Background

1. In its recent report of the annual hearing with the Commissioner of Taxation, the Joint Committee of Public Accounts and Audit (JCPAA) expressed an interest in understanding the public consultation process undertaken by the Inspector-General of Taxation (IGT) to develop his work program. Specifically, paragraph 5.13 of that report states:

The Committee is interested in the conduct of the Inspector-General’s public consultation process in preparing his work program, and would appreciate a brief review of the process and the comments of the Inspector-General on the value of the process.

2. The role of the IGT was created to improve the administration of the tax laws for the benefit of all taxpayers by identifying systemic issues in the administration of the tax laws and providing independent advice to government for improvements in this regard.
   
   To support the realisation of these aims, approximately every eighteen months, the IGT undertakes an extensive public consultation process to identify and prioritise those systemic tax administration issues of concern to the community with a view to formulating his work program.

3. As outlined in the IGT’s 2010–11 Annual Report:

Broad consultation with the community ensures that the resources of the IGT focus on tax administration issues of greatest concern and that investigation of such issues are strongly supported by the community. The selected review topics typically involve issues of concern to differing stakeholders. However, collectively, the work program canvasses issues of concern for the whole community including, individuals, businesses, tax practitioners and their representative bodies as well as Government and its agencies.

Work program process

4. It should be noted that whilst there is a formal public consultation period, the IGT continually receives potential review topics from stakeholders in the day-to-day operations of his office. Such feedback is catalogued and considered during the formal public consultation period.
5. To illustrate how the IGT conducts his work program public consultation, set out below is an account of how the current work program was developed and ultimately announced on 10 October 2012.

Media release, advertisement and call for submission

6. The IGT formally commenced his most recent consultation to develop the work program on 13 August 2012 by issuing a media release calling for submissions as well as directly calling for submissions from a number of professional bodies, industry associations, law and accounting firms, taxpayers and other stakeholders.
7. The media release invited the community to raise any areas of concern which they felt should be the subject of review by the IGT. Furthermore, the media release requested commentary on the suitability of eleven identified issues for IGT review. These eleven issues were distilled from matters raised by stakeholders with the IGT since the announcement of the last work program as well as matters which had emerged in earlier IGT reviews and which potentially qualified as review topics in their own right.
8. Significant media interest was generated with a number of newspapers and other publications reporting on the consultation process. In addition, the IGT was invited to participate in radio and television interviews to discuss the IGT work program, the purpose of the associated consultation process and how members of the community could contribute.
9. The IGT also advertised his call for submissions to the development of the work program in a total of five national and state newspapers across the country. The advertisements were designed to bring the IGT’s work program consultation and invitation for submissions to individual and business taxpayers as well other stakeholders who may not be familiar with the function and work of the IGT.

Input from the taxpayers and their representatives

10. As a result of the media coverage, advertisements and direct call for submission, the IGT received input from a range of individual and business taxpayers and their representatives who raised concerns relating to their dealings with the Australian Taxation Office (ATO) across a number of areas.
11. In addition, the IGT hosted three stakeholder meetings (one in Melbourne and two in Sydney) with professional bodies and industry associations who through their membership are aware of systemic tax administration issues.
12. The IGT also met with a number of stakeholders individually both at their request and as initiated by the IGT. These stakeholders included those who were unable to attend the above meetings and accounting and legal tax practitioners.
13. Furthermore, a number of taxpayers approached the IGT separately for meetings or phone conferences to outline their concerns. All of these requests were accepted and the issues that emerged were catalogued and considered in line with other submissions received.

Input from Government, Government Agencies and Parliament

14. The IGT met separately with the Assistant Treasurer, senior Treasury officials and the Second Commissioners of Taxation to provide them with an opportunity to raise issues which the IGT should consider for review.
15. The IGT also sought input from the JCPAA including at the JCPAA’s annual hearing with the Commissioner of Taxation on 14 September 2012.
    
    It should be noted that the Inspector-General of Taxation Act 2003 (IGT Act) specifically allows a Committee of either House of Parliament, including Joint Committees, to request the IGT to conduct a review.
16. Lastly, in line with an earlier recommendation of the JCPAA and a requirement of the IGT Act, the IGT met with the Auditor-General and the Commonwealth Ombudsman to discuss the issues emerging from the work program consultation and those matters likely to be selected for review. A key consideration in this consultation was the need to avoid duplication of efforts and to foster closer collaboration in areas of mutual interest.

Submissions, issues raised and IGT consideration

17. Flowing from the consultation process, the IGT received 107 submissions with a total of 248 issues being raised. There was significant duplication in the issues raised such that 87 discrete issues were identified.
18. Forty-six point eight (46.8) per cent of the 248 issues were raised by individual taxpayers whilst 13.3 per cent were raised by tax practitioners (legal and accounting), 9.7 per cent were raised by business taxpayers, 29.4 per cent were raised by professional and industry associations, and 0.8 per cent were raised anonymously.
19. In considering which issues to review in his forward work program, the IGT had regard to both the quantity of submissions raising a particular issue as well as the nature and impact of the systemic issue raised. In doing so, the IGT aimed to set a program of work which, as a whole, would optimise the benefits to a broad range of taxpayers.
20. On 10 October 2012, the IGT announced his forward work program setting out the reviews selected. The seven reviews selected fell within the top ten topics raised during the public consultations.
21. Overall, the consultation process enabled the IGT to identify and prioritise the issues of community concern with tax administration and gain insight into their impact on taxpayers.

Telephone: (02) 8239 2111
Facsimile: (02) 8239 2100

Level 19, 50 Bridge Street
Sydney NSW 2000
GPO Box 551
Sydney NSW 2001

Manager
Small Business Entities and Industries Concessions Unit
The Treasury
Langton Crescent
PARKES ACT 2600

By email: [email protected]

Dear Manager,

Transparency of Business Tax Debts

The Inspector-General of Taxation (IGT) is pleased to provide the attached submission with respect to the recently announced consultation on the proposed Transparency of Business Tax Debts measures.^[1]The Hon Kelly O’Dwyer MP, Transparency of business tax debts (Media Release, 11 January 2018).

The IGT has reviewed all relevant material provided and has sought to recommend improvements which ensure the measures operate efficiently and equitably for all parties and fulfil the legislative intent.

In summary these improvements, largely, require the Australian Taxation Office (ATO) to inform affected taxpayers that they can lodge a complaint with the IGT, if they have not already done so, and consider the IGT’s findings with respect to that complaint before disclosing information about any tax debt to Credit Reporting Bureaus. There are also recommendations regarding how the ATO notifies affected taxpayers and the type of engagement between the two that precludes the ATO from making any disclosure.

Please contact Jarrod Joseph, Director, on (02) 8239 2102 if you have any queries in relation to the IGT’s submission.

Yours faithfully

[SIGNED]

Ali Noroozi
Inspector-General of Taxation

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INSPECTOR-GENERAL OF TAXATION: SUBMISSION ON TRANSPARENCY OF BUSINESS TAX DEBTS MEASURES

1.1    The Inspector-General of Taxation (IGT) welcomes the opportunity to make a submission to the Government’s consultation on the draft Transparency of Business Tax Debts (TBTD) measures.

1.2    The exposure draft materials relating to the TBTD consultation include the draft Bill (Bill) and accompanying Explanatory Memorandum (EM) as well as the draft declaration or Legislative Instrument (LI) and associated draft Explanatory Statement (ES). There is also the Australian Taxation Office’s (ATO) consultation paper (ATO CP) which sets out how the measures would be administered. The latter is an important initiative consistent with the recommendation made by the IGT in his Review into improving the self assessment system.

^[2]IGT, Review into improving the self assessment system (2013) Rec 5.3.

 However, the ATO CP contains a disclaimer which, whilst appropriate at the exposure draft stage, should be removed when issuing in final form such that all parties can rely on the guidance it contains.

1.3    The IGT has reviewed the above material and notes that a new and specific role is envisaged for the IGT who is to provide independent assurance and safeguard with respect to the administration of the measures. This is achieved through a complaint investigation mechanism for affected taxpayers.

1.4    In this submission, the IGT has sought to recommend improvements which ensure the measures operate efficiently and equitably for all parties and fulfil the legislative intent. Broadly, the recommended improvements require the ATO to inform affected taxpayers that they can lodge a complaint with the IGT, if they have not already done so, and consider the IGT’s findings with respect to that complaint before disclosing information about the related tax debt to Credit Reporting Bureaus (CRB). There are also recommendations regarding how the ATO notifies affected taxpayers and the type of engagement between the two that precludes the ATO from making any disclosure.

1.5    The submission is structured around the following four requirements:

• the Commissioner of Taxation (Commissioner) requirement to take reasonable steps to confirm with the IGT;
• the Commissioner requirement to consult with the IGT;
• the Commissioner requirement to provide a notice to the affected taxpayer; and
• the taxpayer effective engagement requirement.

COMMISSIONER REQUIREMENT TO TAKE REASONABLE STEPS TO CONFIRM WITH THE IGT

1.6    The effective starting point from an affected taxpayer’s perspective is the satisfaction of the LI requirements referred to in paragraph 355-72(1)(c) and subsection 355-72(5) of the Bill in relation to the class of entities that may have their tax debts disclosed to CRBs.

1.7    Paragraph 7(1) of the LI sets out certain tests, the key one for present purposes, being paragraph 7(1)(e) which requires that:

the Commissioner has taken reasonable steps to confirm that the Inspector-General of Taxation does not have an active complaint from the entity [or affected taxpayer] that is, or could be, the subject of an investigation… relating to the Commissioner’s intention to disclose the tax debt information of the entity.

1.8    Accordingly, before the ATO may contemplate disclosure of an affected taxpayer’s debt information, the ATO must take reasonable steps to confirm that the IGT does not have an active complaint from the affected taxpayer prior to notifying them of the intended disclosure. Where the affected taxpayer has made a complaint to the IGT, the ES states that the Commissioner would generally not disclose the entity’s tax debt information to CRBs.^[3]The IGT is an independent statutory agency from the ATO. The IGT may make non-binding determinations with respect to complaint investigations.

1.9    If the Commissioner confirms with the IGT that there is an active complaint that is, or could be, subject of an investigation, the process ends and no disclosure is possible. If there are no complaints on foot with the IGT, the Commissioner may proceed with the disclosure subject to a number of other requirements in the Bill.

Example 1 – Complaint made to IGT before ATO considers disclosing informationA sole trader has lodged a complaint with the IGT in relation to difficulties reaching an agreement on a suitable payment arrangement with the ATO to pay their tax debt.Once the tax debt has been outstanding for more than 90 days, the ATO considers disclosure to CRBs. The ATO checks with the IGT as to whether the IGT is investigating a relevant complaint. The IGT confirms a relevant complaint exists.The ATO does not issue a written notice regarding possible disclosure of the taxpayer’s debt information to a CRB.

COMMISSIONER REQUIREMENT TO CONSULT WITH THE IGT

1.10    The next step in the process provided in the Bill is a requirement for the Commissioner to:

5. in the case of a disclosure of information… both:
   1. the Inspector General has been consulted on the disclosure; and
   2. 21 days have passed after a notice under subsection (2) of this section was given to the primary entity for the disclosure.

1.11    Accordingly, the Commissioner is required to consult with the IGT on the disclosure separately from the requirement that 21 days has passed after notice is given to the affected taxpayer. Thus, both requirements need to be satisfied before the Commissioner can proceed further.

1.12    The challenge is that the Commissioner may consult the IGT at any time during this 21 day period. For example, the Commissioner could consult with the IGT on day one of the affected taxpayer’s notice period at which time there was no relevant complaint on foot as contemplated by the LI. However, subsequently and within the 21 day notice period, the taxpayer may make a complaint to the IGT which is otherwise consistent with the intention of the provision. In this case, the Commissioner has met the above LI requirement even though a relevant complaint has been lodged with the IGT.

1.13    The above anomaly can be addressed by requiring the Commissioner to notify the taxpayer first and only seek to consult with the IGT seven days after the 21 day notice period has ended. It is acknowledged that this would effectively extend the period from 21 days to 28 days in total, but in doing so, the intention of the provision is better achieved and reduces the potential for affected taxpayers being stymied in pursuing their right to complain to the IGT by a mere technicality.

1.14    For completeness, it should be noted that the ES states that where a subsequent disclosure of a taxpayer’s debt information (not being an initial disclosure) is to be made, the Commissioner is still required to take reasonable steps to confirm that there is not a complaint on foot with the IGT although a more streamlined process is envisaged.^[4]Treasury, Draft Explanatory Statement, Tax Debt Information Disclosure Declaration (2018) p 6. The ES further explains that an ATO officer cannot disclose the tax debt information until the complaint lodged with the IGT has been resolved.^[5]It is noted that complainants are also entitled to seek an internal review of IGT decisions. However, neither the Bill nor LI formally requires the Commissioner to further consult or confirm with the IGT in respect of subsequent disclosures. Accordingly the Bill and LI need to be amended to reflect the intent outlined in the ES.

1.15    Turning to the more important issue of the requirement in the Bill for the Commissioner to consult with the IGT, it is crucial to understand what constitutes consult and its interaction with the LI requirement to confirm.

1.16    The requirement, in the Bill, for the Commissioner to consult with the IGT seems to be a purely procedural step and little guidance is provided as to how it may be satisfied. It is the LI requirement of taking reasonable steps to confirm with the IGT that an active complaint is, or could be, on foot that actually prevents the disclosure of the debt information, i.e. the taxpayer is no longer within the ‘class of entities’ under paragraph 355-72(1)(c) of the Bill.

1.17    Taxpayers should be informed of their right and allowed time to lodge a complaint with the IGT as explained below. Where they do lodge a complaint with the IGT, the Bill’s requirement to consult and the LI requirement to confirm should be appropriately amended to make it clear that the ATO should await the outcome of the IGT investigation and duly consider the IGT findings in deciding whether to proceed with the disclosure to CRBs.

1.18    Where affected taxpayers make no complaint to the IGT within the 21 day period and the ATO confirms this with the IGT after seven days have elapsed since the expiration of the notice period, the disclosure may proceed. The same outcome results where the IGT complaint investigation is completed with no adverse finding with respect to the disclosure being made. However, if the IGT does raise concerns, the ATO should consider them in deciding whether to proceed with the disclosure.

Example 2 – Complaint made to the IGT following the ATO’s written noticeA company incurs a tax debt and does not take action to address the debt. After 90 days, the ATO considers disclosing the company’s tax debt to a CRB. The ATO issues a written notice of its intention to disclose the company’s tax debt information to a CRB, including the company’s avenue to lodge a complaint about the proposed disclosure to the IGT.After 21 days has passed of the notice issuing, the ATO checks with the IGT whether the company has made a complaint to the IGT. The IGT confirms that there is a relevant IGT investigation on foot. Accordingly, the taxpayer is not within the class of entities set out in the LI.The ATO does not proceed with disclosure of the taxpayer’s information and awaits the completion of the IGT investigation.

Example 3 – Complaint made to the IGT and IGT makes a determinationFollowing on from Example 2, the IGT completes its investigation of the company’s complaint about the disclosure of their tax debt information.The IGT finds that the company had not received the ATO’s debt-related correspondence and was not aware of their debt obligations. Whilst the company does not wish to dispute the debt, the IGT makes a determination that the ATO should provide the company with additional time to address their tax debt.Given the circumstances, the ATO agrees to provide the company with an additional 3 weeks to negotiate a payment arrangement before again contemplating disclosure of the company’s tax debt information to a CRB.

COMMISSIONER REQUIREMENT TO PROVIDE A NOTICE TO THE AFFECTED TAXPAYER

1.19    Subsections 355-72(2) and (3) of the Bill requires the Commissioner to give affected taxpayers notice in writing and for that notice to be served on the taxpayer. The particular items that the Commissioner is required to provide within the notice are also listed in subsection 355-72(3) of the Bill. The period for the notice has been discussed previously and is found in subparagraph 355-72(1)(e)(ii) of the Bill.

1.20    Relevantly, a key requirement in this notice is that the Commissioner should explain to the affected taxpayer how to make a complaint in relation to the proposed disclosure. The term ‘complaint’ is not defined within the Taxation Administration Act 1953 (TAA 1953) or Bill. Furthermore, the Bill does not expressly require the Commissioner to explain to whom a complaint may be made. However, the EM states that an entity who ‘has been given a notification of the Commissioner’s intention to disclose their tax debt information and is not satisfied with the complaint mechanisms provided by the ATO may wish to lodge a complaint with the Inspector-General of Taxation’.^[6]Treasury, Treasury Laws Amendment (Tax Transparency) Bill 2018, Exposure Draft Explanatory Materials, at [1.63].

