A. Australian Taxation Office

Audit strategy overview

The Australian Taxation Office (ATO) is the Australian Government’s principal revenue collection agency. Its key role is to manage and shape tax, excise and superannuation systems that fund services for Australians. The business intent of the Tax Office is to ‘optimise voluntary compliance and make payments under the law in a way that builds community confidence’. To help satisfy this intent, the Tax Office has a range of processes and practices to help taxpayers understand their rights, to make it as easy as possible to comply, and to verify compliance.

Particular risks for Tax Office administration in 2010–11 include:

• completion of the major ICT ‘change program’;
• legal and administration implications arising out of the Henry review;
• appropriateness of responses to changes in taxpayer behaviours; and
• implementation of administrative processes for new government policies, relating to the economic downturn.

Reflecting the Tax Office’s key roles, the ANAO has given priority to audits that provide coverage to risks associated with the effective collection of revenue. Particular emphasis has been given to the systems, processes and governance frameworks that support revenue collection and community confidence in the tax system within the context of the Tax Office’s Compliance Management program.

The ANAO’s future audit strategy will build on the current approach. While retaining a focus on revenue collection and superannuation, the ANAO will expand the program to review the Tax Office’s client service, covering Tax Office shopfront information centres. The ANAO will also assess aspects of the Tax Office’s administration of Project Wickenby and the non-profit sector.

Audits in progress at 1 July 2010

The Tax Office’s Implementation of its Client Contact—Work Management—Case Management System

As part of the Tax Office’s Change Program the Tax Office implemented a  Client Contact— Work Management—Case Management System (CWC). The CWC is an enterprise-level system used to manage cases and work items, as well as manage client relationship interactions arising from telephone calls and correspondence. This audit is assessing the implementation of the Tax Office’s CWC, including assessing the progress of the CWC against the endorsed Change Program business case.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Administration of the Wine Equalisation Tax

The Wine Equalisation Tax (WET) is a value-based tax applied to wine consumed within Australia. Along with the Luxury Car Tax, WET was introduced in 2000 to help cushion the effect that the abolition of sales tax would have otherwise had. The WET rate is 29 per cent of the wholesale sales value.

Eligible Australian and New Zealand wine producers can apply for a 29 per cent rebate of WET to a maximum value of $500 000. In 2008 Australians consumed 426 million litres of Australian wine and 53 million litres of imported wine for a combined value of some $2.5 billion. The Australian wine industry employs some 31 000 people. In 2008–09 the Tax Office collected $708 million in WET.

The objective of this audit is to assess the effectiveness of the Tax Office’s administration of the Wine Equalisation Tax.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

The Tax Office’s Administration of Fuel Tax Credit Payment Scheme

The Tax Office is responsible for conducting various grant, benefit, tax offset and redistribution programs, sometimes in conjunction with other agencies, arising from a range of government policies. In 2007–08 transfer payments totalled some $9.3 billion. The most significant transfers in value terms were the various business fuel rebate schemes that help users of different fuels. In 2007–08 fuel scheme transfers totalled $4.8 billion. The Tax Office also administers transfers helping families and individual taxpayers including the family tax benefit, the baby bonus and private health insurance rebate. In 2007–08, payments of these transfers totalled almost $2.5 billion.

The objective of this audit is to assess the Tax Office’s effectiveness in administering the fuel tax credit transfer payment scheme. It will focus on this one major element of the transfer payments system and consider the key components of administration including: education and compliance strategies for recipients; mechanisms for communicating with key stakeholders, such as other Australian Government organisations; skilling and operational support for Tax Office staff; performance monitoring and reporting; and linkages to other governance arrangements in the Tax Office.

The audit report is expected to be tabled in the Autumn 2011 Parliamentary Sittings.

Potential audits

Administration of the Superannuation Lost Members Register

The Lost Members Register is a central register of superannuation fund members and retirement savings account holders, maintained by the Tax Office, where the members or holders have been reported by their superannuation funds as lost. The Register contains information sent to the Tax Office by a superannuation provider or its supplier because people may have changed jobs, addresses or names. ANAO Audit Report No.17 2005–06, Administration of the Superannuation Lost Members Register made eight recommendations, with high priority given to two recommendations relating to the quality of Lost Members Register data. Since that audit there have been a number of administrative changes within the Tax Office relating to the Register and changes in legislation and funding that have impacted on its administration.

