I’d like to share with you some of the recent changes and developments at the Australian Tax Office. It is now almost a year since I took up my role as second commissioner responsible for the ATO’s law design and practice. It has been a steep learning curve for me, but it’s also an exciting time as the ATO undergoes transformational change, a fundamental shift to supporting those who do the right thing — putting the taxpayer at the front and centre of our thinking.
Of course this does not mean that we will let up on our compliance activities. We will continue to target those who fail to do the right thing, be they large multinationals or local small businesses. But our focus will be on supporting those who unfailingly comply with their tax and super obligations year in year out. We will make it as easy as possible for people to comply, and as difficult as possible for those who want to cheat the system.
The process of change, which we call reinventing the ATO, is already well under way. And to channel our energies and maintain our focus, we have categorised the change program into three main streams — transforming the client experience, transforming the staff experience and changing our culture. If we want our clients to have a different experience when they deal with us, we need to change first, and for that to happen, our culture needs to change.
As the late American management guru Peter F Drucker put it: “Culture eats strategy for breakfast.” Another expert, former IBM CEO Louis V Gerstner Jr, is quoted as saying: “The thing I have learned at IBM is that culture is everything.”
It’s pretty obvious therefore that any organisation that is attempting to undertake large-scale reform like we are, cannot be successful unless it changes its culture first. So we are focusing on cultural change internally, and we are confident that the results will translate externally.
The need for change
Some of you may ask: why do you need to change? Well, there are a number of drivers.
We had the APSC Capability Review (in late 2013) which found that the ATO had become disconnected from sections of its stakeholders, a finding that was echoed by many of our scrutineers.
The tax environment is also about to undergo significant change. You would be aware that the government is planning to release its Tax White Paper Issues Paper shortly. The Issues Paper will no doubt refer to the complexity of the tax system, design of tax law, administration of the law and reduction of red tape, which is a key priority for the government.
Then there was the Financial Services Inquiry report released in November, which identified a number of tax issues that affect the allocation of funding and risk in the economy. It found that certain tax and regulatory settings distort households’ saving decisions towards housing. A number of other taxes may materially affect the demand for, and supply of, funding for particular sectors and the broader allocation of funding and risk. I won’t go into the details here; for those of you who are interested, they are available on the Inquiry website, but the Inquiry did urge the government to seriously consider tax reform. No doubt, these will also be taken into account as part of the White Paper process.
The Committee for the Economic Development of Australia also released the results of its ‘Big Issues’ survey in November, in which respondents identified tax reform among the top four priority issues for the federal government along with enhancing productivity, improving our competitiveness and encouraging innovation.
Add to all this the need to achieve more with less, keep pace with the latest technological and communication advances, meet customer service demands, the need to be green, to understand and deal with globalisation, our fast changing demographics and you get the picture. The one constant will be change.
Building trust and fostering willing participation
Building a relationship of trust between the ATO and taxpayers goes to the heart of fostering willing participation in the tax system. Let me share with you a quote from Robert Ewing, one of the ATO’s pioneer commissioners:
“Suspicion of taxpayers by officers of the department breeds distrust of the department by taxpayers. This result is to be avoided by every possible means… The principal rule of the department is to assist taxpayers in every possible way.”
Keeping this in mind, the ATO’s new mission is:
“To contribute to the economic and social wellbeing of Australians by fostering willing participation in the tax and superannuation systems.”
We are very fortunate to have high levels of willing participation in Australia. We know this from analysis of our revenue collection which shows that more than 95% of our revenue comes in voluntarily — with relatively little intervention from us but supported by our systems and processes. Less than 5% comes in from compliance enforcement measures. We also know that 90% of revenue is paid on time and over 80% of income tax returns are lodged on time — further evidence that, overwhelmingly, most people do the right thing.
Studies by the Centre of Tax System Integrity at the Australian National University and other academics over the last decade have also shown consistently that the vast majority of Australians willingly comply with their tax obligations.
There are many levers that influence people’s attitudes to the tax system: fairness, the level of complexity, social norms, personal beliefs, economic conditions, advice and relationship with their tax practitioner, the experience they have when dealing with the ATO, and the trust and confidence they have in the system. Basically, most people comply when they are confident that others are doing the same thing.