1.21    The absence of an express reference to the IGT in paragraph 355-72(3)(d) of the Bill has the potential to stymie the policy intent of providing an independent assurance as a ‘check and balance’ on the process. Specifically, affected taxpayers may lodge a complaint with the ATO complaint unit in the first instance and may await the outcome of that complaint before lodging a complaint with the IGT. This may result in complaints not being lodged with the IGT within the 21 day period stipulated in subparagraph 355-72(1)(e)(ii) of the Bill.

1.22    Accordingly, paragraph 355-72(3)(d) of the Bill should be amended to include an express reference to the IGT as the party to whom the affected taxpayer may complain in order to ensure that they are not prevented from accessing the intended independent assurance or safeguard.

Service of Notice

1.23    As noted in the section above, the Bill requires the Commissioner to serve written notice on an entity concerning the intended disclosure of their tax debt information.

1.24    The EM explains that service of the notice may be in accordance with Division 4 of the Taxation Administration Regulations 2017 and section 28A of the Acts Interpretations Act 1901. It follows that service of the notice under the Bill would be considered effective where it has been issued in circumstances similar to those for other tax debt related documents.

1.25    The IGT has recently examined concerns regarding certain ATO correspondence not reaching taxpayers or their advisors with the result being that taxpayers may be left unaware of their obligations and not expecting ATO debt recovery action when their tax debts remain outstanding.

^[7]IGT, Review into aspects of the pay as you go instalments system (2018).

 The major underlying cause was found to be the interaction between the ATO’s accounting systems. Accordingly, as a longer term goal, the IGT had recommended the ATO consider using a single integrated accounting system for administering the income tax and PAYG instalments regimes, and in the interim, a number of other recommendations were made aimed at improving the existing processes.

1.26    In the context of the TBTD measures, given that service may depend on the type of taxpayer entity, for example service to a company

^[8]For example, service of documents to a company may be achieved in accordance with section 109X of the Corporations Act 2001.

 would differ from that for a sole trader or business partnership, it is recommended that the ATO consider a differentiated approach. For example, personal service may be considered in certain cases to ensure prompt and effective service and minimise any potential further delay.

EFFECTIVE ENGAGEMENT

1.27    The Bill and LI provide an additional exemption for taxpayers from having their tax debt information being disclosed if they are effectively engaging with the Commissioner to manage their tax debt. The term ‘effective engagement’ is specifically defined in paragraph 7(3) of the LI to include:

• an arrangement entered into with the Commissioner to pay their tax debt by instalments (known as ‘payment arrangements’) under section 255-115 in schedule 1 to the TAA 1953 and the entity is complying with the arrangement;
• the entity has objected against a taxation decision (within the meaning of section 14ZL of the TAA 1953) to which the tax debt relates; or
• the entity, under section 14ZZ of the TAA 1953, applied to the Administrative Appeals Tribunal for review or appealed to the Federal Court of Australia against a decision made by the Commissioner to which the tax debt relates.

1.28    Taxpayers may, however, consider that they are effectively engaging with the Commissioner by other means such as requesting a payment deferral,

^[9]Taxation Administration Act 1953 sch 1 s 255-10.

providing a security

^[10]Taxation Administration Act 1953 sch 1 subdiv 255-D.

towards a debt or seeking release from the debt due to serious financial hardship.

^[11]Taxation Administration Act 1953 sch 1 pt 4.50.

 Accordingly the definition of effective engagement in the LI should be expanded from the current limited list to a non-exhaustive list which includes these additional courses of action that the taxpayer might take.

1.29    Another challenge is that affected taxpayers may consider that the payment arrangement, or otherwise, they are offering the ATO is reasonable but the ATO has not agreed to it. The IGT had previously examined such concerns in his Debt Collection review,

^[12]IGT, Debt Collection (2015).

 including that ATO staff did not have sufficient capability to analyse the commercial viability of businesses and their particular circumstances, causing delays in negotiating payment arrangements.

1.30    Since the Debt Collection review, the IGT continues to receive complaints concerning difficulties in negotiating payment arrangements with the ATO. Accordingly, it is expected that taxpayer concerns may arise with respect to ‘effectively engaging’ with the Commissioner and require remedy through the IGT’s complaint handling service. Such situations further support the earlier IGT recommended improvements.

Executive Summary

The Inspector-General of Taxation (IGT) welcomes the opportunity to participate in the Tax Forum and is pleased to provide this submission to generate debate on one of the designated topics: namely, Tax System Governance. Governance is a key aspect of any tax system. The approach of tax administrators has a direct bearing on policy implementation and taxpayer confidence through application of fairness, certainty, transparency, minimisation of compliance costs and reduction in unnecessary complexity. Accordingly, the development of a more effective and comprehensive set of governance arrangements for the Australian Taxation Office (ATO) has strong merit. This submission outlines three key options for consideration. These are:

Establishment of a management board (such as those of an advisory or supervisory nature) to bring into the ATO a diverse mix of expertise and experience including information technology, human resources, finance and communication.
Appointment of additional Second Commissioners from the private sector to diversify the ATO Executive Committee, inject a wider range of experiences and perspectives and also provide intelligence on trends in corporate governance and taxation risks. These additional Second Commissioners to be appointed to lead the more contentious areas of the ATO, including one as head of a separate appeals area.
Enhancement and centralisation of the ATO scrutineer function to provide a single port-of-call for taxpayer grievances with tax administration, be they specific disputes or systemic issues. A more co-ordinated approach to ATO scrutiny would also minimise duplication and the cost of external scrutiny.

The three options form an integrated package that provides synergistic benefits beyond each as stand-alone considerations. The package supports a more comprehensive governance framework aimed at providing the ATO with a wider range of expertise to deal with present and future challenges, as well as improving taxpayer experience. The management board has strong stakeholder support and the Government is currently considering its implementation. The IGT recommends that options 2 and 3 be also considered by the Tax Forum to further address the systemic issues identified by business and tax professionals.

2. Introduction

The Tax Forum convened by the Australian Government provides a unique opportunity for the Australian community to contribute to the future direction of Australia’s tax and transfer system. The IGT welcomes the opportunity to provide this submission and participate at the Forum. The IGT is well-positioned to explore and contribute to a number of matters regarding tax administration given his office’s function, expertise and broad-based consultative relationship with both government agencies and private-sector stakeholders at all levels in the community. In seeking to address the designated topics for the Forum, this submission focuses on specific matters affecting governance of the ATO. The submission takes a three pronged approach by addressing the need for a management board (such as those of an advisory or supervisory nature), diversification in the ATO Executive Committee and an improved ATO scrutineering function. There are a range of other important tax administration system issues that the IGT is also considering, but these may be addressed in the conduct of the IGT’s core work program. This submission draws upon earlier IGT submissions to the Australia’s Future Tax System (AFTS) review dated 3rd and 30th of September 2009 respectively.

3. Current ATO Governance Arrangements
   3.1 External Governance

The external governance arrangements currently overseeing the ATO are considerable, many of which have evolved in a piecemeal fashion over the last thirty years. The Commonwealth Ombudsman, established in 1977 as part of the federal government’s coordinated approach to administrative law reform development, is, in the main, responsible for investigating taxpayer complaints. In addition, the Australian National Audit Office (ANAO) carries out performance and financial statement audits. Following the Ralph Review in 1999, the Board of Taxation was established to provide a business and community perspective on the tax system, including advice on improvements that can be made to the implementation of tax laws. The IGT, established in 2003, reviews systemic tax administration issues and reports to the Government with recommendations for improvement for the benefit of all taxpayers. The ATO also has formal accountability to ministers and Parliament through its annual reporting and appearance before parliamentary bodies such as the Joint Committee of Public Accounts and Audit (JCPAA) and the Senate Economics Legislation Committee. Since 2007, the JCPAA has held a biannual public hearing with the Commissioner of Taxation in the interests of greater public accountability and transparency. More recently the JCPAA has foreshadowed greater scrutiny of the ATO through the biannual public hearings having given notice to the Commissioner that he will be required to address issues or concerns raised by scrutineer agencies such as the IGT, the Ombudsman and the ANAO.

3.2 Internal Governance

The Commissioner of Taxation has established the ATO Executive Committee to assist him in setting the longer term direction of the ATO and to administer aspects of Australia’s tax and superannuation systems, while delivering the ATO’s commitments to government. The ATO Executive Committee currently comprises eight senior tax officers including the Commissioner (as Chair), the Second Commissioners and other senior ATO officers (as nominated from time to time by the Chair). Currently, the additional senior ATO members are the Chief Finance Officer, the First Assistant Commissioner ATO People, the Chief Information Officer and the Chief Operating Officer. Independent advisers and other senior ATO representatives may be required to attend and present a report relating to their area of responsibility as a standing item.

4. Case for Reform

The issues relating to ATO governance and the need to reform are not new and date back to the 1975 Asprey Review. The IGT believes that there is merit in the Tax Forum considering the adequacy of these arrangements given:

international trends establishing comprehensive governance frameworks, including the creation of management  boards and specific governance functions;
strong community support for ATO governance reforms to ease the burden of compliance on taxpayers including reducing compliance costs; and
underlying concerns regarding ATO capabilities and approaches evidenced in IGT reviews and community consultations.
4.1 International Trends and Perspective

Management boards are now a characteristic of many revenue authorities around the world, including the United States and United Kingdom.^[1]Organisation for Economic Co-Operation and Development, Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2010), 3 March 2011, pp. 31-36. It is important that Australia keeps pace with international changes in tax administration and adopts those features that would likely deliver benefits in the Australian context. A 2006 International Monetary Fund (IMF) Working Paper^[2]Kidd, M. and Crandall, C., Revenue Authorities: Issues and Problems in Evaluating Their Success; IMF Working Paper 06/240; 1 October 2006. also notes that management boards have now become a common feature of a comprehensive governance framework.

4.1.1 United States Tax Administration Governance

The Internal Revenue Service (IRS) Oversight Board (the IRS Board) was created by the IRS Restructuring and Reform Act of 1998 (USA). The IRS Board has seven Presidential appointees together with the Secretary of Treasury and the IRS Commissioner. The aims of the IRS Board are to improve accountability, continuity, expertise and to provide a private sector perspective.

4.1.1.1 Role and responsibilities of the IRS Board

The IRS Board operates much like a corporate board of directors, but is tailored to fit a public sector organisation. The IRS Board provides the IRS with long term guidance and direction, and applies its private sector experience and expertise in evaluating the IRS progress in improving its service. Specifically, the responsibilities of the IRS Board are to:

review and approve the IRS budget;
review and approve the IRS strategic plan;
select and evaluate some senior IRS executives; and
submit the annual report to Congress.

The IRS Board meets five or more times a year and has a number of committees that assist in its functions and responsibilities — they include an operations committee (which oversees the service and enforcement functions of the IRS), an operations support committee (which oversees the human capital, training, information technology and support functions at the IRS) and the executive committee (which oversees agency-wide personnel matters at the IRS). These committees also meet quarterly to review the array of performance measures against targets. The IRS Board is also active in ensuring that it remains informed — for instance, it holds IRS briefings, it attends Congressional Committees, it makes a number of field visits to both IRS and stakeholder sites and maintains a Stakeholder Outreach Program, which includes conducting annual public meetings, attending nationwide tax forums, conducting an annual taxpayer satisfaction survey and maintaining an ongoing relationship with tax professionals. Under the law, the IRS Board cannot be involved in specific law enforcement activities, including audits, collection activities or criminal investigations. It also cannot be involved in specific procurement activities and it does not develop or formulate tax policy or practice in relation to existing or proposed tax laws. The IRS notes that there are a number of major trends affecting tax administration including the increasing complexity of tax administration, growing human capital challenges, an increase in electronic data, online transactions and related security risks and accelerating globalisation. The IRS believes that the existence of a management board allows it to adapt to these changing circumstances by injecting a wider range of experience, expertise and approaches to tax administration.

4.1.1.2 Role and responsibilities of the Taxpayer Advocate Service

In addition to the IRS Board, the Taxpayer Advocate Service (TAS) was also established to help taxpayers resolve problems and recommend changes. The TAS is an independent organisation within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels or who believe that an IRS system or procedure is not working as it should. The functions of the TAS are set out in the Taxpayer Bill of Rights as follows:

to assist taxpayers in resolving problems with the IRS;
to identify areas in which taxpayers have problems in dealing with the IRS;
to propose changes in the administrative practices of the IRS to mitigate those identified problems, to the extent possible; and
to identify potential legislative changes that may be appropriate to mitigate such problems.

The TAS is headed by the National Taxpayer Advocate, who is appointed by the head of the Treasury and reports directly to the Commissioner of Internal Revenue. Taxpayers may be eligible for assistance if:

they are experiencing economic harm or significant cost (including fees for professional representation),
they have experienced a delay of more than 30 days to resolve their tax issue, or
they have not received a response or resolution to the problem by the date that was promised by the IRS.

The Office of Systemic Advocacy is part of the larger TAS organisation. Systemic advocacy means addressing broad issues that impact groups of taxpayers, including both individuals and businesses. These issues normally:

affect multiple taxpayers;
affect segments of the taxpayer population, locally, regionally or nationally;
relate to IRS systems, policies, and procedures;
require study, analysis, administrative changes or legislative remedies; and
involve protecting taxpayer rights, reducing or preventing taxpayer burden or ensuring the equitable treatment of taxpayers.

The Office of Systemic Advocacy works within the IRS to resolve issues involving procedures and policies by bringing those issues to the attention of IRS management and by making legislative proposals in the annual report to Congress where necessary. The TAS provides two annual reports to Congress — one which identifies the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year and the other which includes a summary of the most serious problems encountered by taxpayers, recommendations for solving those problems and other IRS efforts to improve customer service and reduce taxpayer burden.

4.1.2 United Kingdom Tax Administration Governance

The United Kingdom’s HM Revenue and Customs (HMRC) is a non-ministerial department similar to that of the ATO. This makes it different from most other government departments which work under the direct day-to-day control of a minister. Legislation for the creation of the new HMRC department was enacted in 2005 and included provision for the creation of a management board comprising a Non-Executive Chairman, five internal  HMRC Executive Committee members and four external Non-Executive Directors (the HMRC Board).

4.1.2.1  Role and responsibilities of the HMRC Board

The Chairman leads the HMRC Board which sits a minimum of ten times a year and has the following responsibilities:

development and final approval of HMRC’s overall strategy;
development and final approval of HMRC’s communications strategy and sign off for significant communications identified within it;
development and final approval of the culture and values objectives and strategies;
approval of the final sub-strategies of business lines and functions;
approval of final business plans (including the annual financial plan);
advising the Chief Executive on the appointment of senior executives; and
ensuring the strength of the HMRC Board and committees by participating in the appointment of and advising on the ongoing competence of board members, Executive Committee members and other key appointments.

The HMRC Board’s Non-Executive Directors are senior business figures from outside the department who bring a diverse mix of expertise and skills from across both the public and private sector. HMRC looks to its Non-Executive Directors to:

bring guidance and advice;
support and challenge management about the department’s strategic direction; and
provide support in monitoring and reviewing progress.

