The audit sought to assess how well the Australian Taxation Office (ATO) manages aggressive tax planning. We did this by exploring the nature of aggressive tax planning and the ATO's approach to its management. In the latter context, we looked at:
- the ATO's previous experience with aggressive tax planning and action on previous significant external reviews, particularly dealing with mass marketed investment schemes;
- strategy and operations, intelligence gathering and use; and the identification and management of promoters given their significant role in aggressive tax planning.
The management of aggressive tax planning is an important issue in tax administration because it bears on the integrity, efficiency and effectiveness of the operations of the tax system. Aggressive tax planning poses a risk to a significant amount of revenue and it can affect community confidence in the tax system. The ATO considers aggressive tax planning to be a priority corporate risk.
For the ATO, aggressive tax planning is the point where tax planning goes beyond the policy intent of the law. Its ‘aggressive' or ‘abusive' nature makes it illegal, or contrary to the spirit of the law. Aggressive tax planning has been generally structured around financing arrangements designed to inflate tax deductions and exploit concessions in the tax law designed to encourage certain types of investments.
Aggressive tax planning can be found in ‘boutique'/ ‘one-off' arrangements tailored for high income or high wealth individuals and large corporate entities and also in generic arrangements and products marketed widely to taxpayers (mass marketed arrangements1).
Aspects of the topic have been reviewed previously, and our audit takes account of those reviews. There have been three reports by the Taxation Ombudsman, focussing, in particular, on mass marketed investment schemes (MMIS)2. These are the reports on the Budplan scheme,3 the Main Camp scheme4 and an investigation of a complaint by a promoter of film schemes5). Many of the matters in the Main Camp investigation were also reflected in the Senate Economics References Committee (SERC) inquiry into mass marketed schemes and investor protection.
The SERC's extensive inquiry into aggressive tax planning-related matters was reported in its Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection.6 The Government has not formally responded to the Committee's recommendations. However, the ATO has implemented settlement offers to investors based on the recommendations of the Committee and has undertaken work on a number of matters highlighted by the Committee.
Objective and scope
The objective of the audit was to assess how well the ATO manages aggressive tax planning. To do this, we explored the nature of aggressive tax planning and the ATO's approach to its management. We looked to ascertain whether the ATO had:
- identified lessons from its experience with aggressive tax planning, particularly MMIS, to improve its administration of aggressive tax planning;
- formulated a strategy, and supported this, with an appropriate organisational framework and sound management and operational approaches;
- implemented effective mechanisms to gather and analyse relevant, and real-time, intelligence from ATO sources and external stakeholders, and to provide to taxpayers early warnings of ATO concerns about possible tax arrangements. We did this by looking at the management of the Strategic Intelligence and Analysis unit (SIA) which deals with intelligence gathering and analysis;
- developed an appropriate approach to the identification and management of promoters, given the significant role of promoters in aggressive tax planning, and the significance of the Promoters Taskforce as part of the ATO's response to MMIS. We did this by examining the role and management of the Promoters Taskforce, which is a focus for ATO action on tax promoter7 activities; and
- addressed relevant issues highlighted in the significant external reviews of MMIS.
Background and context—Chapter 1
Aggressive tax planning management is an important issue in tax administration (in Australia and overseas tax administrations), because aggressive tax planning poses a significant risk to revenue and community confidence in the tax system.
Taxpayers have the right to arrange their financial affairs to minimise tax, but it is not acceptable to do so by avoiding the intent of the law or by not following the law itself. Tax planning is the process by which the affairs of a taxpayer, or group of taxpayers, are organised so that, as legally and/or commercially as possible, the liability of the taxpayer to income and other taxes is minimised.8
The difference between tax planning and tax avoidance is not necessarily clear in all circumstances. It may well be a matter of subjective judgement and legal interpretation as to where tax planning reaches the point of aggressive tax planning or tax avoidance. Community attitudes as to what are considered to be acceptable tax planning arrangements to minimise tax liability may differ from managing aggressive tax planning, and the operational methods it employs, reflect the lessons it has learned from its experience with mass marketed schemes as well as from associated academic research work and reviews by the Taxation Ombudsman and the SERC. These lessons have resulted in the ATO revising its approach to the management of aggressive tax planning. The ATO's approach now involves a cross-business line group for organisational leadership and integration; stronger networks to gather and share intelligence; a particular focus on promoters; more timely management of tax issues; clearer and earlier communication with the taxpayers and tax agents; and a greater preparedness to differentiate the treatment of promoters, agents and taxpayers according to circumstances.
