ATO audit: too much oversight by scrutineers?

inquiry into whether the current level of oversight of the ATO is appropriate.

The Australian Taxation Office has stated publicly it believes it is under too much scrutiny, and this needs to be toned down as it diverts a lot of resources that could be better used elsewhere. The tax office cites issues of duplication and overlap, including cost to government. Unfortunately, the majority of respondents who have made submissions to the inquiry do not support this view.

The ATO is a key agency that interacts with all businesses, both small and large, and individual taxpayers. Given this important role, it is understandable there is more scrutiny of its functions  when compared to other government agencies. A high level of scrutiny is appropriate to prevent lapses

in performance which can have a widespread impact on the public.

Over the years, there have been examples of the ATO being dismissive of feedback, especially when it conflicted with an entrenched position. This is less likely to be the case today, given the cultural changes in the ATO of late, but considering the sheer size of the organisation, there still remain pockets

that are slow to adapt. Therefore, external scrutiny is required to provide independent assessment that ATO services are performing as expected.

Australia’s self-assessment tax system relies on high levels of voluntary compliance. This in turn requires taxpayers to have trust and confidence in the fairness and efficiency of the tax system. Taxpayers have certain expectations when they interact with the ATO. These expectations are formalised in the Taxpayers’ Charter which sets out taxpayers’ rights and obligations, as well as actions they may

take if they are not satisfied.

The ATO has considerable power and resources, and it is therefore important that there are checks and balances for taxpayers to address this imbalance of authority in the ATO’s favour. It is also important to balance taxpayer rights against the ATO’s ability to discharge its administrative duties efficiently.

The overriding purpose behind the Taxpayers’ Charter is to foster a relationship of mutual trust, respect

and responsibility between taxpayers and the ATO. Its objective needs to be framed in a way that aims to reduce the cost of compliance, increase the quality and efficacy of willing compliance, and ensure all taxpayers are treated equally. External scrutiny to ensure the principles governing the charter are adhered to is essential to ensure taxpayers can trust the fairness of the tax system.

In the past few decades, the responsibilities placed on taxpayers have increased through more complex

tax systems, anti-avoidance rules of even greater scope, increased disclosures, and an environment of tax legislation in which constant change seems to be the norm. More is expected of taxpayers today.

The Institute of Public Accountants is a member of the Asia-Oceania Tax Consultants’ Association (AOTCA). The AOTCA has been working in collaboration with two other professional bodies of tax advisers, CFE and STEP, to develop a Model Taxpayer Charter. The IPA supports the 10 key

rights and responsibilities of taxpayers and tax administrators embodied in the Model Taxpayer Charter.

The Inspector-General of Taxation is currently conducting a review into the Taxpayers’ Charter. In its submission to this review, the IPA stated that despite taxpayer responsibilities increasing substantially, recognition of taxpayer rights has not kept pace and may have fallen behind.

The size and sophistication of ATO operations have grown in response to policy changes that have expanded the revenue base. The ATO is the second largest government agency and

employs more than 20,000 staff.

The commissioner of taxation has a statutory independence to administer federal taxes. This independence means the commissioner makes the decisions about how to implement and apply the

tax laws. The role of the commissioner is not overseen by a board of directors nor is there any meaningful day-to-day ministerial direction or control compared to other government agencies.

Treasury ministers are accountable to Parliament for the performance of the ATO, but they have no power to direct the commissioner’s administration of the tax laws and have limited involvement in governance of the ATO. The independence of the ATO, along with its very significant powers and responsibilities, effectively require high levels of transparency and public accountability. Governance

arrangements need to strike a balance between maintaining the independence of the commissioner and ensuring a fair and efficient tax system.

The commissioner is required by law to report annually to Parliament on the ATO’s operations and appear before parliamentary committees to explain its administration. The complexity of the tax system makes it difficult for parliamentarians to examine the operations of the ATO effectively. Members of Parliament are not subject matter experts. It is for this reason that these parliamentary examinations of

the ATO cannot be relied upon to fulfil an active role in the cycle of public accountability of the ATO, thus the need for several agencies to complement these parliamentary accountabilities.

One of the main agencies for scrutinising the commissioner’s work is the Inspector-General of

Taxation, an independent statutory agency. The Inspector–General of Taxation’s role is to examine systemic tax administration issues that affect businesses or individuals. The office was established in 2003 to strengthen the advice given to the government about tax administration. It reports its recommendations for improving tax administration to the government. Many of the reviews undertaken have resulted in substantial improvements in tax administration. The ATO has implemented the majority of the recommendations put forward in these reviews. The Inspector-General of Taxation plays an important role in the independent oversight of the ATO. No other agency performs this scrutiny through the lens of a taxpayer and against a taxpayer charter.

The only other agency that conducts detailed reviews of ATO programs, policies, projects and activities is the Australian National Audit Office (ANAO) which undertakes performance audits. These two agencies communicate their proposed activities with each other to avoid any overlap in reviews.

The office of the Inspector-General has recently absorbed the tax investigation and complaints handling

functions of the Commonwealth Ombudsman, improving its ability to identify systemic issues arising from individual taxpayer complaints. This provides taxpayers with a single, specialised scrutiny agency for the handling of both individual tax complaints and systemic tax reviews.

This has been a recent improvement in the oversight framework of the ATO. The Inspector-General of Taxation’s future review work plans could cover systemic issues highlighted by trends in complaints, enabling the office to respond more quickly to emerging issues. The policy decision to transfer the Ombudsman’s tax complaints handling function to the Inspector-General of Taxation has minimised duplication and created significant efficiencies.

In summary, the role of scrutiny is to provide independent assurance that ATO services are well managed and adhere to the Taxpayers’ Charter. The current level of scrutiny provides the mechanisms via which taxpayers gain trust and confidence in the fairness of the tax system, which in turn feeds

into high levels of voluntary compliance. Without the current level of scrutiny, it would be difficult for Parliament to fulfill its role of ensuring accountability of the ATO to the Australian public.

We encourage the ATO to continue the professional way in which it deals with its scrutineers. The magnitude of the ATO’s operations and the important role it plays amplifies the significant risk that needs to be appropriately managed through robust governance arrangements, including independent and effective external scrutineering.

Self-assessment and voluntary compliance is dependent on Australians having confidence in the tax system. Independent scrutineering is the most effective way to safeguard against large-scale systemic failures and irreparable loss of confidence in the system. The House of Representatives Tax Committee’s inquiry into the external scrutiny of the ATO has now been finalised. The committee has agreed that no substantial changes in external scrutiny are required. It has, however, made some administrative recommendations to make it clearer how the scrutineers co-ordinate their work.