In approving the strategies and plans, the HMRC Board must ensure that the views of HMRC’s stakeholders are taken into account. The HMRC Board is supported by the People, Ethics & Responsibilities and Audit & Risk committees to assure the highest standards of corporate governance are in place. Membership of these committees is drawn exclusively from the Non-Executive Directors, with each committee having its own terms of reference setting out its membership, responsibilities, reporting and information requirements. In addition to the HMRC Board, the Chief Executive Officer is responsible for providing leadership and direction to the department and runs all aspects of HMRC’s business, ensuring delivery of the strategic objectives and driving continuous improvement. The Permanent Secretary for Tax reports to the Chief Executive as the Deputy Chief Executive and is the senior tax professional in HMRC. The Permanent Secretary has specific well-defined accountabilities in the areas of tax policy and tax strategy. The Chief Executive Officer and the Permanent Secretary, together with the other Commissioners, make up the Executive Committee, which is the executive decision making body for HMRC. Following the strategic direction provided by the HMRC Board, the Executive Committee oversees the whole breadth of HMRC’s work and is responsible for driving forward continuous improvement and change agendas. It initiates and supervises at a high level the practical steps required to deliver the department’s vision. The Executive Committee’s responsibilities include:

ensuring effective and efficient delivery of the department’s business;
shaping departmental behaviours, policies, processes and structures to achieve our objectives;
leading and promoting change to secure improved performance — including successful delivery of the portfolio of major programmes and projects;
reviewing overall business planning and performance and its contribution to the delivery of departmental objectives and targets;
oversight of the development and management of business lines and function strategies;
ownership and management of key strategic risks;
managing external relations with stakeholders and promoting the department’s good reputation; and
providing oversight of HMRC’s governance arrangements to ensure they remain robust and appropriate.
4.1.3 International Monetary Fund Working Paper

An IMF Working Paper^[3]Ibid; Note also, reference to this paper in Crandall, C., Revenue Administration: Autonomy in Tax Administration and the Revenue Authority Mode l, IMF Technical Notes and Manuals, 18 June … Continue reading found that 75 per cent of surveyed revenue authorities had boards, and nearly all were empowered management boards with specific responsibilities and oversight functions. While the IMF paper was not unequivocal on the real influence of management boards in improving tax administration, it did note management boards with private sector representation may be able to inject a more business-orientated approach to the workings of a revenue authority and thus bring more rigour to financial and human resource matters. The IMF paper also lists a number of considerations concerning the design of a comprehensive governance framework, including the roles and responsibilities of the government, the board and the Chief Executive Officer, so as to ensure that revenue authorities discharge their functions and remain accountable as a public institution. Excerpts of the relevant sections of the IMF Working Paper are contained in Appendix 1.

4.2 Community Calls for ATO Governance Reforms

In submission to the AFTS review, a number of stakeholders (for example, the Group of 100 (G100), Corporate Tax Association, Australian Bankers Association (ABA) and the Business Coalition for Tax Reform) suggested the need to improve the pre-existing governance models through the introduction of a management board. In support of such a proposal, the G100 submission pointed to increasing complexity in response to economic and social trends and the need to keep pace with global business developments. Likewise, the ABA submission pointed to various examples of ATO approaches where it considers that problems are getting more difficult, not better, and, in the ABA’s view, indicates that there are systemic issues involved in achieving consistency and balance in tax administration. The G100 submission suggested that a complex system without someone capable of administering that system objectively, consistently and in a timely manner will fail irrespective of improvements to the policy settings. It noted that the ATO has over the years been given a number of duties apart from responsibility for the collection of tax including administering social welfare programs, superannuation and pension programs, the administration of certain aspects of charitable institutions and other support services to various government agencies. The G100 stated that this increase in scope of ATO activities places additional stresses and strains on its resourcing, human capital needs, managerial capability, governance and risk management framework. The G100 submitted that the operation of market forces means that the majority of the ATO staff, including those in senior ranks and managerial positions, have little or no experience in the private sector and that their entire cultural upbringing and corporate mindset has been fashioned by a public sector outlook and upbringing. The G100 believed that, because of the different culture sets between the private sector and the human capital upbringing within the ATO, there is a ‘disconnect’ which results in a sense of distrust and lack of empathy. The G100 considered that this disconnect can only be systematically addressed by introducing oversight, including external guidance as part of an overall risk management and governance framework, so as to lead to an improvement in ATO culture and performance. Similarly, the ABA and the Business Coalition for Tax Reform recommended the need for a broader cultural change in tax administration so as to have more regard to underlying policy and greater recognition of business realities. The ABA submitted that such a cultural change requires internal processes within the ATO, not more external reviews. In support of a board, the ABA referred to the establishment of the Board of Taxation in relation to tax policy as a significant success and submitted that it should be considered as a model for the ATO. The G100 also expressed particular concern that the perceived culture within the ATO demonstrated a bias to revenue collection. It noted that while the function of the ATO is to enforce and administer the law based on the ‘rule of law’ and in a manner which advances the objectives of timely, consistent and objective administration of the law, it did not believe that the ATO culture is consistent with this. The G100 submitted that while the ATO states that applying the rule of law is a key value, there was a need to have robust governance and risk frameworks capable of overseeing management to ensure that the ATO embraces and ‘lives out’ such values. The G100 submission also presented the results of a high level survey of its members that suggested a strong culture within the ATO, manifested in senior executives as well as other tax officers, whose sense of public duty results in a culture whereby maximising the revenue wherever possible becomes the key, if not primary, objective. The Business Coalition for Tax Reform also believed that the ATO, at times, was inclined to adopt technical positions which would result in greater revenue collection if upheld, which often surprised tax practitioners in the sense that they had thought the law was settled, and which were regarded by many as being inconsistent with policy. Importantly, beyond the establishment of a management board, the Business Coalition for Tax Reform considered that active steps need to be taken to bring in suitably experienced private sector personnel to fill roles at Commissioner and Second Commissioner level so as to bring in a much needed fresh perspective to the ATO.

4.3 Underlying Concerns Regarding the ATO’s Capabilities and Approaches

The IGT’s consultative process, combined with the reports of previous IGT reviews, provide a useful input when considering the deeper issues that might underlie the tensions in tax administration and the calls for improvements to the ATO governance arrangements by business and tax professionals. The principles of good tax administration mentioned in the explanatory memorandum to the IGT Act — namely, fairness, transparency, simplicity and efficiency — are subscribed to by the ATO. However, these principles are perceived sometimes to succumb to the pressure of other forces such as resources, capabilities, complexity, revenue collection and sometimes to the design of the system itself. The IGT also supports stakeholder views that an injection of a wider range of experiences and perspectives into the governance and management of the ATO would assist in responding to these pressures. Over the years, the ATO has established a substantial public consultation framework with the community and the profession in the development of its work initiatives. It should also be recognised that there has been an increase in the external independent scrutineering function over the ATO during that time. Scrutineer reviews and related reporting, including those of the Ombudsman, the ANAO and the IGT, have also been important additions to the tax system. The increased participation of private-sector stakeholders in ATO consultation and scrutineer functions improve transparency, accountability, technical decision making and practical robustness of the system. Notwithstanding the above ATO initiatives, the IGT notes that concerns about tax administration continue to surface from the business sector, especially from medium to large businesses and from those that represent them. This may in part be due to the large business sector being subjected to more compliance action by the ATO, but it may also be due to the smaller taxpayers (including individuals) not being as well equipped as the business sector to identify and raise any collective or individual concerns. Underlying concerns from the business sector relate to the ATO’s capabilities and approaches in developing and applying its view of the law in significant compliance issues or on new laws. In addition, the business sector often expresses concern over a prevailing, unchecked compliance influence in the approaches and actions of the ATO. These aspects of tax administration have also arisen as significant factors in several IGT reviews.^[4]For example, ATO Management of Part IVC Litigation, Potential Revenue Bias in Private Binding Rulings, Settlement of Active Compliance Activities, Delayed or Changed ATO Advice on … Continue reading Taxpayers are more likely to perceive fair treatment where the ATO openly considers whether it has contributed to specific problems. In the course of community consultations, many taxpayers and tax professionals expressed the view that ATO ‘gloss’ on tax disputes erodes confidence in the tax system and believed that the ATO should openly acknowledge both its positive and negative involvement. It has been suggested that the ATO should do more to report the full reality of its return on active compliance investment, factor community perceptions into its risk analyses, and potentially re-focus its resources to achieve better voluntary compliance at reduced costs to the community. The IGT is currently reviewing the ATO’s compliance focus on Small to Medium Enterprises, its implementation of recommendations arising out of the Treasury’s Review on Aspects of Income Tax Self-Assessment and the ATO’s use of early and alternative dispute resolution. The IGT notes that in the course of these current reviews a number of taxpayer concerns, which were previously raised, have resurfaced.

4.4 Previous Reviews that Considered ATO Governance Arrangements

The Joint Standing Committee of Public Accounts (as it then was) in 1993 considered the need to restructure the senior management structure of the ATO. It believed that the administration of the ATO and the taxation system generally would benefit significantly from the injection of opinions and strategies developed externally to the culture of the ATO and from the strengthening and formalisation of tax advisory committees.^[5]Joint Standing Committee of Public Accounts, 326th Report: An assessment of tax – An inquiry into the Australian Taxation Office, Canberra, 1993. The IGT notes that a management board to oversee the ATO was proposed at the time of the Ralph Review and supported by professional bodies. Ultimately, the Ralph Review did not believe the establishment of a policy-constrained board of directors would be helpful to either government or the business community. The Review saw a need to have an independent and business-focused advisory Board of Taxation to assist up front in the development of clear and improved business taxation policy processes and in monitoring the performance of the administrative functions against the Taxpayers’ Charter. The Ralph Review, in not favouring a board responsible for the administration of the ATO, believed that the Board of Taxation approach offered the prospect of greater certainty and less conflict in the downstream administration of business tax laws and therefore would minimise the problems which had given rise to the requests for external control over the administration of the ATO. It should be noted that, at that time, the decision to proceed with the Board of Taxation and leave ATO governance arrangements unchanged may have been influenced by the impending introduction of substantial tax policy reform and that the focus, rightly, was more on achieving the right policy rather than the administration of the new policy or law. The growing support for reforming ATO governance arrangements amongst business taxpayers and tax professionals, together with the continued surfacing of concerns regarding the ATO’s capabilities and approaches, would indicate that we now need to also consider ways of further improving tax administration in Australia.

4.5 Limitations of Aspects of Current ATO Governance Arrangements
4.5.1 Reliance on consultative forums

The ATO publicly places strong emphasis on consultation and engagement with stakeholders in the care and management of the tax system as a means to embed trust and confidence. The ATO has established a large number of consultative forums to ensure that it understands external perspectives. The Commissioner of Taxation reports using around 50 consultative forums with taxpayer, business and tax professional representatives to foster good compliance and to reduce compliance costs. However, the sole reliance on consultative forums as a governance process needs re-examining in light of the ongoing stakeholder concerns with aspects of the ATO’s administration, including its capabilities and approaches. First, consultative forums only provide an input into ATO decision-making, allowing stakeholders to identify and raise problems and concerns. However, there is some dissatisfaction with the degree to which such input is reflected in the final outcome. In an IGT review context, the ATO’s handling of over 60 examples of perceived ‘U-turns’, many of which were raised at ATO consultative forums, suggests that the ATO consultation process is not a complete solution for taxpayers and their representatives to voice and address concerns. Second, the effectiveness of consultative forums relies upon tax officers taking on board issues and concerns raised by taxpayer, business and tax professional representatives and advancing them through the ATO decision-making hierarchy. This is not considered to be a substitute for an injection of taxpayer, business and tax profession experiences and perspectives within senior ATO management.

4.5.2 Role of Parliament

As noted by Dr Ken Henry in his speech ‘Confidence in the operation of the tax system’

^[6]Henry, K., “Confidence in the operation of the tax system”, speech delivered to the Taxation Institute of Australia conference on 13 March 2009, Sydney, available at … Continue reading

 the ultimate ‘owners’ of the Australian tax system are the Australian community. Parliament might be thought of as the community’s ultimate board of directors, with the Commissioner being accountable to it for the administration of his office. The Commissioner also appears before parliamentary committees to explain his administration of the tax laws such as during Senate estimates hearings and the biannual hearings of the Joint Committee of Public Accounts and Audit. The parliamentary committee process has significant practical limitations in scrutinising the ATO (due to the ATO’s size, scope and complexity in function). A review of ATO administration often requires significant amounts of information, judgement and interpretation, which also includes the examination of case files, correspondence, internal ATO communications and tax officer meetings. The parliamentary review process is not designed for that level of scrutiny and is often reliant upon information provided by the ATO which may not always present every perspective (as was evidenced with the ATO’s Moving On document

^[7]Australian Taxation Office, Moving On, 50.1 Supplementary submission to submission 50 into the JCPAA Inquiry reviewing a range of taxation issues within Australia, June 2006, available at … Continue reading

 and the JCPAA’s findings in its Tax Administration report^[8]Joint Committee of Public Accounts and Audit, Report 410 Tax Administration, Canberra, 2008.). The IGT has also found that taxpayers are reluctant or unwilling to raise their concerns in the administration of the tax system directly with the ATO or in parliamentary committees. A number of stakeholders have expressed concern about a fear of ATO retribution against those who publicly criticise the ATO’s conduct or approaches.

5. Options for Reform

The IGT believes that there is merit in establishing comprehensive ATO governance arrangements in line with international tax administration developments and community expectations. There is growing support for the tax system to inject a wider range of experiences and perspectives into ATO management. This is evidenced by the ongoing community feedback together with the wide ranging issues investigated by the IGT and previous parliamentary committee reports. A great majority of the systemic issues identified by the IGT may have been better handled if there was a greater appreciation of taxpayer and business perspectives. While the current ATO governance arrangements are considerable, there are a number of shortcomings that warrant examination in developing a more effective structure. The shortcomings include, a reliance on consultative forums as a substitute for a more participatory form of tax administration, practical limitations of the parliamentary committee process and the piecemeal development of the current governance arrangements, in particular the executive agencies overseeing the ATO and its administration. The key objective of any governance changes should be to promote greater representation of taxpayer, business and tax professionals’ perspectives at the senior levels of tax administration. It should allow for the better fulfilment of the administrative design principles espoused in the Ralph Report — namely engendering taxpayer trust, facilitating and enforcing taxpayer compliance and ensuring a responsive administration. The IGT believes that the following options should be considered in an attempt to improve ATO governance arrangements:

Establishment of a management board (such as those of an advisory or supervisory nature) to bring a diverse mix of expertise, experience and skills from across both public and private sector into the ATO including areas such as information technology, human resources, finance and communication;
Appointment of additional Second Commissioners from the private sector to diversify the ATO Executive Committee, inject a wider range of experiences and perspectives and provide intelligence on trends in corporate governance and taxation risks; and
Enhancement and centralisation of the ATO scrutineer function to provide a single port-of-call for all taxpayer concerns or grievances about the ATO.

The optimal outcome is expected to be achieved by implementing all three options listed above as an integrated package, providing synergistic benefits beyond the options as stand-alone considerations. Whilst a board has strong stakeholder support, the IGT would suggest that for the type of systemic issues identified by business and tax professionals, options 2 and 3 should also be considered.

5.1 Option 1 — Establishment of a Management Board

The ongoing international trend towards a comprehensive set of governance arrangements consisting of a management board provides a good starting point. Other government agencies have already moved down this path with some examples including the Reserve Bank, the Australian Prudential Regulation Authority (APRA) Risk Management and Audit Committee and Australian Securities and Investments Commission (ASIC). 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. As listed by the IMF Working Paper, and drawing from the United States and the United Kingdom experience, the role and features of a management board could, amongst others:

comprise private and public sector (including the Commissioner of Taxation) membership including non-executive directors representing the business community and other interests of government;
provide advice on the management of the ATO including:
development and final approval of the ATO’s overall strategy including performance indicators;
development and final approval of the ATO’s communications strategy and sign off of significant ATO communications identified within it;
development and final approval of the culture and values objectives and strategies;
approval of the final sub-strategies for business lines and functions;
approval of final business plans (including the annual financial plan);
advising the Commissioner of Taxation on the appointment of senior executives; and
ensuring  the strength of the management team by participating in the appointment of and advising on the ongoing competence of board members, Executive Committee members and other key appointments;
maintain the independence and authority of the Commissioner of Taxation by:
the board having no authority over the administration and enforcement of tax legislation and no access to confidential taxpayer information; and
the Commissioner of Taxation being responsible for the day-to-day operations of the ATO.

Along with the establishment of a management board, there would be considerable advantages in also establishing a number of committees to support the board in its functions and responsibilities. One possibility, along the lines of the United Kingdom approach, would be having an Audit and Risk Committee, the People Committee and the Ethics and Responsibilities Committee. Membership of these committees would be drawn exclusively from the non-executive directors. In addition, each committee would have its own terms of reference setting out its membership, responsibilities, reporting and information requirements. Particular senior ATO staff would have to attend committee meetings and provide relevant information, data and reports to allow an in-depth examination of ATO corporate performance.

