Tracking change across the landscape of tax

Bruce Quigley, Second Commissioner of Taxation
TIA 10th Annual States Taxation Conference
Sofitel Hotel, Brisbane, 30 July 2010
(check against delivery)

The ATO's new strategic directions

It's a great pleasure to be back in Brisbane for this significant conference of the TIA: your 10th annual states taxation conference. I'd like to note at the outset that your 10th conference coincides with our hundredth year, so it's a good opportunity to look back as well as to look forward as this morning we traverse some of the changing landscape of tax.

I know it's early, but I want you to come with me to the pub - any pub, in any corner of Australia - and listen to the conversations people are having over a drink or two. I think the bar-room conversation is often a good barometer (if you'll excuse the pun) of the mind and mood of many Australians.

When the conversation turns inevitably to tax, I believe you would find the great Australian value for fairness and a fair go, mixed with a few other sentiments of varying congeniality.

You might be wondering why I'd take you to the pub to listen to complaints about the taxman, and complaints about those not paying their fair share of tax. It's because part of the ATO's strategic vision as we begin our second century is picturing a future where those pub conversations shift, where criticism of those not paying their fair share becomes the norm.

In setting our directions for the next leg of our journey, we don't think it's far-fetched to imagine that in the future, those conversations, as an indicator of more broad cultural attitudes, might revolve around good tax behaviour rather than a throw-back to the 70s and 80s (and even the late 90s), where the smarties sucked in the gullible.

If a local wag were so inclined, he might boast about his good citizenship, rather than boasting about what he got away with. This would be about making a personal contribution, in accordance with the law, to vital services used by everyone: roads and transport, health and hospitals, schools and universities. At the very least, if the wag were to boast about shirking his responsibilities and his anti-social behaviour, his mates might indicate their displeasure, much like the majority of Australians who support the White Ribbon campaign and say 'no' to violence against women.

If you're skeptical, I'd compare it to the way our attitude to something like drink driving has changed in the last two or three decades. We've seen a seismic shift in what's considered acceptable behaviour - cultural not just legislative change - in what 'mates' will tolerate or encourage in each other.

We know our goal of cultural change is an ambitious one, and one that we certainly can't achieve alone; we don't have all the answers, nor do we hold all the levers. But we're committed to the journey, and it's likely to be a long journey that will need to make progress on an ongoing basis.

Indeed it's this picture - not just of mates at the bar, but of a community that values its tax and superannuation systems as assets, that sees willing participation as good citizenship - that fuels and drives our new strategic directions.

This morning I'd like to talk to about what those directions are, and how they map across the changing terrain of taxation here and internationally. In particular, how they fit in with a more joined-up approach to taxation; how revenue authorities are cooperating to achieve shared goals on behalf of their communities.

As tax professionals, I know you have a vested interest in keeping abreast of those changes, and keeping track of how the ATO is travelling. The ATO would like you to join us on this journey, positioning the profession as one that contributes to the public good.

Our new Strategic Statement 2010-15 is an aspirational and hopefully an inspirational statement that will guide our focus, our operations, and our engagement with the Australian public.

At the heart of this new vision is putting taxpayers at the centre of everything we do. Willing compliance is our catchphrase, and we believe that this will be encouraged by making it as easy and accessible as possible for people to comply with their tax obligations, and articulating the wider social and economic benefits of a culture that adheres to the public pact institutionalised in the laws administered by the ATO.

The compliance focus of revenue authorities generally - not only the ATO's - has shifted in recent years from a traditional "after the fact" approach to encouraging and supporting willing compliance. International studies and internal experiences have reinforced our view that better compliance outcomes are achieved though greater community education; better contact and collaboration with community, business, and the tax profession; a stronger focus on personalised tax and superannuation administration.

We believe we can help to foster change in community attitudes, instilling a value for healthy tax and super systems so that the care and ownership of these systems rests with the community. We want people to equate tax compliance with good citizenship, and while that might seem a long journey from here, we believe it's one worth taking.

We also believe we won't get there without the cooperation and collaboration of the Australian community, of our counterparts in the states and territories, and our counterparts overseas.

The international picture

The US Commissioner of the IRS recently reiterated the long-held view that "modern tax administration requires global engagement."¹

The truth of this observation, acknowledged by tax administrators since the advent of globalisation, has been underscored by the global financial crisis, and post-GFC, we are seeing signs of better and stronger cross-border mechanisms.

In 2009, the year following the greatest financial collapse since 1929, more progress was made toward full and effective exchange of information, based on a universally endorsed standard, than in the preceding decade. ²

At the London summit last year, the OECD Secretary General called this progress "nothing short of a revolution."³

In large part this revolution is technology-driven. The same technological advances that created the conditions for a global economy allow us to work globally to tackle harmful tax practices. Advances in communication and information sharing enable authorities and agencies to collaborate with unprecedented speed and accuracy.

