions to provide internal checks on ATO systems and governance. The fraud and corruption control plan is updated annually to comply with the Commonwealth Fraud Control Framework 2017. The agency’s fraud control management was considered in investigations following the revelations of Operation Elbrus in 2017, as discussed in Chapter 2.
Reporting against the 2016–17 Corporate Plan
The 2016–17 Corporate Plan states that one of the key risks to the organisation is ‘failing to manage our organisational capability.’ The document also stresses that:
…cultural change is at the heart of the ATO’s transformation and aims to improve the client and staff experience. We have made progress but are yet to realise all-encompassing change.…[and further] we are focussed on embedding cultural change, so the client focus, service ethic, sensible risk management and outcome orientation are the norm and reflected in everything we do.
The ATO’s 2016–17 Corporate Plan was the first of four plans to be issued articulating the ATO’s vision to 2020. These goals are those against which the 2016–17 Annual Report would report. The 2016–17 plan sets performance measures in four categories:
Reporting against the four Corporate Plan performance categories in the 2016–17 Annual Report is not easily reconciled however: a total of 20 performance criteria are identified in the plan under Program 1.1 and are reported against targets throughout the Annual Report. Additionally, a new performance category—that of professionalism, not included in the original Corporate Plan, bought the total to 21 outcome areas.
Four of the 21 criteria are measured through community feedback through surveys the ATO conducts and these four relate to measuring integrity and the level of confidence and trust the community has in the tax administration. Three of the four outcomes modestly exceeded targets by one percentage point and one remained stable. This is summarised in Table 6.1. For the purposes of this assessment the 2017–18 results were known at the time of writing, reporting a four percentage point slippage in community satisfaction, a two percentage point drop in perception of fairness but achieving the highest result for employee engagement since 2012. For completeness, the 2017–18 statistics are included in Table 6.1.
Table 6.1: Corporate Plan performance results (from surveys), Program 1.1, 2015–16 to 2016–17
Satisfaction—community satisfaction with ATO performance
Corp Plan 19
Greater than or equal to 2015–16
Fairness—perceptions of fairness in disputes
Corp Plan 19
Greater than or equal to 2015–16
Professionalism—people surveyed agreed that the ATO listens to and responds to feedback
Corp Plan (not identified as a key criteria)
Greater than or equal to 2015–16
Ease—people surveyed agree the ATO makes it easy to access services and information
Corp Plan 19
Greater than or equal to 2015–16
Culture—level of employee engagement (b)
Corp Plan 19
Greater than or equal to 2015–16
Source: Commissioner of Taxation Annual Report 2016–17, pp. 96–97 and Commissioner of Taxation Annual Report 2017–18, pp. 15, 30, 48, 195, 196.
(a) The measures of professionalism in the Commissioner of Taxation Annual Report 2017‑18,Table 5.16, Commitments to Service—Professional, 2016–17 and 2017–18, p. 195 are new indicators based on respect and courtesy (from 89 to 91 per cent) and knowledgeability of ATO workforce (from 73 to 77 per cent).
(b) The results of this measure are gathered from the June 2017 APS Census run by the Australian Public Service Commission (APSC). All other results of measures reported in this table are from ATO commissioned surveys.
Reconciliation and transparency
The Committee found that the annual reporting of survey results on fairness and community satisfaction outcomes does not reveal a complete picture of survey results—rather, many of the less positive results are revealed only in an appendix or merely have a qualitative mention in performance reporting. For example, in 2016–17 the ATO tested 11 areas of its performance in surveys of community satisfaction, yet only reported four quantitative outcomes under performance results in the 2016–17 Annual Report. Ten of the 11 survey results are presented in Appendix 7—Service Commitments and Activities. There is no referencing between the reported outcomes in the Table 2.17 performance results and its analysis, and, as relevant, Appendix 7, Table 5.10 service commitment reporting results.
The Inspector-General of Taxation (IGT) also highlighted that while the ATO agreed to the Committee’s 2016 review report recommendation that the ATO in future report against its fairness measures in specific ways—that it only partially reported in the requested manner, explaining that:
However it [the ATO] does not appear to have done so on the basis of taxpayer and tax agent experience of the outcome, the process, the information provided and the interaction with staff for specific business lines.
Reconciling reported outcomes under performance results in the Annual Report to intended results in the Corporate Plan is reasonably straightforward. However, the inclusion of one of three new indicators of professionalism as the third reported performance criterion (not mentioned in the 2016–17 Corporate Plan), and two other indicators under Professional listed under service commitment outcomes, hinders clarity.
Despite a passing mention of 11 community satisfaction surveys being conducted, the discussion under community satisfaction with the ATO (holistically) does not reference where each of these indicators are reported in the Annual Report; nor is there an explanation why only two survey driven service indicators of 11 such indicators were highlighted for discussion in a group of four other ATO survey driven performance criterion.
Adding additional confusion, the indicator for ‘Ease’ which appears under performance results in Table 2.17 of the Annual Report is listed under service commitments, Table 5.10, Appendix 7; and yet the third indicator of ‘Professionalism’ (one of the chosen four indicators highlighted out of the 11 survey indicators) is not listed with the other two ‘Professional’ results in the service commitments table.
The Committee notes that the 2017–18 Corporate Plan used a new format for identifying performance criteria based on five strategic perspectives, covering nine objectives: Government, two measures (G1 and G2); Client, three measures (C1, C2 and C3); Workforce, one measure (W1); Operational, two measures (O1 and O2), and Financial: one measure (F1).
The main difference between the previous format and the new Corporate Plan format is that the highlighted indicators of agency performance in G1‑F1 are mostly quantitatively measured from existing ATO data and resources and less driven by subjectivity from community perception surveys. That said, the 2017–18 survey work was targeted at ‘partner perceptions’ of how the ATO empowers and includes them (including tax and IT professionals) and also the existing indicator of ‘ease in accessing services and information’.
