Business concerns about Tax Office investigated

SMEs that have been the subject of hefty and at times over-the-top penalties by the Australian Taxation Office and company chief executives that are pouring money into fighting the tax authority on the way it subjectively identifies a taxpayer’s “risk” will now have their concerns investigated by the Inspector-General of Taxation, Ali Noroozi.

The Inspector-General has spent months seeking submissions from interested parties and has announced his work program for the year ahead.

Noroozi points to five main review areas, including the ATO’s use of compliance risk assessment tools, its administration of penalties, management of transfer pricing matters, its compliance approaches to individual taxpayers and the way the authority interacts with the Australian Valuation Office.

One of the big issues for the top end of town is how the ATO identifies how risky they are and accordingly targets them. Noroozi says people had raised concerns about a significant number of compliant taxpayers being “inadvertently captured resulting in the unnecessary imposition of higher compliance costs”.See who’s who on ATO’s hit list.

“Concerns were also expressed in relation to inaccurate risk ratings based on incorrect assumptions or irrelevant factors which taxpayers cannot correct or test due to the lack of transparency of the process,” he says in a statement.

“The robustness of the methodology was also questioned, particularly the potential for arbitrary risk ratings where subjective criteria were the determinative factors.”

In relation to SMEs, he says ATO penalty decisions have been a big issue. “Questions have been raised as to whether the relevant ATO processes place sufficient emphasis on appropriate evidentiary bases for penalty decisions to avoid unsustainable penalties being used as ‘bargaining chips’ in settlement negotiations,” he says.

He says submissions also refer to “significant compliance costs in disputing ATO penalty decisions” and hopes to “determine the underlying causes for unsustainable ATO penalty decisions” and the “fairness of aspects of the penalty regime”.

The Institute of Charted Accountants tax counsel Paul Stacey says the ATO has been “overly enthusiastic” in its administration of penalties for some time and is glad this will be under closer scrutiny. “We see instances time and time again where the Administrative Appeals Tribunal reduces the amount of penalties imposed by the ATO,” he says. “That suggests that the ATO hasn’t got this area of administration of tax law quite right.”

Noroozi will also review of the ATO’s management of transfer pricing matters within the small to medium enterprise and large business market segments and suggests improvements may include offering “safe harbours” to reduce compliance costs and delays.

Transfer pricing basically allows companies to shift money between certain tax jurisdictions to avoid paying tax twice on the same amount. While much media attention has focused on the impact the new laws will have on companies including Google, GE, Chevron and BHP Billiton, it’s the SMEs that often lack resources to fight the Tax Office if it picks a bone with them.

Noroozi says there were issues raised on the “commissioner’s interpretation of the law and his discretion to make transfer pricing adjustments”.

He says greater clarity may be achieved by consolidating and updating such advice to take into account relevant changes in international arrangements.

CPA Australia’s head of business and investment policy, Paul Drum, says transfer pricing has significant implications for Australia’s position as a market for much-needed capital. “The regulations as they stand are somewhat confusing and complex,” he says. “As such they risk adversely affecting those businesses – SMEs in particular – that may be less well placed to deal with such complexity.”

The other main area affecting business is the ATO’s compliance approaches to individual taxpayers and micro businesses. Noroozi cites concerns regarding “delays, perceptions of ATO auditor aggressiveness and lack of capability”.

He recently reviewed the ATO’s use of benchmarking to target the cash economy and found almost 6000 small business taxpayers were wrongly accused by the ATO

Now three further issues will be explored, including delayed refunds arising from the income tax refund integrity program; administration of excess contributions tax; and use of third party data in compliance activities.

“While these identified areas may be most relevant to individual taxpayers and to some extent micro businesses, they may also surface common issues or themes having broader application to other taxpayer segments,” he says.

Concerns relating to the ATO’s interaction with the Australian Valuation Office (AVO) have also been raised, with questions on whether the “AVO is sufficiently independent of the ATO and whether there is a revenue bias in determining its valuations or related advice”.

“The unnecessary compliance costs and delays incurred in challenging AVO valuations were thought to be exacerbated by a perceived lack of expertise within the AVO and selective provision of information or briefing by the ATO to the AVO,” he says.

The IGT will investigate whether an appropriate level of independence is maintained between the ATO and AVO, and look at transparency and appropriateness of ATO-AVO instructions, interactions, governance structures and service standards. The IGT will also consider the nature or areas of valuations undertaken by the AVO and its capabilities in provision of services to the ATO.

Noroozi says a “wide range of issues and concerns” had been raised with him during consultations and “while I cannot review every issue, I am confident that the topics selected reflect the greatest levels of community concern or significance in achieving a more efficient, fair and transparent tax administration.”

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