Australian Taxation Office response to the Ledlin Report

The Tax Office contracted Ledlin Partners, business and commercial lawyers, to review a number of debt collection practices in the Australian Taxation Office. Since delivery of the final report in March 2003, a number of changes to debt collection operations have occurred. (These are detailed in the specific responses to the report’s recommendations, which follow.)

The working arrangements of around one third of staff in Operations Debt and Lodgement were covered in this examination – other areas, such as those responsible for lodgment compliance, provision of advice, prosecution and legal recovery processes were not covered. Ledlin Partners were contracted between January and March 2003, at a cost of around $95,000. (Putting this in some further context, the direct budget of Operations Debt and Lodgment is around $190 million for the current year.)

Since delivery of the report, the business model and team structures supporting outbound phone work and other activities which support securing payment, as reviewed by the consultants, have been restructured. Current productivity reports indicate that the number of cases finalised by staff has improved considerably across debt collection areas in this period.

The following key points provide context against which the Tax Office responses to each of the recommendations should be read.

Key points

• The Tax Office’s debt and lodgment case management system is continually enhanced with an annual investment in the order of $5 million over the last couple of years. The system is operating in a high volume environment and the Australian public can now expect to receive a letter or a phone call 10 to 30 days after falling into debt.

• The Tax Office is governed by a publicly available receivables policy. In discussion with the Australian National Audit Office and the Australian • Bureau of Statistics, the Tax Office recently reviewed and significantly improved its approach to the determination of its provision for bad and doubtful debts and to writing off debts.

• In 2002-03 the Tax Office recruited in excess of 900 staff in its Operations Debt and Lodgment area. Induction training for those new staff and intensive collections techniques skilling for 1,500 staff in the area followed the recruitment.

• The effectiveness of debt management has significantly improved, resulting in an increase in the volume and value of debt collections with all substantive debt now being actively managed. At any point in time, the Tax Office has around 1.2 million accounts with amounts outstanding. These case holdings need to be understood in light of the rules in place in the case management system for the more effective management of debt. The Tax Office typically sees around 150,000 cases in the system that have in fact been finalised, but which are held for around 30 days after that finalisation to ensure that they do not give rise to further debt. The holdings are also inflated by numbers of cases that result from timing issues – the taxpayer pays, but pays late. In the last twelve months the Tax Office has finalised 1.6 million such cases with collections of $37.7 billion.

• As the Government’s principle revenue agency, the Tax Office recognises that it coexists with commercial collection agencies but also that it necessarily has a different relationship with the Australian community. The consistent message to the community from the Tax Office is that ‘we do not want to see a debt with the Tax Office that results from a genuine mistake (or from a temporary cash flow difficulty) be the cause of bankruptcy for an ongoing, viable business’. In this sense the Tax Office must have a concern for keeping businesses in business. By way of example, in the last twelve months parts of the community have suffered adverse impacts of drought and bush fires. The Tax Office has acknowledged these circumstances and differentiated its approach to lodgment enforcement and recovery action for affected segments of the community.

• In recent years the Government has acknowledged increased Tax Office workloads by providing additional funding for among other aspects of its operations, debt collection. To ensure the best use of that resourcing the Tax Office continues to examine collection practices across a range of revenue and debt collection agencies, both in Australia and internationally.
  The Tax Office commissioned the Ledlin Partners consultancy with the intention of seeking yet another view for comparison. Its purpose was to see what might be possible from a more commercial perspective, always accepting that it might not be appropriate for a Government revenue collection agency to respond to all insights emerging.

Ledlin Partners recommendations

The Ledlin Partners Report’s recommendations and accompanying observations are commented on here, in turn. The Tax Office’s views in response are provided.

Systems: Our recommendation is that urgent consideration be given to more “collection” enhancements to improve the collection efficiency of the ATO. In addition, we recommend that we arrange for a number of Team Leaders to be taken to on-site Collection Call Centres to give them the sense of what needs to be achieved.

ATO response: accepted in part with some changes already in development.

The enhancements suggested with this recommendation include:

the setting of different collection parameters for different accounts, (for example income tax, GST write off and recovery accounts) the ability to refer accounts from operative to technical adviser to team leader and vice versa, for comment, etc, on line behavioral scoring to assist in determining the most appropriate recovery response.

The debt consultants’ report recognises that the Tax Office’s debt case management system already has the functionality to support a number of ‘essential’ requirements. In addition the Tax Office outlays around $5 million per annum on its receivables system and will continue a program of review and enhancement.

Comments below provide views on a number of the requirements suggested.