This trend continues in the 2018–19 Corporate Plan, which drops the ease of accessing services survey measure (Client focused strategic objective) and focuses instead only on quantitative measures (median cost of individuals managing tax affairs and proportion of key digital inbound transactions). The same service commitment indicators are reported as in 2016–17 although they are now listed under separate categories and in separate tables. This presentation provides greater clarity however reporting would still benefit from a summary table and referencing.
Community satisfaction survey results and reported concerns
Given the negative public attention in this reporting period and the ensuing review period, it is notable that the community satisfaction rating only slipped four percentage points in the next reporting period. This may merely be a statistical reflection of the increasing number of taxpayers who, with relatively straight forward tax affairs, are lodging through myTax with pre‑filled data—and who do not perceive any issues.
This result is commensurate with the relatively low number of taxpayers who lodged a complaint about inappropriate or unfair ATO administration with the Inspector-General of Taxation in the 2016–17 year—2 083 reports, of which 1 391 led to investigations.
The number of reports to the IGT increased five per cent over the 12 months, yet reports only comprise 0.01 per cent of all individual and small business taxpayers participating in the system. However, the IGT investigation statistics, as an indicator of the level of initial community satisfaction, should be read with a measure of conservatism as matters at the investigation stage do not equate to the number of ATO complaints. Additionally, the IGT complaints handling function was only in its second year of reporting, and as the IGT’s Annual Report points out ‘one area that requires improvement is the visibility of the IGT’.
On more than one occasion in the inquiry period the Inspector-General of Taxation stated that he believed that five per cent of decisions made by the ATO are likely to be erroneous, which would indicate considerably more investigations if all these matters were raised. At a Committee hearing he explained:
In large organisations you cannot guarantee that everything will go according to plans or all procedures will be followed at all times. I would say, and this is not backed up by hard evidence, in five per cent of cases it is likely things will go wrong and that’s why the government has offices like mine: to make sure we address the five per cent.
In Senate Estimates in May 2018 the Tax Commissioner disputed this figure which was raised again during the ABC Four Corners program less than a fortnight later, stating:
…the number of lodgements is over 35 million. In such a large system human error will inevitably result in mistakes being made—however, nothing like the unsubstantiated claim that we get one in 20 things wrong. Based on the numbers I gave you, that would mean we allegedly get wrong in the vicinity of 830,000 tax returns or 1.75 million lodgements each year.
The Commissioner concluded, saying ‘It just can’t be’:
Australia has a self-assessment taxation system and as such the ATO does not directly make decisions on 35 million lodgements each year even though data in these is auto-scrutinised for irregularities. As such, the percentage of human error, whatever that may be, is a percentage of a much smaller pool of actual annual ATO compliance interventions; far fewer than 1.75 million.
The IGT clarified what he meant in regard to the five per cent error level in the IGT’s submission to the Secretary of the Treasury for the Investigation into matters reported by the Four Corners program about small business dealing with the Australian Taxation Office (April 2018). Mr Noroozi explained:
Take for example the ATO’s response to the IGT statement in the Four Corners program that ‘perhaps in five per cent of the cases or so an organisation that size may not get it right’. The ATO was well aware of the context of that statement, as it had been made 12 days earlier during the IGT’s public appearance at the 28 March public hearing in Canberra.
However, in response at the hearing the ATO referred to performance statistics and other reporting that compared all manner of actions with the total number of lodgements by all taxpayers, as noted earlier. The IGT also criticised the ATO’s response saying that the more important issue is how errors are addressed, not so much the size of them.
The Committee concluded that attempts to reconcile between different areas of the annual report and to companion target and commitment documents proved challenging. The survey result information did not provide any meaningful analysis on the commissioned surveys—how they were undertaken, including details of the survey parameters. Furthermore, a couple of performance indicators had methodology changes and so comparisons across time were not possible. The Committee accepts this will occur from time to time, but not regularly.
Given the weight afforded by the ATO to the outcome of community survey results—and the cost of undertaking these surveys—the Annual Report should include a dedicated table listing all survey areas and providing an overall analysis and explanation of notable outcomes and impacts and referencing to indicators highlighted elsewhere in the Annual Report. The Committee is conscious of the need for concise reporting but not to the detriment of transparency.
The Committee noted there remained no explanation in the Annual Report of survey conduct and composition in the following year’s 2017–18 reporting; which illuminated why the ABC may have sought the full results of the community satisfaction/corporate perceptions survey under freedom of information access in July 2018. It is impossible to know if all survey results have been reported from the reporting commentary and again there is no separate reporting of survey outcomes and overall community satisfaction (as this appears to represent an amalgam of the various survey indicators).
Similarly, evidence received from the Inspector-General on fairness reporting identified that there wasn’t a breakdown of fairness criteria in the 2016–17 Annual Report, despite the Government Response to Recommendation 10 of the 2016 Annual Report review agreeing the ATO would report the detail in 2016–17. The Committee acknowledges that the 2017–18 reporting of fairness provides more information and disaggregation but not from the perspective of taxpayers, and separately tax professionals, and not for different business lines.
The Committee considers that, as a foundation principal, the ATO should report pertinent details and outcomes of community perception surveys to improve transparency on commitments to rights, values and principles enunciated in the Taxpayers’ Charter.
Survey criteria must also be static so as to provide meaningful benchmarking of results across time and provide clear benchmarking against the ATO’s pledges of what taxpayers can expect from the ATO as currently outlined in the Taxpayers’ Charter, Essentials, Your Rights—What You Can Expect from Us, as well as against Corporate Plan objective measures.
The Committee recommends that the ATO should ensure that community satisfaction performance measures are reported consistently over time and benchmarked against commensurate commitments to rights, values and principles as enunciated in the Taxpayers’ Charter, in addition to the strategic objectives set in the corporate plan.