While we may attempt to influence many of these levers, about the only thing within our control is the experience we create for clients. Research tells us that the better the experience, the more likely we are to build trust and confidence. Therefore, we are focusing our efforts on improving the client experience in order to further increase the levels of willing participation.
Given that most people do the right thing, we will reward this behaviour with a lighter touch experience: easier, less complex, and less intrusive. In essence, this means designing the system for the benefit of those who do the right thing year in year out, rather than for those who don’t.
We need to invert our thinking, respecting and valuing those who do the right thing and make their experience a whole lot better. Our approach to getting the design of the client experience right was to work with our clients. We have been conducting focus groups and one-on-one interviews with various segments and stakeholders of the community, including business and intermediaries, to understand their current experience and how they would like it to change.
What we are hearing is that people want:
- To spend less time and effort on complying;
- A range of channels that can be accessed when and how they want — including more digital avenues but not losing the option of talking to a real person;
- To have more certainty and to be able to trust our advice;
- Communication that is better targeted to circumstances, in plain language in the right tone — when people need it and in the form they want;
- Early conversations to stop disputes becoming entrenched, and to identify the right issues that need attention;
- Security of data and protection of privacy;
- Better use of data that we already have;
- Streamlined dealings with government in general;
- Use of “natural” systems; and
- To know that we deal with those who are not doing the right thing.
We have used this feedback to come up with a design blueprint that will help us build and implement the improved client experience. Not only will this mean new products and services, it will also mean a fresh approach to compliance — with a stronger focus on fostering sustainable willing participation, and smarter ways to address endemic risks.
We are developing a full suite of strategies that are targeted and tailored, based on risk, transparency and behaviour. These strategies will address the numerous influencers of people’s attitudes to participating in the tax system — as I mentioned before, things like perceptions of fairness, ease of compliance, the quality of our engagements and relationships, and social norms.
In this context, I must point out that misleading reports like the one put out by United Voice recently, do the tax system no favours whatsoever. A good tax administration relies on willing participation by the community, which, as I said before, draws its support from confidence among taxpayers that everyone else is paying their fair share, and that the administration has the capacity to create a level playing field for all players by taking strong action against those who dodge their obligations.
Using questionable research to make misleading (and in some cases just blatantly wrong) claims that some large taxpayers don’t pay any tax or pay very little tax undermines confidence in the system and achieves the exact opposite of what organisations like United Voice claim to be advocating.
One of the big changes under our reinvention program over the last two years has been our approach to managing and resolving disputes with taxpayers. This is also very topical given the House of Representatives Standing Committee on Tax and Revenue’s Inquiry into the ATO’s management of disputes with taxpayers, which is due to publish its report around March this year.
Although not desirable, disputes are a feature of our tax system, particularly given its size and complexity. Sometimes they even work to improve the system — for example, when there is a contentious or uncertain point of law that requires clarification and it is in the public interest to seek law clarification through litigation — or when it highlights an area for improvement in our administration.
But we are acutely aware of the need to manage disputes in a timely manner — both for the sake of the taxpayer involved and in order to maintain public trust and confidence in the ATO and the broader tax and superannuation system.
While the number of disputes that we deal with is relatively low, their significance is high. They impact people’s lives and businesses and their effects can be long lasting. When they take too long to resolve and are not managed well, the costs are very high — not only in terms of time, effort and money, but also the stress for everyone involved.
Given the evidence and submissions made to the Inquiry, I acknowledge there were cases in the past where we certainly could have done things better. I’m pleased to say that we are now changing. The ATO’s stance, strategy and capability is now firmly focused on resolving disputes as early as possible, in a way that is efficient, respectful and fair.
Resolving disputes early not only saves time and money for the taxpayer and the ATO, it also provides certainty for taxpayers and promotes productive relationships. To resolve disputes in this way means we focus on a taxpayer’s experience across all their dealings with the ATO — not just when they have lodged an objection; better that we have prevented the need for an objection in the first place.