This cooperation is most visible in the area of tax havens. There are an increasing number of bilateral and multilateral arrangements to tackle tax havens and induce conformity from those jurisdictions that have allowed abusive practices to flourish. The impetus for this change is the economic reality that tax havens continue to have a devastating impact on developing countries, having a potentially negative impact on them of up to $160 billion every year.⁴

In London, the G20 leaders stated that "the era of banking secrecy is over."⁵ I might add, the era of greater transparency is on its way.

Australia is at the vanguard of this evolution, and is seen as one of the leaders in progressing the negotiations of Tax Information Exchange Agreements, or TIEAs⁶. Australia has had negotiations with 38 foreign jurisdictions who sit outside the OECD, and now has 25 TIEAs, with many more in the pipeline. Some of the most encouraging have been negotiated in surprising quarters.

Not long ago it would have been hard to imagine us having a Tax Information Exchange Agreement with Vanuatu or the Marshall Islands but these have been signed recently, as part of our Pacific Strategy, suggesting that our global - and regional - landscape is indeed changing.

Project Wickenby has played an important role in this change. Wickenby is now five years old and tracking very well. By June we had completed nearly 1200 audits, raising liabilities of nearly $730 million. 57 people have been charged and 11 people have been convicted of serious offences; there are 26 criminal convictions underway. We've also seen the impact in what we're calling the 'compliance dividend' - that is, the revenue raised from taxpayers who become more compliant following a Wickenby investigation.

Wickenby is also having a notable deterrent effect. AUSTRAC has shown a 30% reduction in the flow of funds from Australia to Vanuatu, Switzerland and Liechtenstein, where the project has had a focus. This is compared to a 5% reduction in other major haven jurisdictions.

We've also noticed that it's becoming more prevalent in public consciousness, garnering some media attention, and shaping attitudes to tax behaviour. I was pleased to read a recent column in Smart Company that took to task a potential investor over the question of setting up an offshore account as a tax dodge.⁷ The answer given was pretty unequivocal: there's a fine line between minimisation and avoidance; there's a real risk of getting into "strife with the Tax Office" if you cross the line; and there's no excuse for relying on unfounded advice when you should be consulting a properly registered tax professional. We're very pleased that our message is being picked up and carried by others in the wider community, and that there's an appreciation of the work that the ATO does in the community of protecting honest taxpayers and ensuring that our public infrastructure is properly funded.

The judiciary is also picking up the vibe (at least where fraudulent round robin off-shore arrangements are involved). In a recent decision, the NSW Court of Appeal doubled the sentences for two carpenters caught by Wickenby. The judge was noted as saying that "deceitful conduct" should be "appropriately punished" as a deterrent.⁸

Australia's changing demographic

10 years into the twenty-first century, there's a national conversation going on about the way Australia is growing, and how our institutions and infrastructure will accommodate this change.

The government's Intergenerational Report 2010, launched by the Treasurer in February, included some important projections about our growing, and ageing population. By 2050, the proportion of our population aged over 65 is expected to increase from 13% in 2010 to 23%.

In 2050 there will be 2.7 people of working age to support each Australian aged 65 years and over. Compare that with five working people per aged person today and 7.5 in 1970.⁹

From a social point of view, the older segment of our population represents a wealth of life experience that enriches our country enormously. From a purely fiscal point of view, it means there will be fewer taxpayers to fund more welfare beneficiaries.

We will need to apply our collective ingenuity and imagination to meet these challenges.

Revenue authorities working together

State and territory revenue offices

The dynamic relationships we have with state and territory revenue offices are intrinsic to what we do. They help us get a better picture of taxpayers, but they also help to create a level playing field for the broader community. When you look at the kinds of data we get, and the use to which we put it, it's about making the tax and super systems easier, fairer, and more consistent, in accordance with the ATO's goal of being more taxpayer-centred.

The relationship between the agencies is supported through a governance framework: led at the highest level by a meeting of ATO and revenue office Commissioners; supported by a Compliance Committee, which I'll talk more about in a moment.

The ATO and the revenue offices also have their own internal committee frameworks which support the joint governance approach. These committees have added demonstrable value to the sharing relationship. Through them, the amount of information shared as an effective means of mitigating compliance issues across jurisdictions, continues to grow.

Various ATO officers sit on revenue offices' audit and risk committees and the States and Territories have a representative working with the ATO to represent their interests, particularly in the field of GST administration. I myself am on the Audit Committee with the Queensland Office of State Revenue.

In recent years, the ATO has been working more closely with state and territory revenue offices through the Compliance Committee in the areas of property transactions and employer obligations. As a result, the amount and range of information exchanged between the ATO and revenue offices is increasing significantly.

The data exchange in the area of payroll tax has seen the revenue raised in the four years from 05-06 to 08-09 total $257 million and has resulted in the detection of 3702 employers who have failed to register for payroll tax¹⁰.