This dovetails with recommendations in Chapter 5 on developing benchmarks to assess performance to the Taxpayers’ Charter, and with the recommendations to improve on fairness measures in dispute resolution in Chapter 4.
Strengthening internal governance and independent review
Despite the control functions and frameworks as mentioned previously, the Committee has received persuasive evidence to suggest there is a need to strengthen ATO internal review processes at executive level and create firewalls protecting review and decision-making processes and to improve accountability both internal and externally, that is both within and across executive levels and to taxpayers.
This includes a potential separation of line functions under the current organisational structure within the ATO, or establishing an entirely new and independent suite of review and mediation bodies.
The ATO currently oversees taxation objections and appeal functions within the same business line area, Review and Dispute Resolution, under the one group, Law Design and Practice Group, headed by the one Second Commissioner.
Taxpayer engagement activity, including advice, compliance activity and audit is in a distinctly separate group headed by another Second Commissioner. However, despite this apparent separation, the Committee heard of the inherent risks to the independence of review decisions, in particular when opinions of law are sought. This is because the appeals area sits within the same group as does the legal expertise function.
IGT proposals for an internal independent appeals process
In 2000, the Administrative Review Council’s best practice guide to internal review processes in the Commonwealth Public Sector stressed that internal review officers should be ‘organisationally distinct from primary decision makers’ and they ‘should not be physically located close to the primary decision makers whose decisions they review’. It considered that any inferences between decision makers, whether intentional or not, within the same business line, were more likely to lead to the same conclusion and could only be independently checked by the Administrative Appeals Tribunal (AAT) or Federal Court.
IGT proposals 2015
In 2015 the IGT’s review of the ATO’s Management of Tax Disputes identified a flaw in the ATO’s organisational structure, which it considered militated against best practice in separation of compliance decision-making and objections decision‑making. Following the IGT tax disputes review, the Committee’s broader disputes review for all taxpayer groups also recommended for the complete separation of appeals processes from compliance decisions. The separate appeals area was recommended to be led by a new Second Commissioner of Taxation heading the appeals group.
However, the Government objected to the recommended restructure, and the Tax Commissioner stated that having the two Second Commissioners for these organisational groups (one for compliance and the other appeals) may lead to the Tax Commissioner being forced to adjudicate in cases of differing opinion. In addition, in response to a pilot being conducted of a separate appeals group, the ATO’s main objections were that stakeholders had expressed a preference for involving legal experts early in disputes and that the ‘organisational logistics of a such a pilot would be burdensome’.
Six months after reporting on the Management of Tax Disputes the IGT completed his Debt Collection review, reporting to the Assistant Treasurer.
This comprehensive review made 19 recommendations, of which the ATO agreed, agreed in principal or partially agreed to 16, disagreed with two and one recommendation was considered policy and a matter for Government. In the Executive Summary to the report the IGT cited concerns regarding the commentary surrounding the ATO’s response to the report which:
Raises potential governance concerns as it creates substantial uncertainty with the scope of agreement and risks inadequate implementation of recommendations.
Furthermore, one of the disagreed recommendations, Recommendation 4.7, related to another internal structure deficiency, requesting ‘the ATO to consider merging the Debt Business Line into the Compliance Group’. However, the IGT seemed content to conclude that:
While the ATO has disagreed with it, the accompanying commentary confirms that consideration of the appropriate organisational structure will be undertaken through its ‘Reinvention’ program.
Soon after the report was released the ATO restructured, but the Debt Business line was not moved to the compliance area. The IGT commented at a hearing in Canberra:
For example, one of the ones they didn't agree with, even though they did say they would look at it as they look at restructuring, was where we had suggested that the debt collection area should be within the compliance area. They disagreed with that. The reason we had said it should be in the compliance area was that the compliance team know the taxpayer; they know what kind of payment arrangement, for example, they may be able to afford.
In an apparent partial restructure gesture, in July 2015, only months after the Committee’s Tax Disputes report was presented, the ATO’s objections function was relocated to the Law Design and Practice Group, where policy, analysis and legislation and in-house and alternative dispute resolution—and the TCN, resided. This remains the current organisational structure.
This bolstered, to a degree, the internal independence between the original decision-maker and the objections area, as noted by the outgoing Inspector‑General of Taxation that:
While the IGT’s and the SCTR’s recommendations were ultimately not implemented, it served as a catalyst for the ATO to administratively restructure itself to move the objection function from the Client Engagement (formerly Compliance) Group into the Law Design and Practice Group. The restructure, together with certain initiatives of the ATO such as the broader rollout of the in-house facilitation service have yielded some benefits with dispute levels (as indicated by objection and litigation figures) decreasing in recent years.
Refresh—IGT proposal to the Treasury 2018
In the submission to the Secretary of the Treasury for the Investigation into matters reported by the Four Corners program about small business dealing with the Australian Taxation Office the IGT reiterated his conviction that this is an organisational restructure that should be resolved. The submission elaborated:
The Debt Business Line is currently in the Service Delivery Group, however, the business line that would have issued the assessment and is well acquainted with the taxpayer in question lies in the Client Engagement Group. The co-location of these two functions within the one group, would facilitate a more efficient, better informed and coordinated ATO action.
In response to questions on notice arising from the 30 May 2018 Senate Estimates hearing of the Senate Economics Legislation Committee the Tax Commissioner however, had highlighted what had been achieved in the 2015 restructure:
…all objections are managed by Review and Dispute Resolution which is an area of the ATO. This area, led by the Second Commissioner Law Design and Practice, is separate from the original decision maker.
