The Australian National Audit Office (ANAO) has become the latest in a line of organisations to attack the 'private rulings' system operated by the Australian Taxation Office (ATO). They don't work in taxpayers' best interests because of inadequate internal checks and balances, says its audit review.
The product ruling system was introduced in 1998 to clamp down on the explosion of tax minimisation schemes, which the Tax Office said had resulted in more than $4 billion in deductions leaching from the system. Tax Office rulings guarantee taxpayers how their investment will be taxed under the law.
The ANAO says the system of private binding rulings issued to individuals on the legality of tax minimisation schemes undermines consistency, fairness and certainty. That's a slightly (or very) odd statement considering that the whole purpose of the private rulings system is to give certainty. The private rulings system is also in line with practice in most major OECD economies, which all operate clearance systems of one kind or another. They're almost unavoidable, given the complexity of modern tax legislation. So the attack on the private rulings system isn't quite what it might seem.
Either the ATO is operating in a less than transparent way, which would justify these attacks on the grounds of fairness, or else the attacks are politically motivated, which given Australia's highly partisan history and the imminence of an election may be the more credible scenario.
It's sure however that the ATO has come in for a lot of justified criticism lately, especially with regard to tax minimisation schemes; but the problem has been more one of slowness to respond rather than over-eagerness to slap approval notices on rich men's tax shelters.
The ANAO's report, tabled in parliament yesterday, said while the ATO had taken steps to fix problems identified in past reports, more work was needed. The ATO issued 89,779 private rulings in the last financial year compared to 133 public rulings, which the report says were generally administered well.
"This positive assessment for public rulings contrasts with the situation for private rulings where, at the time of the audit, the lack of integration of systems and inadequate system controls undermine certainty, fairness and consistency of treatment for taxpayers," the report said. The Tax Office does not know how much revenue is being lost, or even gained, through aggressive tax minimisation schemes and other investments it has approved under its controversial rulings system, according to the report.
The ATO came in for a lot of probably justified criticism as regards its internal organisation and IT systems. Tax offices worldwide are at the bottom of the league (below it, often) on the IT scale. There is a law of nature that says c = pb squared, where c = cock-up propensity, p = population and b = bureaucracy. Evidently Australia doesn't square up to the US, say, or the UK, in this competition, but it does quite well on its own terms, and it has nothing to learn from its godfather, the UK's Inland Revenue in terms of obscurantism or incoherence.
Fragmented IT systems, says the report, made it hard for staff to access information which slowed down the process, while taxpayer details were stored on a central database, contrary to ATO security rules. Private rulings were issued from numerous regional offices and there was not enough information to assess the costs involved, such as staff time.
Labor assistant treasury spokesman Kelvin Thomson said it was time the government issued a `please explain' notice to the ATO over private rulings. "Some private rulings have been a licence to print money for those who have been able to obtain them, and rulings in the area of employee benefits and controlling interest superannuation continue to threaten at least $2 billion in revenue," he said.
The report recommended the ATO better prioritise its public rulings and develop standards on timeliness, cost, quality and quantity for both public and private rulings.
The ATO cravenly agreed to all 12 recommendations. In fact it had already promised to publish private rulings after an inquiry by former National Crime Authority chairman Tom Sherman last year.
Tax Commissioner Michael Carmody said the report endorsed ATO efforts to fix problems with the system.
"Over the years we have been continually improving the way we provide advice to the community to increase taxpayers certainty and, as the ANAO recognises, we continue to do so," he said.
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