Introduction

A Tax File Number (TFN) is an eight or nine digit number that is issued to an individual or a business by the Commissioner of Taxation. The TFN was originally intended to be a high integrity, unique identifier, enabling improved controls over the Australian Taxation Office's (ATO) income matching system.

The TFN system¹ was designed to improve compliance in taxation and government payments systems, and improve service and administrative efficiency, whilst maintaining privacy. The TFN system has been significantly and progressively extended since its inception, both for taxation and broader whole of government purposes. For example, Centrelink is authorised to use TFNs to verify client identity and establish income levels and a TFN is required for the Higher Education Contribution Scheme.

On 29 April 1999 the Auditor General's Report No.37 of 1998-99, The Management of Tax File Numbers (Report No.37), was tabled in the Parliament. The House of Representatives Standing Committee on Economics, Finance and Public Administration (the Committee) subsequently reviewed this report. The Committee's report, Numbers on the Run, was tabled on 28 August 2000 (Numbers on the Run). One of the Committee's recommendations was that the Auditor General conduct a follow up performance audit of the ATO's management of the TFN system.

Audit objective

The objective of this audit was to examine the action taken by the ATO to improve TFN integrity, particularly through the implementation of the recommendations made in:

• Report No.37, taking into account any changed circumstances, or new administrative issues, affecting the implementation of those recommendations; and
•  Numbers on the Run, taking into account that the Government has not formally responded to the report at this time.

The audit also aimed to identify further opportunities for the ATO to improve the effectiveness and efficiency of the TFN system.

The report of this audit is necessarily detailed as it considers each of the recommendations and the extent to which they have been implemented.

The previous reports

The Previous Audit: Report No.37

Report No.37 reviewed how effectively and efficiently the ATO administered the TFN system. ANAO concluded that the ATO's TFN system improved tax effectiveness by enabling the collection of additional revenue. ANAO found that the TFN system also improved administrative efficiency, through the provision of better services at a lower cost.

ANAO considered that further gains in the effectiveness and efficiency of the TFN system were achievable, and made seven recommendations aimed at improving the ATO's administration of the TFN system. These recommendations related to TFN system integrity and governance, client service, identity verification and TFN quotation arrangements.

The ATO agreed to all recommendations, with some qualification in two instances.

House of Representatives Standing Committee on Economics, Finance and Public Administration Report: Numbers on the Run

Following the tabling of Report No.37, the Committee undertook a review of the report. As part of its inquiry, the Committee investigated the administrative, policy, and client service issues of TFN management. The Committee also considered a number of broader policy issues and, in particular, looked at the growing problems of identity fraud and illegal work by non residents. The Committee found that the ATO:

was an organisation that was reactive rather than proactive; where emphasis is placed on strategies that return a short term financial gain rather than ensuring the longer term integrity of the system; and where management philosophies are not well translated through the organisation.²

In commenting on its own report, the Committee noted ‘This report adds to 15 years of Auditor General and parliamentary inquiries that have found shortcomings in the quality of the ATO's data and systems'.³ The Committee also observed ‘in a general sense the tax revenue system is working well'.⁴ The Committee acknowledged the significant efforts of the ATO in balancing the competing priorities that it has to balance.⁵

In its report, Numbers on the Run, the Committee made 26 recommendations. The majority of these concurred with, or extended, the recommendations made by the ANAO. The Committee's recommendations were ‘aimed at ensuring the ongoing quality and coverage of the TFN system. This is important for the administration of taxation, income support, superannuation and employment generally'.⁶ The Committee considered that the implementation of its recommendations were ‘crucial for ongoing community and government confidence in the TFN system as a system that treats people fairly'.⁷

At the time of this follow up audit, the Government had not tabled a response to the Numbers on the Run. However, the ATO's budget for 2002-03 and 2003-04 included, in total, an additional $26 million for the implementation of TFN improvements recommended by the two reports. The ATO has advised the ANAO that it spent a further $4.42 million on TFN improvement initiatives.

Some of the recommendations (or their components) of both have not been actioned by the ATO in the absence of a Government policy direction or because a recommendation (or its component) was addressed to an agency other than the ATO.

Audit findings and conclusion

The ATO has fully or substantially implemented key recommendations of both reports across business lines, improving the integrity of the TFN system, and, as a result, ATO's administration of taxation. In particular, the ATO has cleansed the tax database substantially, removed extraneous records and upgraded data quality; tightened up identity requirements; brought TFN registration arrangements up to a higher standard; and is undertaking more effective data matching, especially with the use of more extensive third party data sets.

These improvements have, in large measure, been achieved as a result of the additional $30.42 million that the ATO has spent during 2002 2004 on the TFN Integrity Improvement project.

Interrelationships between the TFN system and other systems within the ATO still require improvement. The ANAO notes that developments underway as part of the ATO's Easier, Cheaper and More Personalised Program are, in part, designed to address these.

This follow up audit identified opportunities for the ATO to further improve the effectiveness and efficiency of the TFN system. These include:

• publishing information about the quality of ATO's data;
•  raising the standard of the quality of information on the ATO's databases dealing with partnerships, trusts and superannuation;
•  enabling anyone to apply for a TFN through Centrelink;
• ensuring that value for money is obtained from the Schools' Education Program administered by the ATO;
•  implementing a targeted community education and awareness program aimed at TFN fraud and misuse;
•  acting on the risks brought to light in connection with the proposed anti money laundering reforms and making improved use of Australian Transaction Reports and Analysis centre (AUSTRAC) data as a result; and
•  better managing the compliance risks associated with assessable government payments.

ANAO has made seven recommendations to achieve these improvements. The ATO agreed to all recommendations, with some qualification in one instance.

Agency Response

The Tax Office regards the Tax File Number as the cornerstone of the tax system and acknowledges the important role it plays in administration of wider government revenue systems administered by other agencies. In this regard, the Tax File Number facilitates data matching between the Tax Office and other agencies providing significant revenue and welfare benefits to Government and the community. Recent years have seen significant investment to improve the integrity of the Tax File Number system and to implement the recommendations raised in previous reports prepared by the Australian National Audit Office and the House of Representatives' Standing Committee on Economics, Finance and Public Administration.

The Tax Office, Government and community are now benefiting from the substantial progress in improving the integrity of the Tax File Number system. In recognising this performance the Tax Office also acknowledges there are a few remaining issues that continue to be progressed.

The Tax Office supports the recommendations resulting from the current audit and will continue to progress initiatives, in a proactive manner, to deliver upon these recommendations and other areas where the potential for improvement is identified.

Footnotes

1 The TFN system is described in detail in Australian National Audit Office Report No.37 of 1998-99 Management of Tax File Numbers Australian Taxation Office.

2 Numbers on the Run page vii

3 ibid., page vii.

4 Ibid., page vii.

5 Ibid., page 5.

6 Ibid., page viii.

7 Ibid., page viii.