Classic Texts in Australian and International Taxation Law

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II. Procedures and Compliance

22.64. Submissions have been received dealing with the relationship between the Taxation Office and taxpayers and their advisers. The matters raised include the manner in which taxpayers are informed of adjustments made in assessing returns lodged, information disseminated by the Taxation Office for the benefit of taxpayers and their advisers, and the question of whether a formal assessment should be issued in respect of non-taxable returns specifying the amount of a loss available for recoupment in other income years.

Adjustment Sheets

22.65. Where the taxable income shown by an assessment varies from that shown by the taxpayer in his return, or there is some other matter affecting the assessment that needs to be explained to the taxpayer, the Taxation Office issues an explanatory advice known as an ‘adjustment sheet’. Some submissions have criticised these sheets on the grounds of insufficient detail and inadequate disclosure of reasons.

22.66. It is always open to taxpayers and their representatives to seek further clarification by correspondence or by personal attendance at the Taxation Office or at a regional office. Earlier in this chapter the Committee has suggested a procedure that would enable taxpayers, in cases under appeal, to obtain from the Commissioner further details of an assessment.

22.67. The Committee acknowledges that some of the criticism of the details shown on adjustment sheets may be justified. However, improvement cannot be achieved by a change in the law; it appears to be largely a matter of administration. The Committee recommends that the Commissioner and his officers arrange for a review of the present practices to provide greater detail of adjustments made in those cases where a spelling out of reasons is needed to explain the variation made.

Supply of Information

22.68. Return forms. With return forms the Taxation Office supplies instruction sheets and other information designed to assist taxpayers in completing their returns. This material has been expanded in recent years: in relation to a salary or wage return (Form S), the 1974 Guide to Form S and the pamphlet explaining age concessions are proving particularly helpful.

22.69. There is a continuing need to expand and improve material available to taxpayers and their advisers in relation to the preparation of returns, and to this end many of the practices adopted in the United States and Canada might usefully be followed. In particular, the Committee recommends extending the provision by the Taxation Office of standard forms for attachment to the return where appropriate. Standard forms could be made available giving details of disposals of property, net rental income, motor-car expenses, and travelling and entertainment expenses—this list is clearly not exhaustive.

22.70. Information bulletins. From time to time the Commissioner has issued pamphlets, bulletins and the like setting out guidelines on the interpretation of the taxation laws and practices being adopted. The series of Income Tax Orders issued in the comparatively early years of Federal income tax and the Public Information Bulletins published after the 1964 amending income tax legislation are cases in point.

22.71. The publication by the Commissioner of rulings, guidelines and information on these lines is desirable and creates a better understanding of taxation laws and

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practices. Further, the dissemination of this information leads to fuller co-operation by taxpayers and their advisers in complying with the provisions of the law. Published information of this nature also helps to dispel the frequently-voiced criticism, when the operation of the taxation laws has an effect believed to be disadvantageous to the taxpayer, that the Taxation Office is endeavouring to assume the role of ‘rule-maker’.

22.72. The Committee is aware of the activities of overseas taxation administrations in issuing general rulings and information and is particularly impressed by what is being done in the United States and Canada. In issuing rulings and guidelines, the Taxation Office needs to make it clear that the published information is not binding upon the Commissioner in any proceedings before a Court or other tribunal.

22.73. Advance rulings. When requested by a taxpayer, the Taxation Office now gives advance rulings on the application of specific provisions of the law to a proposed transaction where full details of the contemplated transaction are supplied. The ruling is normally given on the understanding that it is not legally binding on the Commissioner. There is considerable merit in placing advance rulings by the Commissioner on a formalised basis binding him to the decision given. Rulings of this nature would clearly be of benefit to the taxpayer concerned and it is therefore reasonable that the cost of providing the service should be met by him rather than by the general body of taxpayers. In Canada an advance rulings service has been inaugurated for which there is a charge of $Can20 per hour, with a minimum of $Can 150 for any one ruling. The Committee recommends that a charge be made for giving advance rulings, based on the cost incurred by the Commissioner, subject to a minimum charge of, say, $200.

Non-taxable ‘Assessments’

22.74. Each year the Taxation Office receives returns of income upon which no income tax is payable. In relation to these returns the legislation does not require the Commissioner to issue any binding notification of his computation of the taxable income or loss, as it does in respect of returns upon which tax is payable. It has been put to the Committee that any adjustment sheet or other advice issued by the Commissioner should in effect be treated as an ‘assessment’ under the legislation, particularly where losses available for carry-forward are involved. This would mean, among other things, that the provisions of the law relating to the amendment of assessments and to objections and appeals against assessments would apply in relation to non-taxable ‘assessments’.

22.75. The argument for treating advices of losses as assessments is mainly that it would enable the taxpayer promptly to challenge, by the procedure for objection and appeal under the law, any adjustment made by the Commissioner with which the taxpayer did not agree. The present position, of course, is that the taxpayer is in no way deprived of the right of objection and appeal against adjustments in determining losses that become effective as a deduction from subsequent income. In the year of effective set-off, the taxpayer can object and appeal against the quantum of loss so brought forward and thus challenge any adjustment by the Commissioner.