But Mr Noroozi, in his valedictory speech in October 2018, took the opportunity to once more drive home the need to urgently review the current restructure saying:
It is acknowledged that the ATO has sought to partially implement this IGT recommendation but it falls short of what is required. The appeals function has been moved from the compliance group to the legal advisory group. One of the issues with this structure is that it gives rise to a conflict. Precedential views are developed and finalised within the legal advisory group and taxpayers who wish to object to ATO decisions, may have to also challenge an ATO precedential view. The appeals function must be truly separate, and be perceived to be so, from both the compliance and legal advisory functions to facilitate a fresh and impartial review of the taxpayer’s case.
In her submission to the inquiry, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Ms Kate Carnell AO supported the IGT’s view:
Further, 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".
Ms Carnell also supported the IGT’s model, which included executive leadership by a new second commissioner, adding in her submission that:
The Second Commissioner should provide a review of business issues independent of the ATO’s audit and legal areas, as noted by Mr Ali Noroozi in his valedictory speech (4 October 2018) where he (again) called for “the creation of a separate and dedicated appeals group within the ATO led by a new Second Commissioner.
Establishing an ATO Advisory Board
As discussed above, the Inspector-General of Taxation has long stressed the importance of the separate function being headed by an independent Second Commissioner. This was also a recommendation of the Committee of the 44th Parliament.
In his 2011 submission to the Tax Reform Forum, for example, the IGT had suggested that additional Second Commissioners be appointed to ‘lead the more contentious areas of the ATO, including one as head of a separate appeals area’. Additional Second Commissioners have since been appointed, but not one dedicated to an appeals-only group.
The Inspector‑General noted in that submission that failing the creation of a new dedicated Second Commissioner function (or in the event it does not prove successful of its own), then an ATO Advisory Board should be established. This alternative mechanism would also provide a strong mechanism to promote fairness.
In consideration of various models overseas, the IGT concluded that creation of an oversight board comprising community members with key taxation expertise and current business environment acumen could provide an independent but expert sounding board and a formal scrutineer role, stating that:
The establishment of a management board will have number of positive influences in tax administration. It will bring a diverse mix of expertise and skills from across both public and private sector into the ATO in areas such as information technology, human resources, finance and communication. This is especially relevant given that the role and scale of the ATO’s operations have grown substantially over the last twenty years. It will also help instil better project management skills and provide a new source of intelligence regarding business practices.
Mr Noroozi further stated at the Committee hearing on 29 June 2018:
None of us can tell the tax office or the commissioner what to do. The board is like APRA or ASIC. If you look at the US or UK revenue agencies, they all have a board. What should happen is a board with an independent chair. That also brings a whole load of new expertise around the table. If you look at most companies, they have a board and they have a managing director. It's no different to that.
The Review into Australia’s Future Tax System (AFTSR) was focussed on tax policy, rather than administration. However, it did make some comment relevant to this inquiry to improve the accountability mechanisms of the ATO, one being the establishment of an advisory board for the ATO.The revenue agencies in the US, UK and Canada also have a management board rather than an advisory board as suggested by the IGT. This is not external scrutiny in the sense of an independent statutory agency, but does form part of the accountability framework.
The Committee notes the support for an advisory board from the IGT and the AFTS review. The Committee has considered the creation of an advisory board to the ATO which would primarily offer expertise from a variety of sectors. There is definitely merit in the concept however the Committee notes it was probably of greater relevance at the time of the Henry Tax Review when there were fewer external impacts, influences and new expertise within the ATO, including ‘new private-sector blood’. The Committee recommends that the government consider the merits of establishing an advisory board given the current environment within the ATO and in light of the Reinvention Program.
The Committee notes the AFTSR Recommendation 115 clarifies that: ‘The board would not be a decision-making body and would have no role in interpreting the tax laws or examining individual taxpayer issues. The government would appoint members to the board’.
The Committee recommends that the Government consider the mechanics of establishing an advisory board to the ATO to advise the Commissioner of Taxation on the general organisation and management of the ATO.
Functions of an independent appeals body
The IGT emphasised two important functions that a separate appeals area within the ATO could undertake:
Merits-based pre-assessment reviews ‘available to all taxpayers, including small business and individuals, based on pre-established criteria’ (currently this process is only available to large taxpayers—however a limited pilot program for other taxpayers commenced in July 2018); and
A program, administered independently of the ATO, to provide assistance or funding for vulnerable, unrepresented taxpayers who may need to challenge the decision of the ATO, akin to the support provided under the US Low Income Taxpayer Clinics (LITC) program.
Merit-based independent reviews
Independent reviews are available for groups with a turnover of $250 million who have received a Statement of Audit Position following an audit ‘regarding income tax, excise, goods and services tax, or other forms of tax’ and who request consideration for an independent review. The pilot offering to small business started 1 July 2018 in Victoria and South Australia and was expanded Australia-wide on 15 October 2018. It will run until 30 June 2019. Businesses selected with an audit in progress will be offered to participate in an independent review process using a technical officer outside the relevant audit area.
The IGT stressed that the support of these proposed functions for the ATO would not be inexpensive but given the impact of the ABC Four Corners program, and ‘ongoing levels of discontent’, that it is now an important safeguard to include in the tax administration system. He emphasises the need to accordingly boost ATO resources to provide an independently styled service to taxpayers, stating: ‘The IGT appreciates that the ATO may require significant additional resources to provide the latter service to all taxpayers, however, such costs may now be worthy of consideration.’
The ASBFEO enthusiastically backed the IGT position for the immediate permanent introduction of independent reviews for small businesses under audit. Ms Carnell believes this program is likely to help this category of taxpayer much more than the bigger players who have greater capacity to absorb litigation costs. The Ombudsman’s submission states:
We applaud the recent ATO (limited) pilot that extends to small business an offer of internal independent review by a senior officer of the ATO. This was available initially only to large taxpayers, but is obviously of far greater benefit to small business that lacks the resources and expertise to take on the ATO in court.
