To the Assistant Minister for Superannuation, Financial Services and Financial Technology
In my opinion, the financial statements of the Australian Taxation Office (the Entity) for the year ended 30 June 2019:
(a) comply with Australian Accounting Standards – Reduced Disclosure Requirements and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and
(b) present fairly the financial position of the Entity as at 30 June 2019 and its financial performance and cash flows for the year then ended.
The financial statements of the Entity, which I have audited, comprise the following statements as at 30 June 2019 and for the year then ended:
- Statement by the Commissioner of Taxation and Chief Finance Officer;
- Statement of Comprehensive Income;
- Statement of Financial Position;
- Statement of Changes in Equity;
- Cash Flow Statement;
- Administered Schedule of Comprehensive Income;
- Administered Schedule of Assets and Liabilities;
- Administered Reconciliation Schedule;
- Administered Cash Flow Statement; and
- Notes to and forming part of the financial statements, comprising a Summary of Significant Accounting Policies and other explanatory information.
Basis for Opinion
I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Entity in accordance with the relevant ethical requirements for financial statement audits conducted by me. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) to the extent that they are not in conflict with the Auditor-General Act 1997. I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.
Key Audit Matters
Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the current period. These matters were addressed in the context of my audit of the financial statements as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters.
Key audit matter: Accuracy of taxation revenue
Refer to Note 14 ‘Administered – Income’
I focused on the estimation processes adopted by the Entity for financial reporting of taxation revenue given the value of the transactions and the complexity and judgement involved in the estimation processes and calculations. The reliable estimation of taxation revenue is complex due to uncertain timing of tax return assessments and payments and forecasting of likely taxation revenue outcomes. The Entity applies significant judgement when selecting the appropriate base for revenue recognition.
The ATO uses two bases for revenue recognition – the Economic Transactions Method (ETM) and the Taxation Liability Method (TLM). Under the ETM the ATO recognises taxation revenue when it gains control over future economic benefits that arise from tax legislation. The ETM involves significant estimates based on available information. The TLM recognises revenue at the earlier of when an assessment of tax liability is or can be made or payment is received. Revenue recognised under the TLM is generally recognised at a later time than if it were measured under the ETM.
The methodologies used by the Entity to prepare taxation revenue for its financial statements involve data analysis and estimation processes with high inherent risk that elevate the risk of error. As part of the estimation process the Entity conducts data analysis of past taxpayer behaviours and records together with assumptions about economic factors such as future wage growth and gross domestic product. For the year ended 30 June 2019, the Entity reported total taxation revenue of $ 433,438 m.
How the audit addressed the matter
I assessed the appropriateness of the base for revenue recognition with reference to the accuracy of prior year results and historical trends. I assessed the effectiveness of the taxation estimate process controls and the associated validation procedures together with the completeness, relevance and accuracy of data used in developing taxation revenue estimates. I assessed the reasonableness of the interpretation and analysis of data used by the Entity for material estimates and recalculated these estimates as at 30 June 2019. I evaluated the adequacy of documentation to support the Entity’s judgements made in relation to key estimates and allocations of revenue at year-end. This included an assessment of the quality assurance process over manual adjustments processed as at 30 June 2019.
Key audit matter: Completeness of taxation revenue
Refer to Note 14 ‘Administered – Income’
I focused on this area given the importance of the compliance risk management process in detecting and correcting non-compliant taxation returns.
The measurement and recognition of taxation revenue that is materially correct is dependent on information provided by taxpayers in a self-assessment and voluntary compliance taxation regime. Ineffective design and implementation of the compliance taxation regime elevates the risk that invalid taxation returns are not detected and corrected by the Entity resulting in an understatement of taxation revenue.
For the year ended 30 June 2019, the Entity reported total taxation revenue of $ 433,438 m.
How the audit addressed the matter
I assessed the completeness of taxation revenue by conducting an evaluation of the Entity’s compliance risk management processes by benchmarking the Entity’s compliance framework against the Organisation for Economic Co-operation and Development best practice principles of what constitutes an effective taxation compliance program.
I assessed the Entity’s risk identification, risk assessment and risk prioritisation processes for a selection of risks. In performing my procedures I also assessed the risk treatment strategies and implementation and assessed the process of monitoring performance and evaluating compliance outcomes on a sample basis at an enterprise level.
Key audit matter: Valuation of taxation receivables and provision for refunds
Refer to Note 15 ‘Administered – Non-Financial Assets & Note 16 ‘Administered – Provisions’
I focused on the calculations that support the valuation of the impairment and credit amendments allowances for taxation receivables and the provision for income taxation refunds. These three balances reduce the total comprehensive income reported by the ATO and involve significant judgement.
In each component there are complex methodologies and assumptions underpinning the calculation and assessment of the recoverability of taxation receivables and the calculation of the provision for refunds. Estimate methodologies are based on assumptions including taxpayer compliance and lodgement history, the existence of dispute over a receivable and the taxpayer’s capacity to pay. Models use historical data to predict future taxpayer behavior.
For the year ended 30 June 2019, the Entity reported:
- total taxation receivables of $24,761m;
- impairment allowance of $15,484m;
- allowance for credit amendments of $5,095m; and
- provision for refunds of $2,738m.
How the audit addressed the matter
To audit the the valuation of taxation receivables and provision for refunds, I performed the following procedures:
- evaluated the adequacy of the Entity’s oversight processes which included the documentation and quality assurance processes to support judgements made in relation to overdue and disputed debts;
- assessed the reasonableness of the underlying assumptions and methodology developed and adopted by the Entity;
- assessed the completeness of the source data used in estimating the balances;
- recalculated the impairment allowance at balance date and assessed whether it was appropriately reflected in the Entity’s financial statements;
- performed sample testing of individual taxation receivables, to assess the Entity’s application of taxation law and the revenue recognition for individual taxpayers’ accounts; and
- examined the provision balance and assessed the reasonableness of the impairment rate applied to large disputed taxation cases where an individual assessment has not been made.
Accountable Authority’s Responsibility for the Financial Statements
As the Accountable Authority of the Australian Taxation Office the Commissioner of Taxation is responsible under the Public Governance, Performance and Accountability Act 2013 for the preparation and fair presentation of annual financial statements that comply with Australian Accounting Standards – Reduced Disclosure Requirements and the rules made under that Act. The Commissioner is also responsible for such internal control as the Commissioner determines is necessary to enable the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Commissioner of Taxation is responsible for assessing the Entity’s ability to continue as a going concern, taking into account whether the entity’s operations will cease as a result of an administrative restructure or for any other reason. The Commissioner of Taxation is also responsible for disclosing matters related to going concern as applicable and using the going concern basis of accounting unless the assessment indicated that it is not appropriate.
Auditor’s Responsibilities for the Audit of the Financial Statements
My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:
- identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
- obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control;
- evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Accountable Authority;
- conclude on the appropriateness of the Accountable Authority’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern; and
- evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
I communicate with the Accountable Authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.
From the matters communicated with the Accountable Authority, I determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. I describe these matters in my auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, I determine that a matter should not be communicated in my report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Australian National Audit Office
12 September 2019