An audit would examine the Tax Office’s administration of the Lost Members Register.

The Compliance Approach Towards, and Management of, Small to Medium Enterprises

There are 130 000 business with an annual turnover of between $2 million and $250 million in Australia. These small to medium enterprises employ 26 per cent of the workforce and account for 15 per cent of the Tax Office’s total revenue collections. The Tax Office compliance work surrounding small to medium enterprises includes comparing information that businesses provide in tax returns with information supplied by third parties, including financial institutions, government agencies and industry. This data matching is increasingly automated and comprehensive and includes reviews of unusually high refunds and unusual pay-as-you-go instalment payment patterns. The Tax Office also uses statistical analysis to help identify tax risks based on business results that are outside industry norms or expected economic performance.

An audit would examine the Tax Office’s management of small to medium enterprises, including the use of profiling to manage compliance risks.

Administration of Transfer Pricing

With increasing globalisation of markets, some small to medium enterprises are adopting more aggressive tax practices with some making use of transfer pricing. The transfer pricing provisions provide a legislative framework for dealing with arrangements under which profits are moved out of Australia, primarily through the mechanism of inter-company and intra-company transfer pricing for products, services and intangibles.

The Tax Office has been conducting a transfer pricing compliance program that includes conducting reviews and audits as well as providing an advanced pricing arrangement program to give businesses one-on-one certainty about the treatment of their transfer pricing arrangements.

An audit would consider the effectiveness of the governance and administrative arrangements of transfer pricing administration as well as the Tax Office’s interaction with revenue authorities in other jurisdictions to ensure equity for Australia’s revenues in this area.

Project Wickenby

Project Wickenby is a multi-agency task force that was formally established in February 2006. The objective of the task force is to make Australia unattractive for tax fraud and evasion. The work aims to detect, deter and deal with: tax avoidance and evasion; breaches of financial laws and regulations; attempts to defraud the community including investors and creditors; money laundering; and concealment of income or assets.

The agencies involved in administering Project Wickenby are the Tax Office, the Australian Securities and Investments Commission, the Australian Crime Commission, the Commonwealth Director of Public Prosecutions, the Australian Federal Police, AUSTRAC, and the Attorney General’s Department with the support of the Australian Government Solicitor. For improved collaboration the Project Wickenby Cross-agency Advisory Committee was established, while the Tax Office remained the lead agency reporting to the government on progress.

Government resourcing for Project Wickenby is approximately $430 million.

An audit would examine whether the Tax Office effectively carried out its role as part of the Project Wickenby taskforce. The audit would cover aspects of the governance arrangements, compliance approaches, and administration practices in relation to the terms of reference laid out by the Government.

Administration of the Non-profit Organisations Sector

Non-profit organisations are estimated to make up just over four per cent of GDP, with nearly five million volunteers contributing an additional $14.6 billion in unpaid work. As of the 2006–07 financial year there were 51 671 organisations with charity status endorsed by the Tax Office. When an organisation has charity status they can claim concessions on income tax, fringe benefits tax and the goods and services tax. Also, 25 000 organisations have been endorsed by the Tax Office for deductible gift status. Unless an organisation is stated explicitly in the income tax law, deductible gift status can only be claimed following endorsement by the Tax Office. In 2006–07 $1.9 million was claimed for deductible gifts by individuals while $373 million was claimed in refundable franking credits.

With a reliance on the endorsement of tax deductible status from within the Tax Office forming a crucial element of this sector, an audit would examine the Tax Office’s administrative arrangements involving the non-profit sector, and would focus on examination of the deductable gift endorsement process and associated arrangements.

