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Thursday, 26 February 1987
Page: 819

Mr HURFORD (Minister for Community Services and Minister Assisting the Treasurer) —I present the Government's response to the report of the House of Representatives Standing Committee on Expenditure entitled `A taxing problem', together with the text of a statement. I seek leave also to have the Government's response incorporated in Hansard. This has been discussed with the Opposition.

Leave granted.

The statement read as follows-



The Auditor-General conducted five efficiency audits in the Australian Taxation Office (ATO) over the period January 1982 to December 1984.

The areas examined were as follows:

Collection of Sales Tax

Controls over Processing of Income Tax Assessment

Processing and Assessment of Income Tax Returns

Processing of Income Tax Instalment Declarations

Checking of Dividends and Interest Disclosed in Income Tax Returns.

In September 1986 the House of Representatives Standing Committee on Expenditure tabled a report on the efficiency audit reports entitled `A Taxing Problem'. This statement deals with each of the recommendations made in the report.

Recommendations Relating to Australian Audit Office

(1) The Australian Audit Office follow a more positive approach in its reporting by providing, in particular, detailed constructive recommendations and advice to audited agencies in cases where serious deficiencies within an agency's activities are observed. (Paragraph 2.9 of Expenditure Committee report.)

(2) A summary of findings detailing the Australian Audit Office's findings and recommendations be included in all future efficiency audit reports. (Paragraph 2.10.)

(3) The Australian Audit Office include time targets for implementation of its efficiency audit recommendations and indicate priorities among these recommendations, such time targets to be set after consultation with departments and authorities subject to efficiency audits. (Paragraph 2.13.)

(5) The Australian Audit Office advise the Parliament at the first available opportunity of deficiencies in the implementation of efficiency audit recommendations. (Paragraph 2.23.)

In response, the Auditor-General has, by letter of 13 February 1987, advised the Chairman of the Expenditure Committee of the effect that these matters fall within his statutory responsibilities under the Audit Act and has in that letter provided the Chairman with his comments on the recommendations as they relate to the operations of the Australian Audit Office.

Recommendations relating to Department of Finance

(4) The Australian Audit Office be given on a timely basis, a copy of all quarterly reports sent to the Minister for Finance concerning implementation of recommendations in efficiency audit reports. (Paragraph 2.23.)

The Department advises that existing liaison arrangements between the Australian Audit Office and the Department of Finance for access to the quarterly reports from Ministers are considered to be satisfactory and will continue.

(6) The Department of Finance actively follow-up the comments made by the Auditor-General and keep the Parliament informed by reporting regularly to the Parliamentary committees that examine efficiency audit reports. (Paragraph 2.23.)

The Department has advised that since 1980 Prime Ministers have required all Ministers to furnish returns to the Minister for Finance, at three monthly intervals, outlining the action taken or to be taken to rectify adverse comments made by the Auditor-General to Parliament in respect of their department and any statutory authorities within their portfolio responsibility. The Minister for Finance is required to pursue with individual Ministers any matters which are not progressing satisfactorily and, if necessary, report to the Prime Minister.

As noted by the Committee, these review arrangements now encompass efficiency audit reports.

Any extension of this review process, as recommended by the Committee, to include the Department reporting to Parliamentary Committees, impinges on the relationship between the Parliament and the executive government. The Minister for Finance is currently examining a request of a similar nature from another Committee and an announcement will be made as soon as possible.

Recommendations Relating to Australian Taxation Office

(7) The Government establish a Joint Management Review to investigate the overall performance and operation of the Australian Taxation Office and inform the Parliament of the outcome of the review. (Paragraph 2.29.)

The Government has responded to this recommendation by accepting a proposal from the Commissioner of Taxation that a broad review of the Australian Taxation Office be carried out.

The review will be led by Dr Ron Cullen, former Chairman of the Victorian Public Service Board. Dr Cullen, who has conducted similar reviews in Victoria, has occupied senior management positions in both the public and private sectors.

The present review will be carried out as a Program Management Performance Review, a form of review which has now replaced Joint Management Reviews.

The review team led by Dr Cullen (other members being Mr Denis Cortese, Deputy Commissioner of Taxation, Sydney, and Mr Bill Geogiou, Assistant Commissioner, Public Service Board) will have as its primary aim the task of identifying and appraising the totality of the strategic initiatives introduced and planned by the Commissioner of Taxation to improve the performance and operation of the Australian Taxation Office. It is being asked to express an opinion about the probability of the success or failure of these initiatives and to propose, if appropriate, modifications or changes.