5.1.1 Recent Government action

In 2009, the Government announced a review, Australia’s future tax system (AFTS) and the IGT proposed to that review for consideration potential alternative ATO board structures. Appendix 2 contains a diagrammatic representation of an example of a management board. It should be noted that the head of a centralised scrutineer agency (described below) would also be a member. The IGT believes that the appointment of the scrutineer agency head on the board provides an independence check and balance on the ATO’s internal management as well a pro-active and real-time response to significant systemic issues. Appendix 3 contains an example of a possible committee structure. On 5 August 2010, the Government announced the establishment of a Tax System Advisory Board (the Board) to assist the Commissioner and the ATO Executive Committee on the general management and organisation of the ATO. In January 2011, the Assistant Treasurer released a discussion paper setting out the design parameters for the Board and invited submissions on each of the three potential models for the Board. In response to this discussion paper, the IGT has met with the Consultation Panel to discuss his views, in particular that the success of the Board will largely rely on the Board not just being independent but also seen to be independent. The IGT also raised the need for options 2 and 3 (mentioned above and detailed further below) to be considered.

5.2 Option 2 — Diversification Of The Ato Executive Committee
5.2.1 The benefits of diversification

The IGT considers that there are broader benefits to be realised by the diversification of the ATO Executive Committee, in addition to the suggestions noted in option 1 above. As Dr Ken Henry noted in his speech ‘Confidence in the operation of the tax system’, a key difference between the ATO and a number of Australian regulators, including Australian Competition and Consumer Commission (ACCC), APRA and ASIC is that tax commissioners have largely been appointed from within the ranks of the ATO. This, he says, may have contributed to perceptions that the ATO could be more ‘outward looking’. The IGT also agrees with stakeholder submissions that the majority of the ATO staff, including those in senior ranks and managerial positions, have limited experience in the private sector. As a consequence, the organisational culture and mindset is fashioned from a public sector perspective. Given that the ATO interfaces directly with business, there is a real need for both parties to ‘speak the same language’ and have shared expectations. Stakeholders often contrast the Australian position with that of the United States, where it is much more common and culturally accepted for professional personnel to work both inside and outside of the government revenue collection agency, being the IRS. To address the issues identified by business and tax professionals, a board, in isolation, may not be sufficient. The overall governance structure is likely to be enhanced by the diversification in the composition of the ATO Executive Committee. To this end, the IGT proposes the appointment of two additional Second Commissioners from the private sector to inject a wider range of experiences and perspectives into ATO management and provide intelligence and insight regarding trends in corporate governance and taxation risks.

5.2.2 The role and functions of the additional Second Commissioners

The additional Second Commissioners should be full-time roles. They would be both members of the ATO management executive and be part of the day-to-day management team. These Second Commissioners may serve the system best by having specific responsibility for particularly critical or contentious areas of tax administration. These areas may be those where the ATO’s approaches, views and actions may be enhanced by having informed business perspectives and taxpayer experiences. One such area is the ATO’s objection and litigation sections. Stakeholders, by way of example, perceive that there is a lack of independent review where an ATO objection officer is located within the same business line as the original decision-maker, albeit a different section. The original decision-maker is perceived by taxpayers to have some kind of input or influence on the objection determination, either directly or indirectly, due to factors such as organisational, behavioural or social considerations. The Joint Standing Committee of Public Accounts also reflected on this independence concern noting that it was difficult to characterise the objections process as an ‘independent review’ where objections officers were subject to the same culture, corporate goals and values as the rest of the ATO.^[9]Joint Standing Committee of Public Accounts, above n 6, p. 325. The IGT’s report into the Underlying Causes and Management of Objections to Tax Office Decisions found that in relatively simple matters, there was independent review but in larger, more complex, objections the line between the objections officer and original decision-maker was blurred. The IGT’s report into Large Business Audit and Risk reviews considered similar concerns regarding the ATO’s technical decision making review, where recommendation was made and accepted by the ATO for improvement. An innovation, suggested by a wide range of stakeholders, is that the ATO should have a strong independent internal appeals or review area. The IGT sees considerable merit in this idea. While increasing the independence of review of original ATO decisions, the IGT believes that a separate appeals area would empower the ATO’s in-house legal section to independently assess the evidence and prospects of a case before progressing the matter to litigation. The ATO’s litigation arm would, like the Director of Public Prosecutions in criminal matters, have ultimate discretion as to which matters the ATO would litigate, which would be conceded and which should otherwise be settled. This would ensure that only genuine and fundamental disputes on interpretation or application of the law are litigated, resulting in cost savings for both government and taxpayers. To achieve such an outcome, one of the additional Second Commissioners would head up this new appeals and review area, providing stakeholders with stronger assurance of independence. The IGT notes that such a model currently exists in the IRS in the United States, with its Appeals area being empowered to separately and independently settle and pursue matters arising out of original IRS decisions. It is appreciated that this approach may on occasions give rise to internal tensions within the ATO. The IGT considers that tensions of this nature are desirable in ensuring appropriate outcomes are achieved, thereby reducing the overall level of taxpayer disputes and the cost to the broader tax system. In relation to the role of the other additional Second Commissioner, a number of options are available. For example, the appointment could be to a compliance role with responsibility for liaising with business, tax professionals and advisers where there is conflict or disagreement between the ATO and taxpayers. Other options may be for them to act as high level circuit-breakers within the ATO by being able to co-ordinate and drive the requisite ATO responses and be responsible for implementing changes to address identified shortcomings or to bring together key ATO decision-makers (for example, the Tax Counsel Network, centres of expertise and business lines compliance segments) where required to reach internal resolution of technical issues or disputes more quickly.

5.3 Option 3 — Centralised Scrutineer Agency

The IGT believes that a well-resourced and centralised ATO scrutineer function, incorporating best local and overseas practice, would better serve the Australian tax system.

5.3.1 Benefits of a well-resourced and centralised scrutineer agency

Under the proposed centralised model, the scrutineer would continue to play an important role in ensuring taxpayer rights are protected and would promote confidence in the integrity, transparency and accountability of the administrator. It would also provide a range of other benefits, including:

a single port-of-call for considering taxpayers’ administration issues and simplifying and improving access;
a more holistic understanding of taxpayer issues arising in relation to their dealings with the tax system;
prompt systemic issues identification that emerges from handling significant number of similar complaints;
removal of overlap between the current scrutineer agencies;
economies of scale and scope in centralising the separate scrutineer functions; and
greater synergistic benefits for the ATO in only having a single tax administration scrutineer agency.

The centralisation provides a single port-of-call for taxpayer grievances, be they specific disputes or systemic issues. The investigation and resolution of specific taxpayer disputes would ensure the proposed central scrutineer agency has greater opportunity to foresee likely systemic issues arising and would prevent unnecessary delay in their resolution. In relation to the ATO, it would only be subject to one scrutineer as opposed to the current model in which it is required to respond to several agencies. The multiplicity and duplication of action by scrutineers sometimes requires multiple ATO responses to aspects of the same issue. It would also arguably enable the ATO to enhance its responsiveness and reduce the cost of scrutineer engagement.^[10]Commissioner of Taxation, “Sustaining Good Practice Tax Administration”, Speech delivered to the Australasian Tax Teachers Association Conference, New Zealand on 20 January 2009. The … Continue reading As foreshadowed above, it is also envisaged that the head of the scrutineer agency would participate at the proposed management board level of the ATO, allowing for the proactive and timely consideration of issues and concerns rather than the more reactive nature of current scrutiny which investigates or reviews taxpayer concerns after the event. It will also encourage the scrutineer agency to play a more supporting role in tax administration, not only through responding to taxpayer concerns and issues, but also providing input to ATO senior management in its strategies and approaches.

5.3.2 Operational structure of new scrutineer agency

The roles and responsibilities of the IGT and aspects of those of the Ombudsman and the ANAO (i.e. those relating to tax administration) may be brought together into one statutory agency. The functions of this taxation administration scrutineering agency would include:

assisting taxpayers in resolving complaints and problems with the ATO;
identifying systemic issues in which taxpayers have problems in dealings with the ATO;
recommending proposed improvements to the ATO’s administrative systems and practices in mitigating systemic issues; and
identifying tax administration policy issues, for legislative consideration, that seek to mitigate those systemic issues.

Similar to the activities of the Ombudsman relating to tax administration, this agency would consider and investigate specific taxpayer complaints from people or businesses who believe they have been treated unfairly or unreasonably by the ATO. The aim would be to resolve complaints impartially, informally and quickly or to suggest other avenues for resolving the matter. The handling of such complaints would assist in the identification of potential systemic issues, as a number of taxpayers raising similar concerns could suggest an underlying problem. Similar to the IGT, this agency would undertake reviews into systems established by the ATO to administer the tax laws or systems established by the tax laws and then make recommendations for the improvement of those systems.

5.3.3 Resourcing and Funding of the centralised scrutineer agency

The AFTS review raised the need for the existing scrutineering functions to be resourced appropriately beyond that of the current level of funding and made recommendation accordingly.^[11]Treasury, Australia’s future tax system—Report to the Treasurer, Canberra, 2009, recommendation 117 at pp. 663-4. Analysis will be required to determine the appropriate level of resourcing that is required to operate the proposed centralised agency effectively.

5.3.4 Reporting

The centralised scrutineer agency reporting line would need to be considered. The reporting may be directly to Parliament and/or to Government. Where the scrutineer agency head is on the ATO management board, there may be scope to differentiate the agency’s reporting. One possibility could be along the lines of the United States TAS, where the scrutineer agency is required to provide two annual reports that would be tabled in Parliament. One report would identify the priority issues that the scrutineer agency will address in the coming fiscal year and the other would set out:

a summary of the most serious problems encountered by taxpayers;
findings from specific reviews undertaken on systemic tax issues and recommendations for improving tax administration; and
other efforts to improve taxpayer experience and reduce the compliance burden.

Lastly, and consistent with the AFTS’ recommendation 118,^[12]ibid., p. 664. the centralised scrutineer agency reports may also be considered by the JCPAA. This ensures Parliament receives an independent and candid report of the problems taxpayers are experiencing and the scrutineer’s opinion on their redress. These reports may then be used in the scrutiny of the ATO’s performance in any parliamentary review process.

Appendix 1: Excerpts From IMF Working Paper
Role of the Minister of Finance
Control over the RA

The legislated role of the minister of finance with respect to the Revenue Authority (RA) has a major impact on the governance as well as the degree of autonomy from the executive level of government. Therefore, it is critical to set out the role of the minister in terms of the control and supervision of the RA (direct control and supervision in some cases, almost nil in others), the appointment of the chair and members of the board and the CEO, the approval of the budget, and so on. If too much authority is granted to the minister in these areas, the RA will de facto have a significantly reduced autonomy; if too little authority is granted to the minister, there is a danger that the RA may lose necessary sensitivity to its inherent public sector role.

Implications of corporate character

The role for the government in a more autonomous revenue authority will be much more limited than would be the case for a RA which was not a ‘body corporate’ and which was in effect directly subordinated to the minister of finance. For this kind of RA, a first consideration is in regard to the board. Clearly, the government is the ‘shareholder’ of the corporate body (the RA) and therefore needs to have a say in the appointment of those who will govern that body. There are two aspects to this: the appointment of the chair of the board and its members; and the appointment of the CEO.

Relationship to CEO

The position of CEO is one of the most important in the RA, and the CEO will in effect have a dual set of accountabilities. He or she will be subordinate to the board in terms of the management; however, he or she will also be directly accountable to the legislature and to the government for the execution of all the operational powers and functions assigned to the RA by virtue of the tax and customs laws.

Power of directive

Many government institutions that have been established as corporate bodies, including RAs, include a provision for the minister to issue a directive to that corporate body. This kind of provision allows the government as the effective shareholder to direct that some particular action be done. Any such direction requires maximum transparency, usually through publication in a country’s official gazette. The argument in favour of these kinds of mechanisms is that they maintain a certain amount of executive level authority and accountability without materially affecting the autonomous nature of the RA, since the expectation is they would be rarely used.

Role of the board

RAs normally have a board whose functions and powers form an essential part of the organization’s governance framework. Such boards can be advisory in nature, usually in cases where the minister has a strong role and autonomy is more limited, or they can be management boards with strong functions set out in legislation. Boards are almost always prohibited from involvement in the operational execution of the tax and customs laws, and from access to any information about individuals or corporations obtained as a result of the administration and enforcement of those laws. To do otherwise would place the (private sector) members of the board in an obvious and untenable potential conflict of interest situation.

Board functions

The role and functions of the board flow directly from the legislation. Board functions, again depending on degree of autonomy, could include the following: to oversee the administration, management, and organization of the RA; to oversee the management of resources, services, property, personnel, and contracts; to approve the strategic plans and the budget of the RA; to approve the annual report; to establish policies to be followed; to establish by-laws for the functioning and operations of the board. In general, the board will have the power to execute all the authorities of RA with respect to carrying out the board’s mandate.

Board meetings

The chair will normally preside over the board’s meetings and exercise the powers and functions as prescribed by by-laws established by the board under its legislated authority.

Ex-officio members

A board has many duties and functions to perform and requires a mixture of skills and experiences in order to be effective. As a RA remains a government institution, it is often considered advisable to include certain government representatives on the board. In order to ensure autonomy at the same time, these positions are usually based on the notion of fixed ex-officio, or non-voting, appointments. This will respect the principle that all (voting) members of the board are required to act strictly in the best interests of the organisation, and not represent the interests of some other constituency.

The CEO

In the context of corporate governance, there is a debate as to whether the CEO should also be a member of the board. The CEO of the RA has a critical role to play and has an important relationship with the board, as well as with the minister of finance in terms of the revenue laws. Careful consideration needs to be given to the most effective role for the CEO on the board.

Selection of board members

In the interest of ensuring sufficient capacity on the board, the legislation should clearly indicate that all members of the board must have the experience and knowledge required for discharging their functions, normally in finance, accounting, taxation, public administration, law, or some other related field.

Size of the board

Considerable debate has also taken place concerning the optimum size for corporate boards. It would appear from the literature that boards of 7 to 12 members are now being considered optimal in terms of the efficient and effective functioning of corporate boards. Larger boards than this are considered unwieldy; smaller ones are felt to be too narrow and tending to lack comprehensive skills.

Role of the CEO

Powers vested in CEO. The CEO is generally responsible for supervising and managing the day-to-day operations of the RA. The management authority of the organization is embodied in the board, and in that respect the CEO, even though possibly a member of the board, is subordinated to it. However, the RA also has the mandate for the execution and enforcement of the revenue legislation, and the board will be prohibited from involvement in these areas. It is possible, then, to have an RA where the CEO only has responsibility over the areas where the board has a mandate, and where the heads of the revenue departments retain their powers and functions directly from the respective legislation. At issue here is the extent to which all the powers and obligations related to the revenue laws (such as the power to assess taxes, make a customs determination, issue interpretations, impose or waive penalties, and so on) are actually given to the CEO through the enabling legislation of the revenue authority, who in turn delegates them to other senior officials and staff, or whether they are still given directly to the departmental heads, which serves to exclude the CEO from operations (this was a feature of some early RAs).

Accountability to the government

Although RAs are intended to have independence from the public sector, it is important that they retain accountability to the government as a public institution. After all, an RA, despite its independence, continues to perform critical public sector functions. It is thus essential to establish appropriate accountability mechanisms that reflect the desired degree of autonomy for the organization. It is generally felt that the greater the autonomy of the RA from the public service, the greater the need for unique, structured, and transparent accountability mechanisms in the legislation. In the government context, laws assign responsibility and authority to organizations and individuals within them, and these organizations and individuals are held accountable for the effective and efficient performance of their responsibilities according to the governance framework established for them. Many of the aspects discussed earlier in this paper constitute in effect accountability mechanisms to serve this purpose.

Internal and external audit

A first element concerns the issue of auditing, both internal and external. As for internal audit, it is generally accepted that boards of RAs will have an active role in reviewing the outputs of internal audit (including internal affairs) in order to be able to exercise their management responsibilities, and that the organization should have an independent internal audit function reporting directly to the CEO (there is some current debate as to whether internal audit should report to the board). An RA must also have external audit. There are two choices for external audit—either the board appoints the external auditor, or the auditor general of the country, which reports to parliament, is named the external auditor for the RA.