22.76. If advices of losses were to be regarded as assessments, consequences other than rights of objection and appeal would follow. The provisions of the law relating to amendment of assessments would apply so that taxpayers would be subject to the time restrictions on adjustments that now apply to taxable assessments. If a taxpayer did not object within sixty days of service of a notice, he could find that a required adjustment to a loss involving a question of interpretation of a law was not possible

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under the legislation or that the time to correct an error in calculation or mistake of fact had run out. Further, a taxpayer in reaching a decision whether to challenge, by objection and appeal, an adjustment in a non-taxable assessment would need to weigh up the time and cost involved against the possible tax effect in the future.

22.77. It would be difficult to confine any provisions granting assessment status only to cases involving losses. Instances where adjustments to claimed losses create a taxable income but no tax liability would have to be included; also those cases involving a taxable income but no tax payable, where the year concerned could be taken into account in determining an average income, would have claim to similar treatment. In the result, the Taxation Office might be faced with the task of issuing a great number of non-taxable assessments to taxpayers who did not require the information.

22.78. The Committee does not favour provisions requiring the Commissioner to issue a non-taxable assessment in every non-taxable case or provisions treating all advices issued by the Commissioner in relation to non-taxable returns as assessments. It recommends that a taxpayer be entitled to request the Commissioner to issue a formal non-taxable assessment which, on issue, would for all purposes be regarded as an assessment. At the same time opportunity might be taken to clarify the intended purpose of section 171 of the Act, which deals with the position where no notice of assessment has been served within the period of twelve months after lodgment of a return.

Taxpayer Compliance

22.79. Any system of direct taxation relies heavily on the general acceptance of the system by those required to pay the levy and on the rendering of true returns. Legislation imposing taxes normally provides for additional imposts for incorrect and untrue returns or statements and failure to supply returns or information on time; and there are Court processes for prosecution in these instances. Like the taxation authorities of many other countries, the Taxation Office maintains on its staff officers whose task is to audit and examine the returns of taxpayers to detect inaccuracies or deception. In the opinion of the Committee this audit activity is essential. There is merit in extending it to the greatest possible number of taxpayers and giving it maximum publicity.

22.80. Elsewhere in this Report the Committee has proposed the introduction of a capital gains tax, measures for dealing with income splitting and ways of tightening up on the taxation of gifts of property. These recommendations relate mainly to capital transactions which will require the disclosure to the Commissioner of relevant information. In order that the Commissioner can properly administer provisions to this effect and also to assist in the general administration of income tax, estate duty and gift duty laws, the present requirements to supply balance sheets or statements of assets and liabilities with income tax returns should be enlarged.

22.81. At the present time balance sheets or statements of assets and liabilities must be furnished with each income tax return of a company, a superannuation fund, a partnership in business and certain trust estates. The Committee recommends that these requirements be extended so that a balance sheet or statement of business assets and liabilities is also supplied with each income tax return of a taxpayer carrying on a business or profession; all trust estates and partnerships should be included too.

22.82. A standard form of balance sheet or statement of assets and liabilities should be issued by the Commissioner for completion and forwarding with returns other than company returns. The form should also provide for the supply of associated

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information required by the Commissioner, such as movements in capital accounts of taxpayers in business.

Registered Tax Agents

22.83. The income tax law provides for the registration as tax agents of all persons who charge fees for the preparation of income tax returns or for transacting income tax business on behalf of taxpayers. At 31 March 1974, there were 19,432 individuals, partnerships and companies registered as tax agents.

22.84. The Act and Regulations provide for a Tax Agents’ Board in each State and for the constitution and conduct of these Boards, the registration and cancellation of registration of tax agents, and the imposing of penalties for offences against the provisions. Apart from the cancellation of a tax agent's license where, for example, he does not wish to continue as an agent or where a partnership or company is dissolved or liquidated, there are provisions for cancellation where the Board is satisfied that an agent has prepared a false return, neglected the business of a principal, been guilty of misconduct as an agent or is not a fit and proper person to remain registered. There is a right of appeal to a Court against the decision of the Board.

22.85. Where the Board finds a tax agent guilty of misrepresentation, neglect, incapacity or unfitness, the only disciplinary action it may impose, apart from reprimand, is to cancel his registration—a somewhat drastic step. There are obviously cases where cancellation is too severe a penalty but something stronger than a reprimand is called for. Accordingly, the Committee recommends that provision be made for other disciplinary action such as the imposition of a fine and suspension of registration for a period.

22.86. In view of the growth in the number of registered tax agents, with consequential increase in the number of disciplinary cases coming before Tax Agents’ Boards, and the additional disciplinary measures recommended in the previous paragraph, it is necessary that the present constitution of the Boards be reconsidered. The Boards at present comprise a Chairman, who is the officer in charge of the Commonwealth Sub-Treasury in the State, the Commonwealth Chief Auditor for the State and a person appointed by the Governor-General—normally a senior practising accountant. When the constitution of the Boards is being reviewed, consideration should be given to attaching greater weight to their disciplinary functions and less weight to their registration procedures. Moreover, one member, preferably the Chairman, should be an experienced legal practitioner.

22.87. The certificate relating to sources of information that a tax agent is required to complete on each return he prepares for a client includes the following, as set out in the Regulation:

‘(b) Have you satisfied yourself, and, if so, how, that the books of account, or other sources of information upon which the return is based, are correct and disclose the whole of the taxpayer's income from all sources?’

This question is frequently answered by a statement by the tax agent that he has not satisfied himself as to the accuracy of the return.