Introduction

1. The Australian Taxation Office (ATO) is the Australian Government’s principal revenue collection agency. The role of the ATO is to manage and shape taxation, excise and superannuation administrative systems that fund services for Australians, giving effect to social and economic policy.[1] In 2009–10, the ATO collected over $253 billion in tax, superannuation and excise revenue and incurred expenses of some $3 billion.

2. The ATO is also responsible for administering various grant and transfer payments, which give effect to a range of government policies. The Fuel Tax Credits Scheme (Fuel Scheme) is one such transfer payment program. Under transfer payment programs, the Government provides a financial benefit to an individual, corporation or other entity without requiring a good or service in return.

3. The Fuel Scheme commenced on 1 July 2006, replacing the Energy Grants Credits Scheme (EGCS). Both schemes were designed to provide eligible businesses, and limited categories of non-business users of fuel, with a means to recover the excise included in the cost of fuel, when that fuel is used for specific purposes, as defined by each scheme. When claiming a fuel tax credit for fuel intended to be used in a vehicle, the amount able to be claimed is dependent on the gross vehicle mass and whether the vehicle is used for travelling on a public road.

4. The new Fuel Scheme expanded the eligibility provisions that applied under the EGCS[2] and is currently the largest transfer payment program administered by the ATO. The cost of the Fuel Scheme in 2009–10 was some $5 billion, a 14.5 per cent increase on the $4.4 billion incurred in the Fuel Scheme’s initial year of operation in 2006–07.[3] This increase, in part, stems from the growth in the number of active participants after the eligibility criteria under the Fuel Scheme were extended. The total number of active participants has also increased by 31 per cent since the Fuel Scheme’s introduction, from 146 874 as at 1 July 2006 to 191 751 as at 30 June 2010. The mining industry was the main claimant group, by value, in 2009–10.

5. At present, the maximum fuel tax credit to eligible participants is 38.143 cents per litre of fuel. For business entities, a fuel tax credit is claimed and adjusted through their Business Activity Statement (BAS). Individuals and non-profit entities that are not registered for the Goods and Service Tax (GST) can only submit claims via a pre populated paper form.

6. The ATO publishes a range of guidance material to assist claimants to comply with their obligations under the Fuel Scheme. The Department of Infrastructure and Transport is also responsible for publishing information outlining the environmental criteria for the Fuel Scheme.[4]

7. Administration of the Fuel Tax Credits Scheme within the ATO is undertaken by specialist staff in the Indirect Tax (ITX) business line.

Audit objective and scope

8. The objective of the audit was to assess the effectiveness of the ATO’s administration of the Fuel Tax Credits Scheme. Particular emphasis was given to the Fuel Scheme’s:

• governance and reporting arrangements;
• risk management strategies; and
• compliance management program.

Overall conclusion

9. When the Fuel Tax Credits Scheme was introduced on 1 July 2006 as a replacement for the Energy Grants Credits Scheme (EGCS), it expanded eligibility provisions, refocussed the fuel tax rebate system on the uses of fuel rather than on specific fuel types, and aimed to lower compliance costs for business.

10. In implementing the Fuel Scheme, the ATO was able to build on and refine the experience it had gained through administering the former EGCS. Existing administrative processes, such as claiming credits through the BAS, provided a generally effective basis for the ATO to collect and analyse most of the information required from participants to allow it to administer the Fuel Scheme, and to undertake risk analysis and compliance activity on a case by case basis, as required.

11. Overall, the ATO is effectively administering the Fuel Scheme. Governance, reporting and processing arrangements are generally sound. The Fuel Scheme’s risk management strategies are appropriate and the compliance program addresses identified risks and non compliant practices.

12. Governance arrangements support the administration of the Fuel Scheme at both the strategic and operational levels. At a strategic level, key governance bodies, including the Excise Product Committee and Excise Compliance Risk Forum, are well informed and provide appropriate direction, responding to identified risks and implementation issues over time. Operationally, effective governance is extended through decision making, review and quality assurance processes, which underpin, and provide assurance for, compliance decisions.

13. The ATO has in place various risk management strategies to address inappropriate or erroneous Fuel Scheme claims. Taxpayers are provided with guidance material to promote voluntary compliance, and claims are risk assessed at the pre-issue payment stage. The ATO also assesses all claims on a post-issue payment basis, including identifying claims which occur over multiple payment periods.

14. Over time, the ATO has modified its risk identification and management processes to better target known risks, and has sought to quantify new risks through adding, and altering, risk identification parameters—at both the pre-issue and post-issue payment stages. Overall, the application of the various risk management strategies has been effective in identifying, responding to, and reducing Fuel Scheme risks.

15. The ATO supports the ongoing integrity of the Fuel Scheme by responding to identified risks through its compliance program, and undertaking reviews and audits of specifically identified taxpayers. As part of its active compliance program for the Fuel Scheme, the ATO undertook 15 053 reviews and 11 872 audits of fuel tax credit claims over the four year period commencing 1 July 2006. These reviews and audits resulted in adjustments to claims made of some $124.5 million over the same period.