Over the last 18 months or so, we have made significant improvements to our dispute prevention and resolution processes, including:
- The establishment of our separate Review and Disputes Resolution Business Line in my Law Design and Practice Group. This represents the beginning of the structural separation of our objections and review from our compliance function. It has started with the large market and high wealth individuals.
- Whilst other objections are currently still managed within the Compliance Group that is undertaken in a separate area from the original audit team and decision maker.
- Ensuring we have early conversations — getting our people to pick up the phone to taxpayers earlier in the piece, both at audit and objection stage, rather than getting into protracted paper wars.
- Providing greater technical decision-making support to our auditors.
- Increased training and feedback about dispute prevention and resolution.
- Entrenching independence protocols designed to ensure a fresh view is brought to any review.
- Encouraging review officers to challenge an ATO precedential view where appropriate.
- We are using mediators, facilitators and private practitioners (including former judges) for alternative dispute resolution.
- We have implemented an in-house facilitation service primarily for small business and individuals for less complex disputes. This service has been available since April last year, with 59 referrals made either by the taxpayer or the ATO (both completed and in progress). We are already seeing the benefits and are looking to build on this further, particularly at audit and objection stage.
- We have introduced the Independent Review service — a pre-assessment review of audit cases for publicly listed companies and taxpayers with an annual turnover greater than $250 million.
- We have moved objections for taxpayers with an annual turnover greater than $100 million from the Compliance Group to the Review and Dispute Resolution business line. This ensures independence and structural separation between ATO officers handling objections and the original decision-makers.
- We have worked closely with practitioners to revise our settlement guidelines and create an externally-focused, principles-based policy statement. The new Settlement Code has been written in a clear, concise and positive way — reduced from 45 pages to just two — and emphasises our commitment to early resolution of disputes and sensible use of settlements, not at all cost, but where it is practical, beneficial and efficient to do so.
- And in November, we commenced a survey to understand taxpayers’ perceptions of fairness in dealing with us in disputes. The first survey will cover 350 taxpayers, mainly small business and individuals. We expect the report to be completed next month.
Since implementing these strategies, we are seeing improvements to the client experience. For example:
- Average cycle times for rulings have been reduced from 129 days to 70 days, and in some instances as low as 40 days;
- We are settling more cases earlier. In 2013-14, 77% of settlements occurred before litigation, an increase from 52% in 2010-11; and
- Of the 21 Independent Review cases completed, only one case has proceeded to objection.
While the feedback is positive and the results show we are resolving disputes much earlier, we continue to focus on strategies to improve the taxpayer experience and are currently exploring:
- Expanding the scope of existing strategies to more taxpayers;
- Reviewing our performance measures to ensure a focus on outcomes and the whole experience that people have with us; and
- Introducing a Dispute Resolution Charter.
We support the creation of a separate area within the ATO to manage disputes for taxpayers. As was discussed in hearings with the House of Representatives Committee, an appropriate level of separation, independence and transparency can be achieved by moving all objections from the Compliance Group to the Review and Dispute Resolution business line. This would be in line with current practice in leading tax administrations like the US Internal Revenue Service and the Canada Revenue Agency.
The House Committee also raised with us further improvements in our internal governance of disputes and we are looking at options in this space too. However, we note that some submissions to the Committee do provide conflicting messages that must be reconciled. For example, we are told we shouldn’t be litigating so much and we should seek to resolve disputes (we agree) but at the same time are criticised for settling too much. We are then also told by settling too much there are fewer cases and therefore fewer precedents coming out of the courts. There are other examples. The important thing to be observed is how to get the balance right and this is what we strive for.
Now let me share with you a key focus area for the ATO under our reinvention program — law design. Tax law as it currently stands runs into thousands of pages. To put it in context, Australia’s first public servant, Robert Garran, said of the very first Income Tax Assessment Act that “it was a thing of beauty and simplicity with words that would not have shamed Wordsworth or T.S. Eliot.” (Prosper the Commonwealth, 1958, p145). But over the years, complexity crept in and it became, in Garran’s words, “a literary monstrosity”. That was how he described it in the 1950s. I wonder what he’d have to say about it today!
