Australia's Future Tax System

Final Report: Detailed Analysis

Chapter G: Institutions, governance and administration

G1. A responsive and accountable tax system

G1–2 An open and accountable tax administration

Principles for an open and accountable tax administration

The tax authority is responsible for decisions that affect millions of taxpayers, often having a direct impact on their financial position. The resources of the tax authority mean that there is a significant imbalance of power between it and most taxpayers, especially individual and small business taxpayers. Disputes between the tax authority and taxpayers are resolved through the tribunals and the courts. However, this is often a costly and time-consuming process, despite improvements such as the small claims division of the Administrative Appeals Tribunal, and alternative dispute resolution mechanisms.

The tax authority should be independent in its administration of the law. This independence is founded on strong equity and integrity arguments — namely, that it would be undesirable for the administration of the tax laws to be influenced by political forces. Although independent, the tax authority performs a critical function of government, which means effective monitoring and scrutiny are essential.

Public confidence in the tax authority is particularly important in a system of self-assessment. This system relies substantially on voluntary compliance, which is more likely to be forthcoming when taxpayers have confidence that the tax authority is administering the law fairly and efficiently.

Principles

The tax authority should be independent in its administration of the tax laws. However, the independence of the tax authority, together with its considerable responsibilities and powers, means that it should have extensive and clear accountabilities, to help ensure that it administers the system fairly and efficiently.

The ATO — its current role and accountability

The role of the ATO

The ATO will recognise its centenary of service to Australia in 2010. It has been part of enormous changes in the tax system over this period. The ATO originated in an era when the design of the tax system was determined largely by the feasibility of basic administration. Over time, the size and sophistication of ATO operations have grown in response to policy changes that expanded the revenue base, as well as seeking to achieve a range of economic and social objectives.

Tax policy goals have become more sophisticated, reflecting the increasing complexity of our society. For example, a growing number of Australian taxpayers now own equity investments, are involved in complicated business structures, and invest or work overseas. Increasing globalisation, e-commerce and financial innovation have also prompted more sophisticated tax rules. As a consequence, the tax laws have needed to become more complex — as noted previously, the income tax laws have grown from 526 pages in 1975 to be almost 6,000 pages in 2009. This complexity makes it hard for taxpayers with more complicated affairs to have the certainty they need to comply with the law.

At the same time, the ATO has assumed a greater role in administering non-tax policies, which themselves have become more complicated to administer. The ATO administered transfers totalling almost $17 billion in 2008–09 — including paying around $8 billion to over 8.5 million taxpayers as part of the Government's economic stimulus package. Even apart from the one-off stimulus package, there has been a significant growth in the payments and transfers administered by the ATO in recent years. The ATO administers transfers to families and individual taxpayers such as the private health insurance offset and superannuation co-contribution payments. It also administers a variety of fuel schemes that affect businesses, and provides industry assistance via the research and development tax offset and large-scale film production tax offset (ATO 2009b). The ATO is one of only a handful of tax administrators in the OECD that also has responsibility for administering student loans and valuations (OECD 2008). The ATO also administers significant aspects of Australia's retirement income systems, as well as the Australian Business Register.

In the course of meeting these demands, the ATO has grown into an organisation of more than 20,000 staff. It is the second-largest government agency, employing around 15 per cent of staff in the Australian Public Service (APSC 2008). The ATO's operating budget for 2008-09 was $3 billion (ATO 2009b).

Globalisation, technological progress and international competitiveness will influence how the system operates in the future and will add to the pressure on the ATO to perform at a high level. Taxpayers will continue to demand more tailored assistance and personalised services from the ATO (see Section G3 Local government). At some point, it might make sense to have a single national body, such as the ATO, collect and administer all the taxes in the federation (see Section G2 State tax reform). Such changes will increase the significance of the ATO, and increase the importance of its accountability and transparency.

Accountability of the ATO

The Commissioner of Taxation has a statutory independence to administer the main federal taxes. Independence means that the Commissioner makes the decisions about how to implement and apply the tax laws. Of course, disputes between the Commissioner and taxpayers are arbitrated through the legal system, with the courts providing authoritative interpretation of tax laws.

The ATO is an agency in the Treasury portfolio. Therefore, Treasury ministers are accountable to the Parliament for the performance of the ATO under the principles of responsible government. However, the Commissioner's statutory independence means ministers have limited involvement in the governance of the ATO. In particular, ministers have no power to direct the Commissioner's administration of the tax laws and exercise limited control over the management of the ATO.