Reporting to parliament

Providing formal reports to parliament is another means of ensuring accountability to both the parliament and the executive. The two most common forms of reporting are through the annual corporate plan and budget (a look ahead at what the RA plans to do in the coming year) and the annual report (a look back at what was accomplished in the year past). Such documents provide valuable information to the government and the parliament, to ensure transparency.

Appendix 2: Example of a Management Board Structure

Appendix 3: Example of Committee Structure

On 8 May 2020, the IGTO lodged a submission to assist the Committee in its Inquiry into the Commissioner of Taxation Annual Report 2018-19. Following our appearance at a public hearing before the Committee, we lodged a supplementary submission on 13 August 2020. The Committee has also published the IGTO’s opening statement which was tabled at the public hearing on 31 July 2020.

On 23 April 2020, the IGTO lodged a submission to assist the Committee in its Inquiry into the Tax Treatment of Employee Share Schemes. Following our appearance at a public hearing before the Committee, we lodged a supplementary submission on 14 July 2020.

On 17 April 2020, the IGTO lodged a submission to assist the Committee in its Inquiry into the Development of the Australian Corporate Bond Market. Following our appearance at a public hearing before the Committee, we lodged a supplementary submission on 19 November 2020.

1. Introduction

1.1 The Inspector-General of Taxation (IGT) welcomes the opportunity to make a submission to the House of Representatives Standing Committee on Tax and Revenue’s (Committee) Inquiry into Taxpayer Engagement with the Tax System (Inquiry).

1.2 It is widely acknowledged that the willing engagement of taxpayers in the tax system is a key driver for voluntary compliance:

Contemporary taxation authorities are heavily invested in genuine engagement with the community. Taxation is a complex socio-economic phenomenon that is a great deal more than just economics and fiscal policy. The citizens’ willingness to voluntarily comply with their tax obligations is directly related to the salience of their relationship with the revenue authority. Engagement is therefore critical to successful administration as it improves efficiency, reduces the cost of administration and enhances compliance.

^[1]Jo’Anne Langham and Neil Paulsen, ‘Effective engagement: Building a relationship of cooperation and trust with the community’ (2015) eJournal of Tax Research 13:1, pp 378-402 at 378.

1.3 The Australian Taxation Office (ATO) has also recognised the importance of the willingness of taxpayers to engage:

Our mission is to contribute to the economic and social wellbeing of Australians by fostering willing participation in our tax and superannuation systems, and our vision is that we are a trusted and respected administrator both here and internationally. Effective client and industry engagement goes to the very core of those things.

^[2]Australian Taxation Office (ATO), ‘Our evolving approach to taxpayer engagement’ (Speech delivered to the Tax Institute of Victoria Fourth Annual Forum, 5 October 2016) <www.ato.gov.au>

1.4 Within this context, scrutineers, such as the IGT, play a critical role in fostering community trust and confidence in the tax system which in turn enhances voluntary participation and efficient administration. Taxpayers and their advisers take comfort that an independent agency can investigate their complaints or broader systemic issues, provide impartial views and make recommendations for improvement. The availability of such avenues significantly contributes to the perception of fairness in the tax system as a whole.

1.5 This submission seeks to faithfully address the Committee’s terms of reference and, in doing so, it has drawn on findings from the IGT’s prior reviews and complaints handling function as well as relevant research on current international practices. It is structured around the four themes specified in the terms of reference:

• the prevalence and impact of the ‘cash economy’ on the tax system, mechanisms to ensure tax compliance and strategies used by comparable countries’ revenue authorities;
• how taxpayers currently interact with the tax and superannuation system, including through tax agents and other intermediaries, and the different compliance burdens of doing so;
• the contemporary use of information and communication technology by the Australian Taxation Office and comparative tax administrators to deliver services; and
• behavioural insights from other service delivery agencies including possible ways to better inform taxpayers to help them make decisions in their best interests.

^[3]House of Representatives Standing Committee on Tax and Revenue, ‘Inquiry into Taxpayer Engagement with the Tax System’ (25 November 2016) <www.aph.gov.au>

2. The cash economy

2.1 There is currently no universally accepted definition of the ‘cash economy’. It varies from jurisdiction to jurisdiction and may be referred to by a number of different names, including the ‘hidden economy’, ‘non-observed economy’ (NOE), ‘underground economy’ or ‘black economy’.

2.2 In Australia, the ATO has defined the cash economy as those:

…businesses that deliberately hide income to avoid paying the right amount of tax or superannuation. They usually do this by not recording or reporting all their cash or electronic transactions.

^[4]ATO, ‘The cash and hidden economy’ (2 November 2016) < www.ato.gov.au>

Prevalence and impact of the cash economy on the tax system

2.3 In order to develop mechanisms and strategies to combat the cash economy, a clear understanding of its scope and prevalence is needed. However, as the Australian Bureau of Statistics (ABS) has previously noted:

By its very nature, the NOE cannot be directly measured, or it can be very expensive to attempt this measurement. Therefore, estimates of NOE activity must rely on limited indicative information and a variety of indirect methods – all of which can be regarded as contentious. It is likely that an unknown proportion of underground production is already captured in the observable data, owing to the data sources used and the estimation methods employed in collecting the observable data.

^[5]Australian Bureau of Statistics, ‘5204.0.55.008 – Information paper: The Non-Observed Economy and Australia’s GDP, 2012’ (18 September 2013) <www.abs.gov.au>

2.4 Historically, the prevalence of the cash economy in Australia has been estimated to be between 3 and 15 per cent of gross domestic product (GDP).

^[6]Senate Economic References Committee, The structure and distributive effects of the Australian taxation system (2004), p 62.

However, more recent estimates from the ABS suggest that the figure is closer to 1.5 per cent of GDP or $24 billion.^[7]Above n 5.

2.5 The ATO considers that the cash economy is most prevalent in the small business market segment where approximately 1.6 million small businesses, operating across 233 industries, are likely to have regular access to cash.

^[8]Australian National Audit Office (ANAO), Strategies and Activities to Address the Cash and Hidden Economy (2016).

2.6 More recently, tax gap methodology has been used by revenue authorities to assist in measuring, amongst other things, the cash economy. The tax gap:

…is an estimate of the difference between what the ATO collects and the amount that would have been collected if every taxpayer was fully compliant….

Tax gaps are, in effect, about measuring what is not visible – what people have not told us about their compliance, whether through misunderstanding, by choice or by taking a tax position that differs from the ATO view of the law.

^[9]Commissioner of Taxation, Annual Report 2015-16 (2016) p 43.

2.7 In 2014, the Commissioner of Taxation (Commissioner) committed to estimating tax gaps for all taxes and programs that the ATO administers. Whilst the ATO has yet to establish a full set of reliable gaps for income tax, the ATO has published tax gap estimates for goods and services tax (GST), wine equalisation tax, luxury car tax, petrol and diesel excise and duty, pay as you go (PAYG) withholding and fuel tax credits.

^[10]ATO, ‘Australian tax gaps 2015-16’ (2 November 2016) <www.ato.gov.au>

2.8 The ATO’s recent approach to measure tax gap seems to align with processes adopted by other revenue authorities, such as the United Kingdom’s (UK) Her Majesty’s Revenue and Customs (HMRC). HMRC, who has been measuring tax gap for some time, publishes an annual report of its tax gap analysis. For the 2014-15 financial year, HMRC reported that the tax gap attributable to the hidden economy was £6.2 billion

^[11]Her Majesty’s Revenue & Customs (HMRC), Measuring tax gaps 2016 edition (2016) <www.gov.uk>

 which represents approximately 17 per cent of the total tax gap of £36 billion.

2.9 In terms of impact of the cash economy, it is wide-reaching and affects all Australians. As the ATO has stated:^[12]Above n 4.

The cash and hidden economy affects all Australians. It affects us by reducing the amount of money available to fund community services such as health, education and other government programs.

Honest businesses face unfair competition when others don’t correctly record and report all their income and expenses.

The cash and hidden economy can also hurt you as an individual. Consumers who support it, by paying cash and not obtaining a receipt, risk having no evidence to:

• support a claim for a refund if the goods or services purchased are faulty
• prove who was responsible in cases of poor work quality.

Those who participate in the cash and hidden economy are disadvantaging the community, honest taxpayers and honest businesses by not competing fairly.

Mechanisms to ensure tax compliance

International approaches

2.10 Based on surveys of 26 member countries, in 2012, the OECD delivered its report on combating the cash economy. The report noted that whilst a number of jurisdictions had comprehensive overarching strategies, many did not, ‘suggesting that this area of non-compliance may not be receiving adequate attention.’

^[13]Organisation for Economic Cooperation and Development (OECD), Reducing opportunities for tax non-compliance in the underground economy (2012), p 2.

2.11 The OECD report provided a summary of the core elements of a comprehensive overarching framework for combating the cash economy including that:^[14]Ibid.

• There are arrangements in place for ‘whole of revenue body‘ co-ordination;
• Comprehensive research efforts are undertaken;
• Enhanced risk detection processes are in place;
• A multi-faceted set of risk treatments is undertaken;
• Steps are taken to leverage improved compliance through key intermediaries;
• There is effective co-operation across Government;
• Wide use is made of the media; and
• Efforts are made to evaluate the impacts of individual risk treatments and/or the overall strategy.

2.12 The report also identified a large range of risk detection and risk treatment approaches reported by the revenue authorities in their survey responses or which were highlighted by the OECD research. These approaches included:^[15]Ibid, p 3.

• Comprehensive industry benchmarking, coupled with leveraging via tax professionals, media engagement and automated targeting of large numbers of taxpayers (Australia).
• Industry-based withholding/third party reporting regimes (Ireland and Canada).
• Increased controls over cash transactions (Netherlands, Spain, and Sweden).
• Increased record-keeping controls for employees in high-risk industry sectors (e.g. restaurants and hairdressing) (Sweden‘s staff ledgers).
• Initiatives aimed at reducing the use of cash transactions (Norway and Turkey).
• The use of monetary incentives to encourage proper record-keeping and deter unrecorded cash payments (Canada‘s and Norway‘s home renovation tax credit, Korea‘s lottery and incentive for obtaining receipts).
• Increased revenue body use of suspicious transactions reports collected by a separate government agency (Australia and France).
• Educating new/potential taxpayers (Austria‘s schools initiative, Canada‘s trade school initiative).^[16]Ibid, p 3.

2.13 Turning to approaches of comparable jurisdictions, in 2007, the United States’ (US) National Taxpayer Advocate (NTA) undertook a review of the revenue forgone because of the cash economy. The report indicated that the difference between the tax payable and the amount voluntarily paid by taxpayers was approximately US$345 billion in 2001, with US$100 billion per year being attributable to the cash economy.

^[17]National Taxpayer Advocate (NTA), 2007 Annual Report to Congress Volume 2 (2008) <www.irs.gov>, p 4.

The major recommendation from the NTA was that a Cash Economy Program Office should be established^[18]Ibid, p 13. as a means of implementing and coordinating the overall strategies of the Internal Revenue Service (IRS) in this area. It appears that the IRS declined to do so and the NTA had expressed concerns that without such an office, ‘ad hoc measures will not get the job done’

^[19]Internal Revenue Service, ‘National Taxpayer Advocate Delivers Report to Congress’ (IR-2008-4, 9 January 2008) < www.irs.gov>

.

2.14 In New Zealand, the Inland Revenue Department (IRD) had indicated in 2011 that it had adopted a range of strategies to target different industries in which the risk had been identified. These strategies included raising awareness of obligations, enforcing penalties, prosecuting serious offenders, increasing data matching and partnering with industry associations and other government agencies on education, information sharing and investigations.

^[20]New Zealand Inland Revenue Department, The Hidden Economy (2011) <www.ird.govt.nz>

2.15 In 2016, the HMRC published a number of consultation papers in relation to proposals to assist in tackling the cash economy.

^[21]HMRC, ‘Proposals to tackle the hidden economy’ (26 August 2006) <www.gov.uk>

These new proposed strategies follow on from earlier initiatives in which the HMRC made use of extensive educational campaigns to improve taxpayer compliance behaviour.

^[22]HMRC, New campaign against tax evasion (November 2012) <www.gov.uk>

The current proposed strategies are three-pronged and include extending the data-gathering powers to ‘money service businesses’,

^[23]HMRC, ‘Tackling the hidden economy: extension of data-gathering powers to money service businesses’ (26 August 2016) <www.gov.uk>

the need for new penalties and sanctions

^[24]HMRC, ‘Tackling the hidden economy: Sanctions’ (26 August 2016) <www.gov.uk>

as well as conditional registration.

^[25]HMRC, ‘Tackling the hidden economy: Conditionality’ (26 August 2016) <www.gov.uk>

The latter point requires ‘tax registration as a condition of access to some essential business services or licences’.^[26]Ibid, p 9. As part of its strategy, the HMRC is also seeking to identify points at which businesses tend to enter the cash economy by failing to register for certain taxes (such as Value Added Tax when certain thresholds are met) and making it as easy as possible for taxpayers to register.

Australian approach

2.16 In 1998, the Government stated that the ‘taxes and collection systems allow too much scope for taxpayers to participate in the cash economy’.

^[27]Peter Costello MP, Tax Reform: Not a new tax, a new tax system (August 1998) <archive.treasury.gov.au>.

The Government at the time proposed and implemented a number of strategies including the introduction of the Australian Business Number (ABN) as a single business identifier for dealing with the whole-of-government, simplifying payment and reporting systems (the PAYG system) as well as other law and administrative changes to promote certainty and make compliance simpler and fairer.^[28]Ibid, pp-132-134. The improvements included the requirement for all businesses to register for ABNs with the consequence that unregistered businesses would have a significant proportion of their payment withheld by trade partners and remitted to the ATO.

2.17 Notwithstanding the legislative improvements, the risk of non-compliance still remains within the tax system. Dealing effectively with the cash economy can present many challenges, including:^[29]Above n 13.

• difficulties in detecting underreported income due to the ‘hidden’ and dispersed nature of the economic activities concerned;
• challenges in identifying the most revenue-productive targets due to the relatively large number of participants, each with small amounts of tax which in aggregate can be sizable;
• many participants having poor records and in some cases may not even be registered with the ATO;
• ascertaining the full extent of a taxpayer’s unreported income for a fiscal period may necessitate exhaustive and often time-consuming inquiries by the ATO;
• collecting the tax, interest and penalties may be difficult even after assessments have been issued;
• detecting and dealing with such non-compliance provides no guarantee that it will not be repeated into the future; and
• compliant taxpayers may become less compliant where they feel that the underground economy is not being properly addressed and that, as a result, they bear an unfair share of the tax burden.

2.18 Given the challenges above and its resources, the ATO has applied a number of different strategies and initiatives to combat these risks over the years. One such strategy is the use of benchmarks which are financial ratios that assist businesses to compare their performance with other businesses within the same industry. The ATO uses such benchmarks to identify businesses, in particular industries, which may incorrectly report their business income and expenses. Businesses significantly outside of the benchmarks can expect a form of ATO engagement to better understand their specific position.

^[30]IGT, Review into the Australian Taxation Office’s use of benchmarking to target the cash economy (2012) p 7.

2.19 The ATO also uses other risk-based approaches to identify taxpayers or transactions which it considers represent a higher risk of non-compliance. It currently publishes material about specific industries in which it is seeing disproportionate numbers of businesses that:

• indicate unrealistic income relative to the assets and lifestyle of the business and owner;
• fail to register for GST or lodge activity statements or tax returns;
• underreport transactions and income according to third-party data;
• fail to meet super or employer obligations;
• operate outside the normal small business benchmarks for their industry; or
• are reported to the ATO by the community for potential tax evasion.

^[31]ATO, ‘Working with industry’ (11 January 2017) <www.ato.gov.au>

2.20 In 2015-16, the ATO committed approximately 400 staff and a budget of $39.5 million to further combat the risk posed by the cash economy.^[32]Above n 8, p 7. The ATO adopted a range of different strategies including computerised risk models and specific data matching which used information from other agencies, business suppliers and banks to target its compliance strategies.

^[33]ATO, ‘Michael Hardy discusses the cash economy with David Koch – transcript’ (12 February 2014) <www.ato.gov.au>

2.21 In 2016, the Australian National Audit Office (ANAO) undertook an independent performance audit of the ATO’s approach to the cash and hidden economy.^[34]Above n 8. As part of its review, the ANAO noted that in 2014-15, the ATO’s approach to the cash economy shifted from:

…focusing primarily on audit activities…to a broad omitted income focus on registration, lodgment and correct reporting by small businesses as part of an overarching community participation and assurance framework. The strategies comprise two elements: community participation and engagement, using a range of media and social media channels; and compliance activities, including taxpayer audits and reviews.^[35]Above n 8, p 16.

