The objective of the audit was to assess the ATO's administration of the Surcharge. Specifically, the audit sought to: report on the environment into which the Surcharge was introduced, including the legislative intent behind the Surcharge, and the current Surcharge environment; examine and report on aspects of Surcharge governance; assess the systems, processes and controls the ATO uses to: match Member Contributions Statements (MCS) data with income tax return data using Tax File Numbers (TFNs); process Surcharge information; and issue Surcharge liability assessments. assess the mechanisms the ATO uses to assess, classify, manage and rectify existing Surcharge exceptions, and prevent future exceptions from occurring; and examine the mechanisms and strategies the ATO uses to provide assurance that members and holders of contributions are complying with their Surcharge obligations.
The Superannuation Contributions Surcharge (the Surcharge) was introduced in 1996–97 to make superannuation arrangements fairer, more equitable and better suited to the needs of the modern workforce.
The calculation of the Surcharge depends on a number of factors, including the superannuation fund type and the particular income tax arrangements of a superannuation fund member.1 In simple terms, the Surcharge is levied on the surchargeable contributions of a member whose Adjusted Taxable Income (ATI) exceeds the minimum Surcharge threshold in a given income year. The ATO determines a member's ATI and calculates a member's Surcharge liability by matching and combining data from an individual's income tax return2 , with the member contribution data the ATO receives via a Member Contribution Statement (MCS).3 The holder of the surchargeable contributions (the holder)4 provides this statement to the ATO.
The objective of the audit was to assess the ATO's administration of the Surcharge. Specifically, the audit sought to:
- report on the environment into which the Surcharge was introduced, including the legislative intent behind the Surcharge, and the current Surcharge environment;
- examine and report on aspects of Surcharge governance;
- assess the systems, processes and controls the ATO uses to:
– match Member Contributions Statements (MCS) data with income tax return data using Tax File Numbers (TFNs);
– process Surcharge information; and
– issue Surcharge liability assessments.
- assess the mechanisms the ATO uses to assess, classify, manage and rectify existing Surcharge exceptions, and prevent future exceptions from occurring; and
- examine the mechanisms and strategies the ATO uses to provide assurance that members and holders of contributions are complying with their Surcharge obligations.
The introduction of the Surcharge presented a difficult challenge for the ATO. The mechanism chosen to collect Surcharge revenue was complex, and required that the ATO collect large amounts of superannuation contributions information from superannuation providers. Following the establishment of the Surcharge, additional pressures were placed on the ATO's capacity to administer the Surcharge, including: significant and ongoing amendments to Surcharge legislation; the introduction of tax reform; and reductions in ATO funding for the Surcharge.
Overall, we concluded that the ATO's administration of the Surcharge has not been managed well. In particular, we found a number of administrative deficiencies relating to: past Surcharge governance arrangements; Surcharge systems, processes and controls; the past management of Surcharge exceptions; and Surcharge compliance. The ATO has put into place a number of mechanisms to address these problems and to improve its administration of the Surcharge.
We made 17 recommendations relating to the following areas:
- establishing a robust and well documented planning, risk management and reporting framework and methodology for Surcharge related activities;
- developing and maintaining high quality Surcharge procedures and systems documentation;
- developing and using a robust, consistent, and secure methodology for changes made to Surcharge systems;
- resolving all Surcharge exceptions in accordance with applicable Australian Government Solicitor advice;
- developing a robust Surcharge compliance framework, including methodology to analyse and report on holder and member compliance; and
- enforcing holder and member compliance through the development and implementation of a comprehensive Surcharge compliance strategy.
The ATO agreed to all 17 recommendations made in the audit.
Background and Context (Chapter 1)
At the time the Surcharge was introduced in 1996–97, the ATO rated it as one of the most difficult administrative challenges it had ever faced.5 Implementing the Surcharge involved the single largest data load over the shortest period that the ATO had ever undertaken (up to that point in time).
Prior to the introduction of the Surcharge in 1996–97, industry stakeholders voiced strong opposition to the mechanism6 to collect the Surcharge. This mechanism placed significant obligations on the superannuation industry to collect and provide large amounts of superannuation contributions information to the ATO for processing.
In addition, the ATO advised that it had to administer the Surcharge in an environment where there were considerable and ongoing amendments to the Surcharge legislation and significant ATO resources were required for tax reform.
Since the Surcharge was introduced, Surcharge revenue collections increased significantly from
$286 million in 1998–99 to $1 050 million in 2003–04
(a 267 per cent increase). Over the same time period, there has been a moderate increase in the number of members paying the surcharge from 552 000 to 640 000 (a 16 per cent increase).7
To manage the complex task of processing and calculating the Surcharge, the ATO developed the Superannuation Contributions Surcharge (SCS) system. Although among the ATO's largest IT systems, the SCS system is used to collect significantly less revenue than other ATO IT systems of a comparative size. For example, the Pay As You Go Withholding (PAYGW) system was used to collect $90 billion in revenue in 2003–04. In comparison, the SCS system was used to collect $1 billion in Surcharge revenue. The ANAO considers that the introduction of the SCS system by the ATO in a short period of time, and with a limited budget, was a commendable achievement.
