Inspector-General of Taxation

[21:55]

CHAIR: Good evening, and welcome to this edition of estimates.

Senator CORMANN: I think you were not able to make it last time and we were talking to Mr McLoughlin in your absence.

Mr Noroozi : Yes.

Senator CORMANN: When we last met with your office we talked about the increasing focus by the ATO on litigation and an increasingly adversarial culture. That seems to be the case. Mr McLoughlin told us there was a review on the way. Have you made any progress on that review? Is there anything you can share with us about your findings around the broad issue of the perception of an increased focus on litigation?

Mr Noroozi : The review Mr McLoughlin may have been referring to is the alternative dispute resolution, which has not been completed or released yet. But I can share with you what is in the public domain and also what I mentioned in our submission to the tax forum. I think it is the litigation issue that you wanted to raise?

Senator CORMANN: Yes.

Mr Noroozi : That is, to some extent ,covered in our submission to the tax forum. One of the things we had suggested was a separate appeals area within the ATO which would provide a more independent internal review. We used to have a separate appeals area in this country many years ago. The US and other countries have it. There is an objection process at the moment, so once the tax office makes a finding and issues the assessment, you can object to that assessment. I am suggesting that from that stage it should be moved into this new proposed appeals area, where there would be a different set of eyes and a truly independent look at it. But they would not only look at the objection issue. Before it ever progresses to going into court, they would really assess the evidence and make a decision as to whether it is worth taking to court. Since then a quite senior ex-tax officer confessed in his valedictory speech that perhaps the ATO could improve or have a more specialised litigation function. If I could refer you to our submission to the tax forum in which we talked about the separate appeals area. It may not be the total answer, but I think it would go some way towards ensuring that there is money to be saved by the taxpayer and the government, if only genuine cases went to court.

Senator CORMANN: You are very good at straightaway going for the solution, but what I am keen to get a flavour from you about is what your observations have been in terms of the incidence of the ATO going to litigation and the incidence of end-to-end dispute resolution rather than alternative dispute resolution.

Mr Noroozi : Again, I can share with you what is in the public domain. In the last few years, the tax office has been running more cases. They are still winning more than they lose, but they are also losing more. If you look at the cases that have gone to the High Court—that means all the way—since around the middle of 2008, they have not really had a win where a taxpayer was involved. What I am saying is that that is not necessarily symptomatic of an issue. If you talk to most legal experts they would say, for example, if you look up part IVA—cases relating to anti-avoidance measures—initially many of those cases were going the way of the commissioner. In the last few years they have been going more towards the taxpayer. It is like the swinging of a pendulum; it may be that after awhile it finds its natural position without any intervention necessary. I guess what I am also saying is that the tax office has been litigating more. They are still winning the majority, but they are losing more than they used to. Certainly if you look at the cases that have gone to the High Court, they have not really won any for a couple of years where there was a taxpayer involved. Sure, they have won a couple where there was a constitutional challenge by an academic and so on, but an actual case involving a taxpayer—

Senator CORMANN: Would that seem to indicate that the ATO is not picking its fights properly? They are not making the right assessments of—

Mr Noroozi : As I pointed out to you, it is not always as simple as that. What I was trying to say is that some legal experts would say that it is basically the swinging of the pendulum. They used to win a lot, for example, when it came to general anti-avoidance type cases, but now they seem to be losing a few. It is not unusual for the pendulum to swing from its highest point on one side to the highest point on the other before it finds its natural equilibrium. I have told you what the picture is and I have told you what a possible solution. There are proponents of your argument who would say, 'Yes, perhaps they should improve that function,' and I have already pointed out to you that there are people within the tax office that feel their litigation function could be improved. I have suggested, for example, in a number of our earlier reviews into objections and into settlements and also in my submissions to the Tax Forum that I feel as if that function could also be improved.

Senator CORMANN: Thank you for that. I have just a couple of quick questions. The alternative dispute resolution review is not yet finalised and has not been publicly released yet. Can you provide an update on any other reviews you may have completed or submitted to the minister since we last met in October?

Mr Noroozi : Yes, there was a class ruling review that is now with the minister. There is also another review—which the tax office is handling—of audits and risk reviews involving high-wealth individuals and the bigger SMEs, the ones with turnover between $100 million and $250 million. Those are currently with the minister, and he has 25 sitting days from the date we gave them to him to release them.

Senator CORMANN: How much longer to go?