16. The ANAO has made one recommendation, directed at more closely aligning service standards for the timing of fuel tax credit reviews and audits with more realistic benchmarks. This would enable an improvement in compliance activity planning and communication with taxpayers regarding the proposed timeline for audit activity.

Key findings by chapter

Governance and performance reporting (Chapter 2)

17. The ATO has appropriate governance arrangements in place to support the operation of the Fuel Scheme. The key areas of focus for its governance bodies have been on the operation of the Fuel Scheme, the impacts of changing taxpayer eligibility, and the detection of, and response to, scheme risks.

18. Internal management committees, including the Excise Product Committee and the Excise Compliance Risk Forum meet on a regular basis to consider information about key risks and priorities for the administration of the Fuel Scheme. Relevant matters covered by these two committees include: work processes and allocations; objections and litigation; technical issues; and risk and intelligence.

19. Internally the ATO manages staff workloads through its operational plans, which are based on forecasting the time required to complete compliance reviews and audits. This measure, known as ‘cycle time’, is measured in days and recorded within the ATO’s systems. Cycle time assists operational staff by providing guidance on the time a particular item of work should take to complete, and management to track performance against this expected timeframe. Cycle times are also used to inform taxpayers who are being audited of the proposed time to complete the audit.

20. The ATO is experiencing difficulty in meeting its own benchmarks on the time taken to complete some compliance activities, particularly where there is interaction with taxpayers. The benchmarks are used to advise taxpayers, inform the allocation of tasks to staff, monitor and manage staff performance and report internally on casework. Given their importance, the ANAO has recommended that the current benchmarks be reviewed to ensure they reflect more realistic timeframes.

21. To further strengthen its governance framework the ATO has applied two quality assurance processes over time. The first was the Technical Quality Review (TQR), which has been progressively replaced by the Integrated Quality Framework (IQF). The IQF applies to a broad range of administrative activities, examining procedures for soundness, integrity, correctness, appropriateness, effectiveness, transparency, consistency, timeliness and efficiency. The audit considered the application of the TQR and IQF processes only in relation to the scheme’s compliance reviews and audits (discussed in Chapter 4).

Risk identification and management (Chapter 3)

22. The ATO seeks to minimise the risk of non-compliant claims and errors in two key ways: through educating taxpayers; and implementing a multi layered risk assessment and compliance approach to identify and respond to Fuel Scheme risks.

23. Guidance material issued by the ATO is an effective way of educating claimants and supporting voluntary compliance. Legislative guidance, public rulings specific to certain industry groups, and general guidance material are all available on the ATO website.

24. The ATO has put in place effective strategies to identify potentially inappropriate claims or significant errors. At the pre-issue payment stage, the ATO’s systems have various risk identification triggers to test all reimbursement claims for errors. Post-issue of the payment, all claims are assessed to identify higher risk claims for specific risks, over multiple claim periods. Regardless of whether a claim is selected on a pre-issue or post-issue payment basis, all claims may subsequently be selected for compliance review and audit. The ATO uses the experiences gained from risk identification and compliance outcomes to assist in informing its future risk identification approaches.

25. The ATO has recently reviewed its risk identification parameters, which has led to a reduction in the number of compliance review and audit activities undertaken in 2009–10. These reviews have resulted in:

• an adjustment of the risk identification parameters used to identify cases for compliance review and audit, in view of the maturity of the processes relating to the Fuel Scheme and the greater experience of taxpayers accessing the Fuel Scheme;
• revision of the dollar threshold level above which claims are selected for further examination. This level was increased because the ATO determined that the dollar threshold had previously been set too low, generating false positives, and creating work that had less risk mitigation value compared to other potential opportunities; and
• the introduction of higher claim averaging tolerances for businesses involved in certain activities that were, by their nature, impacted by cash flow variability.

26. The ATO, from time to time, also conducts general, whole-of-scheme risk analysis exercises to gain a better appreciation of Fuel Scheme risks. During July 2008, the ATO conducted a benchmarking exercise to assess the level of taxpayer compliance and to gain further insights into potential Fuel Scheme risks. Out of a potential population of 141 537 taxpayers at the time of the exercise, the claims of 171 taxpayers were examined. Through conducting audits on this sample, ATO analysis indicated that 33 per cent of those taxpayers made an error in preparing their fuel tax credit claims. However, it noted that the size of the errors was comparatively small — less than 1.2 per cent of the total value of fuel tax credits claimed by the sample group. By extrapolating the sample results back to the total population of claims, the ATO estimated the value attributable to errors from inappropriate claims to be approximately $60 million, based on 2006–07 data.

27. A significant proportion of the errors detected in the benchmarking exercise resulted from the inappropriate application of environmental criteria when making a claim.[5] In a targeted response to this exercise, the ATO undertook further educational activities, including the release of specific pamphlets to promote a greater understanding of, and compliance with, the environmental criteria that were giving rise to the errors.