The high-level management of the ATO is the responsibility of the Commissioner, three Second Commissioners and senior executives appointed by the Commissioner who are responsible for finance, operations, information and communications technology and human resources. They are supported by a number of consultative and internal committees that include members drawn from outside the ATO to contribute external perspectives (ATO 2009b).

  • The ATO's Audit Committee oversees the internal governance and assurance policies used to monitor and evaluate its internal controls. The committee also ensures that recommendations of external scrutineers are implemented, including those of the Australian National Audit Office, Inspector-General of Taxation and Ombudsman. The committee includes external representatives who bring high-level public and private sector experience and relevant financial expertise.
  • The ATO's People Committee supports the ATO Executive on people, culture and integrity issues. The committee includes representation from the Australian Public Service Commission, the Ombudsman's office and private sector companies. Other external advisers attend meetings on invitation.
  • The Change Program Steering Committee sets the direction, outcomes and priorities for the ATO's change program. It includes the ATO's information technology consultants and independent assurers.

The ATO also has a number of advisory panels that include external representation, such as the Public Rulings Panel, the General Anti-Avoidance Panel, the new Offshore Voluntary Disclosure Panel and the Wide Settlements Panel. In addition, there is an independent Integrity Advisor reporting to the Commissioner, and a Special Revenue Advisor seconded from the Treasury.

The Commissioner is required by law to report annually to Parliament on the operation of the ATO. The Commissioner also appears before parliamentary committees to explain the ATO's administration of the tax laws. In addition to the normal Senate estimates hearings, the ATO has attended biannual hearings of the JCPAA since 2007 to answer questions about the ATO's administration and to outline its future plans. While many stakeholders support these arrangements, the complexity of the tax system makes it difficult for parliamentarians to examine the operations of the ATO effectively. If Parliament had a better understanding of the difficulties experienced by taxpayers and the ATO it would also be in a better position to critically examine the tax laws it makes.

A number of agencies complement these parliamentary accountabilities by scrutinising different aspects of the Commissioner's work. The Australian National Audit Office conducts financial, performance and business support process audits on the ATO. The Ombudsman and the Inspector-General of Taxation both have review functions, each with differing perspectives but with some potential for overlap.

The Ombudsman's main role is to investigate and resolve taxpayer complaints about the ATO. It sometimes examines systemic administration issues. In 1995, the position of the Taxation Ombudsman was established to give a special focus to the handling of tax complaints. While the Ombudsman is available to assist businesses and individuals equally, in practice mainly individuals and owner-operated small businesses approach the Ombudsman.

The Inspector-General of Taxation reviews systemic tax administration issues. The office was established in 2003 to strengthen the advice given to the government about tax administration. The Inspector-General reports to the government on the way the ATO administers the tax system. Like the Ombudsman, the Inspector-General is able to investigate systemic tax administration issues that affect individuals or businesses. However, the Inspector-General has come to focus his activities on issues that affect mainly businesses, in part reflecting the Ombudsman's focus on individual taxpayer concerns.

The Ombudsman and the Inspector-General liaise with each other to avoid duplicating effort. However, there remains the potential for taxpayers to be confused about which body is the appropriate one to deal with a complaint about the ATO.

When compared with the resources of the ATO (more than 20,000 staff and an annual budget of around $3 billion), the resources committed to review the ATO by the Ombudsman and the Inspector-General are not substantial. The Ombudsman had an annual budget of around $20 million in 2008–09 and employed 152 staff, though this was to investigate all Commonwealth agencies, not just the ATO. In 2008–09, 1,422 complaints (7 per cent of all complaints) to the Ombudsman related to the ATO (Ombudsman 2009). The Inspector-General had an annual budget of around $2.2 million in 2008–09 and employed seven staff. During 2008–09, the Inspector-General completed four reviews and, as at the end June 2009, had five reviews under way (IGT 2009).

In the United States, relatively more funding is directed to the scrutiny of the Inland Revenue Service (IRS). The IRS has around 90,000 staff (IRS 2009) and is subject to scrutiny by the National Taxpayer Advocate, which has about 1,150 case advocates (NTA 2009). However, there are a number of explanations for this apparent disparity between Australia and the United States. To a great extent it reflects the more proactive role of the Taxpayer Advocate, especially in representing the interests of individual taxpayers in disputes with the IRS. In other comparable countries, such as the United Kingdom, the resources dedicated to scrutiny of the tax administration are similar to that in Australia.