Queuing functionality

Collection data (including payment amounts) is held by ATO accounting systems. Two issues affect availability of that data for reporting purposes. Firstly, because taxation legislation recognises the concept of a running balance, individual postings to accounts frequently cannot be disentangled easily. The running balance account is designed specifically to alleviate the need for this. Staff pursue the ‘bottom line’ account balance, including General Interest Charge as calculated.

Secondly, in line with ATO information technology architecture derivable data such as account balances are not stored on the debt case management system. This is because these balances are used for a number of purposes, not just Debt Collection, and must be freely available to other ATO systems.

Account management

The case management system allows the allocation of cases both by systematic download to teams and by specific allocation to an individual operative in response to a client’s call. The report acknowledges that the system has appropriate functionality.

Flexibility

The debt and lodgement case management system has been designed to allow ready (but not real-time/on line) modifications of system parameters including thresholds, queuing parameters, letter content and the like. Time taken to modify these elements typically results from the Tax Office’s thorough testing to minimise negative client impacts rather than due to delays in adjusting the parameters themselves. Quick time with high accuracy, rather than real time response is what is required here. Facilities which allow modification of production parameters (for example the number and type of letters issued on a daily basis) are available on-line.

Target analysis

Accepting that regular adaptation of business strategies makes detailed reporting complex, the Tax Office elects to use generic extraction and reporting facilities including a data warehouse and industry standard, on-line analytical processing tools. The development of some on-line reporting at the team level is currently being specified.

While the Tax Office will continue to enhance performance measures, it will avoid any measures seen as rewarding staff or teams for individual dollars collected.

‘What if’ facility

This is described in the report as an interest calculator/simulator with ability to comply with varying statutory requirements as regards applicable interest. The system would allow for various repayment scenarios by displaying various interest changes, time periods for repayment and corresponding payment amounts.

New case management functionality will support the suggested approaches with respect to proposed arrangements to pay. The case management system will allow zero per cent and concessional General Interest Charge imposition, rather than just the full rate, from November 2003.

Write-off/recoveries

Actual write off of debt is supported within the debt case management system. The development of processes that allow the separate treatment and reporting of obligations that are ‘bad’ or ‘doubtful’ is in train, although specific business rules have yet to be defined. System changes are scheduled for the first half of the 2004 year.

External interfaces

Use of the Genesys suite of tools is already being extended within Operations Debt and Lodgement. The interface between these tools and the debt case management system is being strengthened to support collection action.

Online help and training

On-line help is available in each screen of the debt case management system and is supported by a multi-media learning tool.

Behavioural scoring

In June this year two Tax Office senior executives visited a number of United States revenue administrations examining other opportunities for enhancements to the overall debt collection system, including as one component, the debt case management system. This has led the Tax Office to revisit the effectiveness of its own behavioural scoring facility, ‘Net Risk’. The debt and lodgement risk model has been reviewed and is currently subject to further analysis with a view to re-engineering its architecture.

On site visits

The Tax Office already liaises at higher levels with revenue agencies overseas and with providers such as D & B Australia (Dunn & Bradstreet) to examine opportunities for better practice. The Tax Office will compliment this with visits to collection call centres.

2. Whole of client approach
‘ We recommend that known and identifiable amounts of collectable debt should be pursued irrespective of lodgement compliance issues – non-lodgement should involve a separate strategy.’

ATO response: largely adopted.

The issue canvassed in this recommendation is the most effective approach to dealing with the often related issue of debt and lodgement. Often a taxpayer who has a debt will also have returns or activity statements outstanding.

Following the Ledlin Partners report we have adjusted our approaches so as to secure payment (in full or by installments) before finalising the lodgement issue.

At the same time, operators seek to secure lodgement when dealing with the taxpayer on the existing debt. Where further lodgement action is required this is now referred to specialist units for necessary action.

3. Write offs
‘ Our recommendation is that the ATO adopt a write off policy where forecasted amounts are written off monthly and segmented by tax type so that the value of the collectable debt is far more realistic. Recovery of older debt can be separately managed by specialist teams. In addition, forecasting techniques can be applied to reduce delinquency rates and write offs and increased collections.’

ATO response: accept, recognising need for further discussion with the Australian National Audit Office.

In deciding not to pursue further action to collect a debt, the Tax Office is governed by the requirements of the Financial Management Accountability Act 1997. Section 47 specifies that a Chief Officer must ‘pursue recovery of each debt ...unless:

the debt has been written off as authorised by the Act; or
the debt is not legally recoverable, or
it is not economical to pursue the debt.’
These requirements have shaped published policy and other guidelines to staff.

In the last two years considerable effort has been applied to more accurate provisioning of bad and doubtful debts for financial statement purposes. Work in this regard has been undertaken with the guidance of the Australian National Audit Office and assistance from the Australian Bureau of Statistics.

