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Tax administration in a digital age: the Australian experience

This is the slightly-edited text of a speech by ATO Second Commissioner Neil Olesen at the University of NSW – biennial international ATAX conference on tax administration in Sydney on April 5, 2018.

The ATAX conference has a very learned reputation and I feel I should probably start with a definition of what we mean when we talk about “the digital age”. But I’m not going to do that; I’ll keep myself some wriggle room!

I would note that while data and technology have always played an important role in tax administration throughout my career, what’s new is the reach that a tax administrator can now have into the community and insights that are now available (or becoming available), including in real-time, or something near real-time, because of digital technology. These are significant game changers for how we do our role.

There are four main sections of my presentation to you today:

  1. The core business of tax administration and how that has changed, and not changed
  2. The digital transformation journey – a combination of mandated, organic and deliberately designed change
  3. The complexity of digitisation and lessons to date
  4. Where to from here

The core business of tax administration

The fundamental of ‘what’ tax administration is about has not really changed that much over time; we’re tax collectors and we aim to collect as much as we sustainably can of the tax payable under the current law, and we aim to do that as efficiently as we sensibly can, for both ourselves and for our clients.

But we’re not just a tax collector; we are also a custodian of the tax system. We’re in a unique position where we see the operation of the system up very close.

Three key questions are always in focus as we do our work:

  1. How well is the tax system performing, in a practical sense?

  2. How can our administration of the system be improved, so that it performs better?

  3. How can we continue to build community trust and confidence in the work that we do, and by extension, in the system itself?

To get a proper and complete answer to these questions is what has driven us to estimate, for the first time, tax gaps in Australia – that is, to understand the difference between the taxes actually being collected and the taxes that theoretically should have been collected.

We have now published tax gap estimates for income tax in the large company market, for GST, for Fuel Tax Credits and Fuel Excise, for Pay As You Go Withholding, for Wine Equalisation Tax, and for the Superannuation Guarantee – which is not so much a tax gap as a compulsory contributions gap; and we are currently researching and finalising the estimates for the individuals’ income tax gap and the small business income tax gap (and a few others to boot).

The research and random enquiry programs we have used to estimate the gaps have provided us with insights into the behaviour of clients and agents, and of what is driving the size of the gaps.

We always imagined this work would be helpful, but it has probably exceeded our expectations.

Having this data and insight into where to focus our attention has been a huge step forward. These insights are making us rethink where we focus and what levers we may need to pull to improve compliance and sustainably reduce the gaps.

The digital era offers us new ways to meet these challenges. We find ourselves at an exciting point in our history where we have unprecedented insight into how well the system is operating, combined with unprecedented new means to address those insights through the opportunities that digital offers.

More than ever we are focussed on using digital solutions to improve client experiences, to make it easier for taxpayers to meet their obligations, to streamline processes, and to better tailor and target our services and enforcement. And increasingly, the work we are doing is contributing to a whole-of-government digital transformation agenda.

Graph showing work we are doing is contributing to a whole-of-government digital transformation agenda. ELS, etax, Business portal, ato.gov.au, ATOapp, Agents portals, myTax, Virtual assistant, SuperStream, Voice authentication, Social channels, myGov, ATO Beta, myDeductions, Smarter Data RAD Lab, ATO Community, PLS, STP

The deliberately designed digital journey

When I think of our digital journey to date, I’m reminded of the old story of someone who, when asked for directions by a stranger, answers by saying: “well if I was going there I wouldn’t be starting from here”. Our journey has been an interesting mix of mandated, organic, and deliberately designed change. And while, with the benefits of hindsight, we might imagine that we could have done things differently, we’re actually not in bad shape. We’re certainly not there yet, but we’re well on our way, with some very good foundations, and some very good services.

There are a couple of key examples that particularly illustrate the progress we have made:

MyTax

The first is MyTax. MyTax is our streamlined online tax return offering for individuals preparing their own return. It can be done on most smart devices and is accessible via myGov through our website, our app or online services. MyTax has been a huge step forward in our digital service offer.