2.22 The ANAO concluded that the ATO’s current strategies and activities ‘are consistent with international approaches’ and that ‘the ATO’s planning, liaison and reporting arrangements have been sound, and risk management activities and case selection processes have supported increasingly cost-effective compliance cases being conducted with taxpayers in recent years’.^[36]Ibid, p 7. In addition to the compliance and enforcement initiatives, the ANAO also examined the ATO’s help and education activities, through its website and targeted communications. The ANAO commented that the ATO needed to evaluate the effectiveness of such activities.^[37]Ibid, p 45.

2.23 It should be noted that the above matters may be further considered by the Black Economy Taskforce which has been recently established to develop ‘an overarching whole of government policy framework and detailed proposals for action’.^[38]Kelly O’Dwyer MP, ‘Black Economy Taskforce’ (Media Release, 14 December 2016) <jkmo.ministers.treasury.gov.au>. It is due to deliver an interim report in March 2017 and a final report in October 2017.^[39]Ibid.

IGT observations

2.24 The IGT has previously undertaken two reviews which are relevant to the ATO’s approach to the cash economy.

2.25 Firstly, in 2012, the IGT reviewed one of the ATO’s main initiatives to address the cash economy risks, namely, the use of benchmarks.^[40]Above n 30. The IGT’s review found that of over 7,600 benchmarking audits, the ATO made adjustments in only 24 per cent of cases. Whilst the IGT acknowledged that 24 per cent may be higher than a random sampling of audit cases, there was scope for the ATO to improve its current approach to better exclude compliant taxpayers. In all, the IGT made 11 recommendations to which the ATO agreed in full or in part. Following the implementation of these recommendations, the ATO’s strike rate increased from 24 per cent to over 50 per cent.

^[41]ATO, ‘Commissioner and Minister Senate estimates briefing’ (October 2012) <https://foi.iorder.com.au>

2.26The above improvement in strike rate also reduced the compliance burden on otherwise compliant taxpayers. In that report, the IGT had noted:

…the ATO needs to strike a balance between reducing compliance costs for taxpayers, whilst at the same time collecting enough information about those taxpayers to make an informed risk assessment.^[42]Above n 30, p 67.

and

To ensure compliance costs are minimised, the IGT considers that the ATO should use a staged approach in its information gathering as part of its risk identification process. The approach should also accommodate less formal means where possible. Information gathering that occurs in a less formal context than that of a formal audit may also reduce taxpayer stress given its lower intensity.^[43]Above n 30, p 67.

2.27 Secondly, the ATO’s use of compliance risk assessment tools more generally was examined in another review where the IGT had stressed the importance of clearly articulating the risk hypothesis to ensure that risk inputs, both qualitative and quantitative, are appropriate to detecting and addressing those risks.

^[44]IGT, Review into aspects of the Australian Taxation Office’s use of compliance risk assessment tools (2014), p 142.

The IGT also discussed the use of representative random audits as a means of assessing the underlying levels of non-compliance which in turn may be used for assessing the effectiveness of the ATO’s risk assessment tools.^[45]Ibid, p 145. The use of random audits would also assist the ATO in measuring the tax gap and potentially act as a deterrent against non-compliance.^[46]Ibid, p 147.

2.28 The IGT supports the ATO’s current work to measure the scope and impact of the cash economy and it is pleasing that the ATO has undertaken some work to measure the tax gap. An important factor in this task would be for the ATO to identify which component of the tax gap is in fact attributable to the cash economy and which components are due to other reasons, such as lack of knowledge of tax laws or taxpayers adopting positions that are different to the ATO’s view of the law. In doing so, the ATO could engage with the academic community as well as revenue agencies of comparable jurisdictions, such as the HMRC.

2.29 In respect of enforcement and compliance activities, as mentioned above, the ANAO has found the ATO’s strategies and activities to combat the cash economy are generally working well. In addition, the ANAO has noted that more can be done to measure the effectiveness of help and education programs.

2.30 The IGT believes that the ATO’s enforcement activities should be further augmented by educational programs and campaigns along similar lines to recommendations made by the ATO’s 1998 Cash Economy Taskforce

^[47]Cash Economy Taskforce, Improving tax compliance in the cash economy (April 1998), pp ii and iii.

. Such programs should be aimed at the community as a whole and may have more long term effect when focused on the young or new arrivals to Australia. It should be noted the Commissioner has requested the IGT to conduct a review into improving willing participation in the tax and superannuation systems by targeting these demographics.

^[48]IGT, ‘IGT Work Program 2017’ (31 January 2017) <www.igt.gov.au>

2.31 Education and appropriate campaigns can be very effective. For example, ‘drink driving campaigns’ have transformed the way Australians view drink driving such that it is now socially unacceptable as well as being illegal. As mentioned above, similar educative campaigns have been used by the HMRC to improve taxpayer compliance behaviour.^[49]Above n 22.

2.32 The IGT is also looking forward to the findings and recommendations of the Committee as well as the Black Economy Taskforce. The IGT would be pleased to offer assistance and expertise in relation to any identified measures to combat the significant risks posed by the cash economy.

3. Taxpayer interactions with the taxation and superannuation systems

3.1 Generally, taxpayers interact with the tax and superannuation systems in order to meet their statutory obligations such as registering, reporting, withholding and paying their tax liabilities. Taxpayers may choose to do so through intermediaries, such as tax practitioners, or directly through services and channels provided by the ATO.

Use of tax practitioners and other intermediaries

3.2 Tax practitioners, including lawyers and business activity statement (BAS) preparers, have played a fundamental role in the tax system particularly since the shift from full assessment to self assessment in 1986. The shift to self assessment transferred to taxpayers the responsibility of applying the tax laws to their affairs with the consequence that incorrect application would result in taxpayers being exposed to additional primary tax, penalties and interest.

3.3 Within the self assessment system, taxpayers have increasingly come to depend on tax practitioners who perform a broad range of tax related activities such as preparing and filing tax returns, providing advice and representation when dealing with the ATO. They may also provide non-tax related services such as audit, assurance and financial advisory services. As a result of their activities, tax practitioners are an invaluable source of knowledge and practical experience which may be drawn upon to develop more effective and efficient tax laws and administrative practices.

^[50]OECD, Together for Better Outcomes: Engaging and Involving SME Taxpayers and Stakeholders (2013) pp 16-18.

3.4 The OECD has also acknowledged the crucial intermediary role of tax practitioners between taxpayers and the revenue authorities. In this tripartite relationship, tax practitioners contribute to the smooth functioning of the tax system and facilitate tax compliance.

^[51]OECD, Increasing Taxpayers’ Use of Self-Service Channels (OECD Publishing, 2014) p 35.

 In particular, the OECD has also noted:

The importance of the role tax advisers play in a tax system can be tested by answering a simple question: would compliance with tax laws improve if tax advisers did not exist? The Study Team found no country where the answer to that question is yes. Across the whole range of taxpayers, taxes and circumstances, the vast majority of tax advisers help their clients to avoid errors and deter them from engaging in unlawful or overly-aggressive activities.

^[52]OECD, Study into the Role of Tax Intermediaries (2008) p 14.

3.5 The Productivity Commission has noted that ‘small businesses are much more likely than large businesses to rely on third parties, including industry and professional associations and intermediaries such as tax agents, to receive information on regulatory requirements.’

^[53]Productivity Commission, Regulatory Engagement with Small Business (2013) p 141.

 This should not detract from the important role that tax practitioners across all market segments, including the large business market, play in the effective administration of the tax system.

3.6 As noted by the IGT in his 2015 review into the ATO’s services and support for tax practitioners,^[54]Above n 9, p 46. taxpayer reliance on tax practitioners in Australia has gradually increased since the implementation of self assessment, due to a number of factors including:

• complexity of the business operations and related regulations;
• individual taxpayers involvement in investment activities and income sources others than personal exertion;
• scope and complexity of tax law and related compliance; and
• use of the tax system to deliver social policies as well as to collect revenue.

^[55]IGT, The Australian Taxation Office’s services and support for tax practitioners (2015) p 2; see also: ANAO, The Australian Taxation Office’s Management of its Relationship with … Continue reading

3.7 Australia has some of the highest levels of reliance on tax practitioners of any OECD country.

^[56]OECD, Tax Administration 2015 Comparative Information on OECD and other Advanced and Emerging Economies (2015) p 267.

In 2015-16, the ATO reported that 74.2 per cent of all individuals and over 95 per cent of business taxpayers used the services of a tax practitioner.^[57]Above n 9, p 46.

3.8 In addition to the traditional tax intermediaries noted above, there are increasingly new players providing services and products within the tax sphere. Most notable of the new intermediaries are software developers whose products are being developed to feed directly into ATO systems to align with initiatives, such as Standard Business Reporting (SBR) and Single Touch Payroll (STP). The customer support from these providers and the associated cost will no doubt influence the experience of taxpayers and their advisers in managing their affairs.

3.9 Similarly, as the ATO continues to roll out technology to enable taxpayers to effectively manage their own tax affairs, sufficient take-up depends on ready access to adequate hardware, software and robust internet connections. Accordingly, other software and hardware developers as well as telecommunications entities also necessarily play an important role.

Self-service channels

3.10 In line with the whole-of-government digital transformation initiative, the ATO has adopted a digital-by-default policy which aims to ‘deliver a simpler, easier, more flexible and adaptable way of interacting digitally’ with ATO services.^[58]ATO, ‘Digital by default’ (undated) <lets-talk.ato.gov.au/> The ATO has noted that:

The proposed initiative will require most of the community to use digital services to send and receive information and payments to the ATO. The ATO is seeking feedback from all sectors of the community to understand the range of support needed to transition fully to digital services.^[59]Ibid.

3.11 The ATO has previously,^[60]Above n 53, p 164. and continues to deliver, a range of online services which are available to individuals, businesses and tax practitioners, examples of which include:

^[61]ATO, Online services: Individuals and sole traders’ (9 August 2016) <www.ato.gov.au>; ATO, Online services: Tax agents’ (13 May 2016) <www.ato.gov.au>; ATO, Online services: BAS … Continue reading

• lodging tax returns electronically using myTax;
• finding and managing superannuation;
• managing PAYG instalments and other activity statements;
• receiving ATO communication electronically via myGov; and
• managing business reporting and transactions via the Tax Agent Portal, BAS Agent Portal and Electronic Lodgment Service (ELS).

3.12 As part of the ATO’s move towards a digital environment, it called for submissions from the general public regarding its Digital by default consultation paper. The consultation paper yielded 1003 responses with more than half of the respondents acknowledging the benefits for the entire community from a digital-by-default concept.^[62]ATO, ‘Digital by Default – Findings report’ (undated), <lets-talk.ato.gov.au >.

3.13 At the same time, the ATO also noted that a key theme emerging from the consultation was that the community expects digital-by-default to be more than digital only. It was accepted that while digital services will be the primary way to interact with the ATO, alternative options needed to be available for users for whom this was not an option.^[63]Ibid, page 2. Specifically, more information was needed about the availability of alternative modes of interaction and to whom they would available.^[64]Ibid, page 5.

3.14 The ATO has noted the community’s views that access to alternative service channels should be available for the following reasons:

• advanced age, serious health issues and physical or cognitive disabilities
• inability to access the internet due to extreme costs
• the internet not being available or extremely unreliable in remote or metropolitan areas
• limited financial capacity and financial hardship; and
• limited computer literacy.^[65]Ibid.

Compliance costs

3.15 For many businesses, tax and superannuation are amongst a much broader spectrum of regulatory requirements^[66]Above n 53, p 293. and concerns about the level of cumulative burdens have been raised by businesses across a range of activities and regulatory areas.^[67]Ibid.

3.16 It is important to acknowledge that all taxpayers are expected to bear a ‘baseline’ level of tax compliance costs. Additional costs may be imposed on taxpayers where further engagement with the ATO is required, for example when the ATO undertakes compliance activities.^[68]Above n 44, p 81. Stakeholders believe that such costs may be unnecessarily imposed where the ATO’s risk assessment is inaccurate, its communication inadequate or its actions are disproportionate to the mischief or identified risks.^[69]Above n 44, p iii.

3.17 There have been a number of studies which have examined the compliance burden. These include a Productivity Commission research paper

^[70]Productivity Commission, Compliance Costs of Taxation in Australia (1996) <https://www.pc.gov.au>

as well as a number of academic papers which have examined compliance costs and their impact on both small and large taxpayers

^[71]Chris Evans, Phil Lignier and Binh Tran-Nam, Tax Compliance Costs for the Small and Medium Enterprise Sector: Recent Evidence from Australia (26 September 2013) … Continue reading

. Some of these studies suggest that compliance costs represent a higher percentage of sales and income for small and medium enterprises when compared with larger businesses.

^[72]OECD, Taxation of SMEs in OECD and G20 Countries, OECD Tax Policy Studies (2015), p 13; Productivity Commission, Regulator Engagement with Small Businesses (2013) pp 72-73.

 For example, a 2012 comparative study found that ‘while medium and large businesses usually spend less than 1/10th of 1% of their turnover on TCC [tax compliance costs], small businesses often face TCC of 5% or more of turnover, which can be compared to an extra tax burden’.

^[73]Jacqueline Coolidge, (2012), ‘Findings of tax compliance cost surveys in developing countries’ (2012) eJournal of Tax Research, 10(2), pp. 250-287.

3.18 It should also be noted that large businesses are increasingly concerned about the growing compliance costs arising from a range of initiatives being implemented by the ATO in the last few years. These concerns were raised with the IGT during the development of his 2017 Work Program.^[74]Above n 48.

IGT observations

3.19 The IGT supports the ongoing use of technology where such technology makes it easier and cheaper for taxpayers to effectively interact with the system to discharge their obligations. However, notwithstanding the increased use of technology and digital channels, it is necessary to appreciate that tax practitioners and other intermediaries continue to play a crucial role in the tax system. The ATO’s ongoing service delivery should not detract or dissuade taxpayers from seeking independent tax and legal advice on their tax affairs. The ATO cannot and should not be the sole source of advice for taxpayers.

3.20 The IGT has previously examined the role of tax practitioners and the ATO’s support and services for them in 2015.^[75]IGT, Above n 55. In that report, the IGT noted that tax practitioners face a number of challenges including ‘new technology, globalisation, client demand for a wider range of services, future changes arising from ‘disruptive’ technology and an impending generational change’.^[76]IGT, Above n 55, p 10. Moreover, the IGT observed the strain on the relationship between tax practitioners and the ATO which was, in part, due to dissatisfaction with some of the ATO services and the communication between them.^[77]IGT, Above n 55, pp iii-iv.

3.21 The ATO has been working to improve its relationship with tax practitioners as it is critical for the efficient administration of the tax system. Furthermore, the IGT has announced that, in response to a request from the Commissioner, a review will be conducted into the future role of the tax profession. The aim of the review is to consult widely with tax practitioners, taxpayers and their representative bodies as well as with the ATO and TPB to ensure all major issues are addressed and to chart the best way forward for the efficient and effective administration of the tax system. In particular, the increased use of digital technology and ATO service delivery initiatives will be explored.

3.22 As technology continues to develop, the role of tax practitioners and their business models will necessarily transform.

^[78]OECD, Rethinking Tax Services: The Changing Role of Tax Service Providers in SME Tax Compliance (2016) p 58.

 The OECD has already observed some changes in this regard, noting that tax service providers (TSPs) are moving from:

…a reactive model of fulfilling customer demand with a more proactive one. Whereas many TSPs are used to executing more operational tasks, based on legal obligations, they are gradually acquiring a more strategic role when it comes to financial planning and business advice.^[79]Ibid.

3.23 The OECD foreshadows the increasing use of data analytics, predictive modelling and advanced decision support systems as a means for TSPs to more comprehensively understand their clients’ circumstances which would provide a basis for more tailored advice.^[80]Above n 78.

3.24 Technological developments may also necessitate greater reliance on third party software providers in future. Whilst the IGT may tangentially consider the role of these new intermediaries as part of the above review, the Committee may also wish to examine how they are currently interacting with the ATO and the community in providing their services and any improvements that may be required.