When the Surcharge was introduced, the additional administrative responsibility to supply contributions information to the ATO, attracted criticism from Superannuation industry representatives as being costly and inefficient. During the audit, we interviewed key stakeholders concerning their views on the ATO's current Surcharge administrative practice. Although the majority of those interviewed accepted the intent of the Surcharge policy, which is to bring equity to the superannuation system, they remained critical of the Surcharge collection mechanism.
Governance (Chapter 2)
An effective governance framework is essential to the effective management of the Surcharge, as it supports good practice in the ATO and provides the public with assurance that the Surcharge is applied equitably. The ATO advised the ANAO that in 1999–2000, several significant events, including the implementation of tax reform, meant that the ATO had to make some difficult decisions regarding Surcharge administration and resourcing for the immediate future. These were to not:
- undertake further development of Surcharge IT processing systems;
- rectify large numbers of Surcharge exceptions8 ; and
- pursue the collection of TFNs from members, to assist with the process of matching member contributions to income tax returns.
Although these decisions were understandable given the taxation environment that existed at the time, they have adversely affected, and continue to adversely affect, the ATO's ability to administer the Surcharge effectively. Had a fully effective governance framework been in place, key risks (such as the exception backlogs) could have been identified and reported earlier, and mitigation strategies implemented in a more timely manner.
In 2002–03 the ATO invested considerable resources to improve its administration of the Surcharge. As a result, there were noticeable improvements in Surcharge governance in 2003–04 in comparison to previous years, particularly with regard to external reporting. That said, we identified several areas that require significant improvement. These include establishing:
- procedures and protocols for recording key Surcharge management decisions;
- a robust and coordinated Surcharge planning process and methodology at the operational level;
- a sound Surcharge risk management framework, which complies with ATO corporate risk processes and underpins planning and reporting; and
- effective internal reporting procedures to report Surcharge performance and risks, and to provide ATO corporate management with the information needed to make informed decisions.
The ANAO recognises that the ATO is working to address all of these areas to improve their administration of the Surcharge.
Surcharge Systems (Chapter 3)
Efficient and effective Surcharge systems, processes and controls are critical to the effective administration of the Surcharge, given the large amounts of Surcharge data that needs to be processed, and the complexity of the calculations needed to be performed to assess the Surcharge. Although the ATO is able to process large quantities of Surcharge information, and collect significant amounts of Surcharge revenue, we consider that it has not been able to provide adequate assurance that this is done efficiently and effectively. In particular:
- coordination between the ATO's Operations Service Line and the Superannuation Business Line needs to be improved to facilitate the more efficient and effective capture of Surcharge data from holders for processing;
- Surcharge processing procedures documentation is incomplete, and in some areas, does not exist;
- Surcharge information technology (IT) system baseline specifications do not exist, and there is not a consistent approach to document and retain Surcharge IT system change specifications;
- business managers, who should have a comprehensive understanding of Surcharge legislation and ATO policy, are not required to review and approve major changes to Surcharge systems;
- the ATO does not use a consistent approach to record changes to Surcharge systems;
- the majority of systems changes are emergency fixes, which are not subject to the same levels of scrutiny as other system changes; and
- the Superannuation Business Line is the largest user of the ATO's Firecall utility9 , suggesting it is being used as part of ‘business-as-usual' activity, contrary to its original purpose.
During the audit, the ATO commenced a number of reviews aimed at identifying areas of weakness within Surcharge systems, and developing strategies to strengthen the procedures and controls applicable to Surcharge processing activities. The ATO advised that, as a result of these reviews, new measures had been put in place to improve the efficiency and effectiveness of Surcharge processing activities, and to mitigate risks related to the operation of Surcharge IT systems.
Surcharge Exceptions (Chapter 4)
Surcharge exceptions are an area of significant concern for the ATO, as they prevent the Commissioner of Taxation (the Commissioner) from making Surcharge assessments. The ATO acknowledges that its overall management of exceptions since the introduction of the Surcharge has been less than adequate. Decisions not to resolve Surcharge exceptions have resulted in large backlogs (in excess of 11 million exceptions as at August 2004), which continue to grow markedly each year. The ANAO estimates that there is a range of between $360 million and $750 million in uncollected Surcharge revenue associated with these backlogs.
In 2002–03 the ATO commenced initiatives such as the reintroduction of the Please Quote TFN (PQTFN) letter process and the Exceptions Taskforce, to reduce exception backlogs and to minimise the potential for future exceptions to occur. The ANAO considers that for these initiatives to be successful, the ATO should:
- resolve all Surcharge exceptions in accordance with applicable Surcharge legislation and good administrative practice;
- utilise existing mechanisms, such as PQTFN letters and default assessments to encourage members to quote their TFNs to the ATO for Surcharge matching purposes;
- as part of a comprehensive compliance program, assess the quality of MCS data submitted by members and holders, and implement strategies to improve the quality of MCS data; and
- where possible, and subject to future system redevelopment activity, assess the costs and benefits of introducing short term, automated measures to resolve current and future SCS exceptions.