As an aside, I understand that researchers at the University of New South Wales School of Business and Taxation Law are working to develop a “complexity index” to measure tax system complexity in Australia. Such an index will reinforce what many of us already know and what some taxpayers have found out the hard way — and at great cost: that our tax system is simply far too complex.
It is common sense that you cannot have a law covering each and every aspect of human existence. That’s not what the rule of law is supposed to mean. It’s about creating the right legislative framework and allowing the courts to interpret and regulators to administer the laws consistent with the spirit and intent with which they were designed. It has often been said that because business is much more complex the law has to be complex. This is a jump in logic, it doesn’t follow, it is a non sequitur. Complex laws add to the complexity of business — businesses have to adapt their transactions to avoid unintended consequences and double taxation. Complex laws tend to create gaps and unintended points of non-taxation. Complex laws have also tended to add to uncertainty rather than reduce it.
In practice, there is enormous complexity in how the laws work in different circumstances and how the compliance burden is shared across the community — among individuals, small businesses, large corporates and multinationals.
The challenge for tax administrations worldwide, including the ATO, is to ensure that the design of legislation and its implementation and interpretation in practice keeps up with contemporary business practices, rapidly changing technology and the needs of the digital economy while at the same time addressing the risks presented by those companies that choose to use artificial boundaries to minimise or even avoid their tax obligations.
One of my priorities as second commissioner responsible for the ATO’s law area is working with Treasury to ensure that this happens.
There is also the challenge of good governance — to ensure that laws do not have unintended consequences and they work as intended. Perhaps there are lessons that the ATO can learn from our counterparts across the Tasman. New Zealand Inland Revenue also has a systematic approach to law development, including engaging certain tax professionals in the design of legislation very early in the development process.
The ATO is strengthening its relationships with Treasury at various levels to be more active and supportive in law design and development. However, at the end of the day, the ATO plays an advisory role, and policy matters relating to taxation are the preserve of government.
Statutory Remedial Powers
As administrator of our tax system, the ATO experiences and observes firsthand the operation of our tax laws in actual practice. With the knowledge and insight gained by these experiences and observations, we provide advice and input to Treasury on how aspects of the law can be improved — which laws work in practice and which ones don’t. In a sense, among other roles, we perform an advocacy function on behalf of the taxpayer.
But law change cannot always be the solution and some of you would be aware of the proposal for statutory remedial power for the commissioner or, as some describe it, “commissioner’s discretion”. The concept here is to give greater flexibility in dealing with legislative problems which cannot be resolved by way of interpretation. The particular legislative problem we are thinking about is when the words in law do not produce the right outcome and result in something contrary to the original policy intent.
We think that such a remedial power could have helped in the past in dealing with some of the announced but un-enacted taxation measures.
A number of professional bodies have also suggested that statutory remedial power, or SRP for short, should be looked at as part of the broader consideration of systemic solutions to prevent a build-up of announced but un-enacted tax and superannuation measures in relation to technical defects in the law. It is important to recognise that a build-up of measures arises from the demand for change and the speed with which change can be made.
Although we envisage an SRP can help make changes more quickly, some easing of pressure on the demand for change within the system would complement any commissioner’s discretion. From the perspective of the ATO, recent structural changes in the areas that deal with Treasury have helped better manage the demand for law change.
During the course of last year, a working group was set up to examine this proposal comprising the ATO, Treasury and representatives of the tax, accounting and legal professions. The consultation phase is now complete and the working group has produced a joint Statement of Intent about what such a remedial power could try to achieve. It proposes that the commissioner may vary the law (in favour of the taxpayer) in two types of circumstances:
- Firstly, where the application of the law produces outcomes which appear to be inconsistent with the reasonably ascertainable policy intent of the law. This may include situations where it is reasonably clear that, particular arrangements or transactions were not contemplated at the time of the policy development or the drafting of the law, and
- Secondly, where it results in compliance costs on taxpayers that are unnecessary or disproportionate to achieve the reasonably ascertainable broader policy intent of the law and those costs can be relieved in a way that is consistent with that intent.
