In brief

  • The Inspector-General of Taxation (IGT) released his Report into the Australian Tax Office’s (ATO) large business risk review and audit policies, procedures and practices1 (Report).
  • The Report states that the review was ‘prompted by concerns raised by large business taxpayers and their advisers in relation to the ATO’s efficiency and effectiveness in managing these risk reviews and audits’. 
  • The Report identifies three broad areas for improvement by the ATO in this area and makes 28 recommendations, 25 of which the ATO has agreed with at least in part or in principle.

Areas for improvement identified in the Report and ATO Response

The three broad areas identified for improvement by the ATO in the Report are:

  • greater certainty and transparency in the risk review and audit processes and procedures
  • more consistent and proportionate application of risk review and audit principles and practices, and
  • greater engagement and dialogue and aspiring to a greater level of trust between taxpayers and the ATO so as to minimise compliance costs.

The ATO has agreed in full with 22 of the IGT’s 28 recommendations, and agreed in principle with a further two recommendations. The ATO disagreed with three recommendations.


The Report is welcome and so too largely is the ATO’s response. When dealing with policies and practices concerning large business risk reviews and audits, it is, of course, necessary to balance streamlining processes with maintaining flexibility to deal with the circumstances of an individual case. We are already seeing changes in the way the ATO conducts its audits and reviews in response to the Report.

There are a large number of recommendations in the Report. We comment on three below.

IGT recommendations agreed to by ATO

One of the IGT’s recommendations agreed to by the ATO was that, when the ATO is contemplating making a voluntary information request of a taxpayer, the ATO should provide that request in draft to the taxpayer, together with the reason for making the request. The ATO accepted that recommendation. That recommendation is sound.

However, in our view, that recommendation should have been extended by the IGT to formal requests for documents where no risk arises from forewarning the recipient of that notice. No such risk will usually arise in relation to large business recipients. Providing formal notices in draft to the recipient will allow the recipient and the ATO to discuss the scope of the request, narrowing it if necessary so that the ATO obtains the documents it really wants and diminishing costs to the recipient. Discussions which confine the scope of document requests are not uncommon with other regulators, and having those discussions before a formal notice is issued would avoid the need for the ATO to cancel the notice and re-issue it in more confined terms, which the ATO can be reluctant to do.

IGT recommendations not agreed to by ATO

In relation to two of the matters which the ATO does not agree with:

Early identification of areas of agreement or disagreement of the facts: The Report recommended the ATO adopt a process aimed at establishing the facts at an early stage. The IGT suggested this be achieved by the ATO supplying a draft statement of facts to the taxpayer for their comment, before further progressing the technical analysis. The ATO disagreed, arguing that the relevant facts are determined by reference to the technical legal analysis it conducts, and cannot be determined out of this context. The ATO suggested that, if a statement of facts should be prepared at an early stage, then it would welcome taxpayers providing that statement instead.

In very many large audit cases, facts drive the tax technical outcome, rather than the other way round. The ATO points to its process of including facts in its position paper, which will also include the technical analysis based on those facts. We consider that in large audit/review cases which involve potentially disputed facts, the ATO should prepare a statement of facts, as it perceives them, prior to the issue of a position paper, and invite comment from the taxpayer, rather than include facts and technical analysis in the one paper. This could have at least three advantages:

  • It may avoid the ATO, or the taxpayer, embarking on potentially irrelevant technical analysis predicated on an incorrect view of the facts of the case. 
  • It should also avoid the ATO taking an entrenched technical view which does not arise because the facts are not as assumed by the ATO. 
  • It may also identify whether the taxpayer, or the ATO, can establish, by evidence, critically important facts which may determine the applicable technical outcomes.

In many cases this would lead to a more streamlined and efficient process.

Audit and Review Benchmarks: The Report also recommended that the ATO improve case management by setting clear benchmarks for key events within the audit timeframe. It is disappointing that the ATO does not agree with this recommendation. Practice Statement PS LA 2006/8 recognises the ATO’s policy that all large business audits should be finalised within two years. That Practice Statement also recognises that interest charges should not accrue where there is unreasonable delay within that timeframe. While the ATO recognises that its officers will prepare an audit plan and provide regular progress updates to the taxpayer, it is important to ensure:

  • the ATO is fully accountable for any delays for which it is responsible, and
  • the taxpayer is not accountable for any delays caused by matters not within the taxpayer’s control.

Benchmarks would assist with this. We doubt that, with appropriate communication and co-operation between the ATO and the taxpayer, setting benchmarks need be at the detriment of relationships and case outcomes.