Findings

Over the nearly 100 years of its existence, the ATO has assumed considerable responsibilities and powers. It has grown to become a large and modern organisation. Throughout this evolution it has recognised the value of engaging external perspectives into its management. The need for this expertise is likely to become greater as the ATO faces a range of future challenges.

The ATO is scrutinised by many bodies, including the Parliament, the Commonwealth Ombudsman, the ANAO and the Inspector-General of Taxation. However, the effectiveness of this scrutiny is dependent to some extent on the resources and other responsibilities of these institutions.

While the Ombudsman and the Inspector-General of Taxation perform valuable roles, they would be more effective if their roles were clarified to remove the potential for overlap between them.

While the Commissioner of Taxation is ultimately accountable to Parliament, the complexity of the tax system makes it difficult for parliamentarians to perform an active role in the cycle of public accountability of the ATO.

Independent surveys continue to find that Australians have a high level of confidence in the ATO. This was recognised by the JCPAA in its recent extensive review of the ATO.

Improving the accountability of the ATO

Recommendation 115:

A board should be established to advise the Commissioner of Taxation on the general organisation and management of the ATO. The board would not be a decision-making body and would have no role in interpreting the tax laws or examining individual taxpayer issues. The government would appoint members to the board.

Recommendation 116:

The government should clarify that the role of the Inspector-General of Taxation is to examine systemic tax administration issues that affect businesses.

Recommendation 117:

The government should ensure that sufficient resources are devoted to the functions of the Inspector-General of Taxation, the Australian National Audit Office and the Commonwealth Ombudsman, recognising their importance in maintaining a fair and efficient tax system.

Recommendation 118:

The Joint Committee of Public Accounts and Audit should examine reports of the Inspector-General of Taxation and the Commonwealth Ombudsman, and monitor the ATO's implementation of the recommendations in those reports.

An advisory board for the ATO

The independence of the ATO, together with its very significant powers and responsibilities, means that it should be subject to very high levels of public accountability and transparency. While the independence of the Commissioner needs to be preserved, governance arrangements need to strike a balance between maintaining that independence and getting the best performance from the ATO.

In the course of its consultations, the Review heard suggestions that the ATO should be overseen by a board of directors drawn from the wider community. These submissions pointed out that the revenue authorities in Canada, the United Kingdom and the United States are overseen by boards that include representatives with backgrounds outside the bureaucracy. A key function for these oversight boards is to inject a range of experience and perspectives into the management of those tax authorities. In line with this objective, all of these boards have a role in developing corporate strategies and plans. Significantly, though, none of them are involved in the interpretation of the tax laws or in the affairs of particular taxpayers. This limitation preserves the independence of the tax administrators in relation to the application of the tax laws. In the United States, the IRS oversight board was established in response to a general crisis of taxpayer confidence in tax administration (US Congress 1997). This is not the situation in Australia, where the vast majority of taxpayers are satisfied with the performance and approach of the ATO.

The suggestions for an oversight board also draw on the experience of governance arrangements in the private sector. Private sector models can provide some insights about appropriate arrangements for the public sector, but significant limitations apply in the public sector context. These considerations were canvassed in the 2003 Uhrig review of the corporate governance of public sector authorities which found that executive management, rather than a board of management, is likely to be the most effective governance arrangement for an organisation that essentially delivers government services (Uhrig 2003). The Uhrig review found that the presence of an oversight board often obscured the accountability of a statutory authority to a minister. These were considerations in the government decision in 2005 to wind up the governing boards of Medicare Australia and Centrelink and to introduce executive management.

While the ATO is not subject to the same day-to-day ministerial direction and control as many other government agencies, it is subject to many other accountabilities and lines of reporting. The Commissioner also has very specific personal responsibilities under the tax laws and other laws such as the Financial Management and Accountability Act 1997 and the Public Service Act 1999. The Review does not consider it appropriate to disturb these existing accountabilities and has concluded that the ATO should continue to be led by the Commissioner as an executive manager directly accountable for the performance of the organisation.

However, the Uhrig review found that the accountabilities of a statutory authority could accommodate an advisory board that advises the chief executive in a non-binding manner. This Review considers that such an advisory board should be established for the ATO (see Recommendation 115). This would usefully add to, formalise and elevate the existing consultative arrangements that support the Commissioner's management of the ATO — such as the participation of externals in the ATO's Audit Committee, People Committee and Change Program Steering Committee. This should not be seen as a criticism of the current management of the ATO. Rather, the Review's aim is to put the ATO in the best possible position to meet the significant challenges of the future. Though the current management arrangements have served the system well in the past, the pace and significance of changes to the ATO's work mean that it could benefit from additional management arrangements that offer an even greater range of expertise and perspectives.