We envisage that a remedial power would provide a mechanism for resolving unintended and anomalous outcomes or disproportionate compliance costs in the tax law more quickly than is possible through the existing legislative amendment process. The power may also have a broader benefit for the tax system by allowing minor technical corrections that wouldn’t otherwise happen.
The proposal now needs to be considered by government to progress this concept. The form and scope of such a remedial power will determine what issues it may be able to deal with. Whatever form it takes, the exercise of the power must be public and open to scrutiny.
Those issues that may not be able to be dealt with by the power would continue to be considered under existing policy and law development processes. Of course any decision on giving such a power to the commissioner, and what form such a power should take, are matters for the government.
Review of public advice and guidance products
We are currently undertaking a review of the effectiveness of ATO advice and guidance, such as the mix and quality of our products, their timeliness, and the effectiveness of the current consultation processes (including the Rulings Panel).
As part of this review, we’re looking at a wide range of products, from factsheets and Interpretative Decisions to Tax Rulings.
The consultation that we undertook to assist us with this review, both internally and externally, revealed a key theme: there was a lack of strategic management of the end-to-end process that identifies, prioritises, coordinates, creates and maintains the ATO’s advice and guidance products. Although processes are mostly corporately managed, a lack of central coordination means product development can be ad-hoc and lack clear lines of accountability and coordination.
The consultation raised a number of key issues with the current advice and guidance system including:
- A lack of readily identifiable information on existing entry points for externals to raise issues on which advice or guidance may be warranted;
- No transparent strategy in regards to issue identification and prioritisation;
- The timing of consultation is often inflexible and too late in the lifecycle of advice and guidance production; and
- Inadequate search function on ato.gov.au and lack of contemporary channels in providing advice and guidance.
This last feedback, relating to ato.gov.au, is of particular concern to us and we are working continually to simplify and improve the search functionality on our website.
The consultation process has made it clear that it is critical for the ATO to have corporate structures, processes and delivery platforms in place aimed at delivering products that are flexible, tailored and responsive to end users’ needs, including through the use of modern, contemporary channels such as web chat or apps to provide guidance. This in turn will ensure that the ATO is providing effective contemporary guidance that promotes willing participation in the tax and superannuation system.
In order to assist taxpayers to meet their tax obligations, we want our advice and guidance products to:
- Be easy to find and access; and
- Contain clear, accurate and reliable information that explains the practical application of the law, which can be applied to individual taxpayers’ circumstances and gives them the level of certainty they require.
In short, we want to ensure that we have guidance that actually guides.
If we can get this right, the next generation of guidance should be developed as part of business as usual and be able to keep up with changes that may arise from our reinvention program.
One of the other significant outcomes of the consultation is that the Tax Institute, a key external partner, will lead a project to “triage” our existing external guidance for opportunities for improvement, broadly under the umbrella of the National Tax Liaison Group (NTLG), and reporting to our Chief Tax Counsel, Jeremy Hirschhorn.
As the project continues, the exact scope and approach will be progressively refined. The initial status report from the Tax Institute to the NTLG is due in March and we look forward to working with the Tax Institute and the NTLG to improve our public advice and guidance products.
Last June, we announced that we were trialing an External Compliance Assurance Process for selected large taxpayers. The objective of ECAP is to provide certainty more quickly to taxpayers by offering them the choice of nominating their statutory company auditor to undertake factual findings work or for the ATO to undertake the risk assurance work.
The intent of the pilot is to test the effectiveness and viability of taxpayers using existing registered company auditors to conduct assurance on factual matters. If effective — and as the pilot comes to a close indications are encouraging — this approach will reduce compliance costs and red tape for business taxpayers and ensure that the right amount of tax is being paid. Despite misrepresentations by some (I never cease to be amazed by the mischief that some people like to create) it is not handing over ATO auditing functions to the accounting firms.
The business community is looking to the ATO to provide more innovative services that acknowledge business imperatives and practices. The ECAP allows for business to determine, at their own cost, those situations where it is more efficient and effective to have someone already familiar with a particular issue or area to review and verify factual data. It does not cover interpretative issues.