Assistance for vulnerable unrepresented taxpayers
The IGT highlighted as a worthy initiative the ATO’s pilot program Dispute Assist, which commenced in December 2016 and which provides internal support for unrepresented individual taxpayers, for example the elderly and those in vulnerable health or domestic situations. He stated the pilot program is indicative that this type of support is required. However, he also considered that it is inappropriate for the assistance to be provided by the party with which the taxpayer is in dispute, noting that: ‘taxpayers maybe uncomfortable with such assistance being provided by the party with whom they have a disagreement, namely the ATO’.
As an alternative, the IGT suggested the Government consider funding a function akin to the US ‘Low Income Taxpayer Clinics’. This is a program supported administratively by the US Internal Revenue Service (IRS), but external to it, where federal funds are matched by organisations who wish to support US taxpayers of low income and/or poor English proficiency to understand their tax obligations and provide representation for disputes.
The ASBFEO also suggested an external low-cost review mechanism to assist the more vulnerable taxpayer categories (it was pointedly aimed at supporting small business) but unlike the IGT’s suggested funding support for organisations to facilitate financial support for say, private legal assistance, the ASBFEO suggests a review body which has the power to bind the ATO to their decisions.
Given the relatively much higher burden of costs on the small taxpayer categories to appeal any compliance decision, Ms Carnell also called for a completely independent appeals body, stating support for:
The creation of a fully independent low-cost external review mechanism that is binding on the ATO and facilitation of taxpayer appeals through the court system (where necessary), including expansion of the ATO's Test Case Litigation Program. Although attention should be given to the test case program immediately, the external review mechanism (which is in addition to internal independent review mentioned above) might be set up once the new Second Commissioner is in place and all continuing gaps are identified.
ASBFEO recommended a two pronged approach to overcome the hurdle of costly tribunal or court processes for small business taxpayers:
Maintain the current pilot program in permanent manner, offering merits-based independent reviews to small business (and individuals) who are undergoing audit; and
To cover those who are not being audited but who have objected to a tax assessment which has been decided in favour of the ATO, and who could then could only appeal further to the AAT or the Federal Court (at considerable relative expensive)—to establish an external low‑cost review mechanism with binding powers to facilitate these taxpayer appeals.
Additionally, the ASBFEO believes the IGT should also have ‘the power to make decisions binding on the ATO’, along with an enhanced small business focus. Ms Carnell said this function should also be supported by:
a. increasing small business awareness/expertise within the IGT;
b. tailoring the existing IGT website to specifically address small business needs; and
c. changing the name of the IGT to the 'Taxation Ombudsman" to make it clear that the agency assists business (and others) in their disputes with the ATO.
The Inspector-General of Taxation supported the name change of his role to Taxation Ombudsman:
I also believe that the IGT should be renamed the Taxation Ombudsman to make it more identifiable amongst those who most need assistance in their disputes with the ATO. While the IGT is well-known in the tax profession, awareness of its services needs to be better promoted amongst small businesses and individuals including the most vulnerable. As the Chief Justice of New South Wales, the Hon Tom Bathurst, has recently remarked:
The worth of any society can be found in the extent to which the rights of its citizens are protected regardless of whether they are rich, poor, powerful or vulnerable, and especially when they are subject to disability or disadvantage, and unable to enforce it themselves.
The issue of extending the IGT’s powers is considered in the section on the IGT’s future role later in this Chapter.
The Committee recommends the restructure of the ATO’s dispute resolution function by completely separating the appeals group to be headed by an independent, additional Second Commissioner. During this restructure the Debt Business Line should be merged with the compliance group such that information on taxpayers’ payment agreements is better communicated and respected.
The Committee endorses the calls for a permanent extension of the program to offer independent reviews to small business and individual taxpayers who are the subject of audits and who meet certain program criteria. These are the people most likely to benefit from a review where a different outcome would mean they avert the need to go through a costly and personally draining process, especially while they try to manage their employment or small business. Given the outcome of the reviews undertaken in the large business sector—that one third of the recommendations were in the taxpayer’s favour—it appears that audit positions warrant review processes being rolled out in these other taxpayer categories.
The pilot program has been supported by both the Inspector-General of Taxation and the Australian Small Business and Enterprise Ombudsman. Additionally, the original scope has already been extended from two States to all Australian jurisdictions, within months after commencement. This is a positive sign that the program is seen as effective and fair and value‑for‑money. It is also very transparent, exposing the ATO’s at times flawed decisions. By the end of the pilot period the ATO will have considerable performance data and feedback to feed into reviewing the program as necessary before making it a permanent program.
The Committee recommends that an autonomous appeals group, headed by an independent Second Commissioner, is established to focus solely on tax dispute processes. During this restructure the business debt line should also be transferred out of Service Delivery Group to the compliance (Client Engagement Group).
This new organisational structure will allow the appeals group the focus and autonomy to conduct merit-based pre-assessment (independent) reviews for all eligible taxpayers.
The Committee recommends that the merit-based independent review program continues to be offered to small business and individual taxpayers who are being audited and that the ATO is adequately resourced to permanently fulfil this obligation under the principles of the Charter into the future.
The Committee also has concerns that Dispute Assist puts the taxpayer in an inherently conflicted position. It believes an independent low-cost external review mechanism could be created to operate using the foundation concept of the American Low Income Taxpayer Clinics. This would enable external support mechanisms to be funded at arms-length, providing independent assistance to vulnerable and unrepresented taxpayers. This would allow true independence of dispute support, providing that advisory bodies are available and willing to participate.
The Committee does not support a separate external body with binding decision power in reviews. The reasons for this are outlined later in the Chapter with respect to calls for the IGT’s role being complemented with the power of binding review decisions.
And the Committee, like the Inspector-General of Taxation, does not support the IGT becoming a Taxation Ombudsman for the small business sector only. The IGT’s Office is designed to be of assistance to all taxpayers and some of the most vulnerable are individuals and some of the more perplexing tax administration issues are revealed through larger taxpayers—which feeds into the IGT’s role to conduct reviews of the tax administration system.