28. Overall, for most of the life of the Fuel Scheme, the ATO has considered it to be a ‘moderate’ risk, largely because it was a new scheme that included transitional provisions from the EGCS, and because eligibility would continue to alter over time. However, the ATO reduced the Fuel Scheme’s risk rating to ‘low’ in November 2010. This lower rating recognises the recent stability in eligibility criteria and follows the assessment of a reduction in environmental risks, such as the impact of the global financial crisis on taxpayer behaviour. The ATO advised that Fuel Scheme risks would continue to be reviewed on an ongoing basis.

Compliance management (Chapter 4)

29. The ATO relies on its compliance activities, including reviews and audits, as the primary response to identified risks and non compliant practices. It has in place generally effective and appropriate compliance strategies that support the integrity of the administration of the Fuel Scheme. High risk cases are identified on an ongoing basis and are subject to reviews and audits.

30. The ATO has undertaken, on average, 3763 reviews per year from 2006-07 to 2009-10. The majority of these reviews occurred within the micro enterprises and individuals and small and medium enterprises markets. Reviews generally do not involve taxpayer contact. Where a review is unable to substantiate a claim it is likely that the taxpayer will be audited. The ATO undertook more reviews in 2007–08 (3978) and 2008–09 (5821), in response to changes in eligibility criteria and general perceived risks.

31. Where, following a review, the ATO considers that a claim represents a higher risk, an audit is conducted. Audits typically consider a longer period of claims, involve direct taxpayer contact, and are likely to result in a revenue adjustment. Audits are more resource intensive than reviews and the ATO undertook, on average, 2968 audits per year over the four year period from 2006–07 to 2009–10. The liability adjustments for this period totalled some $124.5 million.[6]

32. To further underpin the integrity of its Fuel Scheme compliance reviews and audits, the ATO has used the TQR and IQF quality assurance frameworks to improve administration over time. For example, quality assurance processes may identify that, whilst technically correct, the clarity of documentation provided to taxpayers could be improved. The independent quality assurance processes also serve to verify the appropriateness of technical decisions made during review and audit processes, taxpayer liability adjustments and the technical accuracy of correspondence to taxpayers advising them of review/audit outcomes.

33. The Serious Non-Compliance (SNC) capability within the ATO assists in dealing with those taxpayers involved in fraud or more extreme cases of tax evasion, as well as taxpayers who have disengaged from the tax system, and those that have demonstrated a strong resistance to meeting their tax obligations. The process required to investigate, gather appropriate evidence and bring a case to court can be lengthy—particularly for complex matters. Currently, the SNC is investigating four fuel scheme cases. A fifth case has been finalised and required no further action. As of March 2011, one prosecution case was submitted to the Commonwealth Director of Public Prosecutions for consideration, resulting in a successful prosecution.

Summary of agency response

34. The ATO’s summary response to the report is reproduced below. The full response is at Appendix 1 of the report.

The ATO notes the ANAO comment that ‘… The Fuel Scheme’s risk management strategies are appropriate and the compliance program addresses identified risks and non-compliant practices.’

The ATO is also pleased with the audit finding that ‘The Tax Office has put in place effective strategies to identify potentially inappropriate claims or significant errors.’

The ATO agrees with the ANAO recommendation to review cycle times of compliance reviews and audits for the Fuel Tax Credit Scheme.

Footnotes

[1] Australian Taxation Office, Australian Taxation Office Annual Report 2008-09, 2009, p. iii.

[2] For example, on 1 July 2006, eligibility expanded to include agriculture, fishing, forestry and other activities. On 1 July 2008, the eligibility criteria of the Scheme was further expanded to include additional activities, and significantly, to include petrol as a fuel that could be claimed under the Scheme.

[3] The cost of claims made in each year since 2006–07 includes costs associated with the Energy Grants Credits Scheme, as the ATO is unable to disaggregate payments made under each scheme. However, the quantum of Energy Grants Credits Scheme payments is relatively minor compared to the Fuel Tax Credits Scheme and is understood to have diminished significantly over time since the commencement of the Fuel Tax Credits Scheme.

[4] Information that is made available on the Department’s website includes the operation of the DT80 emissions test standard, the process for seeking accreditation for a vehicle maintenance program, appropriate record keeping, and representations regarding amendment or inclusions to the provisions specified in departmental vehicle maintenance schedules. The department publishes general guidance on these matters through the publication ‘Guidelines for Environmental Criteria - Fuel Tax Credit for Heavy Diesel Vehicles’, supplemented by website material.

[5] The environmental criteria are outlined in the publication ‘Fuel Tax Credit for Heavy Diesel Vehicles – guidelines for satisfying the Environmental Criteria’, available online at <http://www.infrastructure.gov.au/roads/environment/fuel_tax_credit/guidelines.aspx> [accessed 13 April 2010].

[6] During 2006–07 the ATO raised $12.2 million in adjustments, reflecting that the Fuel Scheme had just commenced. From 2007–08 through 2009–10 inclusive the ATO raised average adjustments of $37.4 million each year.