The ECAP pilot has progressed well and the feedback from taxpayers and industry has been very positive. One case resulted in the taxpayer initiating 5 years of income tax returns amendments to correct reported amounts. That taxpayer has indicated that they have updated their controls around tax return preparation. We have also found that where tax governance issues have been identified (about 50% of the cases) the taxpayers and/or auditors in the majority of those cases have offered mitigation actions, ensuring that these errors won’t be repeated. Potentially there may also be pre-lodgment application of this program.
We are currently evaluating the pilot and expect that recommendations concerning the future of ECAP in the longer term will be made next month.
International tax reform is now front and centre of public debate on tax. As chair of the G20 last year, Australia led global efforts against tax minimisation, avoidance and tax havens.
The G20 leaders agreed at their meeting in Brisbane in November that profits should be taxed where economic activities deriving the profits are performed and where value is created. They also committed to finalising work on the OECD’s Action Plan on Base Erosion and Profit Shifting or BEPS this year.
Treasurer Joe Hockey indicated late last year that the Government is contemplating additional legislative action and we have seen the UK make some progress in this space. In November, the ATO hosted the 44th meeting of the Study Group on Asian Tax Administration and Research in Sydney. As a consequence of this meeting, tax commissioners from the Asia-Pacific region will establish a regional taskforce to share compliance tactics, increase tax transparency and help countries to tackle base erosion and profit shifting.
The 17-member group — which includes China, Japan, Singapore and Korea as well as developing countries like Indonesia and Papua New Guinea — agreed to set up a permanent taskforce to support collaboration on tax issues and help create robust tax systems in each jurisdiction.
The taskforce will help the member countries work together more effectively as we address issues facing us all, including profit shifting by multinationals. Perhaps for the first time in history, there is powerful and unprecedented international collaboration on tax matters and Australia is at the forefront of efforts to reform the century-old tax system.
Another important development in this space was the passing by parliament of the International Tax Agreements Amendment Bill 2014, giving legal effect to a treaty that Australia signed in 2013 with the Government of Switzerland — hitherto considered a tax haven for those seeking to avoid their tax obligations. Not anymore. The treaty came into force on 14 October 2014 and enables the revenue authorities of Australia and Switzerland to exchange taxpayer information for the purpose of addressing tax evasion. It’s now a question of when, not if, tax dodgers are caught.
Any suggestion that we are going soft on large corporates avoiding their tax obligations could not be further from the truth. As I have previously said, it’s important to have a debate but even more important to do so with facts, not myths.
For the past 18 months, the ATO has been closely examining the tax arrangements of multinational companies. We are using our treaty and information sharing agreements to check the assertions they make to the ATO against what they are declaring in other jurisdictions.
The tax arrangements can be complex and it takes time to work through the issues and unravel the connections, so that the ATO can come to a view about a company’s tax liability in Australia.
We have commenced more than 200 client risk reviews on multinational companies, including 25 tech companies or companies that conduct a significant portion of their business digitally. We have completed approximately 50% of the reviews and have commenced 20 audits where we have identified significant concerns. Our risk identification program is ongoing and we expect to commence further risk reviews and audits in the future.
By the second half of this year, we are expecting to see some of these cases tested in court. No doubt the world will be watching with interest to see the outcomes.
We also expect some companies will accept that they need to contribute more tax in Australia without the need for litigation.
I have shared with you the new directions that the ATO is heading in as we endeavour to reform tax administration with the aim of transforming the tax and super experience in Australia. I would welcome your feedback on our initiatives and any suggestions for improvements.
As a former part-time lecturer in the University of Sydney Masters course, I value the role that tax teachers and academics play in ensuring the health of our tax system.
A well-rounded tax education is an important pillar for preparing the tax administrators, advisers and practitioners of tomorrow. I urge you to keep up the good work in this regard.
The ATO too is refocusing its efforts on the core training and CPD/CLE of our compliance and law interpretation people. It is a particular passion of mine to ensure we have the best trained tax people we possible can and we will be exploring different ways of delivering that ongoing training and education.
This is an edited version of the speech given as a keynote address to the Australasian Tax Teachers’ Association 27th annual conference at the University of Adelaide on January 20.