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Tuesday, 17 March 1987
Page: 984

(Question No. 3707)

Mr Jacobi asked the Treasurer, upon notice, on 9 April 1986:

(1) Is it a fact that the Australian Taxation Office (ATO) has estimated that (a) 63% to 75% of reportable farm income and (b) 70% to 75% of reportable non-farm income is disclosed in income tax returns.

(2) Is it also a fact that (a) in particular industries, unincorporated businesses are estimated to disclose in returns as little as 60% of reportable income, (b) tax evaded by understatement of income and overstatement of expenses by unincorporated businesses is estimated to amount to $1000 million per annum and (c) tax evaded by understatement of income and overstatement of expenses by companies is estimated to amount to $500 million per annum.

(3) Is business and professional income disclosed in tax returns subject to adequate checking in the ATO either before or after returns are assessed.

(4) Is it a fact that (a) the ATO has been refused access to information held by some Government departments and authorities, (b) the ATO is reluctant to exercise its formal powers pursuant to section 264 of the Income Tax Assessment Act to obtain the information and (c) some departments are subject to secrecy provisions in legislation enacted more recently than section 264 which may override section 264.

(5) Is it a fact that (a) in 1983 the ATO identified medical services as one of several areas where it believed there was tax evasion in respect of undisclosed income, (b) ATO officers consider it would be very useful to have access to the payments records of the Department of Health and the Health Insurance Commission and information about international drug companies and (c) the ATO has been refused access to information because of the secrecy provisions of Commonwealth health legislation.

(6) Will he take urgent steps to clarify the investigatory powers of the ATO.

(7) Which departments or authorities have refused the ATO access to information.

(8) Is it a fact that (a) there is no formal statement of policy by the ATO's Head Office to require systematic collection and use of external information to check returns, (b) branch offices of the ATO do not have a planned approach for collection of information to assist in identifying suitable projects for the detection of undisclosed income and (c) the re-organisation of the ATO in 1984 has had little practical effect on compliance procedures within and between regional offices; if so, will he take steps to remedy the situation.

(9) Did the Perth Office of the ATO carry out a successful project concerning an oil company's shares sold within 12 months of their issue in 1980 which resulted in the ATO recovering from 225 shareholders almost $1 million in tax and penalties.

(10) Has the ATO carried out similar projects in respect of (a) profits which appear to have been made at the same time on the sale of shares in another oil company or (b) any other company in other years; if not, why not and what action will be taken to remedy the situation.

(11) Is he able to say whether payments by the Australian Wheat Board to wheat farmers comprise a significant proportion of wheat farmer's income.

(12) Does the ATO check farmers' returns with Wheat Board records.

(13) Is it a fact that during 1981, following a project initiated by the Perth ATO to detect non-disclosure of income from grain sales other than the Wheat Board (a) the ATO sought explanations from the taxpayers or their tax agents in approximately 130 cases where income appeared not to have been disclosed, (b) the project when complete will result in almost $400,000 in tax and penalty being recovered and (c) in some cases where the taxpayers or tax agent had admitted as long ago as 1981 that the income had not been disclosed, the ATO still had not taken action to amend the assessment and recover the evaded tax; if so, what is the reason for the delay in pursuing the cases.

(14) Has the ATO in other States pursued similar projects relating to grain sales; if not, why not.

(15) Is it a fact that (a) State Government motor vehicle registration and police authorities have records of owners of motor vehicles which would provide information about the owners of luxury cars whose tax returns could be checked to ensure that they had disclosed income broadly commensurate with the cars they owned and (b) the ATO in Perth has been refused general access to police records but has been permitted information in response to occasional requests about a particular taxpayer.

(16) Is it a fact that (a) in 1979 the Melbourne ATO, and in 1983 the Perth ATO, obtained from boat registration authorities, details of owners of a sample of private boats with a view to checking that the owners' tax returns disclosed income commensurate with such boats but work on these projects lapsed before any conclusions could be drawn about the value of the checks and (b) no project has been conducted on the ownership of private aircraft.

(17) Have other branch offices of the ATO conducted projects relating to (a) luxury cars, (b) luxury boats and (c) private aircraft; if not, why not.

(18) Will he ensure that the ATO examines these areas.

(19) What level of co-operation does the ATO receive from State government motor registration and police authorities.

(20) What steps have been taken to develop closer relations and improve the exchange of information between the ATO and the Australian Customs Service so that checks can be made on income disclosure from businesses involving imports, exports and licence holders.

(21) Is it a fact that (a) the traditional approach to the problem of low disclosure of income by unincorporated businesses involves a combination of an assessing method which, in practice, means accepting business returns without any check of disclosed income, a small number of investigations and audits based on information derived from an analysis of business returns and an occasional ad hoc project using external information, (b) the traditional approach appears to have been largely ineffectual, (c) only limited use has been made of the vast amount of available information about income held by Government departments and authorities and private businesses and (d) systematic use of external information by the ATO has been limited to (i) checking of dividends and interest paid to individuals and (ii) unemployment and sickness benefits paid to salary or wage taxpayers.