As at mid 2003, there were some 400 full-time equivalent staff across the ATO involved in aggressive tax planning management activities, who report directly to the senior executive in the ATO with particular accountability in relation to aggressive tax planning, at an estimated staff cost of $39 million in 2002–03.
Strategic direction and governance arrangements— Chapter 2
The ATO's strategy in managing aggressive tax planning is given expression and support in its organisational arrangements, conceptual frameworks, management approaches and support mechanisms. The ATO seeks to better engage with the community as part of its strategic approach to managing aggressive tax planning.
We found that the effectiveness of the ATO's cross-business line organisational approach depends on the extent to which the relevant steering committee and the business lines effectively engage and support one another in managing aggressive tax planning. It also depends on the business lines: devoting sufficient resources to identify and manage new and emerging aggressive tax planning risks in a comprehensive, integrated and holistic way; the ATO's and may also change over time. Although not amenable, in practical terms, to a precise definition, the ATO has indicators that it regards as ‘red flags', or ‘warning lights', of aggressive tax planning.
We found that the ATO's strategy and approaches for having effective communication and information sharing across the ATO; and implementing effective strategies with external stakeholders, such as Commonwealth agencies and the community.
Since August 1999, when it established a steering committee as an organisational focus for the management of aggressive tax planning, the ATO has developed and refined a conceptual framework for managing such planning, reflecting the notion that its management is an End-to-End (E2E) process. The E2E process emphasises the need for timely and systemic responses to aggressive tax planning risks through collaboration across, and within, business lines. The ATO also seeks to take into account the linkages between key elements in the aggressive tax planning ‘landscape', and how aggressive tax planning occurs in the tax system, by considering Promoters, their Associates, the Schemes, Taxpayers involved and Other issues (the PASTO model).
We found that the concepts of the E2E process and the PASTO model provide a sound basis for managing aggressive tax planning. This is because they acknowledge the linkages the ATO needs to take into account to manage the activity in a comprehensive and appropriate manner. However, relevant ATO staff are not fully implementing these concepts as intended. Appropriate measures are required to clarify the roles and expectations of staff and reinforce these with suitable training and performance management support.
Aggressive tax planning data management
Accurate, comprehensive and current data is vital for the ATO to understand and manage aggressive tax planning issues properly. Data quality depends on the ATO having an overall strategy for aggressive tax planning data management. It also depends on the various aggressive tax planning segments' willingness to support the processes and systems being used to manage aggressive tax planning data in an holistic way. We found that the ATO does not have an overall strategy for managing aggressive tax planning data in an holistic way, although the ATPDatabase has been established to capture data around the PASTO elements.
We found problems with the ATPDatabase. These include some segments not using the Database as intended; it containing incomplete and out-of-date data, it not having inbuilt quality assurance processes to assure the integrity of data; and limitations in its capacity around case monitoring and the collation of management information on aggressive tax planning. These problems mean that there are gaps in the comprehensiveness and currency of aggressive tax planning data, and that manual processes and cross checking are required to deal with the shortcomings of the Database's functionality.
The ATO has devised two measures since August 2002 to address some of the problems with aggressive tax planning data management. These relate to the intelligence and management reporting modules for the ATPDatabase and processes to improve use of the ATPDatabase. However, these are yet to be fully implemented. In August 2003, the ATO took a further initiative, involving a strategic review of systems support needs, looking at aggressive tax planning business support requirements and the ATO's corporate direction for information systems development. The ANAO supports the ATO's consideration of current and future aggressive tax planning data management, particularly if it serves to develop a strategy for the best use of the ATPDatabase; clarifies the expectations and needs of staff; and, most importantly, leads to action to improve the management and reporting of aggressive tax planning information.
