On 4 June 2014 the Australian National Audit Office (ANAO) released a report on its audit of the ATO’s management of compliance by high wealth individuals: Managing Compliance of High Wealth Individuals.
The ATO defines high wealth individuals (HWIs) as Australian resident individuals who, together with their associates, effectively control an estimated net wealth of $30 million or more. In total, HWIs control significant wealth, estimated by the ATO to be in excess of $500 billion in 2012–13. Despite HWIs’ contribution to taxation revenue ($1.4 billion in 2011–12) there is a perception among the wider population that the rich may not always pay their fair share of tax.
The ATO uses two broad categories of compliance activities: voluntary compliance activities that encourage taxpayers and their representatives to understand and comply with their obligations; and active compliance activities that seek to verify information or enforce taxation law.
The objective of the ANAO audit was to assess the effectiveness of the ATO’s activities to promote tax compliance by high wealth individuals. To form a conclusion against this objective, the ANAO adopted the following high-level criteria:
- compliance activities were supported by effective business and administrative arrangements
- compliance risks were identified effectively
- compliance activities, and associated objections and reviews, were conducted effectively, and
- outcomes and objectives were achieved.
The audit’s overall conclusion is that the ATO has effectively carried out a range of activities and engaged with HWI taxpayers and their representatives to reinforce their understanding of, and promote compliance with, tax obligations. The ATO’s engagement approach has been one of transparency about its key areas of focus, and it has disseminated extensive guidance material and information in relation to tax requirements. The ATO has also had a particularly extensive HWI active compliance focus, conducting audits and risk reviews of over 90% of the population between 2009–10 and 2012–13 and collecting almost $852 million as a result of these compliance activities ($671 million from audits and $181 million from risk reviews).
However, the results of these activities have not always been commensurate with the level of effort deployed by the ATO. Over the four-year period, 90% of the cash collected was from 12% of the audits and 5% of the comprehensive risk reviews undertaken by the ATO. The majority of these audits (70%) and comprehensive risk reviews (84%) did not have a financial outcome. Going forward and in anticipation of a focus on a larger pool of HWIs (from 2600 to around 6300), there is scope for the ATO to improve its risk assessments to better target active compliance activities and reduce compliance costs for both HWI taxpayers and the ATO.
The ATO has recognised the need for improved risk identification and differentiation, and since 2004 has been developing and refining the HWI risk assessment tools, most recently the Risk Differentiation Framework (RDF). Despite acknowledged shortcomings, the RDF has been central to the implementation of the HWI compliance strategy. Between 2009 and 2013, 94% of all cases selected for compliance intervention were identified using the RDF. The ANAO’s analysis of the outcomes of HWI compliance activities has however indicated that the RDF has not always been effective in identifying higher risk cases. The analysis also indicated that there was little or no link between wealth and non-compliance within the HWI population. The ATO has advised that it is further refining the RDF, including by modifying the weighting of wealth, and will continue to assess its reliability in effectively differentiating risk within the HWI population. In this regard, it is important that the ATO analyses the outcomes of the compliance activities in order to assess the effectiveness of the RDF in identifying the highest risk HWIs as well as to test the validity of the risks that have led to the selection of compliance cases.
HWI compliance work is complex, dealing with intricate business structures and contentious tax issues, with little available public information. This often makes it difficult for the ATO officers undertaking HWI compliance work to reach readily agreed positions in a timely way. Almost 40% of reviews and audits completed between 2009–10 and 2012–13 were not delivered within the scheduled cycle time. Audits in particular exceeded cycle times by 352 days on average, against an already long initial cycle time (of 730 days for the majority of cases). Despite these timeframes to resolve cases, HWI taxpayers objected to the outcome of their reviews or audits in approximately 65% of cases completed in 2011–12 and 2012–13. Half of these objections resulted in a positive outcome for HWIs; being allowed either in full or in part. In more than 50% of the cases where an objection had been allowed or settled, ATO objections staff recorded that the original compliance decisions were at least partially incorrect, or the ATO had changed its interpretation of the law.
These high rates of successful objections, together with the large proportion of compliance cases without a financial outcome and frequent completion of cases well beyond target cycle times, highlight opportunities for improving the conduct of HWI compliance activities. The ATO acknowledges these opportunities and has initiatives underway to strengthen compliance practices through improving staff capability, better using technical support, promoting staff communication with taxpayers and reducing the number of aged cases. To more efficiently allocate compliance resources, it is also important that the Private Groups and High Wealth Individuals (PGH) business line better assesses the costs of HWI compliance activities and more accurately calculates the actual return on investment from these activities.
The ANAO has made two recommendations aimed at improving the reliability of the RDF through analysis of active compliance outcomes, and improving resource allocation by having greater regard to compliance risk and financial return.