3.25 In addition to the concerns raised by tax practitioners about digital delivery of services, the IGT has also received complaints from taxpayers directly. These concerns have tended to focus on the difficulties of some taxpayers to use such channels for service delivery. For example, one case concerned a local church’s inability to engage with the SuperStream system electronically due to the remoteness of their location and their limited access to the online services. Other complaints have noted the limited availability of paper forms and guidance and the channels through which these may be requested. The IGT has also received similar feedback through submissions made to the development of his Work Program for 2017^[81]Above n 48..

3.26 As noted above, the ATO has also received feedback on the need for alternatives to digital interaction in certain cases and has published information on its website which outlines the types of services it provides for people with a disability.

^[82]ATO, ‘Our services for people with disability’ (7 January 2016) <www.ato.gov.au>

 Through the IGT’s complaints handling function, we have also become aware that ATO officers seek to assist taxpayers where they can by, for example, providing printed copies of sections of the website and other digital information.

3.27 The lack of access to digital channels has also been explored in other jurisdictions, such as the US where the NTA recently undertook a survey on broadband and internet access. The NTA found that more than 33 million taxpayers in the US did not have access to broadband and 14 million had no internet access at home which significantly limited their online activities.

^[83]NTA, 2016 Annual Report to Congress (2017), p 20.

Taxpayers who were low income, elderly or disabled were found to be less likely to have internet access when compared with survey participants who were classified as ‘not low income’.^[84]Ibid.

3.28 In addition to lack of access to the internet or digital technology, there may be unforeseen technological outages such as the one which occurred in late 2016 and which the Commissioner has referred to as the ‘worst unplanned system outage in recent memory’

^[85]ATO, ‘Commissioner of Taxation, Chris Jordan AO on system outages’ (Media Statement, 16 December 2016) <www.lets-talk.ato.gov.au>

. A second system-wide ATO outage has also occurred in early February 2017. Large-scale systems upgrades may also have a similar effect, such as those experienced during the ATO’s Change Program which led to significant delays in tax return processing.

^[86]See for example, IGT, Review into the ATO’s Change Program (2010).

3.29 In the light of the NTA’s research in the US, taxpayer requests to the IGT and the ATO for alternatives to digital interactions as well as the potential for technological outages, the Committee may wish to consider whether there is a need to formally establish alternative methods of interaction with the ATO, at least as a contingency measure.

3.30 In relation to the recent ATO outages, the IGT has been informed that the ATO is undertaking a number of internal reviews into their causes and consequences. At the same time, it has also commissioned PwC to externally review the matter.^[87]ATO, ‘ATO systems update’ (24 January 2017) <lets-talk.ato.gov.au>. To the extent that outages or disruptions continue and concerns persist, the IGT will consider whether to independently investigate the matter.

3.31 Finally, in relation to issues concerning compliance costs, the IGT believes that a greater understanding of the costs imposed on all taxpayers when interacting with the tax system would assist to inform both tax policy design and administrative practices. The IGT has previously supported the idea of an independent body, such as the Productivity Commission, ‘undertaking a study to measure tax related compliance costs and their impact on the administrator, the taxpayer, tax practitioners and the Australian economy as a whole.’

^[88]IGT, Review into improving the self assessment system (2013) p 63.

 Such a study would also be useful in determining whether the increased use of digital interaction has lessened the compliance burden for the various taxpayer groups.

4. Use of information and communications technology

4.1 The previous chapter of the IGT submission examined a number of ways in which taxpayers interacted with the tax system, including through electronic and digital channels offered by the ATO. The use of electronic and digital channels is supported internally by the ATO’s own Information and Communication Technology (ICT) platform.

4.2 As part of its Capability Review of the ATO in 2013, the Australian Public Service Commission (APSC) stated that:

…ICT is the lifeblood of the ATO. It underpins most, if not all, of the work the ATO performs and has an impact on its ability to be agile, responsive and ultimately perform to meet service delivery and stakeholder expectations.

^[89]Australian Public Service Commission, Capability Review Australian Taxation Office (2013) p 9.

4.3 Following the APSC’s review, the ATO released its Information Technology (IT) Strategy to guide its design of IT services, focusing on the client experience and includes initiatives such as increasing its use of third party data.

^[90]ATO, ATO IT Strategy Summary (July 2014) pp 3-7.

4.4 The IGT has previously examined a number of ATO initiatives aimed at enhancing its technological services through data collection and use as well as the ATO’s communications. These discrete initiatives are separately discussed below and include the IGT’s view and observations.

Use of data matching and pre-filling

4.5 Each year, the ATO receives large amounts of taxpayer data from a number of third party sources including from other government agencies, financial institutions and foreign revenue authorities. Some are required to be provided by legislation whilst others are provided by less formal means.^[91]Data may also be received by the ATO through memoranda of understanding with other government agencies, through use of its information gathering powers or under various treaties and double tax … Continue reading The ATO validates and refines such data before comparing them to taxpayers’ reported information to identify potential discrepancies. The cases which contain discrepancies undergo a selection process to identify those suitable for further scrutiny and potentially lead to audits.

4.6 In addition to using its data holdings to identify potential discrepancies in reported income, the ATO also uses it to pre-fill electronic income tax returns where the data can be appropriately matched to a specific taxpayer. Pre-fill is designed to improve accuracy and ease the preparation of tax returns. Information that may be pre-filled include items such as salary and wages, taxes withheld by employers and bank interest.

4.7 In 2015, the OECD reported that almost half of revenue bodies that it surveyed made use of pre-filling.^[92]Above n 56, p 256. Australia’s use of pre-filling is similar to Canada’s

^[93]Canada Revenue Agency (CRA), ‘About Auto-fill my return’ (2 February 2017) <www.cra-arc.gc.ca>.

and was considered by the OECD to be ‘substantial’ and in line with other jurisdictions such as the Netherlands, Portugal, France and Singapore.^[94]Above n 56, p 256. In contrast, the OECD noted a number of other jurisdictions had the capability to generate fully completed tax returns.^[95]Ibid, p 255.

4.8 Other research has noted different regimes to pre-filling, such as the concept of reduced filing that has been used by HMRC in the UK and IRD in New Zealand.

^[96]Jason Kerr, ‘Tax return simplification: risk key engagement, a return to risk?’ eJournal of Tax Research (2012) vol 10, no 2, pp 465-482.

 Reduced filing systems:

…feature comprehensive withholding mechanisms and little or no deductibility for expenses and result in a situation where the majority of taxpayers are not required to annually reconcile their tax.^[97]Ibid, p 466.

4.9 In Scandinavian countries, revenue agencies have a vastly different approach. Digitisation has been a key objective of the whole of the public sector in Sweden, Norway and Denmark for some time.

^[98]OECD, Third Party Reporting Arrangements and Pre-filled Tax Returns: The Danish and Swedish Approaches (2008), p 4.

Denmark was the first Scandinavian country to introduce pre-filled tax returns in the 1990s, followed by Sweden and Norway.^[99]Ibid, p 9. In Sweden, taxpayers can accept a pre-filled return by internet, phone, SMS or paper. Since 2009, Norway has adopted a silent acceptance approach whereby if taxpayers do not respond to the pre-filled income tax return, it is treated as final and binding. Similarly, in Denmark a ‘no response’ is deemed to be acceptance of the return. The OECD has reported that, the Scandinavian countries experienced a 50 to 75 percent rate of returns not requiring adjustment by taxpayers.

^[100]OECD, Using Third Party Information Reports to Assist Taxpayers Meet Their Return Filing Obligations – Country Experiences with the Use of Pre-Populated Personal Tax Returns (2006).

4.10 The use of data for pre-filling purposes, whether to partially or fully complete a return depends on the receipt of timely and accurate data. In this regard, the ANAO has suggested that the reliance of the goodwill of data providers to deliver data earlier might not be sufficient to optimise the implementation and efficiency of the pre-fill initiative.

^[101]ANAO, The Australian Taxation Office’s Use of Data Matching and Analytics in Tax Administration (2008) 85.

 The OECD has also expressed the need for timely data in relation to pre-fill.

^[102]OECD, Tax repayments: Maintaining the Balance Between Refund Service Delivery, Compliance and Integrity (2011) p 9.

IGT observations

4.11 In 2013, the IGT undertook a review into the ATO’s approach to data matching.

^[103]IGT, Review into the Australian Taxation Office’s compliance approach to individual taxpayers – use of data matching (2014).

 Overall, the ATO’s data matching was found to be effective, however, a number of recommendations were made which included some aimed at ensuring the relevant data is accurate before being used in compliance activities and raising awareness of channels for review where taxpayers disagreed with the ATO’s decisions.^[104]Ibid, p vii.

4.12 The IGT’s review also considered the ATO’s use of its available data to assist taxpayers and tax practitioners in lodging income tax returns. Despite the support for the ATO’s pre-filling program, concerns were raised with the IGT regarding the ATO’s processes for correcting errors in pre-filled data.^[105]Ibid, pp 43-47.

4.13 While the use of pre-filled information has been welcomed suggestions have been made to the IGT that the ATO could do more to collect additional data to assist taxpayers. However, challenges do exist in this regard:

^[106]Fraser Institute, Prefilled Personal Income Tax Returns A Comparative Analysis of Australia, Belgium, California, Québec, and Spain (2011) p 13.

1. timeliness – the legislated deadlines for the provision of third-party information to the ATO are potentially too late for taxpayers who want to submit their income tax returns early;
2. comprehensiveness – the pre-filled information could be more comprehensive and often because of technical problems, some supposedly available pre-fill information may not be available;
3. availability – the availability of systems could be improved; and
4. reliability and accuracy – in some instances, pre-filling information may not be reliable. However, the ATO website does caveat that taxpayers bear the onus of confirming the veracity of any information reported in their tax return.

4.14 Some submissions to the IGT’s 2017 Work Program have suggested that the ATO could do more to bolster its pre-filling program. One example was collecting data on deductible charitable donations and pre-filling those as a means of both assisting taxpayers and fostering greater giving. Any such moves to expand the pre-filling program will necessarily require the ATO to have robust processes for obtaining the data. As mentioned above the ANAO has asserted that it is not sufficient to simply rely on the good will of data providers. Where necessary, the ATO may require legislative changes mandating the provision of relevant data.

4.15 However, in the above review, the IGT has noted that although the use of data is helpful, where the ATO requests large amounts of information which are ultimately not used, this creates costs for the third party providers and administrative costs for the ATO.^[107]Above n 103, p 42. To reduce these impacts the IGT recommended that the ATO needs to identify the areas in which its data matching work is effective and those in which it is less effective.^[108]Above n 103, p 43. Moreover, the IGT also recommended that the ATO work closely with potential data providers to consider their ‘natural business systems’ and the options available to the ATO to support or subsidise any necessary changes to improve the provision of data.

4.16 The ATO has recognised the importance of data collection and use and is implementing a strategic Smarter Data program to make smarter, unified use of data to improve decisions, services and compliance. It is a whole-of-ATO approach to risk assessment, intelligence, analytics, data management and technology. This framework will seek to deliver value by ‘making it easy to comply and hard not to’ in line with the ATO’s reinvention program.

^[109]ATO, Smarter Data Program reinventing data and analytics – the ATO experience (Presentation delivered to SAS, May 2015) <www.sas.com>

 The IGT has not had an opportunity to review this program and it may be an area which may benefit from the Committee’s consideration.

4.17 Whilst the ATO continues to improve the accuracy of the pre-filled information, it is important that taxpayers and their advisers do not rely solely on it in completing their tax returns. Any inaccuracies are not desirable for the integrity of the system and may also result in subsequent compliance action which would impose an additional burden on both the ATO and the taxpayer.

4.18 In progressing pre-filling further in this country, it may be useful to consider the approaches of different jurisdictions as outlined above. In this regard, whilst it may be attractive to reach the ultimate goal of relieving taxpayers of the need to lodge annual tax returns, it is necessary to consider the different socio-economic and legal frameworks that vary between such jurisdictions. For example, in many countries where tax returns are fully completed by the revenue authority, there may not be as comprehensive a regime for claiming deductions for work-related expenses as there is in Australia.^[110]Above n 96, p 466.

4.19 The Committee may wish to consider the extent to which pre-filling of tax returns should be further progressed in Australia and the legislative and administrative means which would facilitate such a goal.

Standard Business Reporting

4.20 Many jurisdictions are currently progressing whole-of-government strategies to provide a single portal for citizens to access government information and services including an authentication mechanism.^[111]Above n 51 (2014). Such strategies rely on the sharing and reuse of reported data, implying a need for standardisation of required data.^[112]Ibid, p 26. In Australia, SBR is one such strategy.^[113]IGT, Above n 55.

4.21 Since 2010, Australia has pursued the adoption of SBR which aims to simplify business reporting obligations through a standard approach to online or digital record-keeping, collection of electronically reported information and distribution of that information to the appropriate government agency.^[114]Ibid, p 64. As such, SBR is not an information technology system but a ‘collection of core services, data and message standards that uses a hub or mail centre.’^[115]Ibid.

4.22 SBR is intended to yield a number of benefits including a reduction of data entry, increased productivity, information sharing, greater certainty, real-time validation and security.^[116]Ibid.

4.23 In line with the SBR initiative, the ATO intends to upgrade its current online platform, including the ELS through which tax practitioners lodge their clients’ returns. As a result of this development, practitioners will need to upgrade their current practice management software to one that is SBR-enabled. Taxpayers will also be encouraged to implement SBR-enabled software. In both cases, initial cost outlays are expected for both tax practitioners and their clients.

IGT observations

4.24 The IGT considered SBR in his 2015 review into services and support for tax practitioners.^[117]Ibid. It was found that stakeholders have generally supported the SBR’s aim of streamlining reporting requirements for government departments such as the ATO.^[118]Ibid, p 65. However, at the time the review was conducted, the main impediment to SBR’s success was its low adoption rate by businesses and tax practitioners.^[119]Ibid, p 68. To address the issues related to SBR-adoption, the IGT set out a number of steps that the ATO could take.

4.25 First, closely working with tax practitioners is required to better understand and respond to causes of tax practitioner and taxpayer resistance to adopting SBR-enabled software. The IGT noted that co-operation would be difficult if tax practitioners are pushed towards products which may not provide full functionality and may expose the ATO to the risk of lower practitioner engagement and satisfaction.^[120]IGT, Above n 55, p 68-69.

4.26 Secondly, co-operation with software developers as well as tax practitioners and taxpayers would be necessary to enhance the user experience of SBR-enabled accounting software. Such improved user experience as well as other benefits of adopting SBR could be better communicated to all the relevant parties.^[121]Ibid.

4.27 Thirdly, targeted financial incentives could be considered to reduce set up or upgrade costs for tax practitioners. It could also adopt concessional treatment during the transition period, such as allowing the deferral of certain payments or lodgment obligations without penalties being incurred — as was done in the UK in broadly similar circumstances. Tax practitioners and taxpayers could be made aware of such treatment well in advance of the transition period.^[122]Ibid.

4.28 Lastly, the IGT was of the view that SBR education and training for tax practitioners will be needed to reduce the risk of incorrect reporting and demand on the ATO’s telephony channel from taxpayers and tax practitioners seeking assistance. The ATO could provide educational materials such as online tutorials delivering practical guidance that would assist tax practitioners with the transition to SBR.^[123]Ibid.

4.29 The Committee may wish to further examine the ATO’s implementation of SBR, given the passage of time since the ATO commenced this task and the above IGT review.

Single Touch Payroll

4.30 STP aims to ‘cut red tape’ for employers by ‘simplifying tax and superannuation reporting obligations’.^[124]Josh Frydenberg MP, ‘Cutting red tape for employers through Single Touch Payroll’ (Media Release, 28 December 2015) <jaf.ministers.treasury.gov.au>. Employers who are required to comply with STP requirements will need to report PAYG withholding and superannuation guarantee (SG) information to the ATO every payroll cycle.

4.31Employers with 20 or more employees will be required to comply with STP requirements from 1 July 2018.

^[125]Budget Savings (Omnibus) Act 2016 sch 23 pt 1 div 3.

However there are options for early uptake from 1 July 2017.

^[126]ATO, ‘Simpler reporting with Single Touch Payroll’ (1 December 2016) <www.ato.gov.au>

 Employers who are required to comply with STP will incur some initial set-up costs in either purchasing new software, upgrading existing software or using the services of an external intermediary to comply with their obligations.

