The Australian Tax Office (ATO) regulates the Australian tax system with the compliance model. This model assumes that taxpayers have the capacity to comply, but many may slip through the cracks in the tax system and have difficulty complying for reasons beyond their control. As a result, the ATO’s application of the compliance model may lead to these taxpayers being unjustly regarded as seriously noncompliant, resulting in them being unjustly met with the full force of the law.
The ATO compliance model
The Australian tax system is complex. Yet, it relies on self-assessment where taxpayers are responsible for the information provided in their tax returns, rather than having the ATO work out their tax for them. This thus places lots of responsibility on taxpayers to get it right, and there are many that need assistance who cannot afford to pay for it.
From the late 1990s, the ATO has been regulating the Australian tax system using the compliance model. This model assumes that most taxpayers are willing and able to comply and uses an escalating range of sanctions to encourage or enforce compliance when the taxpayer become disengaged.
Under the model, the ATO is supposed to treat taxpayers in accordance with their situation, instead of using a rigid one-size fits-all approach. For taxpayers who are willing to comply but encounter difficulties in doing so, the model advocates that the ATO provides respectful assistance, ensures procedurally fair treatment, and makes a positive interaction with the taxpayer. For taxpayers who do not want to comply, the model advocates using audits and penalties.
In all cases, the model recommends that the ATO seeks to make high quality personal interactions in the first instance and harsh penalties should be the last resort when the personal interactions have failed.
Cases in the National Tax Clinic Program
In 2019, the federal government announced a pilot National Tax Clinic program to assist taxpayers who cannot comply on their own and who cannot afford professional tax help. The program provides a safe place for these taxpayers as they struggle with a combination of financial, situational, physical or emotional issues.
Although there are many cases that the tax clinics around the country see daily, we chose those cases that demonstrate the consequences of the ATO treating taxpayers inappropriately in a range of situations and causes of noncompliance such as a taxpayer’s personal circumstances, the actions of another government department, and the actions of another person.
Following is a summary of each case. More information is available in the published article.
Case 1
The taxpayer was a successful businessperson. His physical disability led him to close the business and go on a Disability Support Pension. He was forced to make an early withdrawal of his superannuation to cover medical costs, but this move inadvertently triggered a Higher Education Loan Payment (HELP) repayment when he lodged his tax return. The clinic completed an application to defer the HELP repayment that was initially declined without explanation, but was later approved through an objection lodged by the clinic which provided the same information as the original application.
Shortly after, the ATO sent the taxpayer a letter regarding an outstanding tax debt that he was unaware of. The tax debt was raised by default assessments which he did not receive due to a change in his address, but he failed to inform the ATO about the change. The outstanding tax debt has been put on hold by the ATO.
Case 2
The ATO contacted the director of a deregistered trustee company regarding outstanding superannuation guarantee payments for employees discovered during an audit. Following an objection, the ATO withdrew the amended superannuation guarantee assessment since it was invalid because the company was deregistered.
Separately, the ATO pursued the taxpayer for the company’s nonpayment of PAYG and GST through letters mailed to her home and calls to her mobile phone. Voicemail messages left by the ATO requested that she call the ATO back, but when she did so, ATO representatives refused to speak to her since she was not authorised to act on behalf of a company as it had been deregistered. The clinic is continuing to assist the taxpayer to resolve these issues.
Case 3
An elderly widowed taxpayer sold her home where she had rented one room to international students. It became apparent that the tax professional who prepared her return did not consider the main residence exemption for capital gains tax, resulting in a tax debt that the taxpayer could not pay and made her consider bankruptcy as a way out. The clinic lodged an amended return and substantially reduced the debt.
Fixing cracks in the compliance system
The compliance model relies on high quality interactions between the ATO and the taxpayer. But in the cases discussed above, these interactions were poor or non-existent with the ATO appearing reticent to truly engage with each taxpayer’s circumstances. The ATO made decisions without explanation, refused to communicate in person, and sent letters demanding payment.
Under the compliance model, all taxpayers ought to be treated with a light touch first with harsh penalties reserved for those who are disengaged with the tax system. All taxpayers in the cases above were willing to comply and came to the tax clinic to get help, but the ATO treated them as disengaged from the beginning. If the ATO took some time to interact with the taxpayer, it could have developed a response that better reflected their willingness to comply.
The compliance model recommends that ATO consider the circumstances in which non-compliance occurred to determine a solution in response, but the ATO was completely ignorant of them. The first experienced physical incapacity, the second was no longer a company director, and the third was an elderly widow who had previously relied on her husband for financial and tax matters.
While each taxpayer is partly responsible for their predicament, a significant reason for their non-compliance was beyond their control due to their special circumstances. In each case, the ATO needed to be advised by the tax clinic (effectively acting as third-party mediators) of the circumstances that affected the taxpayer’s ability to comply. The tax clinic setting gave the professionals operating with it an opportunity to use their many years of professional tax experience to identify the issues and find a unique workable solution to each scenario. Without the assistance of tax clinics, taxpayers such as those described above would be regarded by the ATO as being determined not to comply. These taxpayers would have face harsh penalties, even though they were all willing to comply and actively attempting to do so, even prior to their coming to the clinic.
These taxpayers need assistance from tax clinics because the ATO is not aware of their specific circumstances, including the taxpayer’s physical, mental and other contextual factors that prevent them from complying. The ATO also does not incorporate these factors into its decisions about what penalty to impose. The ATO does not strive for high quality interactions with taxpayers, instead seeking to raise the revenue for the least cost. If the ATO interacted on a more empathic and positive manner with taxpayers and understood that there are cases where noncompliance is unavoidable, then a more equitable solution may occur.
Further reading
Vitale, C., Castelyn, D., Harrison, B., & Whait, R. (2024). Slipping through the cracks: Deficiencies in the Australian Taxation Office’s application of its compliance model. Australian Tax Review, 53(3), 184–201.
Recent Comments