The creation of an advisory board would increase the ability of the ATO to benefit from external experiences and perspectives. The discipline of a regular external review of the ATO's corporate reports and plans, in addition to that already carried out by the JCPAA, would also ensure the ATO is suitably focused on the strategic challenges of the future. It would also contribute to a more open and transparent environment, which would promote greater trust and confidence in the operation of the system.

Responsibilities of the ATO advisory board

The advisory board would not be involved in the interpretation of the tax laws or in the affairs of particular taxpayers. This limitation would preserve the Commissioner's independence in relation to the administration of the tax laws.

The advisory board would provide the ATO with more high-level strategic advice and apply private-sector experience and expertise to improve the ATO's performance. It should also review the ATO's management practices to ensure the highest standards of corporate governance continue to be maintained. It would bring an additional diversity to the mix of expertise, experience and skills available to the ATO, including in areas such as information technology, human resources, finance and communication.

The board would not be a decision-making body and is intended to assist the Commissioner to exercise his existing role, rather than to interfere with the Commissioner's responsibility for running the ATO. While ultimate responsibility would remain with the Commissioner, the role of the advisory board would be to advise the Commissioner about the general organisation and management of the ATO, including advising on the ATO's:

  • strategic plans;
  • financial performance and budget;
  • corporate values;
  • human resources strategies; and
  • management of significant resources and contracts.

The advisory board would complement the executive management arrangements that already exist in the ATO. As noted above, the ATO Executive is currently supported by many committees and forums that include external representatives. The advisory board would bring together other external representatives into another body. This board would provide advice to the ATO Executive, drawing on the information generated by the ATO's management committees. For instance, the advisory board could be expected to complement the ATO's People Committee in advising the Commissioner on strategies to increase the diversity of skills and experiences held in the ATO.

The advisory board will add to the JCPAA's review of the ATO's governance reports and corporate plans. However, whereas the JCPAA meets the Commissioner twice a year, the advisory board would be a standing source of advice for the Commissioner.

Composition of the ATO advisory board

The size of the advisory board would need to take into account the size and complexity of the ATO's operations and the board's proposed role. A board of between six and nine members would be consistent with current thinking about the most effective number of members for boards (Uhrig 2003). However, over time the size of the board might change in line with changes in the responsibilities of the board and of the ATO.

In line with the responsibilities of the board, the government should appoint members with regard to the need for the board to have practical expertise in finance, information and communications technology, and human resources. Of course, the ATO should continue to access these skills and experience through other avenues as it does now, although over time it might look to rationalise these in the context of new arrangements. Board members would not be selected to represent the interests of particular organisations or interests and would not necessarily be tax experts. Instead, the government should select board members according to their personal ability to contribute to the good management and organisation of the ATO.

As noted above, the ATO could have a greater role in administering State taxes in the future (see Section G2 State tax reform). If so, it might be appropriate for the States to have a closer relationship with the ATO. One way to achieve this would be to give the States a role in the selection of some advisory board members.

Clarifying the roles of the Ombudsman and the Inspector-General of Taxation

As outlined above, the responsibilities of the Commonwealth Ombudsman, the ANAO, the JCPAA and the Inspector-General of Taxation overlap considerably. This has the potential to cause confusion and uncertainty and to involve a wasteful duplication of effort.

One approach to this problem would be to merge the tax investigation functions of the Ombudsman and the Inspector-General into one organisation, and limiting the scope of scrutineers, including the ANAO and the JCPAA, from reviewing matters otherwise covered. Potentially, this would provide a more complete overview of the issues faced by taxpayers in their dealings with the tax system. In particular, it would improve the ability of the organisation to identify systemic issues arising from individual taxpayer complaints. This could help to resolve problems before they impact on many taxpayers. Taxpayers could also benefit by being able to seek assistance on tax administration issues from a single agency. Finally, there might be modest administrative efficiencies in amalgamating the two functions into one agency, and in reducing the impact on the ATO of overlapping scrutiny.

Having the Ombudsman perform the Inspector-General's role would involve the Ombudsman reporting to Treasury ministers on tax administration issues as well as generally reporting to the Parliament. Some taxpayers may see this as reducing the Ombudsman's independence. Another potential concern is that resources intended for the review of systemic issues might be diverted to addressing individual taxpayer complaints.