More recently, the ATO has decided to resolve a large number of the outstanding Surcharge exceptions by excluding particular categories of members from being assessed for the Surcharge. These include:
- members who are deceased;
- members aged 55 years and over and in receipt of retirement income; and
- exceptions relating to members' MCSs reported to the ATO for the 1997, 1998 or 1999 financial years.
The ATO advised that it has made significant progress in rectifying its exception backlogs using this approach. Specifically it advised, as at 5 March 2005, approximately 380 000 processing exceptions have been set aside in accordance with the Commissioner's general discretionary powers and 234 000 exceptions have been resolved. The ATO has raised additional Surcharge assessments to the value of $67 million. This includes matching TFNs to 1.5m of these cases which generated 4 480 assessments with Surcharge revenue value of approximately $3.5 million.
Given the ATO's past experience with the management of Surcharge exceptions, the ANAO considers that the ATO needs to ensure that its approach to resolving Surcharge exceptions is logical, transparent and equitable.
Surcharge Compliance Management (Chapter 5)
A comprehensive and integrated Surcharge compliance framework is essential to the effective administration of the Surcharge, and to ensure that all taxpayers are treated equitably. Although the ATO is currently undertaking steps to improve Surcharge compliance, we found that the ATO's current Surcharge compliance framework is less than adequate, and past compliance enforcement activity has been less than effective. This is evident in poor lodgement compliance statistics for all market segments (particularly for small funds), as well as the high number of unresolved Surcharge exceptions.
We recognise that it would be costly for the ATO to enforce full compliance by members and holders with their Surcharge lodgement obligations. However there are steps the ATO can take to maximise the benefit of its existing compliance resources. These include:
- developing a robust Surcharge compliance framework, including methodology to analyse and report on holder and member Surcharge compliance;
- obtaining a more comprehensive knowledge of the Surcharge population through the analysis of Australian Prudential Regulation Authority (APRA) and ATO data, and by clearly defining and analysing market segment data;
- enforcing compliance through the use of legislative mechanisms such as contravention notices;
- developing a comprehensive Surcharge compliance strategy;
- introducing compliance mechanisms to identify which holders are lodging poor quality data, and acting on that information; and
- clearly defining cross-Business Line dependencies, and establishing procedures for cross-Business Line compliance activity.
Not only would these steps improve member and holder compliance with their Surcharge obligations, but it would also significantly lessen the impact of other Surcharge administrative problems such as the rectification of exceptions, a large number of which result from poor quality data provided by holders. The ANAO recognises that the ATO has now invested significant resources to address these issues.
Summary of ATO's Response
The ATO regards implementing the Surcharge as one of its most difficult challenges. This was not necessarily because of the measure itself, rather the environment in which it was introduced. At the time the ATO was under considerable pressure implementing numerous amendments to the superannuation legislation and the introduction of a major tax reform program. Overall the Surcharge system has been implemented and is delivering, in aggregate, its projected outcomes. Since its introduction the number of taxpayers paying the Surcharge has grown by 18 per cent and revenue by 267 per cent.
At the same time the ATO has not performed to the high standard the community expects. The ATO is dedicated to addressing these shortcomings and has made significant progress to ensure they do not recur.
The ATO also acknowledges that Surcharge exceptions could have been better managed. Each year the ATO receives 16.5 million Member Contribution Statements. Around 1 million of these cannot be matched to a TFN and it is these cases that are the bulk of the exceptions in the current processing backlogs. However, only a small proportion of these backlog exceptions will ultimately generate a Surcharge liability. On average, the exceptions would represent 6.8 per cent of total Surcharge revenue. By 30 June 2005, all of the backlog exceptions will have been processed and procedures will be in place to ensure that Surcharge exception backlogs do not recur.
1 A ‘member' means a member of a superannuation fund or of an Approved Deposit Fund (ADF), the holder of a Retirement Savings Amount (RSA), or the purchaser of an annuity from a life assurance company or from a registered organisation.
2 This will generally be the taxable income detail for the member, along with any reportable fringe benefit information and deducted personal superannuation contributions.
3 A Member Contributions Statement (MCS) is an ATO approved form that indicates the value of a member's superannuation contributions. In addition to the value of a member's contributions, the MCS should also contain the members Tax File Number (TFN), which the ATO uses to match the MCS to other taxation information to calculate the Surcharge.
4 In most cases (except those cases where the contributed amounts have started to be paid out to the member) this will be the relevant superannuation fund that has control of the member's contributed superannuation amounts.
5 Letter sent from the then Assistant Treasurer, Senator the Hon. Rod Kemp to the then Minister for Finance and Administration, the Hon. John Fahey MP, 22 October 1997.
6 The Surcharge collection mechanism relies on the provision of superannuation contributions information by holders (superannuation funds and other providers of superannuation services).
7 Surcharge revenue figures and the number of members paying the Surcharge have been sourced from ATO superannuation systems. These systems are discussed in Chapter 3.
8 An exception is broadly defined as an event that interrupts workflow through a process or system that requires correction by manual or electronic intervention.
9 Firecall is a special access authority built within ATO systems, which bypasses regular security controls to allow staff to perform emergency system and data fixes. ATO policy states that ‘Firecall use is the exception and not the rule.'