Further guidance from the Australian National Audit Office will be required if the Tax Office is now to adjust its systems and its work practices to acknowledge doubtful debts and approach them differently. Subject to this qualification, this recommendation is accepted.

4. Recruiting
‘ We recommend that the recruitment process presently employed be reviewed with an emphasis on collection skills and the use of specialist credit recruitment agencies. In any event, the current process should be made more “user friendly” with a number of specific contact points rather than only on-line contact and an emphasis on quicker feedback to applicants.’

ATO response: accepted in part.

The previous selection process has been reviewed. Difficulties occurred due to very large number of applicants and positions to be filled. Learnings from this process have been incorporated in processes to be used in future.

Rather than recruiting debt collectors as such, the Tax Office recruitment is based on evaluation of skills such as communication, negotiation and analytical skills. This is because the Tax Office has a broad range of administrative concerns for which it recruits large numbers of staff. Its expectation in doing so is that these staff should be adaptable and able to move reasonably quickly to support different activities as priorities dictate. Particularly at the APS3 level, which is the mainstay of debt recovery activities, mobility across operations and compliance areas is high. Within the Operations Business Line, whole teams of staff are regularly required to be moved to meet the priorities of four business processes; debt collection and lodgement enforcement being recognised separately from Tax File Number and Australian Business Number registrations, payment and product processing and account management.

Equally the Tax Office acknowledges the need to have specific collections techniques skilling to compliment the capabilities of recruits placed in our debt areas and has significantly upgraded the intensity of its training following receipt of the Ledlin Partners report (see next recommendation).

5. Skilling & training
‘ We recommend that specific collections training be provided by qualified and experienced trainers who themselves have collection experience. In the case of any training materials for collections we recommend that they need to be adapted for ATO specific use. We envisage the incorporating of more ATO case studies, together with further assertive collection techniques, all conducted in a professional environment.’

ATO response: adopted.

Operations Debt and Lodgement has now adjusted its training materials to better reflect the specific collections techniques mentioned, particularly in the critical area of maximising the value of the first contact with a taxpayer through usage of more collections focused language. To optimise the delivery of this skilling, experienced staff who themselves have undergone an intensive ‘train the trainer’ program have been utilised. To date, some 1,500 staff have successfully completed these training programs.

6. Performance Management and measuring results
‘ We recommend that there be developed a set of measurable KPIs that are realistic, ongoing, achievable and form part of an overall collection strategy. Regular feedback to Team Members is absolutely critical so that exceptional performance and key strengths can be acknowledged and weaknesses can be identified and assistance rendered where necessary.’

ATO response: agree in principle.

The performance management process articulated here is basically the same as the model that is now in place across the Tax Office. Significant investment has been made in the entrenchment of a performance culture.

This recommendation and the related observations in the report are based on a model of case ownership of debt cases. Case ownership enables an individual to monitor both the level of a taxpayer’s debt and the use of associated KPIs. However, the size and scale of the client base managed by the Tax Office necessitates a case management system that ensures the next priority case is assigned to the next available case manager. Accordingly case ownership is not a feature of that system other than large or complex cases.

The case holdings figures quoted in the report under this heading are inaccurate and do not represent the level of cases on hand.

The Tax Office will continue to review performance indicators recognising the operational expectations of staff. However, it will avoid any measures seen as rewarding staff or teams for individual dollars collected.

7. Effective actions
‘ We recommend a review of the AA (automated action or computer generated letter) strategy as it may be that a more effective collection return will be achieved with telephone calls being made earlier in the cycle. In addition we recommend a review of the content of the letters so that a sense of urgency is created and the recipient responds accordingly. The letters could be trialled for effectiveness (as per the Wollongong trial).’

ATO response: adopt

This recommendation is consistent with Tax Office findings. A pilot of automatic reminder letters employing modified wordings will commence during October 2003. This pilot is one of a set of changes to the debt and lodgement case management system listed for system releases between now and the end of the year. Changes to letters are made through a support product which is designed to allow relatively ready modification to letter content.

As part of recent learnings in anticipating the relationship between the ATO Lodgement Program and consequent debt, Operations Debt and Lodgement has identified clients who are likely to have high value obligations and who are at higher risk of not making timely payment. For the 5 June 2003 due date for income tax payment, a new strategy of phone contact ahead of the date was introduced. This was done to remind these taxpayers both of their past behaviours and of the need to lodge and also pay on time. This strategy produced good results with 50 per cent of those called indicating that they had either paid already or would do so by the due date. Of those remaining, 90 per cent entered into short term arrangements to pay over time. This approach is now being scoped for expanded application.

