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Focus: Tax – July 2008

Inspector-General of Taxation reports on GST audits for large taxpayers

In brief: The Inspector-General of Taxation has released a report that makes recommendations for the improvement of the Tax Office's administration of GST audits of large taxpayers. Partner Ross Stitt (view CV), Senior Associate Chris Peadon and Lawyer Pouyan Afshar discuss the report's recommendations.

How does it affect you?

  • The Inspector-General of Taxation has identified problems with the Tax Office's administration of GST audits and has made a number of recommendations aimed at improving the Tax Office's procedures in this regard.
  • The recommendations include suggested legislative changes. It is therefore important that large taxpayers are aware of the Inspector-General of Taxation's recommendations, which are likely to be considered seriously by the Federal Government.

The Inspector-General of Taxation

The office of the Inspector-General of Taxation (the IGOT) was established in 2003 as a separate agency to review the systems established by the Tax Office to administer tax laws and to report and make recommendations to the Federal Government on how these systems could be improved. The IGOT has released a number of reports that have made findings on areas of concern for taxpayers and recommendations aimed at dealing with the relevant issues. (See our previous Allens Focus articles from 13 June 2007 and 11 August 2006.)

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The report

In its latest report, the IGOT dealt with three main issues:

  1. Penalties and the General Interest Charge (GIC) imposed by the Tax Office.
  2. Matters relating to the conduct of audits, in particular, communication between the Tax Office and large taxpayers.
  3. The reporting of GST audit results by the Tax Office.

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Penalties and GIC

The IGOT found that 'there were systemic issues which adversely affected the Tax Office's imposition of shortfall penalties at the initial audit stage in a significant percentage of large taxpayer GST penalty cases'. The IGOT also stated that a majority of cases examined during the review suggest that 'the imposition of a general interest charge is inappropriate in relation to certain 'procedural' compliance adjustments which are revenue-neutral and which are made as a result of a GST audit'.

The IGOT identified the following cases where the imposition of GIC was 'inappropriate', namely where:

  • the Tax Office believed that a taxpayer was 'reckless' despite the matter being legally arguable;
  • penalties had been applied at full rates despite the taxpayer having previously disclosed the nature of the adjustment to the Tax Office; and
  • penalties had been applied despite the taxpayer having obtained and followed credible legal advice that the position the taxpayer was adopting was correct.

In a number of these cases, GIC was ultimately remitted but only after the taxpayer had lodged an objection.

The IGOT recommended that:

  • the Tax Office's existing policy on wash transactions (ie revenue neutral transactions) be altered so that full remission of GIC on a one-off transaction error becomes the norm rather than the exception;
  • the Tax Office issue a specific policy to reflect that it will generally fully remit GIC in cases where a wrong entity has accounted for the GST; and
  • the Tax Office deal with irregular behaviour in accounting for GST (with no revenue loss) under the existing penalty system rather than the GIC regime.

The Tax Office rejected these recommendations, stating that it is reluctant to effect policy change under the current legislative regime. In response, the IGOT recommended that the Federal Government consult with the community on the need for legislative changes that would require the Tax Office to implement and adopt appropriate positions on penalties and GIC.

The IGOT also recommended that in cases where a voluntary disclosure has been made, the full GIC rate should not be charged. It recommended that in this scenario the base rate should be charged, excluding the 7 per cent GIC top-up. The Tax Office rejected this recommendation arguing that the decision to remit some or all of the GIC is discretionary and making a voluntary disclosure is but one factor the Tax Office considers when exercising its discretion. The Tax Office also stated that the imposition of GIC in all previous cases, even involving voluntary disclosures, has been appropriate.

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Reporting of data on GST audits by the Tax Office

Concern had been raised by taxpayers with the IGOT that the Tax Office's reporting of the results of its GST audits may have given an overly negative picture of compliance levels among large taxpayers. The IGOT recommended that the analysis and reporting practices of the Tax Office be improved. The Tax Office agreed with this recommendation.

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Other issues with GST audits

The IGOT discussed some administrative problems with the conduct of GST audits by the Tax Office. In relation to the operation of the margin scheme, the report said that 'the Tax Office has inappropriately dealt with a number of these cases by failing to supply taxpayers with reasons why their valuations do not meet Tax Office requirements'. The review found, moreover, that the Tax Office did not have GST audit timeframe benchmarks, which meant that, in some cases, it was 'taking far too long to finalise some audits'. Finally, with regard to communication issues between the Tax Office and large taxpayers, the IGOT found that large taxpayers do not always receive letters notifying them of the commencement and finalisation of audits and that taxpayers are being 'denied access to the relevant Tax Office decision maker on their case'. The IGOT's recommendations were focused on improving communication between the Tax Office and taxpayers and dealing with some of the other abovementioned issues. These recommendations were all agreed to by the Tax Office.

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Observations

It remains to be seen how the Tax Office will implement the IGOT's recommendations that it has accepted and whether any of the recommendations to the Federal Government will be adopted.

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