Administration of the Obligations of Employers Relating to Staff

The Tax Office is responsible for administrative arrangements covering employer tax obligations not only with respect to company tax instalments but also with respect to payments relating to their employees. Employer obligations in respect of employees include fringe benefits tax (FBT) and pay as you go (PAYG) withholding tax, and Superannuation. The Superannuation Guarantee (Administration) Act 1992 requires employers to contribute a minimum of nine per cent of their employees’ ordinary time earnings to a complying superannuation fund. The Tax Office collects about $3.4 billion annually from some 70 000 employers under the Fringe Benefits Tax Assessment Act 1986 and $115.9 billion in PAYG. During the 2008–09 financial year the Tax Office reviewed the compliance of more than 20 000 employers and raised $277 million in superannuation entitlements for around 147 000 employees.

An audit would examine the Tax Office’s administration of employer obligations and would also assess the effectiveness of Tax Office processes involved when businesses are placed into administration/ liquidation with outstanding payments in these areas.

Tax Office Shopfronts

While the Tax Office’s general business model is to encourage online dealings, the Tax Office still provides a face‑to‑face service through its shopfronts. A total of 730 796 general visits were made to shopfronts in 2008–09, up by six per cent compared to the previous year. Approximately 37 per cent of these visitors proceeded from the reception desk for a more detailed interview to answer their enquiry. This activity is subject to a corporate service standard. In order to expand the sites where taxpayers can access ATO information, the Tax Office has an arrangement with Centrelink to provide basic tax information at Centrelink offices.

An audit would examine the effectiveness of the administration of Tax Office shopfronts.

Administration of the First Home Saver Account

On 4 February 2008, the Government confirmed its 2007 federal election commitment to establish First Home Saver Accounts to assist Australians aged 18 and over to save for their first home. First Home Saver Accounts are the first of their kind in Australia and will provide a simple, tax-effective way for Australians to save for their first home through a combination of Government contributions and low taxes.

For the first $5 000 that the account holder contributes into the account each financial year, the government will generally contribute 17 per cent of that amount. There will be an account balance cap of $75 000 for the 2008–09 financial year, which will be indexed over the life of the account. In 2009 payments to First Home Saver Accounts were approximately $6 million. 

An audit of the First Home Saver Accounts would examine the effectiveness of the Tax Office’s administration of the accounts.

Administration of the Luxury Car Tax

Luxury Car Tax is charged at 33 per cent of the cost, when a luxury car is sold or imported.

A luxury car is a car with a value above the Luxury Car Tax threshold (currently $57 180).  Luxury Car Tax is only applied to the value of the vehicle above the Luxury Car Tax threshold, less GST, and is accounted for by the purchaser, when completing an activity statement for the tax period that applies for GST.

Legislation to increase the Luxury Car Tax rate from 25 per cent to 33 per cent from 1 July 2008 became law on 3 October 2008, and includes a number of concessions.

• In certain circumstances primary producers and tourism operators will be able to claim a refund of eight per cent of the Luxury Car Tax (to a maximum of $3 000) on certain four-wheel drive or all-wheel drive vehicles.
• Luxury Car Tax will not apply to certain fuel-efficient cars under the fuel-efficient car limit ($75 000 for the 2008–09 year) from 3 October 2008. Luxury Car Tax at the rate of 33 per cent will apply to vehicles above this threshold.
• 25 per cent Luxury Car Tax will apply to contracts entered into for purchases or imports of a luxury car before 13 May 2008 (the date of the Federal Budget announcement to increase the Luxury Car Tax rate).

An average of some $405 million has been collected over the past three financial years.

An audit of the Luxury Car Tax would examine the effectiveness of the Tax Office’s administration of the assessment and collection process relating to the Luxury Car Tax.

Management of GST Liability Adjustments

Net GST is calculated as the Gross GST payable plus Deferred GST payments on imports less Input tax credits. If net GST is more than zero this amount is payable to the ATO: a GST liability. Businesses may need to adjust their net GST liability when events occur that affect the current GST liability balance. Examples of events requiring adjustments include sale price changes, sale cancellations, and write-off or recovery of a bad debt. Businesses claim GST credits by lodging activity statements or an annual GST return. 

For the 2007–08 financial year net GST liabilities increased by 5.3 per cent to $41.8 billion. Also in that financial year, the number of entities with a net liability up to $10 000 decreased 3.2 per cent while the number of entities with a net GST liability over $10 million increased by 10.4 per cent or $2.9 billion.

An audit would examine the Tax Office’s management of the GST credit liability adjustment process.

 

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