8. Legal action
‘ We recommend that the ATO consider carefully the formation of a specialist collection legal team that is able to efficiently action matters on behalf of the ATO in a high volume collection environment. It will need personnel who have some experience in collections and in the appropriate legal action required and with the means of generating high volume documentation, lodging same at Courts and arranging for efficient process serving of same. In our view this will also lead to increased collections.’

ATO response:

Specialist legal teams already exist. The recommendation promotes greater use of resort to legal action. In reviewing the extent of resort to legal action the Tax Office is concerned to ensure that legal action is employed in a measured way consistent with the objective of keeping viable businesses trading while also meeting their tax debt (for example by installments).

The balance being struck in determining the extent of resort to legal action will be continually reviewed. Generally legal action will be implemented where a taxpayer fails to respond to letters or telephone calls or either does not make an arrangement to pay or defaults on an arrangement. Depending on the circumstances actions could include:

the issue of a 'garnishee'
the issue of a departure prohibition order, preventing a debtor from leaving the country
the issue of injunctions preventing debtors dealing with their assets
formal legal action, up to and including instigating action that may lead to liquidation of companies or the bankruptcy of an individual.
Quality assurance reviews and regular feedback and communication between debt teams and the more specialised legal teams are now in place to address any perceptions of obstacles to appropriate legal action. Automation of legal action is not presently under consideration.

The Tax Office has in recent past years explored with the Department of Finance, possibilities for operating the legal component of its debt recovery activities as a ‘profit centre’ (in the sense described by the consultants:- in other words, the costs of running the legal action would be funded by the recovery of legal costs and other expenses incurred). Current Commonwealth funding arrangements do not allow operation in this manner.

9. Skip tracing
‘ We recommend that the option of the listing of defaulting taxpayers with a Credit Reporting Agency again be explored as in our experience, listing or the threat of listing adds to collection effectiveness, albeit over time. Records are kept for 7 years and a default listing does affect the ability to obtain credit in the future.’

ATO response: Not accepted due to operation of secrecy provisions of the law.

The secrecy provisions of the Income Tax Assessment Act 1936 preclude the Tax Office from disclosing taxpayers defaulting on their arrangements to pay tax debts. It follows that, should a precondition of gaining access to credit reporting agency information be the disclosure of taxpayer information, the Tax Office would not be able to pursue this recommendation.

The Tax Office does undertake tracing action as a regular part of its operations. In the period February thorough to June this year, teams in Operations Debt and Lodgement actioned some 15,000 cases and were successful in determining new residential, postal or business addresses for 70 per cent of these cases. Tracing techniques used include reference to ATO internal data (for example ABN, TFN) together with searches of external data such as electronic white pages, motor vehicle registry information, Department of Immigration and Multicultural and Indigenous Affairs data.

In addition, an Analytics Project within the ATO Change Program has commenced work to enhance the Tax Office’s capacity to more effectively use information available from other organisations.

10. Dedicated teams for broken arrangements
‘ We recommend a separate broken arrangement team. This Team would have specific expertise in negotiating arrangements and ensuring as much as possible that they were able to be kept. If arrangements were subsequently broken the matter would be referred to another team member within the broken arrangements team. The team would have specific expertise and would be skilled at making arrangements with taxpayers that had a high likelihood of being maintained. A separate team, we believe, would go a long way to achieving the benchmark referred to above.’

ATO response: adopted.

During the 2002-03 year a number of changes to debt and lodgement systems and associated organisational arrangements were made to allow a sharper focus on new debt and smaller (but escalating) debt. Building on the results of this approach the business rules and associated organisational support have been modified to maintain this sharper focus on cases where taxpayers have not responded to automatically generated reminder letters.

System changes will also allow the debt case management system to identify and separately queue those cases with a recent broken arrangement from those that have been in default for some time. The new organisational arrangements underpinning these changes in the case management system are designed to enable us to immediately contact debtors with newly broken arrangements.

Where arrangements have been broken for some time or where data held by the Tax Office indicates that the debt may be ‘doubtful’ or ‘bad’ the case management system will be modified to allow them to be separated from recent defaults. They will then be managed within specialist teams using tailored business strategies.

This will allow a stronger focus on:

new or escalating debt through quicker address of cases where taxpayers have not responded to automatic reminder letters. In this way, responses will align with those applied to new debts
recently broken arrangements for payment, and
those debt cases which are believed to be ‘doubtful’ or ‘bad’.
11. Recovery teams
‘ We recommend a separate Recovery Team(s) for Written Off and/or Old and Ancient debt with a separate Recovery process and a high level of legal and skip tracing expertise.’