To these ends the review is being asked to address, among other things, whether or not:

the corporate goals and strategic directions set by the Commissioner are sound for the current and foreseeable environment and achievable

the strategic management initiatives are comprehensive, appropriately ordered in priority and in logical sequence, having regard to their pivotal importance, cost, and relationship to the goals and strategic directions of the Australian Taxation Office

the management processes for setting goals, strategic directions, ordering priorities, allocating resources, and evaluating outcomes are sound.

The Commissioner of Taxation has welcomed this review, noting that it meets a point made by him to the Expenditure Committee, that it is difficult to adequately assess performance of the Taxation Office in particular areas without taking account of the wide range of matters to which resources must be deployed.

Not only must the Taxation Office carry out its major task of collecting each year some 80 per cent of Commonwealth taxation revenue, it is also heavily engaged in implementation of the Government's very extensive program of tax reform. As well, a very wide range of major improvement initiatives is in progress.

The review led by Dr Cullen will examine the way in which the Taxation Office is handling these tasks, whether they are on the right track and appropriately inter-linked, and whether there are significant matters requiring attention that have been missed.

The review will operate under a Steering Committee chaired by the Commissioner of Taxation, and having the Secretary to the Treasury and the Chairman of the Public Service Board as members. The Auditor-General will serve on the Steering Committee as an observer.

(8) Commencing immediately, the Australian Taxation Office develop adequate priority-setting mechanisms detailing areas that they consider require examination and that this mechanism and identified areas be outlined in ATO's annual report indicating the progress achieved at subsequent intervals. (Paragraph 2.29).

In response, the Commissioner of Taxation has observed to the Government that the Australian Audit Office reports that are at the base of the Expenditure Committee's recommendations cover a period now some time in the past. Since then, the Australian Taxation Office has devoted considerable effort in the direction sought by the Committee. The results of this process will be among the things examined by the review led by Dr Cullen.

A developing corporate planning process, a series of internal efficiency reviews, other major reviews, and the establishment of a Corporate Management Board as part of a re-structuring of Taxation Office top management are key features.

The ATO Corporate Plan for 1985-86 documents those matters that have been seen as calling for priority attention.

Major management initiatives currently being addressed within the Office are covered in the Commissioner's 1985-86 Annual Report to Parliament, in particular on pages 20 to 25. The Report was tabled on 27 November 1986.

The Commissioner will in his next and subsequent Annual Reports cover these matters in the way recommended by the Expenditure Committee.

(9) The Australian Taxation Office, as part of the proposed priority-setting mechanism outlined in Recommendation (8), detail in its annual reports the progress of staff numbers transferred from technical assessing duties to compliance areas such as field or in-house auditing activities. (Paragraph 3.6.)

The Commissioner has advised that he will continue to adopt this course. In his 1985-86 Annual Report he reported (page 22) that there was a reduction of some 500 assessing staff as a result of the first phase of self-assessment implementation. Of this number, 422 additional staff years have been made available for compliance activities in the 1986-87 year with the balance being applied to the return examination function which now takes the place of the formal assessing routine.

(10) In implementing its 1985 ADP Strategic Plan the Australian Taxation Office (ATO):

(a) give priority to improving its income detection capability; and

(b) examine the need for information supplied to it under Income Tax Regulation 11(2) to be compatible with systems in ATO and advise the Government accordingly. (Paragraph 3.20.)

In response to this recommendation it is noted that the Expenditure Committee has recognised that, through actions commencing in 1984, the ATO has substantially revised its ADP strategy. That strategy, which aims to very substantially improve the ATO's capacity to detect omitted income, is heavily supported both by the Government's Australia Card proposals and by the in- principle Government decision, announced on 13 February 1987, to re-design ATO computer systems and, in association with that, to re-equip.

The new ATO ADP Strategic Plan has set a strong course towards establishment of an integrated processing environment. As part of this, the new ATO Information Systems Plan aims to develop a major system to handle income matching and associated processing. The Government's Australia Card proposals are a key ingredient to maximising the effectiveness of this system.

Even without these necessary enhancements, the ATO has been able to more than double over the last two years the dollar value of dividend and interest transactions that have been input into its systems as part of its income matching processes. It is also proposing to enhance these processes in the short term both to improve their efficiency and provide the capability for systematic checking covering a wider variety of income payments.