(22) Will he ask the ATO to (a) adopt a program of obtaining relevant external information on business income, perhaps from a particular source only once in 3 years, for checking a sample of taxpayers' returns and (b) ensure that the return format of information supplied will facilitate checking of that kind.

(23) Would such checking of income improve income disclosure.

(24) Is the internal checking of income tax returns made more difficult because the ATO permits many items of income and expenditure to be shown in returns as aggregates without disclosure of separate components.

(25) Will improvement of the selection of audit cases when taxpayer self-assessment is introduced require more itemisation in the tax return form; if so, when will changes in this area be made.

(26) Does legislation amended with effect from 14 December 1984 provide that a person who fails to lodge a tax return when required is liable to pay additional tax equal to double the tax assessable subject to remission by the ATO or a fine imposed by a court of up to $2000 for a first offence; if so, does the additional tax payable on late returns represent an increase from 100% to 200% of the tax payable compared with previous legislation.

(27) Has the ATO continued to apply its policy of imposing additional tax at a maximum of 20% per annum.

(28) On average is the additional tax being imposed for late lodgment less than 6% of the tax payable.

(29) Has the ATO decided not to increase the penalty rate above 20% in part because to do so would give taxpayers the opportunity to seek review of the additional tax by the Taxation Boards of Review which are already burdened by backlogs of work.

(30) Is it a fact that (a) the ATO generally requires returns of income for the year ended 30 June to be lodged by 31 August of that year where they are prepared by the taxpayer or by 31 October where they are prepared by a tax agent, (b) using its remission powers, the ATO does not impose additional tax on returns lodged within 2 months after those dates, (c) a further period of grace of 7 days is allowed, (d) additional tax at 20% per annum is calculated from that extended date until the date of lodgment and (e) a return lodged 3 months late would be subject to additional tax of 1.3% of the tax payable on the return.

(31) If so, does the penalty (a) represent an appropriate fine for 3 months late lodgment of returns, and (b) provide sufficient incentive for the timely lodgment of returns.

(32) Does the ATO have a similar policy on the late payment of tax and penalties once these are assessed; if so, what are the details.

(33) In some cases is the fine imposed by the court under the taxation legislation less than the additional tax that would otherwise have been imposed by the ATO; if so, will he give urgent consideration to (a) the proposition that all criminal prosecutions relating to taxation be dealt with by the Federal Court of Australia and (b) any other measures which would tackle this anomaly.

(34) Has his attention been drawn to comments and criticisms by the Auditor-General in his report, dated March 1986, about the manner in which the additional tax charged to taxpayers for failure to duly furnish returns or information is reported in the Commissioner of Taxation's annual reports to the Parliament.

(35) Are the Taxation Commissioner's annual reports required to inform Parliament of (a) the large extent to which penalties for late lodgment have been modified by general administrative discretion by the ATO, (b) the reasons for so doing and (c) the amount of remission by the ATO since legislation amended in December 1984 required the ATO to make an assessment of the additional tax payable by a person before it is remitted; if not, what action will be taken to ensure the Parliament is fully informed on these matters.

Mr Keating —The answer to the honourable member's question is as follows:

(1) and (2) Yes. A range of legislative and administrative actions is being taken in response.

(3) The extent to which the Australian Taxation Office (ATO) systematically gathers information on business and professional income and matches it against disclosures made in returns is governed by the limitations of ATO's staff and computer and systems resources. Improvements are being made continuously.

(4) (a) Initial access has been denied where the Government department or authority had secrecy provisions which, it was argued, could override the information gathering powers of the ATO.

(b) Where consultation fails to produce the information sought, the formal powers of section 264 would be used in those instances where legislation does not prevent the disclosure of the information.

(c) Yes.

(5) (a) This is one of many areas where tax evasion can occur.

(b) Yes.

(c) The ATO has not formally sought access to information in terms of section 263 and section 264 in view of its understanding of the Commonwealth health legislation.

(6) The powers are currently being reviewed.

(7) Generally speaking, other departments or authorities have not been approached in such a way as to lead to a refusal.

(8) (a) and (b) Branch offices have traditionally undertaken projects involving the use of particular sources of external information to check the accuracy of related returns. A project is formally defined as activity entailing systematic follow up action in respect of groups of taxpayers to identify pockets of non-compliance. Such action is generally based on information from third parties which may point to unreported income, taxable profits arising from the sale of assets or overclaimed expenses. As indicated in national documentation covering the ATO's audit program, specialist audit staff responsible for audit case selection are required to . . . ``identify projects and promote research in areas where audit action may be necessary, due to widespread tax evasion; evaluate the potential of large scale projects by sample testing the particular area chosen for examination; ensure that adequate records are maintained on the results of projects undertaken; Head Office should be notified on the results of projects undertaken to facilitate an interchange of enforcement information between branches''.

