In a media release issued on 8 July 2014, the Acting Assistant Treasurer, Senator Mathias Corman, announced the release of the the Inspector-General of Taxation's (IGOT's) "Review into the Australian Taxation Office's administration of penalties".
The IGOT noted that the objective of the ATO's penalties regime is to foster voluntary compliance and believes that this objective may be hindered by:
- categories of taxpayer behaviours being too broad;
- the inability to receive interest on money paid for unsustained penalties; and
- the broad application of false or misleading statement penalties where no tax shortfall occurs.
The IGOT also found that over the last three financial years, approximately 35% of total penalties raised were later reduced. While adjustments of primary tax amounts may explain some of these reductions, a significant proportion (approximately 25% of total penalties raised) appears to be due to unsustained penalty decisions. The review identified a number of underlying reasons including ATO officer capability to appropriately deal with facts and evidence, information not being provided to the ATO during audits and insufficient explanation of penalty decisions. The IGOT has made a number of recommendations in this regard including that the ATO:
- ensure its officers engage effectively with taxpayers to collect the facts and evidence relevant to penalties at the time that they collect the same in relation to primary tax;
- develop a penalty decision making tool that provides officers with an analytical framework and assists them to collect all relevant evidence; and
- ensure ATO penalty decisions provide reasons that include the material facts and evidence, how the law was applied and an explanation of any disagreement with taxpayer contentions.
The IGOT found that the use of penalties as leverage to influence primary tax disputes was another concern raised by stakeholders. While the ATO had made some changes to its processes to address such concerns, perceptions of leverage have persisted. The IGOT has made recommendations aimed at addressing these perceptions, including that the ATO:
- only require taxpayers to pay penalty amounts after the dispute on the primary tax is resolved;
- delay discussion with taxpayers concerning any application of potential penalties until after any position papers are issued;
- clearly and concisely communicate to taxpayers the reasons for the ATO’s ability or inability to reduce penalties and primary tax during settlement negotiations; and
- publish more statistical information on the quantum of penalties raised and adjusted.
The review also identified opportunities to improve the clarity and practicality of specific aspects of the ATO’s penalty guidance and has made recommendations to:
- improve the guidance on voluntary disclosures and penalty remission;
- provide better examples of the law being applied to particular circumstances; and
- consolidate all publicly available penalty materials into a single location.
Overall, the IGOT made ten recommendations. The ATO agrees with nine recommendations in whole, in part or in principle.
The remaining recommendation is relevant for Government. This recommendation, suggests that the Government consider whether:
- the current penalties regime could benefit from more categories to treat taxpayers according to their behaviour;
- penalties are appropriately aligned to factors that influence taxpayer behaviours; and
- taxpayers should be compensated for the time-value of money paid on unsustained penalties.
Senator Corman said given interaction between the penalties regime and the broader system of taxation administration, the Government will consider these issues once the Tax White Paper process has been finalised.