Follow-up review into the Tax Offices implementation of agreed

recommendations included in the six reports prepared by the Inspector-General

of Taxation between August 2003 and June 2006

A report to the Assistant Treasurer

Inspector-General of Taxation December 2007

Commonwealth of Australia 2007

ISBN 0 642 74415 7

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Reviewer

Peter Glass

http://www.ag.gov.au/cca

Level 19, 50 Bridge Street Sydney NSW 2000

Telephone: (02) 8239 2111 GPO Box 551 Facsimile: (02) 8239 2100 Sydney NSW 2001

19 December 2007

The Hon Chris Bowen MP Assistant Treasurer Parliament House Canberra ACT 2600

Dear Minister

I am pleased to present to you my report in respect of the review into the Tax Offices implementation of agreed recommendations included in the first six reports prepared by my office.

The review was announced on the 29 June 2006. This report has been prepared under section 10 of the Inspector-General of Taxation Act 2003.

I have provided the Commissioner of Taxation with the opportunity to respond to the reports findings. The Tax Offices response is in Appendix 3 to the report.

The Tax Office agreed wholly or in part to implement 65 of the 73 recommendations made in the six reports. The main focus of the review was to investigate to what extent the Tax Office has implemented the agreed recommendations. I am pleased to report that the Tax Office has implemented or made significant progress with the vast majority (62 of the 65) of the agreed recommendations.

This outcome is a positive reflection on the valuable contribution of information, time and support by taxpayers and their advisers, the outcomes of the work of my office and fulfilment of my role, and on the Tax Offices own commitment to improving tax administration. This is a true community partnership in seeking to improve Australias tax administration systems.

This review has taken somewhat longer that I would have liked; but I note that the process has been akin to undertaking six separate reviews albeit of a smaller scale than the norm. This has tended to multiply the time taken to obtain information, undertake consultation and allow the Tax Office time required under our protocol to comment on draft chapters. Detailed field work has also been undertaken to test implementation status of many recommendations.

This thorough approach has given me confidence in the overall positive findings and also that my reviews have led to significant improvements in tax administration.

In due course I will undertake a follow-up of the five reviews that have been completed since May 2006 (which were therefore outside the scope of this review) and other reviews currently underway.

In the report I have acknowledged the assistance of the many Tax Office staff who provided both time and information in support of the review process.

Yours faithfully

David Vos AM Inspector-General of Taxation

iii

CONTENTS

CHAPTER 1: INTRODUCTION............................................................................................................1

Initiating the Review.......................................................................................................................1

Scope and focus............................................................................................................................1

Acknowledgements........................................................................................................................3

Structure of the report....................................................................................................................3

CHAPTER 2: OVERVIEW AND SUMMARY ...........................................................................................5

CHAPTER 3: REVIEW OF TAX OFFICE MANAGEMENT OF PART IVC LITIGATION ..................................9

Overview of the April 2006 IGT Review .........................................................................................9

Implementation of recommendations ...........................................................................................11

Implementation of subsidiary recommendations ..........................................................................23

CHAPTER 4: REVIEW INTO TAX OFFICE AUDIT TIMEFRAMES ............................................................45

The July 2005 IGT Review...........................................................................................................45

Implementation of recommendations ...........................................................................................46

CHAPTER 5: REVIEW INTO THE TAX OFFICES ADMINISTRATION OF PENALTIES AND INTEREST

ARISING FROM ACTIVE COMPLIANCE ...........................................................................65

Overview of the May 2005 IGT Review........................................................................................65

Implementation of recommendations ...........................................................................................66

CHAPTER 6: REVIEW INTO THE TAX OFFICES SMALL BUSINESS DEBT COLLECTION PRACTICES ........85

Overview of the April 2005 IGT Review .......................................................................................85

Implementation of recommendations ...........................................................................................85

CHAPTER 7: REVIEW OF TAX OFFICE ADMINISTRATION OF GST REFUNDS RESULTING FROM

THE LODGEMENT OF CREDIT BASs..............................................................................91

The January 2005 IGT Review ....................................................................................................91

Implementation of recommendations ...........................................................................................92

CHAPTER 8: REVIEW OF THE REMISSION OF THE GENERAL INTEREST CHARGE FOR GROUPS OF

TAXPAYERS IN DISPUTE WITH THE TAX OFFICE ..........................................................105

The August 2004 IGT Review....................................................................................................105

Implementation of findings.........................................................................................................108

Implementation of subsidiary findings ........................................................................................115

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CHAPTER 9: OTHER MATTERS.....................................................................................................121

Monitoring and reporting of implementation of recommendations to senior Tax Office

management..............................................................................................................................121

Communication to taxpayers of the changes brought about by the implementation of

recommendations ......................................................................................................................122

APPENDIX 1: TERMS OF REFERENCE ............................................................................................124

APPENDIX 2: CONDUCT OF REVIEW ..............................................................................................125

APPENDIX 3: RESPONSE FROM THE SECOND COMMISSIONER OF TAXATION.....................................126

The Tax Offices detailed response combined with the Inspector-Generals

comments..................................................................................................................................129

APPENDIX 4: ABBREVIATIONS......................................................................................................141

vi

CHAPTER 1: INTRODUCTION

INITIATING THE REVIEW

1.1 This is the report on the follow-up review into the Tax Offices implementation of recommendations included in all six publicly released reports prepared by the Inspector-General of Taxation (Inspector-General or IGT) from the Offices inception in August 2003 to June 2006. The review was conducted pursuant to subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act), being a review conducted on the initiative of the Inspector-General.

1.2 The Inspector-General considered it important and necessary to assess, after a reasonable period, the implementation of improvements to tax administration recommended in his reviews and agreed to by the Tax Office. The extent of implementation is a reflection both on the outcomes of the work of the Inspector-General and on the Tax Offices openness to scrutiny and commitment to making improvements.

1.3 It is also a reflection of the valuable contribution made by accounting, tax, legal and business organisations and their members to the Office of the Inspector-General of Taxation. These organisations have provided submissions and the time, and other material, to the Inspector-Generals office to enable particular revi