MyTax was introduced in 2014 for those with simple affairs, and in 2016, it was made available to all individual taxpayers. It is now used by more than 3.5 million people to lodge their annual tax return.

Pre-fill

With myTax, we now have a truly digital experience that is personalised, is pre-filled across a range of income labels, and can deliver tailored messages in real time to help people to get their deductions right.

The pre-fill story is impressive, with some 80 million pieces of information delivered into tax returns in 2017; but that story is now largely ‘old hat’. What is much more recent is the data and analytics that drives the real-time messaging. It uses ‘Nearest Neighbour Analysis’ that lets us predict abnormal claims by comparing amounts entered with those of other people in similar circumstances.

The analytics were developed by us in our data and analytics Research and Development Lab that we established in 2015, and the breakthrough was in getting models to run in real time – just 20 milliseconds to do the analysis across our data holdings and then push a message to the client. When first developed, the models were taking days to run.

The nudges to 170,000 clients during Tax Time 2017 led to deductions being self-adjusted down to the tune of some $80 million. While not everyone adjusted their claims, we were at least able to make transparent what had come to our attention as a risk.

As a digital experience, myTax is real-time engagement at scale – and supports our ambition of moving our compliance interventions ‘upstream’ as much as possible.

Ease

MyTax has provided a range of benefits:

  • a great client experience as evidenced by the client feedback we have received
  • a new channel to engage with our clients
  • and a foundational platform for other digital services which we are now leveraging.

Our performance results for Tax Time 2017 were impressive. In fact, Tax Time 2017 was the most successful ever in terms of ease of experience, client satisfaction, volumes and speed of return processing. More than 5.8 million refunds, or nearly 75%, issued within five days of lodgement and more than 6.6 million refunds (nearly 85%) issued within seven days. Only two years earlier, in Tax Time 2014–15, no refunds had issued within seven days!

The speed, the accuracy and the ease of this experience is partly attributable to our move into digital.

SuperStream

The second key example of our digital journey is SuperStream. For those of you who might not be aware, the ATO plays a key role in administering aspects of Australia’s superannuation system.

SuperStream has been a transformation in the way money and information moves around Australia’s superannuation system using standard formats across the super system – seamlessly connecting employers, funds, service providers and the ATO.

SuperStream was born out of the 2010 Superannuation System Review (otherwise known as the Cooper Review) into the governance, efficiency, structure and operation of Australia’s superannuation system.

This Review found that much of the so-called ‘back office’ of the superannuation industry was plagued by inefficiencies and resulted in millions of ‘lost’ superannuation accounts, as well as difficulties for members in consolidating their accounts. The review also found that employers often struggled to get their employees’ contributions right.

Previous attempts by the industry to innovate and find a solution had failed to produce significant improvements and changes – which, combined with the compulsory nature of superannuation, provided a solid base for government intervention.

SuperStream was designed to modernise the processing of transactions, to improve member, employer and fund experiences, and in turn improve their overall confidence in the superannuation system.

At the end of last year, the benefits of SuperStream for employers and funds were estimated to be $800 million per year, comprising about $400 million per year for employers and a further $400 million per year for funds. More significantly, the estimated improvements in retirement savings for members were estimated at $2.4 billion per year.

When industry performance was recently compared to the base year of the Cooper Review in 2010, significant shifts in productivity and efficiency were evident:

  • there had been a sharp rise in the volume of digital transactions with over 85% straight-through processing rates on contributions and 95% for rollovers
  • there had been a massive reduction (87%) in cheque numbers used in payments
  • there had been a greater consolidation of member accounts and a sustained drop in the number of lost super accounts, and
  • there had been much faster overall allocation of money to accounts resulting in members earning investment returns at the earliest possible time.

Better experience through:

  • lowered costs
  • ease of operation
  • increased retirement savings.