In relation to sub-regulation 11(2) of the Income Tax Regulations, existing law does not specify any format or manner in which information is to be supplied to the ATO. Proposals for legislative change, for consideration by the Government, are being formulated.

(11) The Australian Taxation Office establish a regular review and reporting mechanism in regard to its actual and proposed ADP operations; this mechanism to be along the lines suggested in Recommendation (8). (Paragraph 3.33.)

General and particular processes now in place within the ATO (see response to Recommendation (8)) provide mechanisms of the kind suggested. In addition, led by the directions set in the Corporate Plan, the Systems Group is subject to an annual cycle of planning and review in accordance with the commercial systems development methodology known as Method 1 that has been selected for use in the ATO.

(12) As a matter of urgency, the Australian Taxation Office advise the Government on the effectiveness and cost-effectiveness of a withholding tax on interest paid to Australian residents by all companies and financial institutions, including the Reserve Bank of Australia. (Paragraph 4.19.)

(13) The Australian Taxation Office undertake a study of the effectiveness and cost-effectiveness of alternative tax collection systems (with particular emphasis on a generalised withholding tax structure) and advise the Government accordingly. (Paragraph 4.20.)

In response, the Government remains committed to its Australia Card proposals as providing at this stage the most appropriate solution to the tax evasion problems to which these recommendations refer.

In the Draft White Paper on Reform of the Australian Tax System the question of a withholding tax system was discussed. It was noted there that: ``Consideration may be given to an extension of withholding tax arrangements after a national identification system has been in place for sufficient time to analyse its effectiveness in respect of dividends and interest.''

The Government's intention to proceed by way of the Australia Card proposals was affirmed with the September 1985 statement on tax reform, and is maintained. Accordingly, it does not propose to ask the Australian Taxation Office to pursue these recommendations.

(14) The review of the Prescribed Payments System (PPS) announced by the Treasurer in his September 1985 statement be expedited and the report be presented to the Parliament soon after the completion of the review. (Paragraph 4.26.)

(15) The review referred to in Recommendation (14) include an examination of the effectiveness and cost-effectiveness of the current operation of the Prescribed Payments System. (Paragraph 4.31.)

In response, the many demands of the Government's wide ranging program of tax reform have had to take priority over the proposed review of the Prescribed Payments System. That continues to be the position and accordingly it is not at present practicable to expedite the review. It will be carried out as soon as circumstances allow.

The Australian Taxation Office is continuing to improve the efficiency and effectiveness of PPS.

(16) The Australian Taxation Office examine alternatives to current salary and wage compliance activities, including a review of stricter disclosure requirements for Income Tax Instalment Declarations and advise the Government of benefits and costs of various options available to minimise tax revenue loss in this area. (Paragraph 4.39.)

The Commissioner of Taxation advises that as part of its general compliance strategy the ATO is continuing to explore which particular techniques and approaches available under existing law are most cost-effective.

A pilot project now under way involves the use of computer facilities to run checks against instalment declarations received.

Beyond that, the Government believes that adoption of its Australia Card proposals, which include the compulsory use of the high integrity Australia Card number on instalment declaration forms, will provide a substantial boost to tax compliance in this area. It therefore will not ask the ATO to pursue the matter further at this stage.

(17) The Australian Taxation Office seek from the Attorney-General's Department advice as to whether the late publication on 5 July 1983 of a Commonwealth Gazette notice required under Income Tax Regulation 54dag, legally reviewed Income Instalment Declarations furnished prior to 1 July 1983 for the purposes of determining the amounts to be deducted as tax instalments during the 1983-84 financial year. (Paragraph 4.42.)

The Attorney-General has advised that the late publication on 5 July 1983 of a Commonwealth Gazette notice required under Income Tax Regulations 54dag did not legally revive the earlier Income Instalment Declarations.

The Commissioner of Taxation advised that the irregularity did not give rise to any injustice or create a situation which now appears to require a remedy. In any event the ATO required all employees to lodge fresh income tax declarations in July 1985. It is normal practice to require fresh declarations after existing declarations have been in operation for a number of years.

(18) With or without the adoption of the Australia Card, the Australian Taxation Office take the necessary steps to establish a high integrity identification system which would ensure maximum taxpayer compliance. (Paragraph 4.48.)

In response, the Commissioner of Taxation has pointed out that action to establish a high integrity numbering system, based on existing or substitute tax file numbers, would be a large and costly task that would match in dimension that entailed in the Government's Australia Card proposals.

On adoption of those proposals, the ATO would not have a need for its own high integrity numbering system.