Commensurate with the audit resources available and other sources of audit case selection (e.g. the Prescribed Payments System), external sources of information are consistently used for audit purposes. Details of projects undertaken in each branch office are reflected in an Enforcement Bulletin which is circulated nationally.

(c) The re-organisation of the ATO in 1984 has had a substantial impact on compliance activities in branch offices and has contributed to the very successful results obtained in 1985 and 1986 in terms of recovering tax that would otherwise have been evaded. In 1983-84 the total debit raised by compliance activities was $293 million. This increased to $461 million in 1984-85 and then to $609 million in the 1985-86 financial year. Over the same period the number of audits increased from 11,584 in the 1984 year to 22,175 in the 1985-86 year. If income checking activities are included, in the 1985-86 year, 88,174 taxpayers were found to have omitted income or overclaimed deductions or rebates.

(9) Yes.

(10) (a) No.

(b) The ATO is, in general, obliged to allocate its resources in the most efficient and effective possible manner. Preliminary indications of share dealings in other companies indicated that further work in that area, while cost-effective, would not be as cost effective as other work that is undertaken. Share transactions are one of the matters which will be covered by systematic reporting under the Australia Card proposal.

(11) It is believed that this is the case.

(12) The ATO is currently undertaking a project in this area.

(13) Yes. The delay occurred because of the need to use staff resources on work having a higher priority.

(14) The ATO has conducted projects on grain sales in other States. Reporting and systematic checking of payments by marketing authorities and produce agents is also a proposed taxation use for the Australia Card.

(15) (a) Yes.

(b) Yes.

(16) Yes.

(17) Other branches of the ATO have not conducted projects in relation to luxury cars, luxury boats or private aircraft. Other work has had a higher priority.

(18) The ATO is examining these matters.

(19) The ATO generally receives excellent co-operation from the authorities mentioned.

(20) Meetings have been held between the ATO and the Australian Customs Service and formal arrangements are now in place for the exchange of information.

(21) (a) Yes. But the traditional approach mentioned has now been abandoned with the introduction of a system of self-assessment. Technical resources freed up from the introduction of self-assessment have been re-deployed to a significantly expanded audit program.

(b) It is a matter of judgment as to whether the traditional assessing approach was ineffectual. Suffice it to say that it has been largely abandoned following a review which found that a system of self-assessment (coupled with an expanded audit program) would make better use of ATO resources and would ensure a more effective and efficient process of assessing and collecting taxes properly payable.

(c) The use made of external information for audit case selection purposes has been commensurate with available resources and the requirement to achieve specific taxpayer coverage objectives. The results achieved, in terms of additional tax revenues, justify the approaches taken.

(d) No. This matter has been dealt with in the response to Question 8.

(22) It is expected that the proposed taxation uses for the Australia Card will deal with the matters that appear to prompt this particular question.

(23) Yes, any checking of income is likely to improve disclosure of that income.

(24) The matter is one of degree. Obviously, the more detail shown in returns the greater the scope for scrutiny. However, a balance has to be struck between obtaining information which would be useful for enforcement programs and ensuring that preparation of returns is not too onerous.

(25) No, the introduction of self-assessment is not expected to require more itemisation in the tax return form.

(26) Yes. It might be noted that it is Tax Office policy not to charge additional tax where the assessment is a credit.

(27) Yes. However, the Commissioner of Taxation is examining the question of applying higher penalty tax in cases of more serious breaches.

(28) The fact that the level of additional tax imposed in the past for late lodgment has averaged about 6% of the tax payable was partly the result of lodgment concessions granted to taxpayers and tax agents, which were designed to spread more evenly the work load in the ATO and the tax agent's offices.

(29) No. For the general run of cases in which late lodgment contributes to delay in payment of tax a rate of 20% per annum appropriately matches the statutory rate of additional tax for late payment of 20% per annum.

(30) and (31) In general, yes. Although income tax returns are required to be lodged by 31 August, the ATO has a general policy of not imposing additional tax for late lodgment in cases where returns prepared by taxpayers are lodged by 31 October, and by 31 December for returns prepared by tax agents. In addition, concessions are granted to tax agents to lodge some returns without penalty after 31 December provided they have a satisfactory lodgment performance. These arrangements are intended to help to spread the work load more evenly in the ATO and in tax agents' offices.

(32) The policy of the ATO with regard to late payment of tax is that the statutory penalty of 20% per annum arises automatically upon late payment of tax and that any extension of time granted for payment is upon the basis that additional tax is calculated from the original due date. Taxation Ruling No. IT 2091 contains details.

(33) A better balance between fines imposed by courts and additional tax applied administratively has resulted from legislative changes effective from December 1984.

(34) Yes.

(35) Although the taxation legislation requires the Commissioner to report on the working of the legislation, it is not practicable to provide in the annual report a detailed analysis of every aspect of tax administration. Nevertheless, the Commissioner is reviewing the presentation of this part of the annual report.