4.32 The introduction of STP will not only relieve complying employers of a range of reporting obligations,

^[127]Taxation Administration Act 1953 Sch 1 s 389-20.

 the ‘real time’ nature of STP data should enable the ATO to more proactively address PAYG Withholding and SG risks. As the Explanatory Memorandum to the STP legislation states:

More timely information will allow the Commissioner to engage with employers earlier to address cases of non-compliance. This could potentially prevent more punitive outcomes for such employers which would apply under the SG charge regime where non-compliance is identified further down the track.

^[128]House of Representatives, Revised Explanatory Memorandum, Budget Savings (Omnibus) Bill 2016, p 265.

4.33 In addition to exempting employers with fewer than 20 employees, the STP legislation allows the Commissioner to exempt particular employers or classes of employers from meeting those requirements in appropriate circumstances.

4.34 The ATO is currently conducting a pilot of STP to ascertain the level of ‘deregulation benefits’ for the 710,000 small employers who have less than 20 employees and ‘test support and education tools’.

^[129]The Treasury, Regulation Impact Statement: Single Touch Payroll (October 2015) p 39.

 Following the pilot, the Government will make a decision, by the end of the 2017 calendar year, as to whether employers with less than 20 employees will also be required to comply with STP.^[130]Ibid.

IGT observations

4.35 There are clear benefits in the introduction of STP, both for the reduction of reporting burdens on employers as well as enhancing the availability of timely data to enable the ATO to act quickly and address any compliance risks in relation to PAYGW and SG as they arise.

4.36 Whilst appropriate exemption would be of considerable relief for affected employers, the regulation impact statement states that the benefits and efficiencies anticipated from the successful implementation of STP can only be realised through ‘full participation by all businesses’.^[131]Above n 128, p 283.

4.37 Therefore, the IGT believes that, whilst exemptions are important, particularly for smaller or regional employers who may not have the same level of digital access, it is important to examine alternatives to encourage, as opposed to mandate, full participation. Such encouragement or support may include alternative forms of accessing STP and low or no cost options associated with its adoption. The Committee may wish to consider these matters further.

^[132]The IGT has examined STP as part of his Review into the Australian Taxation Office’s employer obligation compliance activities. The report has been transmitted to the Minister but has not yet … Continue reading

Digital communication

4.38 In addition to using its ICT platform to assist taxpayers, the ATO has also made use of digital communications, including social media channels, as a means of quick and cost effective communication with taxpayers.

Email and SMS

4.39 Prior to 2014, the ATO used digital communication channels for sending ad hoc news and information. In 2014, the ATO launched its Digital Outbound Release (DOR) project to enable sending client-specific correspondence via email and SMS. Within three weeks of the DOR being released, more than 76,500 pieces of ATO correspondence were sent digitally rather than by post.

^[133]Accenture Consulting, ‘Australian Taxation Office – How the Australian Taxation Office is driving digital communication to Australian Taxpayers’ (undated) < www.accenture.com>

4.40 The ATO currently uses SMS and emails for promotional and information purposes. General email and SMS messages promote services the ATO offers such as myTax and myGov. Specific email and SMS messages may request actions be taken by using the ATO’s services, such as to verify changes made to an ATO online account.

^[134]ATO, ‘Current ATO SMS and email activities’ (17 October 2016) <www.ato.gov.au>

Social media

4.41 The OECD has said that social media technologies have the potential to ‘bridge access and take-up gaps still faced by many traditional online government services’.

^[135]OECD, Social Media Use by Governments: A Policy Primer to Discuss Trends, Identify Policy Opportunities and Guide Decision Maker (2014) p 3.

 It has also stated that ‘social media have the potential to make policy processes more inclusive and thereby rebuild some confidence between governments and citizens. But there are no “one size fits all” approaches and government strategies need to seriously consider context and demand factors to be effective’.^[136]Ibid.

4.42 The ATO currently uses social media to share the latest information on tax and superannuation changes, initiatives, products and services as well as reminders.

^[137]ATO, ‘Find us on social media’ (1 March 2016) < www.ato.gov.au>

 They can be found on Facebook, Twitter, LinkedIn and YouTube. For example, the ATO used a combination of social media messaging to promote online lodgment options during the 2016 tax time period.

^[138]ATO, ‘Social media’ (7 March 2016) <www.ato.gov.au>

4.43 As social media sites become more pervasive, they allow governments to use new sources of information to better understand the needs and behaviours of individuals and small businesses.^[139]Above n 135, p 4. This has led to the public perception that governments are using social media in an intrusive way, leading to concerns regarding privacy breaches and perceived surveillance.^[140]Ibid, pp 4-5. For example, in November 2016, an Australian Broadcasting Corporation article warned that the ATO is using Facebook, Instagram and other social media to confirm the accuracy of information that is reported to it.

^[141]Brett Williamson, ‘Tax Office Trawls Facebook, Instagram and other social media to catch out dodgers, cheats’ (17 November 2016) <www.abc.net.au>

4.44 Several OECD member countries such as Ireland, Malaysia, the Netherlands, New Zealand and Singapore are now utilising advanced analytics to carry out social network analysis to help detect certain types of Valued Added Tax fraud.

^[142]OECD, Advanced analytics for better tax administration: Putting data to work (2016) pp 21-22.

IGT observations

4.45 The IGT recognises that new means of communication provide different opportunities for the ATO to engage directly with the community at very low cost. However, care must be taken to respect the role of intermediaries, such as tax practitioners. As noted in the previous chapter, the advent of platforms such as myTax and myGov has caused concerns for tax practitioners who feel they are being circumvented. This is particularly true in instances where taxpayers who rely on tax practitioner services are receiving correspondence directly from the ATO through the myGov inbox without the tax practitioner being necessarily informed.

4.46 The IGT has received a number of complaints on the above issue and has facilitated conversations between the ATO and some affected tax practitioners to ensure appropriate outcomes are achieved and to foster a closer working relationship between the two parties.

4.47 In relation to the use of emails and SMS, security issues need to be addressed before their use is extended beyond its current limits, particularly given their use in scams and phishing schemes to obtain taxpayer information or to assume their identities. The ATO is cognisant of these risks and has sought to manage them through website information on current ATO SMS and email activities as well as providing a free telephone line for verifying the authenticity of correspondence.^[143]Above n 134.

4.48 In respect of using social media as a means of detecting non-compliance, whilst the IGT believes that the ATO should use all information at its disposal to combat non-compliance, care must be taken to ensure that information relied upon is accurate and verifiable and that privacy laws are not breached. This is particularly important in the context of social media or other uncontrolled sources of information in which there is significant scope for inaccuracy and exaggeration.

4.49 The Committee may wish to consider any further use of digital communications, particularly social media, by the ATO and in doing so address any security and privacy concerns.

Other uses of ICT

4.50 In addition to the above, the IGT has also examined other ICT improvements that the ATO could implement to assist taxpayers. In the 2015 review into services and support for tax practitioners, the IGT recommended that the ATO increase its use of modern modes of communication.^[144]IGT, Above n 55, p 51. Other recommendations considered the publication of practical online user guides in relation to certain ATO platforms, simplifying proof of identity through the use of unique identifiers or voice recognition and developing a ‘web chat functionality’ to provide tax practitioners with useful information.

4.51 The ATO has undertaken some work in relation to the above. For example, it is making some use of voice recognition for taxpayers

^[145]ATO, ‘ATO launches voice authentication’ (8 April 2014) <www.ato.gov.au>

and has developed a ‘virtual assistant’ on its website called ‘Alex’ that ‘understands conversational language and can clarify what you want and answer your questions.’

^[146]ATO, ‘Introducing Alex, our new web assistant’ (15 September 2015) <www.ato.gov.au>

 The IGT has not had opportunity to examine the effectiveness of these new technologies. The Committee may wish to consider current ATO endeavours in this regard and explore any additional measures to enhance its service delivery to the community.

5. Use of behavioural insights

5.1 Behavioural insights may be defined as drawing:

…on research into behavioural economics and psychology to influence choices in decision-making. By focusing on the social, cognitive and emotional behaviour of individuals and institutions it suggests that subtle changes to the way decisions are framed and conveyed can have big impacts on behaviour.

^[147]NSW Premier and Cabinet, ‘Behavioural Insights Community of Practice’ (undated) <bi.dpc.nsw.gov.au>.

5.2 In recent years, there has been significant interest in the use of behavioural insights amongst government agencies around the world, particularly those engaged in service delivery such as revenue agencies. The UK Government’s Behavioural Insights Team (BIT) has undertaken significant work in this area. It is focused on:

^[148]UK Cabinet Office Behavioural Insights Team, ‘Who are we’ (undated) <www.behaviouralinsights.co.uk>

• making public services more cost-effective and easier for citizens to use;
• improving outcomes by introducing a more realistic model of human behaviour to policy; and wherever possible,
• enabling people to make ‘better choices for themselves’.

5.3 Central to the behavioural insights research is the use of randomised controlled trials (RCT) which involve:

…dividing the study population into two or more groups and randomly assigning individuals to each of these groups. By giving the intervention (for example the modified letter, the changed process, the new text message) to one of these groups while continuing to treat the other group as business per usual, we can determine the difference in effectiveness of each of the interventions. The key ingredient to this approach is the randomisation of individuals to groups, which enables us to assume that any difference in outcomes is attributed to the intervention rather than other factors.

^[149]UK Cabinet Office Behavioural Insights Team, Applying behavioural insights to reduce fraud, error and debt (2012), p 21.

5.4 In 2012, BIT partnered with the NSW Government’s Department of Premier & Cabinet to create a centrally staffed Behavioural Insights Unit (BIU) in Sydney and to obtain insights which would work in the Australian context. The BIU’s latest report, Behavioural Insights in NSW 2016 showcases the major projects over the previous two years. Some of these projects included the use of text reminders to assist tenants to exit arrears, patient attendance at hospital appointments to save on healthcare costs and reminder letters to increase women’s attendance at cervical cancer screenings.

^[150]NSW Premier and Cabinet, ‘Behavioural Insights in NSW 2016’ (19 December 2016) <bi.dpc.nsw.gov.au>.

5.5 Similar teams to the NSW BIU have since been established in the Federal Government and the Victorian Government. On 1 February 2016, the Behavioural Economics Team of the Australian Government (BETA) started work in the Department of Prime Minister and Cabinet. BETA works with partner agencies, such as the ATO, to:

^[151]Department of the Prime Minister and Cabinet, ‘Behavioural Economics’ (undated) <www.dpmc.gov.au>.

• build the APS capability needed to support greater use of behavioural economics in policy-making;
• provide behavioural economics expertise on a number of projects that apply and test policy programme and administrative designs; and
• establish links between the APS and the behavioural economics research and practitioner community, here and overseas.

5.6 BETA is in its very early stages and the IGT is not aware of any projects it may have conducted with the ATO. However, the ATO has undertaken some work which have utilised behavioural insights. For example, in January 2014, the ATO commissioned an external consultant to conduct a project called ‘Attitudinal and Behavioural Research on the Prevention of Aged Debt’ (BRP):

^[152]IGT, Debt Collection (2015) p 51.

The key outcomes of the BRP are to understand the drivers for the accumulation of tax debt by small businesses and subsequently develop better services and compliance strategies which, amongst other things, encourage willing payment of taxes and prevent debt accumulation.

Some of the key areas the project will consider include how small businesses make decisions concerning the payment of tax debt and relative payment priorities as well as how small business taxpayers form views about the behaviour of others. Furthermore, key characteristics of taxpayers likely to fall into tax debts were investigated, including the type of taxpayer entity, number of employees, turnover, the age of the entity and the industry within which they operate. The project will also consider the ATO’s role in the prevention of tax debts and specifically whether its interventions ‘promote, limit or prevent tax debt’.

Toward the end of this review, the ATO advised that they have commenced working with the IRD to compare the results of their respective research to provide ‘new ideas on how to prevent the accumulation of aged debt by small businesses’. Additionally, the ATO expressed an intention to strengthen its corporate research capability more broadly to provide evidence which supports improved decision making.

5.7 The ATO has used behavioural insights to develop its communications to improve payments. In doing so, the ATO examined the language, structure and layout of a number of debt letters to increase payment compliance by being clearer about what taxpayers need to do and the consequences of not paying.

^[153]ATO, ‘Better communication to improve payment compliance’ (7 March 2016) <www.ato.gov.au>.

5.8 The ATO is also using behavioural insights in developing a ‘Debt Engagement Framework’ which focuses on re-engagement with taxpayers to help them understand and manage their payment obligations. During conversations with taxpayers, ATO staff are directed to:^[154]Above n 152, p 133.

1. Seek to understand why the taxpayer is in debt;
2. Emphasise the need for the taxpayer to take quick action to pay debts by using ‘behavioural insights’; and
3. Arrive at a constructive solution that results in a greater likelihood of resolving the debt, such as requesting larger initial payments with next payment within a week.

5.9 Behavioural insights may also be useful in assessing the impact of pre-filling on taxpayer compliance. The concept of pre-filling was discussed in the previous chapter. Broadly, research in this area suggests that when taxpayers are presented with completed tax returns, they are more likely to lodge them without disputing the pre-filled data.^[155]Above n 96. The OECD has come to a similar view based on the Danish and Swedish experience where two thirds of recipients of fully completed income tax returns have lodged such returns without dispute or request for changes.^[156]Above n 98, p 7. A positive consequence is a ‘dramatic reduction in the administrative burden’ for those taxpayers.^[157]Ibid, p 5.

IGT observations

5.10 As noted in previous chapters, various jurisdictions have adopted a range of different approaches to assist their citizens comply with tax obligations. The approach to be adopted in each country has to be suited to the particular social, economic and legal environments in that jurisdiction. Therefore, a key consideration in adopting any initiative would be whether it would yield fair and equitable outcomes, in an Australian context, for both the government and the community. As the APSC has noted:

^[158]Australian Public Service Commission, ‘Changing behaviour: A public policy perspective’ (14 December 2015) <www.apsc.gov.au>.

One of the key learnings from international experience is that public sector agencies need to be mindful that behavioural change policy goals have to be reasonably congruent with a particular society’s views on the right balance between individual responsibility and government responsibility. These views vary according to policy area and over time.

5.11 The IGT has for many years championed the increased use of behavioural insights in various aspects of tax administration and much of the work that the ATO has undertaken in this area has been as a result of IGT reviews. For example, in the Review into the ATO’s compliance approach to individual taxpayers – income tax refund integrity program (ITRIP), the IGT considered applied research from the UK BIT. Having regard to that research, recommendations were made for the ATO to assess the effectiveness of the ITRIP letters to generate the intended behavioural response from individual taxpayers through the use of RCTs in correspondence design.

^[159]IGT, Review into the Australia Taxation Office’s compliance approach to individual taxpayers – income tax refund integrity program (2013).

The IGT also reiterated that support through a range of other reviews including those examining data matching,^[160]Above n 103, pp 55-56 . the ATO’s use of risk assessment tools,^[161]Above n 44, pp 148-149. debt collection,^[162]Above n 152, pp 51, 86, 133. excess contributions tax

^[163]IGT, Review into the Australian Taxation Office’s compliance approach to individual taxpayers – superannuation excess contributions tax (2014) p 60.

and penalties

^[164]IGT, Review into the Australian Taxation Office’s administration of penalties (2014) pp 5-6.

.

5.12 In addition to the above work, the IGT believes that the ATO could further benefit from insights arising out of projects conducted by BETA with other comparable service delivery agencies and learnings from the BIU and BIT. In respect of implementing significant new changes, the ATO should continue to make use of RCTs which have been strongly supported by the BIT.

5.13 The Committee may wish to examine the ATO’s current initiatives involving behavioural insights, in particular any work being done outside of the debt area, and how it is assisting taxpayers to make decisions in their best interest. In doing so, the Committee could consider the taxpayer’s best interest, how it varies across different taxpayer groups and how it is determined. In this regard, the Committee may find learnings from the UK in relation to practising mindfulness by public policy makers particularly useful.

^[165]Rachel Lilley, Mark Whitehead, Rachel Howell, Rhys Jones and Jessica Pykett, ‘Mindfulness Behaviour Change and Engagement in Public Policy – An evaluation’ (October 2014) … Continue reading