The Government notes the support that the Expenditure Committee, by this recommendation, gives to the concept of a high integrity numbering system to be used for tax enforcement purposes but, in the light of its more beneficial Australia Card proposals and in line with earlier responses, does not propose to ask the ATO to pursue the Committee's recommendation.

(19) In view of the introduction of self-assessment, the Australian Taxation Office (ATO) implement a taxpayer flagging and reporting system so as to allow taxpayers to highlight certain items within their returns where uncertainty exists for attention by ATO to assess the returns manually. (Paragraph 4.49.)

The Commissioner notes in response that this has been done. In its June 1986 Circular to Tax Agents on 1986 Income Tax Returns, the ATO advised that it will respond to requests contained in returns for specific attention to be paid to a particular point of principle in a return. Tax agents were asked to identify returns containing such requests by ensuring that the requests were placed prominently in returns using separate pages clearly headed ``Request for Commissioner's Interpretation of the Law''.

Of the returns subject to ``Self-assessment'' in 1986-87 the ATO expects that the vast majority will have been prepared by tax agents. For taxpayers who prepare their own returns, the ATO's 1986 instructions on the preparation of all form types incorporated the advice that where a taxpayer has any doubts about any item relating to the return, the taxpayer should include the full facts with the return.

That ATO's administrative approach to the provision of advice in the ``self-assessment'' environment was reflected in the law on 24 June 1986 by the Taxation Laws Amendment Act 1986. By that Act, new sub-section 169a (2) was inserted into the Income Tax Assessment Act 1936 to require the Commissioner to give attention to any question raised by a taxpayer in the taxpayer's income tax return for a year of income where the question is relevant to the taxpayer's liability to tax in respect of that year of income.

(20) Associated with the introduction of taxpayer self-assessment, the Australian Taxation Office in developing a national compliance and enforcement capability gives priority to the implementation of a fully integrated high quality database able to facilitate efficient taxpayer selection for investigation and tax audit. (Paragraph 4.50.)

In response, the Government actively supports the Australian Taxation Office in attaching the recommended priority. Its Australia Card proposals and the approval announced on 13 February 1987 for ATO systems re-design and re-equipment are key features.

The ATO has, with the aid of Government endorsement of plans for progressively increasing audit coverage and provision of resources to that end, in recent years significantly increased its audit activity. Some 27,200 audits and investigations are being carried out in 1986-87, compared with some 9,700 in 1983-84. It is accepted that substantial further enhancements are achievable.

The Australia Card proposals will provide for greater information in a far more usable form to assist in audit case selection and more effective conduct of audits, as well as supporting computer based income matching processes.

As a companion measure, the ATO will under its re-design and re-equipment proposals be introducing a fully integrated database. To this end its Information Systems Plan has identified the immediate priority as being the acquisition and establishment of a new computing environment followed by development of base systems such as returns processing. These base systems are prerequisites to providing the data that will be used by other new systems that select taxpayers for audit and match income, as well as support the conduct of taxpayer audits and the collection of outstanding debts.

As part of a carefully planned process called for under the ATO's Information Systems Plan, a High Level Integrated Design project will be carried out in 1987 to specifically consider the approaches that will be required in order to achieve integrated systems that encompass all major tax revenue heads and taxpayer information sources.

Pending the development and implementation of a fully integrated high quality database, the ATO will continue, subject to resource availability, to make enhancements to a number of its existing computer systems that support compliance activities.

(21) The Australian Taxation Office undertake a comprehensive review of the Income Tax Assessment Act 1936. Where provisions are found to be ambiguous or in need of amendment advise the Government accordingly as to the appropriate actions necessary. (Paragraph 5.20.)

In response, while the broad thrust of the recommendation is accepted, the need to carry through the tax legislation program required by tax reform and other initiatives has to take priority.

As part of its recent top-structure re-organisation the ATO is creating a law improvement unit within its policy and Legislation Group. As soon as priority legislative tasks have been brought towards finality the ATO will be developing a program for review of the now very substantial income tax law.

Motion (by Mr Lionel Bowen) proposed:

That the House take note of the paper.

Mr Sinclair —I say, with your indulgence, Madam Deputy Speaker, that we anticipate that the debate will be resumed in this House at some convenient time when the Parliament resumes.

Mr Lionel Bowen —Yes, I can indicate to the right honourable member that that will be the arrangement. It will be resumed as soon as we return for the next period of sitting.

Debate (on motion by Mr Sinclair) adjourned.