Inspector-General of Taxation

CHAIR: We are meeting with the Inspector-General of Taxation. Welcome, Mr Noroozi and Mr Pengilley.

Senator BUSHBY: Thank you, Mr Noroozi, for assisting us this evening. We only have a short period of time, and you have got lots of things that you are looking at, so I will try to deal with you as quickly as I can. I understand that yesterday the Assistant Treasurer released a review that you had conducted into self-assessment. Would you mind quickly just running through the findings of that review.

Mr Noroozi : The review was about improving the self-assessment system for everybody. There were 33 recommendations, the vast majority of which the government and the tax office have agreed with. Basically the complaint from taxpayers was that, since self-assessment, the primary duty of interpreting, applying the law and deciding what liabilities have shifted to the taxpayer. Since then, in the last 25 years, the pendulum has been swinging back towards full assessment. The feeling was that—

Senator BUSHBY: But without a consequent shift of responsibility for—

Mr Noroozi : No, that basically we are moving towards full assessment again but without many of the protections.

Senator BUSHBY: Yes, that is right.

Mr Noroozi : So we looked at a number of areas. One of them was the tax office's advice framework and whether the guidance they provide is timely, sufficient and so on. We looked at the commissioner's discretion. We looked at some of their compliance approaches. It is a very long report and probably hard to summarise in the time available. One of the key recommendations, for example, was that in developing tax policy there should be a tripartite team of the Taxation Office and Treasury as well as external experts. That would be an augmentation of existing public consultations.

Senator BUSHBY: Was that one of the recommendations that was accepted?

Mr Noroozi : Yes, in principle. That tripartite team would not only decide or opine on what goes into the EM and the legislation but also what should be in the tax office's advice, if any, and that tax advice be synchronised with the enactment of significant pieces of legislation.

Senator BUSHBY: I have not had a chance to look through that, because we have been locked up in estimates for the last two days. I will have a good read through that in due course. Your new work program is looking at a few things that I find quite interesting, one of which is the ATO's use of compliance tools. I understand you are examining concerns with the ATO's risk assessment tools and their application in selecting taxpayers. What are the concerns that have been raised you have been looking at?

Mr Noroozi : The tax office uses a variety of tools for different market segments. One of the issues that has been raised is the risk differentiated framework and the concerns with that. That now applies not only to the big end of town but also to SMEs and is being applied to tax agents as well. It is where the tax office risk rates certain taxpayers, tax agents and so on. Some of the issues raised are around transparency. People want to know what indicators are being used to decide whether somebody is high risk or low risk; and they want to know whether those indicators are appropriate. Some feel as if they should be a lower risk than they are actually rated at. There are some issues of transparency and there are some issues of risk rating. Are these ratings actually used? Are they the definitive way by which the tax office decides whom to audit. Some say that, even though they are low risk rated, they still get an awful lot of attention from the tax office. When it comes to tax agents, the concern is a little more widespread, because tax agents feel—and some academics would support that—that they should be able to give fearless advice to their clients. To be risk rated by a regulator may be tantamount to influencing the way they might give advice.

Senator BUSHBY: That is interesting.

Mr Noroozi : That particular issue is already dealt with in the review that came out yesterday, which we briefly touched on. That is one of the tools the tax office uses. The other tool that the tax office uses which I have already looked at is around benchmarking of micro-businesses, which we may draw on. There is a number of other reviews that I am doing or have done which will be drawn on in this review when we look at the overall use of risk tools by the tax office.

Senator BUSHBY: I look forward to seeing how you go with that one. Another one that I am particularly interested in—which reflects questions I was asking about ASIC because I think the same problem exists there—is the ATO's administration of penalties. I am particularly interested in the reference in your work program to submissions that refer to significant compliance costs in disputing ATO penalty decisions. Obviously, you are working on that at the moment and you do not have any findings yet, but the findings you might come up with could potentially have a broader scope than the ATO.

Mr Noroozi : The review of self-assessment—the one that came out yesterday—also has a number of recommendations to do with penalties. So some of the issues have been dealt with. This particular review looks at more purely administrative issues. Are ATO penalties sustainable in the first place? Is there sufficient due process in imposing penalties in the first place?

Senator BUSHBY: And are they being used as bargaining chips in settlement negotiations?

Mr Noroozi : Correct. They will all be considered together.

Senator BUSHBY: They are all important issues. Another one that I am particularly interested in, and I have asked questions of the Australian Valuation Office before, is about concerns relating to their interaction with the ATO and whether there is sufficient independence between the two of them, given the potential for revenue bias in determining valuations and related advice for the ATO. Would you care to expand on the concerns that you will be looking at with that one?

Mr Noroozi : That is the one review we have not started yet. The other four have already started. This one will probably start in the second half of calendar year. We may be expanding the terms of reference of that, because since putting on the work program we have had feedback that possibly that review should be little broader—looking at tax office capability and evaluation areas more broadly. What is on the work program at the moment is very much about the independence of the AVO—to what extent are independent. They are never going to be 100 per cent independent because they are actually part of the tax office, but the question is: is there sufficient independence? People feel that there may be more influence than there ought to be.

Senator BUSHBY: It is important that taxpayers have confidence.

Mr Noroozi : Correct.

Senator BUSHBY: The perception is almost as important as the reality, I guess, in some senses.

The other two you are doing are both very interesting as well. One is into transfer pricing matters, which is quite topical, with the Treasurer flying out to Moscow tonight to G20 and having raised the issue before he went. The other is to do with compliance approaches to individual taxpayers. That is looking at three discrete compliance areas, all of which are interesting but I am particularly interested in the administration of excess contributions tax by the ATO. Would you care to explain that particular aspect you are looking at?

Mr Noroozi : Obviously with these reviews I cannot talk about—

Senator BUSHBY: You can talk about the concerns, though.

Mr Noroozi : I can certainly share with you the concerns. The majority of submissions are around the commissioner's exercise of his discretion and the special circumstances in which he would exercise his discretion. We have had probably more submissions on this one and most of our other reviews. We have had quite a lot from individuals that are affected. The other thing that they say is that, in arriving at the discretion decision, the ATO is not seen to be considering all of the taxpayer's information and circumstances.

There is also the question of guidance. People want to know in what circumstances the commissioner would exercise his discretion. There is also this question that there is a deminimus. They want to know how much is that deminimus that basically will not be scrutinised too much. A lot of it seems to be surrounding that commissioner's discretion. Whether it is an administrative issue or a policy issue, that remains to be seen as we investigate.

Senator BUSHBY: But you at the end of your investigation in your review findings will have scope to make recommendations on either, wouldn't you?

Mr Noroozi : To the extent that it is to do with tax administration. I have very limited powers when it comes to policy. If it is purely tax administrative, yes, but I cannot make findings on substantive policy issues.

Senator BUSHBY: Yes, fair enough. What are the issues you are looking at in regard to transfer pricing? There are quite clearly issues that the Treasurer today has put on the table, which are probably more about how the different world jurisdictions work together to minimise effective rorting of the situation. But you would be looking at something more domestic, I would imagine, in terms of how the ATO approaches this?

Mr Noroozi : Certainly that is what I have remit over, but that does not mean that, for example, I cannot recommend that the tax office work closely with other jurisdictions. Obviously that would be the extent of it. I have no jurisdiction over other countries or the OECD might do. Certainly I have already talked to my colleagues in the UK and the US and we have a bit of an idea of how they do things. As we do with every review, we will draw comparisons and so on.

Senator BUSHBY: I look forward to the findings on that. Thank you very much for assisting.

CHAIR: Thank you very much, Mr Noroozi, for coming in this evening.