Another option is that the Ombudsman's responsibilities for investigating tax issues could be performed by the Inspector-General. However, this might lead to confusion since it would mean tax complaints are dealt with differently from complaints against other government agencies. Importantly, such a change would remove the ability of the Ombudsman to apply the lessons learnt from investigations of other areas of government administration to tax issues (and vice versa), which is a significant advantage of the current arrangements. Another consideration is whether transferring the complaint-handling function to an Inspector-General within the Treasury portfolio may result in a perceived loss of independence in reviewing taxpayer complaints. A final consideration is whether tax administration issues would have a sufficient profile within an Ombudsman's office that is responsible for reviewing complaints against all government agencies, but which has a specific role of Taxation Ombudsman focusing on the ATO. The separate office of the Inspector-General has established a strong profile with taxpayers, especially within the large business community. It has allowed for a specific focus on tax administration issues and encouraged regular interaction with taxpayers, tax professionals and the community.

So, there are considerable advantages to maintaining the separate offices and roles of the Ombudsman and the Inspector-General of Taxation. However, as noted above, both have a role in examining systemic tax administration issues and there is a need to clarify these responsibilities to reduce the risk of overlap. Much of the potential for overlap could be removed by directing the Inspector-General to investigate systemic tax administration issues that affect businesses (see Recommendation 116). This would formalise the current practice, an arrangement that has developed through consultation between the Ombudsman and Inspector-General, and in response to the business community's concerns with systemic tax administration issues. Similar arrangements could apply to address the potential duplication arising from reviews by the ANAO and the JCPAA.

Resourcing the Ombudsman, the ANAO and the Inspector-General of Taxation

It is imperative that the Ombudsman, the ANAO and the Inspector-General are sufficiently resourced to adequately perform their important roles.

It is not clear whether there is an unmet demand for reviewing tax administration issues in Australia. In relation to taxpayer complaints, there has been a downward trend in recent years, which the Ombudsman attributes to the ATO's improved handling of complaints and efforts to improve dealings with taxpayers. In relation to systemic reviews, the Inspector-General appears to have met community expectations for the number, scope and detail of investigations. However, these are important matters and the government should examine the resource needs of the Ombudsman, the ANAO and the Inspector-General in more detail to ensure that they are able to perform their roles effectively (see Recommendation 117).

Improving accountability to the Parliament

As noted above, the ATO is ultimately accountable to Parliament. The Review has not sought to disturb these accountabilities, but considers that improvements can be made to make Parliament more effective in holding the Commissioner to account for the performance of the ATO.

An important way in which Parliament operates is through its committees. The JCPAA holds Australian government agencies to account for the lawfulness, efficiency and effectiveness of their operations. In 2008, the committee concluded a major review into the operation of the tax system. Following that report, the ATO has attended biannual hearings of the JCPAA and provided it with a significant range of performance information. The Review has considered ways in which the JCPAA might provide more active oversight of the ATO on behalf of the Parliament.

Some submissions to the Review have expressed concerns that the ATO is not sufficiently accountable for its responses to recommendations of the Inspector-General of Taxation and the Ombudsman. These submissions suggested there should be a power to compel the Commissioner to accept and implement these recommendations. However, the Review does not consider it appropriate for these recommendations to be binding on the ATO, which is ultimately responsible for the administration of the tax laws. Nor is it appropriate that these recommendations be binding on the Treasury or the government.

Instead, the Review considers that the JCPAA should take a role in monitoring the ATO's actions on these recommendations (see Recommendation 118). This would be similar to the role the JCPAA currently performs in examining government responses to reports of the Auditor-General. Like the Auditor-General, the Inspector-General and the Ombudsman perform roles for which Parliament itself is not well suited. The Inspector-General and the Ombudsman have the expertise needed to assess whether the ATO is administering the law in a fair and reasonable way. In reviewing the reports of the Inspector-General and the Ombudsman, the JCPAA could require the ATO to explain whether it has implemented the recommendations made in those reports and its reasons for disagreeing with any of those recommendations.

The JCPAA's primary purpose in reviewing these reports would be to assess whether the ATO has responded appropriately to those reports. In most cases the JCPAA would be expected to avoid going over issues covered during the Inspector-General's and the Ombudsman's inquiries and would focus instead on any disputed issues and on whether the ATO has acted on its responses to the recommendations.