Transparency
8.48 The IGT is of the view that key reasons for transparency or providing information about the risk assessment process are to engender community confidence and improve taxpayer behaviour and practices.
8.49 Transparency of the ATO’s risk assessment framework enhances community confidence that the ATO chooses taxpayers for audits on an objective and coherent basis. A lack of transparency may increase taxpayer perceptions that audit selection decisions are arbitrary or subject to individual officer discretion.
8.50 The publication of details such as risk factors or risk filters facilitates objective verification of the basis for decisions. The publication of the small business benchmarks is a good example of this transparency, where benchmark ranges are published on the ATO’s website. Where taxpayers are selected for compliance activity due to variances from the benchmarks, the taxpayer can refer to the website to verify this basis.
8.51 Other examples of transparent approaches include the publication of the Large
Business and Tax Compliance (LBTC) booklet and Tax compliance for small-to-medium enterprises and wealthy individuals (Tax Compliance) booklet. Although the ATO does
not give the same specific detail as in the case of the small business benchmarks, the publications do show, to some extent, how the ATO applies their risk differentiation framework, as well as what taxpayers can expect from the ATO by way of compliance activities and ATO officer conduct.
8.52 In considering what level of transparency to afford a certain risk assessment process, the ATO needs to balance the need for community confidence in a robust risk-based system and the risk of taxpayer manipulation.
Communication
8.53 The IGT acknowledges that the ATO communicates through tailored communication as well as general communication. Examples of general communications include the annual Compliance Program (now Compliance in focus) as
376 Organisation for Economic Co-operation and Development, Forum on Tax Administration, Compliance Risk
well as those mentioned above, that is the small business benchmarks and LBTC and Tax Compliance booklets.
8.54 Examples of tailored communications, on the other hand, are the RDF notification letter for taxpayers in the large business market segment and small business benchmark letters for those operating in the cash economy.
8.55 How the ATO communicates risk related information with taxpayers depends on the number involved and the resources required. To facilitate positive change in taxpayer behaviour, taxpayers must be provided with adequate information to understand:
the ATO’s concerns including the risk hypothesis that generated the enquiry; the action that the ATO expects them to take (for example review your records,
improve your governance arrangements); whether a response is required; and
the action the ATO will take as a consequence of the taxpayer’s response or non-response.
8.56 It should also be noted that the ATO must recognise the potential for unintended outcomes resulting from inadequately designed and tested communications. For example, in the case of the small business benchmarks, the ATO sent letters to taxpayers where it did not expect a response from a large proportion. Despite this, many taxpayers responded where this was not required. This caused considerable concern and uncertainty as the ATO initially did not acknowledge these letters.
8.57 Before embarking on large scale communication campaigns, the ATO should ensure that it has accounted for potentially unintended behavioural responses. This may take the form of community consultation, letter testing, or using a limited pilot. 8.58 By way of example, the ATO had intended to issue letters to large numbers of lower risk SME taxpayers, advising them of their lower risk categorisation. Importantly, the letter was intended to be advisory and no action was required from the taxpayer. Consultation with tax practitioners through the ATO Tax Practitioner Forum (ATPF) revealed that such a letter was likely to increase compliance costs, with taxpayers inclined to contact their agent to discuss the letter. As such, the ATO discontinued this initiative.
8.59 The IGT has also noted in his, Review into the ATO’s Compliance Approach to
Individual Taxpayers — Income Tax Refund Integrity Program (ITRIP Review), the
potential benefits in having regard to research from the Behavioural Insights Team within the UK Cabinet Office. A key to this approach is the use of randomised controlled trials to assist in developing communication approaches that best achieves the desired behavioural outcome. The ATO currently undertakes a range of testing, such as ‘user-testing’ and ‘simulation centre’ projects as prototypes to determine the likely response of taxpayers to ATO communication approaches. Randomised
controlled trials, however, are often considered to be the ‘gold standard’ in generating that evidence.377
8.60 The IGT also notes that the ATO recognises the value of randomised controlled trials as ‘the ideal evaluation methodology to infer program effectiveness’ including with respect to compliance activities.378 However, the application is not widely adopted as a standard across the ATO.
Communicating outcomes and due process
8.61 Pursuant to the legal principles of natural justice, affected taxpayers or tax practitioners must be afforded a right of review of their initial risk rating particularly where they are categorised at the higher levels which may potentially result in further compliance activity.
8.62 How such a right of review should operate and be communicated to the taxpayer with respect to the large business market is detailed in the IGT’s LB&I Review379 and is augmented in Chapter 3 of this report. In this market segment, the ATO has developed a tailored letter, regarding the taxpayer’s risk rating, which is addressed to the board or CEO rather than the tax manager. In these circumstances where the ATO is effectively issuing a regulator’s opinion, it is particularly important that the ATO ensure it has the most accurate and up-to-date information by giving the taxpayer an adequate opportunity to comment on such information before issuing the letter. Without such due diligence, this type of ATO action may impede behavioural change because of a lack of confidence in the ATO’s analysis.
8.63 It should be noted that such rights of review are also considered in Chapters 4 and 7 of this report with respect to SME taxpayers and tax practitioners.
PROPORTIONALITY OF ATO COMPLIANCE APPROACH
8.64 The IGT’s view is that the ATO’s compliance approach, and potential imposition of compliance costs, should be proportionate to the level and type of risk presented by the taxpayer as well the information confidence and cost levels. Where taxpayers pose a lower risk, less intense enquiries should be made of them. It is important, therefore, that the ATO has processes in place to measure the actual risk, as opposed to the perceived or anticipated risk, posed by the taxpayer or taxpayer population.