In terms of our digital journey, I think the biggest contribution of SuperStream has been to boost the confidence in our ability to deliver truly transformative digital change. There were plenty of people in the superannuation industry at the time who did not think we could pull it off. The fact that we did, and that the benefits continue to accrue each year, and that we continue to build on the foundations and the investment which the super industry has made, has been very significant for confidence in our continuing digital journey.

The complexity of digitisation

Going digital sounds easy, but that’s not true when you’re talking about systems that affect most individuals and a great proportion of the economy, and when you’re not a digital native and have a bundle of legacy systems and applications. If only going digital was as simple as a flick of a switch.

Instead, going digital has required an awful lot of blood, sweat and tears. Along the way, we’ve learnt a bundle of lessons.

The lessons we have learned so far:

Firstly, keep the client at the centre, and focus on the benefits that can be provided for them. There needs to be genuine value and service improvements for clients, to attract and convince them to make the shift. Any undue focus on compliance outcomes runs the risk of derailing the exercise.

Second, as with other major change, acknowledge that not everyone will make it, or not make it as quickly or as easily as others. The transition to digital services requires patience, respect and active assistance, as well as some overhead in maintaining legacy channels and services as people make the transition.

Third, don’t push too quickly or frighten people or get ahead of what the community is ready for – buy-in and uptake are key to successful transition.

Fourth, at least in tax administration, there is no need to be cutting or bleeding edge in the technology or services that are provided. Rather, it is OK to just be contemporary enough. Better to use technologies that are proven and work reliably than risk disappointment and setbacks – confidence is everything.

Fifth, it’s been important for us to listen, communicate and be transparent about what we’re doing, and what we’re not doing, and the reasons why. Consultation and co-design are critical, but so too are feedback loops, especially with key stakeholder groups and partners on whom we are dependent for success. Software or digital service providers, for example, are critical partners for us in this journey.

Sixth, our staff are of course key to making things happen. Going digital changes the way you work and it changes the capabilities you need in your organisation. We need to keep investing in the tools, skills and culture that our people need.

Seventh, to maximise the benefits of new technology, it’s important to redesign business processes to fully exploit the benefits of what the technology offers. It’s not enough to just put existing processes on digital steroids.

Eighth, getting basic building blocks right, such as digital identification, authorisation, and security, is essential. The digital ecosystem that we now inhabit is quite different to what we have been used to and requires new approaches to old problems.

Ninth, we’ve learnt that bolting digital front-ends onto legacy IT infrastructure is a bad idea. We’re now investing in and paying attention to the IT backend and architecture to ensure a solid base, resilience, and stability in our services.

And finally, being clear on outcomes and measuring progress and benefits is important for everyone engaged in the journey. It’s important to remind people, preferably with some hard numbers, that the journey was ultimately worth it.

Where to now?

So – where to now?

Interestingly, on top of the two key examples I’ve already spoken about, we have two equally significant developments, already well advanced, that make up much of our digital agenda for the next 12 months:

The first of these relates to tax agents.

A one-stop software shop for tax agents

Many people in Australia, around 70% of individuals not in business and well over 90% for those in business, use a tax practitioner to help them with their tax affairs.

For the last 30 years, most tax agents have lodged their returns with us using our Electronic Lodgment Service (ELS).

Since 2015, we have been gradually replacing this old channel with our new digital Practitioner Lodgment Service.

This coming Tax Time 2018, all tax agent lodgements (for all income tax returns) will be through this new digital channel. The old functionality has been progressively closed over the last six months, with individual income tax returns closed last Saturday (31 March 2018). All software providers that service the tax agent community have released upgrades that incorporate the new lodgement channel.

In addition, the tax agent portal services, which we introduced in the early 2000s, are being transitioned to our new online platform. The services provided through the new online channel will also be made available for consumption by software providers through Application Program Interfaces, allowing those services to be incorporated by them into their software packages.