Mr Noroozi : I think you should ask—

Senator CORMANN: Given if it is a statutory deadline, I am quite entitled to ask you when they were provided to the minister.

Mr Noroozi : It is a public record. For example, the SME one I think would have to be—if I am doing the maths in my head right—sometime in mid-June. That is counting the number of sitting days, and that could change.

Senator CORMANN: So it is 25 sitting days?

Mr Noroozi : From the date that we gave it to the minister.

Senator CORMANN: What about the class action review?

Mr Noroozi : The class ruling probably should be released around the end of March. That is the latest it has to be released; of course it could be released earlier.

Senator CORMANN: I understand you are currently conducting a review into self-assessment, is that right?

Mr Noroozi : That is right.

Senator CORMANN: Is there anything you can share with us in terms of the flavour of the concerns that have been raised with you?

Mr Noroozi : Before self-assessment came into play we had full assessment, and I think most people in this room are old enough to remember that. Basically, you gave your records to the tax office and they told you how much you were paying. We then moved into a self-assessment regime where, basically, you decide on how much you have to pay and later on down the track the tax office may do an audit. Most would argue we no longer have a self-assessment regime, particularly at the bigger end of town. There are so many other things that happen now. You have pre-lodgment assessments that the commissioner now conducts, particularly at the bigger end of town. So you have prelodgement assessments that the commissioner now conducts, particularly at the bigger end of town. You also have things like reportable tax positions, which will come in this calendar year, where companies at the time they lodge their returns must indicate any positions that have taken that may be uncertain. There is some risk associated with it. So what I think taxpayers are saying is that they have effectively moved from a self-assessment regime to almost something past full assessment, yet the laws we have, which were designed for a self-assessment regime, do not provide them with any benefits. So they have got all this upside of compliance costs but they are not seeing any improvement in certainty. Some of the things we are looking at, for example, in this review are first of all: how can that compliance burden be reduced in any shape, way or form? And even if we cannot do that, then what can we do to provide taxpayers with more certainty? So the sort of things we are might be looking at would be amendment periods. At the moment, for example, the tax office has four years for larger businesses, for example, to audit and adjust your assessment and whether now that they are providing all this information upfront should that be looked at. The penalties regime: now that you are already telling the tax office what kinds of positions you have taken then you have certainly put the tax office on notice. So should you have penalties running from day one—those are some of the issues. Then on the other side of it is the advice framework and whether the tax office provides sufficient guidance and certainty. I can see I am getting the wind-up possibly, so I will stop there.

Senator CORMANN: We are very interested, but they are very long answers. If I can just quickly—and if we can keep the answers short and concise, that would be great—ask two more question: One is: have you ever been approached with concerns around this proportion of tax penalties imposed in the context of the people making inadvertent errors with their concessional or non-concessional contribution caps and paying beyond their non-concessional contribution caps and getting quite significant tax penalties, even though some sometimes mistakes happen outside of people's control. Is that an area that you might, subject to review—

Mr Noroozi : We have a range of issues raised with us.

Senator CORMANN: Is this something you have ever considered for review?

Mr Noroozi : As I said, we are looking at penalties and interest in the context of this self-assessment review.

Senator CORMANN: I am no longer talking about self-assessment; this is a very different and very specific issue. for example—

Mr Noroozi : Are you talking about superannuation?

Senator CORMANN: Excess contributions to superannuation. You have got a rule where, within three years, you cannot put more than $450,000 in. If you do put more in, then that gets taxed effectively at—

Mr Noroozi : We have not looked at that specific issue, no.

Senator CORMANN: You might want to consider it because people run my door in on it just out of interest. Final question—

Mr Noroozi : Sorry: that whole excess super contribution was a policy issue which the government sought to address, so sometimes some things are not within my officers' remit when they are policy issues. I can only look at the administrative side of it.

Senator CORMANN: Trust me: there are some administrative issues.

Mr Noroozi : I appreciate that.

Senator CORMANN: Final question: are you aware of any progress with your recommendation for a board of oversight?

Mr Noroozi : At the tax forum, as you know, the government made a further announcement and we are waiting to hear what the government does.

Senator CORMANN: So there hasn't been any further progress?

Mr Noroozi : Not as far as I am aware.

CHAIR: Thank you, Mr Noroozi, and your officers for attending. Thank you, Minister Arbib, for your attendance here this evening, and we will reconvene tomorrow morning at 9 am and go through until 11 am. The committee stands adjourned.

Committee adjourned at 22 : 09