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Photo: Michel O'Sullivan

The Australian Taxation Office faces a future as a second-rate tax organisation without urgent and ''transformational'' reform, according to an assessment by the public service workplace authority.

The Public Service Commission says the ATO is at a ''turning point'' and must completely change its processes, systems and culture to keep pace with the demands of government and taxpayers and to combat increasingly sophisticated tax cheats.

A commission ''capability review'' found the ATO's systems were not up to the expectations of citizens and businesses, now demanding a paperless e-tax experience.

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The review found the ATO was not as advanced as some of its managers thought and was spending more than $760 million annually on computer systems that left its own public servants, taxpayers and businesses frustrated.

A $70 million investment in modernising the ATO's computer systems was unlikely to be enough, according to the review team. It spent months examining the ATO and its 24,000-strong workforce.

Australia's technology in tax collection has fallen behind that of several developed nations. Denmark is cited as the leader.

Its systems allow 78 per cent of individual tax returns to be completely pre-filled each year.

Ireland, Norway and Britain were also cited as countries whose digital and ''e-government'' strategies were well ahead of those of Australia.

Although the ATO's staff was described as the organisation's ''lifeblood'', employees told the commission that a ''risk averse'' culture was retarding the office.

''External stakeholders'' the review team interviewed voiced similar concerns.

''The ATO has a reputation among some external stakeholders of having a culture that is risk averse and defensive,'' the review says.

The commission found the ATO's technical skills were strong, but that major improvements were needed in its leadership, management, communication and people skills.

There was also concern that isolation made business units scattered around the country ''orphans''.

The IT systems also drew criticism, despite $588 million being spent on keeping them running in 2012-2013 and another $201 million allocated to ''new work''.

''ICT [information and communications technology] was an area of frustration often mentioned by staff and the community throughout the review,'' the team noted.

''Internal stakeholders feel that, all too often, the ability to progress aspects of their business is stifled by a lack of capacity in the ICT forward work plan to accommodate demand.''

In summary, the commission offered the ATO a choice: change or accept a future of mediocrity.

''The ATO is at a turning point,'' the review says. ''It can choose to try to maintain stasis, with the risk of slipping backwards, or transform.''

Tax Commissioner Chris Jordan welcomed the review, noting it acknowledged many strengths in his department and arguing many of the changes identified were already being made.

''While we are already taking steps to position ourselves for the future, I agree we also need to clearly set out our organisation's direction and how we will get there,'' he wrote in response.

''An enterprise-wide ATO strategy describing our strategic shifts and the pathway to achieve them needs to be equally well understood.''