The same Nearest Neighbour analytics used in myTax will also eventually be made available to tax agents for when they complete their clients’ returns – so that there is effectively a consistent tax return experience whether self-prepared or agent prepared.

The goal we have been striving towards for some time has been the ability of tax agents to be able to run their businesses and service their clients through a single interface and practice management package. Software providers are indicating to us they will start to integrate the new services into their software packages from later this calendar year – so that goal is in reach.

So, as was the case with myTax, we get a range of benefits: a better experience for tax agents, but also a new channel for us to engage in real time.

Single Touch Payroll

Our other key “in-flight”’ digital initiative is Single Touch Payroll.

Single Touch Payroll is a streamlined way for employers to report to the ATO each time they pay their employees, whether that is weekly, fortnightly or monthly.

The reporting to us will include employees’ salaries and wages, allowances, deductions from their pay, Pay As You Go Withholding (PAYGW) and superannuation information.

Initially, large employers will start reporting from 1 July this year, then a year later all other employers will be required to use Single Touch Payroll.

Single Touch Payroll levers significantly the SuperStream digital infrastructure, and will provide a range of benefits: ease and simplicity for employers in meeting current obligations, a new service for employees to see a reconciliation between accrued and paid super throughout the year, and for the first time, a near real-time information flow for the ATO to assist with Superannuation Guarantee compliance.

Single Touch Payroll provides an opportunity for us to re-engineer our approach to assuring Super Guarantee compliance. We are thinking about how we might stream work something akin to a typical customs experience – red, amber or green lanes, with tailored experiences for employers and employees depending on their circumstances. But equally we have to be careful not to overcook our use of new channels by over-messaging or creating unnecessary or unproductive reverse workflows for employers.

As myTax, SuperStream, the Practitioner Lodgment Service for tax agents and Single Touch Payroll become the norm over the next couple of years, we will have digital ‘reach’:

  • with all individual self-preparers as they prepare their returns
  • with all tax agents as they prepare their clients’ returns,
  • with all employers in respect of their withholding and super obligations, and
  • with all superannuation funds in respect of the payments they receive.

That’s a very big slab of tax and super system participants!

These new digital channels bring great benefits to users in terms of ease, efficiency and greater certainty. They also give us the ability to engage at scale, in real-time or close to real-time. We’re hopeful too that over time they will help us to sustainably reduce tax gaps and improve voluntary compliance.

These are important foundations that naturally make us think about what else might be possible, which is the focus of our current thinking as tax gap insights continue to emerge.

Before wrapping up, I wanted to make just a few additional comments. I’ve spoken today mostly about how the digital age is shaping our service offer and the interactions we have with our clients, and through that, how we are hoping to sustainably improve levels of voluntary compliance.

But it’s not all about us. There’s a rapidly growing digital, cashless and data-rich economy out there and we need to remain attuned to what that means for our administration and the tax system more generally.

At least in the digital economy, there’s always a record of a transaction, although sometimes it can be a challenge to find that record, or identify the real person behind it. But those challenges have not proven overly difficult to date. In my book, having a record of a transaction is much better than not, as is often the case with cash transactions.

Records are also more mobile in a digital world. It’s surprising the information that falls into our hands these days – from data leaks like the Panama and Paradise Papers, to more formal information exchanges like Country by Country reporting, or through the Common Reporting Standard that is being implemented across the globe. It’s getting much harder to hide stuff and the tendency of disgruntled people to want to share information tends to work to our advantage.

It’s noteworthy too that a lot of tax concepts are being tested as they get applied to the new digital world. In particular, the international taxing framework has been showing some strain; cryptocurrencies also seem to have raised questions and the gig or platform economy is driving a new focus on the employee/contractor distinction.

Naturally, we need to remain active and vigilant to these and other trends and keep seeking to answer those three questions I mentioned at the start:

  1. how well is the system working,
  2. what can we do to improve how well it works, and
  3. how do we continue to build trust and confidence ……. in a digital age.


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