Corporate planning, risk management and performance review
We found that the ATO has a well-developed framework for corporate planning and performance review. However, improvements could be made in planning and risk assessment processes. Planning can be improved by the ATO taking account of, not only technical aggressive tax planning risks, but also taking more explicit account of operational risks in conducting activities, i.e. ‘business risks' such as the quality of data supporting aggressive tax planning.
The ATO has a comprehensive framework for risk management in relation to aggressive tax planning. The risk assessment part of the risk management process would be improved by: having all risks (including risks managed by the business lines) recorded on the Aggressive Tax Planning Risk Register, as intended; and having all aggressive tax planning risk assessments done on a consistent basis, with aggressive tax planning segments using the aggressive tax planning risk matrices when conducting their risk assessments (of promoters, for example).
Strategic Intelligence Analysis—Chapter 3
We found that the SIA now has a sound framework to identify and address aggressive tax planning by gathering and analysing relevant and real-time intelligence from ATO sources, including external stakeholders. However, the intelligence database used by the SIA could be used more effectively. During the audit, the ATO enhanced the capacity of the ATPDatabase to allow the ATO to monitor and report on the timeliness of completion of intelligence analysis conducted.
The SIA has corporate responsibility for providing early warnings to the community about new and emerging aggressive tax planning arrangements, using Taxpayer Alerts. While Taxpayer Alerts have been widely acknowledged as a useful tool to communicate the ATO's view on potential aggressive tax planning arrangements in a timely and considered manner, the timeliness of publishing the ATO view on a matter raised in an Alert was identified by the ATO and tax professionals as needing improvement. The ATO is seeking to improve the timeliness of its processes in this area with continued attention to project management issues.
Promoters Taskforce—Chapter 4
The Promoters Taskforce was formed as part of the ATO's response to dealing with the MMIS issues. The Taskforce provides a corporate focus for ATO action to identify and address new and emerging issues in aggressive tax planning relating to the activities of tax promoters who actively develop, encourage participation in, or sell, arrangements that result in tax avoidance.
There are many areas within the ATO that deal with promoters, but we found that the functions of the Promoters Taskforce, and its functions in relation to these other ATO areas, are not clearly specified. Effective coordination, to avoid duplication of effort or gaps in activities around promoters of aggressive tax planning, requires that the various responsible organisational segments are clear about their roles, particular functions and interrelationships.
We found that the Taskforce has a challenging range of activities to manage; that it had been active in doing so; and that it achieved its two specified objectives in 2002–03 (identifying from its promoter management work $400 million revenue at risk and working on 30 integrated audits).
Improvements in planning and management of the Promoters Taskforce's activities in some areas, including its use and maintenance of the ATPDatabase, would allow the Taskforce to better assure itself and others to whom it is answerable, that it is undertaking the most pressing activities in the most efficient way. We found that there are gaps in the list of promoters maintained by the Taskforce. Many of the risk assessments of promoters documented in the list are not current. As well, where the risk assessments are done by different aggressive tax planning segments, they are not conducted on a consistent basis. We also found that the ATO is not actively managing referrals of new information, or referrals of new promoters, to its list of promoters, with delays in dealing with information and gaps in documentation in many areas. Slow action, or inaction, on the management of the promoter list undermines the ATO's ability to identify and address risks in a comprehensive and integrated way, taking account of the interrelationships between the parties concerned.
Mass marketed investment schemes—Chapter 5
We found that handling MMIS was a major administrative task for the ATO in the late 1990s and early 2000s, with a significant impact on taxpayers who invested in these schemes and intensive scrutiny by external review bodies (the Taxation Ombudsman and the SERC). We noted that the ATO has implemented processes to settle with MMIS investors, although some contentious issues continue to be raised by some taxpayers. These issues include the time the ATO took to amend self-assessed tax returns, aspects of the test litigation process, and the application of the General Interest Charge. The finalisation of MMIS will continue to be an important, though less resource intensive, task for the ATO in 2003–04.
