Report on Aspects of Income Tax Self Assessment
This Chapter deals with those issues raised in Chapter 6 of the discussion paper that did not neatly fall within the main themes of earlier Chapters. The Review has received a number of submissions commenting on these issues.
The discussion paper explained that one way to give taxpayers earlier finality would be for the Tax Office to undertake more pre-assessment examinations of returns, especially for taxpayers with straightforward affairs. This option received considerable support from submissions.
The Review has received advice from the Tax Office that it is exploring systems that will allow it to bring finality for a range of taxpayers with simple affairs at the time of their assessment. Moreover, other Review recommendations effectively deliver much of the outcome that was sought by this method (for example, the recommendations relating to more timely Tax Office advice and the extension of pre-assessment agreements would provide the type of early finality that was intended under this option).
Therefore, the Review has concluded that no recommendation is required at this time.
Many submissions agreed that large sections of the taxpaying community do not fully understand their responsibilities under self assessment, or the consequences of getting their returns wrong. The Tax Office has taken some steps in recent years to alert taxpayers to their responsibilities. For example, current returns show modified signature blocks to alert taxpayers to their obligations under self assessment. However, the Review concludes that more needs to be done.
The Tax Office should take further steps to make it clear that a notice of assessment can be reviewed and amended. These steps could include:
The discussion paper invited comment on whether an appropriate balance existed between the Tax Office and the taxpayer when it comes to formal disputation. In particular, the paper invited comment on whether sufficient alternative dispute resolution processes existed within the current governance framework, or whether additional mechanisms were needed, possibly modelled on the publicly funded taxation advocate that exists in the United States.
The majority of submissions expressed the view that, between the Tax Office’s internal complaint and review mechanisms, the Tax Ombudsman, the Inspector-General of Taxation, the Small Taxation Claims Tribunal and the Board of Taxation, sufficient review mechanisms have been established in the current governance framework.
However, some submissions argued that changes were needed to the Tax Office’s Test Case Litigation Program,63 to improve its transparency and appearance of objectivity.
One of the issues raised was the use of the Program to test the efficacy of particular tax arrangements. Further issues related to the absence of clear criteria for selecting cases and, for cases where funding is rejected, concerns that the Tax Office does not generally communicate the reasons for rejection to applicants.
The Tax Office has published criteria for the Program on its website and has assured the Review that reasons are provided to applicants when applications are rejected. Funding test cases for schemes and similar arrangements may be done under the Program, where important principles are in dispute and it may be unfair to single out an individual participant and expose them to significant costs.
The government should request the Inspector-General of Taxation to evaluate the operation of the Tax Office’s Test Case Litigation Program, with particular focus on:
A number of options canvassed in the discussion paper had the primary purpose of reducing compliance costs for taxpayers. These options related to:
- the review of tax agents’ systems by the Tax Office
- a taxpayer’s obligation to keep records and provide information to the Tax Office on request
- the appropriateness of the lodgment deadlines under the Tax Office’s lodgment program.
Most of the submissions received by the Review suggested that compliance cost reductions could be achieved if the Tax Office:
- made better use of information that is available from third parties
- outlined the basis for future requests for information well before the commencement of the income year (so that businesses have sufficient time to design the most cost effective means of collecting the information).
Some submissions suggested that compliance costs could be reduced if the Tax Office consulted more with the tax profession in the development of return form stationery and issued draft stationery well before the end of the income year (so that businesses have time to put into place systems and documents to support that stationery).
Several submissions commented that significant compliance cost savings could be achieved if some of the more onerous recordkeeping obligations were streamlined, particularly in the areas of fringe benefits tax, motor vehicle log books, uniform capital allowances, substantiation, non-commercial losses, transfer pricing and capital gains tax.
In the case of the review of agents’ systems, a handful of submissions suggested that compliance costs could be reduced if the Tax Office relied on the quality assurance programs deployed by an agent’s professional association, rather than subjecting agents to additional Tax Office reviews.
Finally, although several submissions thought it desirable for more concessional lodgment deadlines to apply, there was no suggestion as to how this might be achieved without pushing deadlines into the following income year, an outcome that could have significant revenue ramifications.