ATO response: adopt.

This is a logical companion step to the decision to recognise potentially doubtful debts and treat differently prior to possible write off.

12. Payment options
‘ We recommend consideration be given to a survey of Taxpayers on possible use of Credit Cards to pay tax. It is our belief that Credit Card payment would be embraced by many Taxpayers – it also has the added advantage of the ATO being paid in a prompt manner and the taxpayer then having the option of paying a financial institution over a period of time (which is the function of a financial institution and not the ATO).’

ATO response: agreed in principle.

Earlier Tax Office consideration of possibilities for use of credit cards did not proceed due to the need to meet the cost of the merchant fees. The Reserve Bank has since changed the rules in this regard. The Tax Office is presently exploring this option against the background of improvements which will eventuate from its ‘Easier, Cheaper and More Personalised’ Program. In considering this option the Tax Office needs to address the issue of charges for use of cards. If these were to be borne by the Tax Office there would be a significant impact on revenue if the facility was made available for all tax payments.

The Tax Office will also need to be conscious of competing considerations of placing people into higher interest rate arrangements associated with cards.

13. Outsourcing
‘ We recommend a “watching brief” be developed for the IRS proposal and its effectiveness be re-visited in 12 months.’

ATO response: accept.

As this report acknowledges, the Tax Office has considered outsourcing possibilities in the past and will continue to do so on the basis of effectiveness. However, any proposal would need to be consistent with the Tax Office’s responsibilities to the community. The ATO would remain accountable for tax debt and the manner in which it is managed, irrespective of who actually does this.

In June this year the Tax Office arranged to visit a number of the State revenue authorities in the United States. Their experiences in connection with outsourcing were among a range of aspects canvassed in seeking to identify possible improvements to Tax Office operations. Reports were mixed. Consistent with the recommendation a ‘watching brief’ in relation to the US Internal Revenue Service experience is being put in place.

14. Project teams
‘ We recommend the formation of one or more separate Project Teams utilising better practice methods and having highly skilled and trained Team members. Those teams would have the responsibility of achieving results.’

ATO response: adopted.

This recommendation supports activity which the Tax Office has been conducting for some time now in seeking to better understand behaviours exhibited by segments of our debtor population and the characteristics of particular categories of debt holdings. This is intended to allow for greater differentiation in approaches to such client segments and categories.

More than 20 projects have been identified for which specific resourcing will be allocated. Particular strategies will be developed for tax practitioners whose clients are in debt and for the small business market, directly. The connections between lodgement and debt will be more closely examined as will the interrelationship between Income Tax and Pay as You Go (Installments) debt.

15. Ledger analysis
‘ We recommend that, as a matter of urgency the ATO explore the development of the “shadow ledger” and the ability of RMS to report dollars collected via Team and Team Member.’

ATO response: agreed in principle.

The new accounting system being developed under the ATO Change Program should deliver opportunities in this regard. The recommendation is under consideration for the purpose of allowing better management reporting. In doing that the Tax Office will avoid any measures seen as rewarding staff or teams for individual collections.

16. Call management
‘ We recommend that as the decision to adopt Genesys has apparently been made that Team Leaders be taken to other Genesys sites to observe the system working in other environments. We also recommend there be some consistency in the work stations in the provision of uniform sized work stations for Team Members and a review of the work times and processes of Team Members.’

ATO response: under consideration.

The Tax Office is presently expanding its Genesys call management platform and is yet to have the full opportunity to redesign its strategies, work practices and procedures in response. The Tax Office acknowledges that there is value in pursuing a more standardised approach to telephony operations across the organisation. The Tax Office will continue to review hours of operation and as part of this will evaluate the experience of the other collection and government agencies.

17. Team structure
‘ We recommend that the Team structure remain as is at the moment and that consideration be given to Team Leaders having responsibility (after the appropriate training) for collections training of their Team Members.’

ATO response: agreed.

The Tax Office has a Performance Development and Management Scheme as a framework to support a performance culture. The job descriptions of staff recognise requirements for self development and contribution to staff development and skilling. Over the last 12 months, staff in technical adviser and managerial positions have participated in a Professional Accreditation program. To date 70 per cent of technical advisers in Operations Debt and Lodgement (159 people) have completed this process with 10 identified as needing further development. This program is ongoing and will eventually provide accreditation for all Team Leaders, Directors and relevant Assistant Commissioners. Since the delivery of this report, coaching responsibilities in specific support of the maintenance of collections techniques have been introduced for more experienced operatives within teams, at the APS4 level. With team sizes of around 15, on average two staff in each team have coaching responsibilities.

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