The Committee recommends that the Government establish a fully independent low cost external support mechanism which provides vulnerable taxpayers (who meet transparent criteria) the ability to provide funded, or part funded legal representation.
The design and operation of the US Low Income Taxpayer Clinics program could be considered as a model for an Australian initiative.
Complementing this support for more vulnerable groups, the Committee also supports the Inspector-General of Taxation having a greater visibility amongst the bulk of taxpayers who are individuals and small business, particularly those who would benefit the most from accessing his Office’s assistance. Most Australians identify with the role of an ‘Ombudsman’ but few would recognise the role of the Inspector-General of Taxation. It is for this reason that the Committee agrees with the name change as suggested by the ASBFEO and the outgoing IGT.
The Committee recommends that the Inspector-General of Taxation is renamed the Taxation Ombudsman to reflect an expanded and fully operational complaints assistance role in addition to the position’s independent review remit, and that:
the Office should be promoted more effectively, particularly through the ATO website and material of the Commonwealth Ombudsman and Australian Small Business and Family Enterprise Ombudsman, and
the Office should also be adequately resourced to provide ongoing effective assistance to Australian taxpayers as the promotion of the function demands greater volumes of assistance.
Models for an external independent appeal body
To achieve a greater separation of decision-making stages and fresh legal interpretation provided at the objections stage, the appeals function and tax counsel could be separated completely from the ATO into a new compliance review agency. This would be similar to the structure in place in the US, the United States Board of Tax Appeals which was established in 1926.
The Tax Disputes inquiry considered this option but did not recommend it for a few reasons. One overarching reason was that there were few submissions and evidence received which supported this extreme model; and also that they believed that many taxpayers perceived the then appeals and review group as having a stronger culture of independence than it had in the past. The Committee therefore believed that changes could be made to the internal arrangements to improve independence of decision-making at appeals stage without establishing an independent body. The Committee concluded ‘it saw no convincing reason why objections should be completely split off and developed into a new agency. The arguments against this proposal were compelling’.
Some of the arguments against the creation of a new appeals agency included, that it may:
add delays and cost to the dispute resolution process; be less efficient; not assist in promoting a productive relationship between taxpayers and the ATO; provide fewer feedback loops [CPSU], and reduce confidence in primary decision-making [ATO evidence];
increase costs and expertise and create difficulties with information flow [The Treasury];
result in efficiency loss; de-skilling of staff and dilute corporate and expert knowledge [CPSU]; and
that the agency may lack ‘the critical mass’ to succeed [Price Waterhouse Coopers].
As discussed in Chapter 4, there was strong support for independence in review processes by taxpayers involved in lengthy dispute with the ATO. Outscribe, who featured in the ABC program, was among those who called for a complete separation of this body from the ATO remarking the low likelihood of having an impartial consideration, given a natural ‘bias and culture’ which can only support taxpayer distrust in ATO decisions.
Equally, Mr Graeme Halperin, a tax Professional also featured on the program, wrote to the Committee to recommend:
A separate, independent Commissioner of Tax Disputes who is not part of the ATO framework should be appointed under separate legislation to review the merits of audit/compliance findings in dispute before adjusting assessments are issued to taxpayers and to manage tax disputes generally. Non-ATO personnel should be appointed to work for the Commissioner of Tax Disputes. Without that separation, there will always be the tendency for ATO personnel managing tax disputes to reinforce and validate the approach taken by audit/compliance personnel and debt recovery personnel in the ATO.
However, the IGT did not endorse the creation of such an agency. His final supplementary submission explained that:
While a separate agency represented the purest and most definitive form of independence from the ATO…such an agency would not be without its challenges including additional costs for Government, be largely staffed with personnel transferred from the ATO, may potentially overlap with the functions of the Administrative Appeals Tribunal and hamper the development of effective feedback loops.
The Committee considered proposals for both internal and external review processes and noted a number of problems in each case. In Chapter 3, a number of taxpayers in dispute recounted experiences where flawed decisions made by an ATO auditor were carried through to the last level of appeal, when they were finally overturned by the adjudicator. At no time, it was claimed did ATO staff, even higher ranking staff, admit to reviewing such decisions.
Precedential adherence is regarded as good practice to increase certainty in tax administration, as recognised in the Australia’s Future Tax System Review report:
The administration of the tax laws can have a significant bearing on the level of certainty taxpayers have about their obligations. A challenge for the tax authority is to be responsive to the individual circumstances of taxpayers while at the same time being fair and consistent.
In regard to the proposal for internal reforms, if the ATO were to set up a clear and distinct appeals area the ATO would continue to rely on precedential in-house documentation for complex tax interpretation to finalise objections decisions. Hence in a proposed dedicated appeals group, and even with the oversight of a separate Second Commissioner, an objections decision would be informed by compliance advice from the ATO’s Tax Counsel Network (TCN) group, and potentially reflect the opinion of the first ATO auditor to review the case.
It appears then, that in having a sole legal advisory team within the ATO, the Tax Counsel Network group, combined with precedential deference to maintain consistency and fairness, there is a trade-off which results in potentially less impartial objection decision-making on points of law. Owing to the need to refer to documented precedential decisions, this would be the case irrespective of where a single legal advisory group is organisationally located. However, any physical and organisational separation would improve risks of unintended interference and bolster the integrity of the structure.
The Committee therefore is of the view that objections decisions undertaken with advice from the TCN, in cases of application of law dispute, must be based on a fresh review to reflect any potential changes to the legal situation or rulings since the first compliance stage decision. Additionally, the Committee continues to support the ex-parte communications protocols within the ATO such that an audit officer can’t discuss audit decisions with an appeals officer except in the presence of the taxpayer and that information exchanged on the case only include factual information.