We also found that the ATO has implemented a range of measures to address some of the issues raised by the SERC (e.g. better intelligence gathering and analysis, better and more timely information flow and warnings to the public, and work on devising a regime of promoter sanctions).
Managing aggressive tax planning well is a complex, ongoing task. It is a priority area for the ATO as well as being a test of tax administration that bears on the integrity and efficiency and effectiveness of the operations of the whole tax system.
Aggressive tax planning is a ‘grey' concept (by its nature). Its management may therefore require subjective judgements and legal interpretation. There is also an important social dimension to managing compliance in this area: community views of what constitutes aggressive tax planning may differ from the ATO's and may change over time. One of the challenging aspects of managing aggressive tax planning is that it requires the ATO to deal with technical matters in the tax system (involving legal and accounting issues), as well as to anticipate, shape and respond to taxpayers' changing attitudes and behaviours.
There have been problems in the past with the ATO's management of aggressive tax planning. Consequently, the matter has been the subject of keen public and parliamentary interest and other external review. The ATO's strategic approach reflects the lessons it has learned. Overall, we conclude that the ATO has now developed the necessary strategies, structures and processes to permit the effective management of aggressive tax planning. The challenge is to apply these and have them properly supported with systems and related tools that facilitate the identification, assessment, treatment and monitoring of aggressive tax planning risks and facilitate coordinated activities. Action in a number of areas to give greater operational force, in practice, to the ATO's strategy for the managing aggressive tax planning, would help the ATO in its ongoing management task. Success of the ATO's approach crucially relies on the continued support of the business lines and their commitment to work in a coordinated and purposeful way. Actions which would improve the ATO's management of aggressive tax planning are to:
- consistently apply the conceptual frameworks in practice for an integrated, holistic and robust approach in managing aggressive tax planning, as intended;
- enhance the ATPDatabase so that it can better support the efficient management of aggressive tax planning;
- improve aggressive tax planning risk assessment processes, including risk assessments of promoters; and
- clarify the functions, and enhance the management processes, of the Promoters Taskforce.
The ATO has responded positively to the problems it has had in managing aggressive tax planning. Since 1999, it has made considerable efforts to improve its management of such planning, with changes of approach in significant ways. We have taken this into account in constructing our five recommendations. The ATO agreed with all the recommendations.
Summary of ATO response
Overall the ATO supports the thrust of the recommendations. The ATO's full response is reproduced at Appendix 1 of the audit report.
1 Examples of mass marketed arrangements include:
- round-robin schemes, including non-recourse financing, often in agriculture, afforestation and franchises;
- certain film schemes, with guaranteed returns that are, in effect, a return of part of the invested funds; and
- employee benefit arrangements.
ATO Submission to Senate Economics References Committee's Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection. No. 845, p.1.
2 The ATO describes MMIS as schemes usually sold through a prospectus and, in some cases, information memoranda, in respect of 1998–99 and earlier years. They include round-robin schemes, including non-recourse financing, often in agriculture, afforestation and franchises; as well as certain film schemes with guaranteed returns that are, in effect, a return of part of the invested funds.
3 The ATO and Budplan—Report of the Investigation into the Australian Taxation Office's handling of claims for tax deductions by investors in a tax-effective financing scheme known as Budplan. Report under section 35A of the Ombudsman Act 1976 (June 1999).
4 The ATO and Main Camp—Report of the investigation into the Australian Taxation Office's handling of claims for tax deductions by investors in a mass marketed tax effective scheme known as Main Camp. Report under section 35A of the Ombudsman Act 1976 (January 2001).
5 Report on Investigation of a complaint by a promoter of a series of films about ATO decisions, Report under section 35A of the Ombudsman Act 1976 (February 2001).
6 There were three reports: Interim Report (June 2001); Second Report (September 2001); and Final Report (February 2002).
7 A tax promoter is defined as someone who earns income from the design, sale, marketing or implementation of tax schemes.
8 See Australian Master Tax Guide 2003, para. 31-000.