Rather than make specific recommendations in each of these areas, the Review has concluded that suggestions on these topics should be referred to the Tax Office for their detailed consideration and appropriate action.
Most provisions of the law dealing with a taxpayer’s liability are self operating, in that they require no decision of the Tax Office to have legal effect. However, the law also includes provisions that give the Tax Office the power to make decisions (discretions), or allow the taxpayer to make choices (elections) affecting their liability.
Before the release of the discussion paper, practitioner and industry groups had expressed concern that self assessment cannot work properly where the calculation of a taxpayer’s liability and lodgment of the return depends on a decision or determination by the Tax Office. Discretions are problematic because taxpayers cannot exercise the Commissioner’s powers themselves and, under self assessment, the Tax Office will not normally consider the issue at the assessment stage.
A factor that reduces the uncertain impact of some discretions is that the Tax Office makes public rulings about how it will exercise certain discretions64 and taxpayers can request private rulings on their particular circumstances.
The majority of submissions responding to the discussion paper favoured retaining some discretions, especially those that empower the Commissioner to relieve the taxpayer of the effects of not complying with every detail of specific regimes (for example, substantiation). Although the discussion paper asked that submissions identify the most important discretions to be removed or rewritten, few have been able to do so.
The Review has concluded that all remaining discretions affecting the calculation of a taxpayer’s liability should be reviewed to see if they can be replaced with objective tests.
Treasury should conduct a detailed review of discretions that go to the determination of a taxpayer’s liability and, wherever practical, recommend replacement tests that a taxpayer can apply at the time of lodgment.
Under self assessment, the Tax Office normally does not look at elections at the time of assessment. Consequently, taxpayers are not required to lodge most elections with the Tax Office — the taxpayer simply decides which provision of the income tax law is to apply in calculating a component of taxable income and keeps a record that verifies the calculation. Whether the taxpayer has made an election is evident from the taxpayer’s records and the calculation of taxable income as disclosed in the tax return.
Taxpayers are generally required to make elections by a particular date, usually on or before the due date for lodgment of a return. The Tax Office can extend the date for lodgment of the return and the time for making many elections.
A small number of elections, because of their nature, must be in writing and/or lodged with the Tax Office. For example, a primary producer who elects to opt out of the averaging system must advise the Tax Office in writing so that the Tax Office, in issuing an assessment, can calculate the taxpayer’s liability correctly. If an election affects the tax treatment of two or more taxpayers, usually those taxpayers must make the election jointly in writing. This prevents difficulties that might arise if taxpayers making joint elections claim to have made different elections.
Occasionally there is controversy about aspects of a particular election, such as the implications of making it, the time allowed for it, and whether the Tax Office has a power to extend that time. For example, earlier this year tax professional bodies argued that the requirements to make a valid family trust election were too inflexible. The Government responded to these concerns by announcing that it would allow family trust elections to be made at any time in relation to an earlier income year, subject to certain conditions.65
Submissions raised some significant law design issues about elections, most of which relate to when a taxpayer can exercise an election. One suggestion was that, in future, ‘drop dead’ dates should be avoided, while another proposal was that the Commissioner should have a general power to extend election times, subject to express exceptions. Other suggestions were that taxpayers should be able to make an election any time within the amendment period or that the Tax Office should have the power to accept a taxpayer’s changed election where this is reasonable and appropriate.
One submission went further by suggesting a list of matters that should be taken into account in designing future elections. The matters included whether the conditions for making the election are reasonable and achievable and whether the consequences of not making an election are proportionate to any mischief involved.
The Review concludes that these issues should be considered in detail in the context of improving tax law design.
Treasury should conduct a review of the design of elections in the law and establish guidelines for framing those elections in the future.
63 . The Test Case Litigation Program was established in the 1995-96 financial year to provide financial assistance to taxpayers to undertake certain litigation in relation to disputes with the Tax Office.
64 . For example, Australian Taxation Office 1997, Taxation Ruling TR 97/24, Australian Taxation Office, Canberra, explains how the Tax Office exercises the discretion (in section 900-195 of the ITAA97) to grant relief where a taxpayer fails to substantiate expenses.
65 . Costello P (Treasurer) and Hockey J (Minister for Small Business) 2004, Small Business Tax Simplification, Parliament House, Canberra, 11 May 2004.