For true independence, however, the appeals process would need to be excised from the ATO and managed by an autonomous tax appeals office which has its own legal team and which considers published precedential documentation along with a fresh review, to reach an objection decision. The Committee sees a great deal of merit in this independent function, especially given the enormous power the ATO has relative to smaller taxpayers. However, it also acknowledges the IGT’s reservations of compromises to the integrity of both his Office and the AAT.
The creation of a new appeals body means a significant ongoing funding commitment. In line with recommendation 117 of the AFTSR, ‘The government should ensure that sufficient resources are devoted to the functions of the Inspector-General of Taxation, the Australian National Audit Office and the Commonwealth Ombudsman, recognising their importance in maintaining a fair and efficient tax system’. Any new oversight function would add duplicated cost and the adequate resourcing of this agency is an important consideration.
On balance, at this stage the Committee sees the preferable choice is to create a new Second Commissioner position to head a dedicated autonomous appeals area separate from both the audit and compliance functions and the expert tax advice area.
The future role of the IGT in complaints handling
The Inspector-General of Taxation was established by the Inspector-General of Taxation ACT 2003 to review, and make recommendations to government on systems established by the ATO to administer the tax laws, including systems for communicating with the public or with particular people or organisations.
From 1 May 2015, the Inspector-General received the investigative powers of the Commonwealth Ombudsman in relation to individual tax administration matters. The rationale for the transfer was set out in the Explanatory Memorandum:
Issues surrounding taxation laws can be complex and specialised. This complexity is compounded as the administration of the taxation laws is scrutinised by both the Inspector-General and the Ombudsman. By concentrating expertise about taxation administration issues, taxpayers are provided with a dedicated body to investigate and handle complaints about all taxation matters.
The complaints transfer served the additional important benefit of enabling the IGT to see trends in systemic tax administration concerns and to self‑initiate systemic investigation in a timely fashion. There was a five per cent increase in complaints registered with the IGT in the 2016–17 financial year and an increase in complexity of matters.
The IGT has noted in his submission to Treasury following the ABC Four Corners program that this steady increase was anticipated as more taxpayers learnt of the service. He also emphasised in his October 2018 valedictory speech the importance of better and clearer promotion of the IGT role:
The IGT should be renamed the Taxation Ombudsman to make it more identifiable amongst those who most need assistance in their disputes with the ATO. While the IGT is well-known in the tax profession, awareness of its services needs to be better promoted amongst small businesses and individuals including the most vulnerable.
In supplementary advice to the Committee, the IGT included his submission to the Treasury review. This submission included the results of his taxpayer survey on matters raised in the ABC Four Corners program in April 2018. In that submission he asserted that ‘a great deal more needs to be done to better inform the public about the services that the IGT can provide’. He then lists measures to overcome this lack of awareness, including for the ATO to engage with small business taxpayers in regular communications; and through an advertising campaign.
IGT complaints process and legal powers
The IGT has substantial powers in requesting information, including the power to require tax officials to give evidence under oath or affirmation. There are criminal penalties including imprisonment for tax officials who do not provide documents he requests. However, decisions of the IGT in tax disputes regarding taxpayer complaints are not binding on the ATO. Nevertheless, the IGT has anticipated that his recommendations could be ‘persuasive’ if the tax administrator perceives ‘a need to change’ on particular matters.
The IGT is therefore a fairness sounding board, not a fairness arbiter. His staff—a total of 27 full-time operative staff, are tax specialists with qualifications in law and/or accounting, often with experience in tax administration or tax practice. There is no legislative enforceability of the IGT’s findings/suggestions at the conclusion of complaints investigations.
A number of submitters advised they supported the IGT’s position in tax fairness investigations to be legally binding. The Small Business and Family Enterprise Ombudsman for example, suggested the IGT be granted ‘More teeth’ and that he should have the ‘capacity to make decisions binding on the ATO’.
However, the Inspector-General has not supported this view. Resource difficulties aside, he has stressed that the IGT’s independence is tied to his inability to make binding decisions:
…the outcomes of complaint investigations or review recommendations are not binding on the ATO or TPB. Such an approach is consistent with other ombudsmen services across Australia and overseas and is necessary to preserve the independence of ombudsmen, such as the IGT, from the subject of their scrutiny.
The above approach also minimises the degree of overlap with the functions of other bodies such as the AAT and the courts who are empowered to render binding decisions on the ATO and the TPB. The maintenance of this sound traditional role of the judiciary is important, however, the cost of litigation can be prohibitive, particularly for the most vulnerable.
The IGT also suggested that binding decision powers could suggest his Office was an alternative AAT. Even if a taxpayer is successful in appeal, the AAT cannot direct payment or award legal costs, which would ensure the IGT would become a preferred route for low level adjudication, an unsustainable and undesirable outcome. The IGT offered alternative suggestions to assist taxpayers wishing to progress clarity and certainty of decisions through adjudication support:
the IGT believes that funding and/or assistance should be provided to taxpayers, in appropriate cases, to exercise their right to bring their matter before the AAT or the courts rather than making his findings binding on the ATO, as advocated by many parties.
Currently, if the ATO chooses not to take on board an alternative view indicated by the IGT, a taxpayer is left with the option of agreeing with the ATO (conceding) or pursuing the matter through the AAT or directly via the Federal Court. Neither of these appeals options are without compliance or opportunity costs, or stress. As such, an individual or small business bears a greater relative weight in obtaining social justice in a tax dispute than would big business or high wealth individuals.
It is undoubtedly true in theory that in a liberal democracy like ours, all individuals and the State have equal access to the courts. However, practical access is somewhat different, given the knowledge and financial resources required to participate effectively in the court process.
This is significant given the IGT advises that 25 per cent of its complaints are from small business and that 99 per cent of all Australian businesses are in this category.
IGT’s role in adjudication of vulnerable unrepresented taxpayers
As discussed above in the section on independent review for vulnerable taxpayers, many unrepresented taxpayers are those without the funds to take the Tax Office to court.
