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  • The OECD four pillars of compliance

    A taxpayer’s compliance is determined based on the extent they meet the following obligations under the OECD four pillars of compliance:

    Registration

    As significant contributors to the Australian tax system, we are confident large corporate groups who should be registered in the system are registered. With sophisticated business operations of $250 million or more in revenue annually, these groups are well aware of their tax obligations.

    Lodgment

    Large corporate groups predominantly lodge on time. These businesses have significant internal capacity and capability to lodge, so failure to lodge is likely to be symptomatic of broader issues within the business.

    Of those that don’t lodge on time, many are late by less than one month and most are late by less than three months. We have specific engagement strategies for these entities and have already seen an improvement in the number of entities lodging on time. From 1 July 2017, there are also new higher penalties for significant global entities (annual global income of $1 billion or more) who fail to lodge on time.

    Occasionally we may find individual entities within a large corporate group not meeting their lodgment obligations. Often this is due to the entities being dormant or non-trading, which is not a revenue risk under ordinary circumstances.

    Large corporate groups – lodgment performance, 201617

    83.3% on time, 9.5% late, 2.2% yet to be lodged.

    Correct reporting

    Measuring assurance and confidence in tax consequences

    In 2014, the ATO adopted tax assured as a performance measure and we published first estimates for the 2015–16 year in our annual report for 2017–18. We adopted this measure, in line with the OECD paper Measures of Tax Compliance Outcomes – A practical guide.

    In simple terms, tax assured reports the amount of tax paid by taxpayers in whom we have justified trust they are paying the right amount of tax. We use a structured approach to decide whether a taxpayer is paying the right amount of tax. You can find out more about this approach in How we gain confidence the right amount of tax is being paid.

    More recently, we have introduced another parallel coverage-related measure we use internally. This measure quantifies the level of economic activity reported by large corporates that we are confident results in appropriate tax outcomes. Ultimately, our goal is to be confident, and to provide the community with confidence, that as many companies as possible are paying the correct amount of tax, based on their economic activity.

    See also:

    Preventative action

    We undertake a range of activities aimed at preventing non-compliance. We do this across the large corporate groups population generally, and through direct action with the largest taxpayers in this population. You can find out more in Population wide approaches to preventing non-compliance and how we engage with specific taxpayers in Active prevention: one-to-one.

    We have introduced and are implementing performance measures for these activities. We reported on tax assured for the first time in our 2017–18 annual report.

    Our estimates of tax assured for the 2015–16 income year, for the large corporate groups covered by our Top 100 and Top 1000 programs, was $19 billion in income tax. These groups represent approximately 70% of the large corporate groups population and approximately 94% of income tax reported by that population.

    See also:

    Corrective action

    Our compliance program for large corporate groups involves around 550 activities each year, including reviews and intensive audits. Corrective action targets those cases where taxpayers seek to push the boundary of acceptable tax planning. We identify these cases based on intelligence, data analysis, and risk assessments.

    Where we suspect a particular arrangement is being used by multiple large corporate groups we address the potential non-compliance in a targeted and coordinated way. This includes investigating both taxpayers and advisers we suspect are involved. We also provide early warning to the market of our concerns, often in the form of a taxpayer alert.

    Results from our compliance activities

    Our compliance activities and the results we obtain act as a visible deterrent against large corporate groups choosing not to comply with their Australian tax obligations.

    The significant fluctuation in the outcomes of our corrective action each year reflects the characteristics of the large corporate groups population:

    • There are low levels of systemic tax avoidance, so we don’t have a regular program of audits on the same fact pattern leading to similar audit results across years.
    • The size of the taxpayers and their transactions is such that a single audit case may amount to significant sums in additional tax payable.
    • Complex transactions may be subject to multi-year investigations and subsequent litigation before the taxpayer pays additional taxes and penalties.
    Corrective action targeting large corporate groups income tax, 2011–12 to 2017–18

     

    2011–12
    $m

    2012–13
    $m

    2013–14
    $m

    2014–15
    $m

    2015–16
    $m

    2016–17
    $m

    2017–18

    Total debits (liabilities) (see note 1)

    1,633

    2,147

    1,602

    2,471

    1,354

    3,659

    3,699

    Audit yield (cash)

    636

    1,852

    1,011

    1,685

    703

    1,332

    2,855

    Tax losses denied

    583

    1,539

    1,170

    1,462

    680

    759

    914

    Note 1: Liabilities raised in a given year may cover multiple years of assessments and include interest and penalties

    The complexity inherent in the law and the business affairs of large corporate groups can lead to significant differences in interpretation of how the law applies in a given circumstance. Taxpayers can and do dispute amended assessments made by us, sometimes all the way to the courts. The result is not always in our favour. Sometimes we settle disputes for a lesser amount than originally assessed. This means the additional cash we collect from an audit doesn’t always equal the amount of additional tax liabilities we raised under the amended assessment.

    Observed behaviours

    Some large corporate groups may engage in tax minimisation or avoidance. But typically, large corporate groups are not reckless and do not evade tax. Where we see an incorrect application of the law, and reasonable care hasn’t been taken, we can apply a range of administrative penalties. These vary, depending on the behaviour involved.

    Analysis of culpability penalty rates imposed confirms a strong compliance culture among large corporate groups. We have applied a zero penalty rate in the majority of cases. This is because the large corporate taxpayer made a voluntary disclosure or, in our view, had a reasonably arguable position. Even where we have applied penalties, in the vast bulk of cases we considered there was, at most, a lack of reasonable care and not recklessness or fraud and evasion.

    Culpability penalty rates applied to large corporate groups, 2014–15 to 2016–17

    Culpability penalty rates: In 2016–17 60% had a 0% penalty rate, 3% had a 10% penalty rate and 37% had a 25% penalty rate. In 2015–16, 85% had a 0% penalty rate, 0% had a 10% penalty rate, 12% had a 25% penalty rate and 4% had a 50% penalty rate. In 2014–15, 68% had a 0% penalty rate, 2% had a 10% penalty rate, 28% had a 25% penalty rate and 2% had a 50% penalty rate.

    On-time payments

    The vast majority of large corporate groups generally pay their tax obligations on time and almost all tax owing is paid within 365 days or within agreed upon timetables. As with lodgment obligations, our work managing debts of large corporate groups focuses on cooperative relationships. We also emphasise transparency, prevention before correction, early assurance and certainty for all parties. This approach is our starting position for working with all businesses. By far, the majority of businesses work this way with us.

    Large corporate groups – payment times, 2016–17

    94.8% on time, 3.7% paid in 90 days, 0.2% paid in 365 days.

    Large corporate groups income tax debt is relatively small compared to the total corporate income tax reported. Similarly, the income tax value of debt owed by large corporate groups represents only a small percentage of their total tax paid on time, and the majority of this debt is disputed.

    Disputed debt covers tax outstanding that is subject to an objection with us, a review via the Administrative Appeals Tribunal or appeal to the Federal Court. We expect that in such a large and complex system we will have disputes. Our intention is to resolve disputes as early as possible, in a way that is fair and respectful.

    A very small amount of debt is owed by former large corporate groups that are now under some form of insolvency administration.

    Large corporate groups – debt as a proportion of corporate income tax, 2016–17

    $44.2 billion company tax, 10% disputed, 0.3% collectable.

    Last modified: 13 Dec 2018QC 53309