Commenting on this Ms Carnell noted that when a taxpayer’s objection is disallowed by the ATO, the taxpayer is left only to appeal to the Administrative Appeals Tribunal and/or the Federal Court, which is costly:
Given the expense and time required to undertake an appeal of this nature, this presents a huge hurdle for small businesses. Should a small business choose to appeal the matter it will need to defend itself by whatever means it has available (including self-representation) against the senior legal counsel used by the ATO.
An AAT paper prepared by the Tax Bar Association of Victoria acknowledges that the costs of appealing an ATO decision go beyond that of administrative fees, whether legally or self-represented:
In most tax matters, the applicant bears the burden of proof to establish that the Commissioner's assessment was excessive. To establish that an assessment was excessive a taxpayer generally needs to show not only that the assessment was greater than it should have been but also what the correct assessment should have been.
In addition, the taxpayer must make an assessment, based on a matrix of probabilities and personal circumstance, of what their likely outcome will be from various dispute resolution options. This will include the quantum of lost time and cost of legal or self-representation. If the taxpayer appeals to the Federal Court they run the risk of being ordered to pay compensation, rather than receiving it, however the AAT can’t award them compensation if they chose that route instead. The Hon. Wayne Martin AC, Supreme Court Judge Western Australia summed this up:
The economic reality in contemporary Australia is that legal aid is of very limited availability in civil disputes outside the area of family law (and even within that area is very limited) with the result that unless the case comes within that small category which will attract the interest of commercial litigation funders, a party without substantial economic resources must represent themselves, and take the risk of a ruinous costs order against them.
Transparency of reporting on ATO activity post-IGT investigation
One of the benefits of arbitration is the limited scope for judicial review, which increases certainty, reduces cost and delay. However, if an outcome of alternative dispute resolution is due to taxpayer surrender, rather than party consensus, that reduces the sense that the process in fair, undermining the ATO’s credibility.
The greatest benefit of adjudication is that there are externalities in the process such that the court appeal provides a public good at the appealing taxpayer’s expense. It enforces legal rights and obligations, articulates and develops case law, publicly affirms who is right and who is wrong, and denounces and deters future conduct. It is on this basis that the Inspector-General of Taxation supports a process similar to the Low Income Taxpayer Clinics in the US, as previously discussed in this Chapter.
However, an IGT review poses opportunity, timing and wellbeing costs on the taxpayer (as the tax dispute remains ‘live’ during the process). For these reasons the committee considers that there needs to be more comprehensive reporting on the outcomes of the IGT review process, after the IGT has given its recommendations to the ATO.
The Committee notes that the proportion of IGT procedural fairness reviews arising from the IGT complaints mechanism is reported in the IGT’s Annual Report. However, the proportion of those reviews where the ATO decision varies from the IGT review findings is not reported.
Further, where, after the IGT findings are formally communicated to the ATO (and also to the taxpayer complainant) there is no public reporting of the number of reviews where the ATO varies (or partly varies) its initial decision/action. The corollary of this is that there is no public reporting by the ATO on the number of IGT complaint review cases where the IGT’s review decision supported the ATO’s original decision—nor where the ATO reviewed its position following the IGT advice, and varied its decision.
The Committee has no public data to suggest how many tax complainants find themselves in a situation where the IGT conclusion differs from that of the ATO, however evidence from taxpayer submissions to the inquiry revealed situations of this kind—that is where the IGT proposed a course of action and the ATO did not apparently change its view.
IGT survey feedback on the complaints handling function in 2016–17 resulted in 59 per cent of complainants reporting they were satisfied with the outcome of the complaint which indicates some alignment between the IGT review position and the taxpayer’s position. This is indicative of a variation between the review position and the original ATO position.
However, importantly, this is a survey of all complaints and not purely investigations outcomes; and the IGT reports that approximately 42 per cent of complaints are resolved to the satisfaction of the taxpayer before an investigation occurs. As such, the survey results do not give any indication of actual ATO response post IGT review.
The reporting of outcomes post IGT complaint review is a fundamental quantitative measure of the procedural fairness of the tax administration system, especially given that the IGT does not investigate matters of fact. At the very least, reporting these outcomes offers transparency in tax dispute resolution through this process.
The IGT complaints handling investigations can be very resource intensive, and as such, a measure of the value of this investment is important. Therefore, in the absence of any better quantitative measure to assess how well the review system is working for taxpayers who have complained of unfair administrative treatment, these outcomes should be reported which reveal the actions of the ATO (full or partial agreement—as indicated by action or reversal of action) in response to the IGT review position.
Transparency in reporting of this information would give taxpayers a better understanding of the review process and its limitations, manage expectations, and support the integrity of the system.
The Committee recommends that the IGT, in procedural fairness investigations, reports quantitatively on the proportion of complaint investigations undertaken in a reporting period where the IGT formed a different view to the ATO’s original decision. Additionally, that:
the IGT, where possible, report any subsequent action taken by the ATO to vary its position to align with the IGT’s; and
the ATO should also annually quantitatively report on its actions in response to IGT complaint review findings as agreed, or partially agreed.
The Committee recommends that where vulnerable, low resourced taxpayers have utilised IGT support through the complaint and investigation mechanisms, and:
where the IGT findings conflict with the final decision of the ATO, these taxpayers will be offered funded participation through an adjudicated appeals process; that
all disputes which proceed through this adjudication channel will be reported in the annual reports of both the ATO and the IGT, specifying the final adjudicated decision.
This support mechanism serves two important purposes. It will enable less powerful taxpayers with generally simpler tax affairs and more constrained financial resources—but greater relative outcome impacts—to pursue an adjudicated outcome where the IGT and ATO’s positions disagree to a material extent. Secondly, this will provide public externalities of case law and better information and certainty for taxpayers.
Mr Jason Falinski