We get information on income tax return and business activity statements, stamp duties, land tax, luxury vehicles and registrations, and payroll tax.

In another example of information exchange the Queensland Office of State Revenue and the ATO recently completed a joint project which examined property transactions where the value of property transferred may have been understated to revenue authorities.

We also shared our knowledge and Computer Assisted Verification (CAV) tool with Queensland. We use CAV to capture and analyse large volumes of data from the taxpayer's own systems. CAV reduces compliance costs, audit times and also provides greater certainty in terms of audit outcomes for both the taxpayers and revenue authorities.

While acting in the Commissioner's role in January, I had the privilege of signing a new Memorandum of Understanding with the state and territory revenue offices, which governs the exchange of data and information to assist with our respective compliance activities. The new MOU, as distinct from the previous one, explicitly highlights the dual roles of the Commissioner as both Commissioner of Taxation and Registrar of the Australian Business Register, which I'll talk more about in a moment.

This positions the ABR as a central government facility of which the ATO is the custodian, not the owner, which ensures that the ATO is a facilitator of cooperation and information exchange between governments and agencies, rather than being a reservoir for tax information.

Making it easier for businesses to comply: SBR, AUSkey, and ABR

The online Standard Business Reporting program (SBR) and the digital signature AUSkey provides a great case study in collaboration with the states.

SBR involves 12 government agencies at federal, state and territory levels. It is designed to reduce the business-to-government reporting burden and deliver cost savings estimated at $800 million per year once fully implemented. It will also allow Australian businesses to be more competitive in international markets.

The ATO is modifying our systems, forms and electronic messages to support SBR. From 1 July, our web services accept activity statements, payment summaries, tax file number declarations, and fringe benefits tax returns from the SBR channel. The taxonomy for company income tax return and schedules is now available and the system to enable software developers to test and self certify will be available later in the year.

A central component of SBR is the new digital signature AUSkey, which many of you will already be familiar with. The idea was to create an authentication solution that strikes a balance between ease of use and security - a single credential for Australian businesses to access government online services. Australian businesses register for their AUSkey online, and use it to access ATO portals and other tax online services. In fact, by 16 July we had approximately 80,000 AUSkeys in circulation, with businesses registering at the rate of around 2000 per day.

Businesses can use their AUSkey to sign on to SBR-enabled financial, accounting or payroll software, to provide their reports to relevant government agencies securely online, and to access the Australian Business Register (ABR) which administers AUSkey.

As the central collection, storage and verification system for businesses, the ABR provides a set of services to government agencies that assist them to streamline their dealings with business and reduce the overall number of transactions businesses must make with government, which is in line with our goal of streamlining service delivery.

The significant growth in the number of agencies accessing ABR services (now more than 190) means that we need to be very careful to ensure the data held within the ABR, and the services through which it is made available, are of the highest standard. We are currently undertaking a technology refresh of the ABR that will make it more flexible and capable of meeting the evolving needs of the Government, the business community and agency users, including ensuring integrity of the information.

We are working with the Department of Innovation, Industry, Science and Research, and with the Australian Securities and Investments Commission, to integrate the process of registering business names and ABNs, and also to change public perceptions of the ABR and ABNs as specifically 'tax products'. The whole point is that they are used by multiple agencies, including us, to build a better picture of business, and to make it easier for business to interact with government. As well as giving us better data, it moves us toward the 'one touch' or 'one click' approach that people are now looking for in all their transactions.

On the compliance front, there are wider implications for agencies and the private sector where employers are not meeting their tax and super obligations for their employees. We are using the latest Australian Government online secure collaboration technology called "GovDex" to share audit and community intelligence of common interest with our colleagues in State and Territory Revenue Offices. While there is room for improvement in the interface, it allows us to learn from each other's experience in "real-time" and work to optimise the effectiveness and sustainability of our compliance activities across federal and state levels of government.

All of these tools which we use to work collaboratively with the states and territories move us closer to our goal of efficient and effective tax and super administration that people can take pride in and share in its ownership. The more we make taxpayers' experience of taxation easier and more aligned with their technology-driven 'one touch' lifestyles, the more likely they are to feel good about paying tax. And when the subject of tax comes up over a few drinks, the more likely they are to talk about their positive experience of an efficient, streamlined, coherent government authority.

GST arrangements

Ten years ago, I think a lot of those pub conversations would have been about the introduction of a radical new tax - the GST. Everyone had their two cents to say about that 10 per cent, and there was a certain amount of anxiety and controversy about its introduction, as well as support. (The 10th anniversary of the GST coincides with the ATO's centenary. There's a joke in there somewhere about the last 10 years as a GST-sized 10% of our lifetime, but I haven't found it yet.) In its 10th year, it's instructive to recall that buzz around its introduction, and compare that with the impact it now has in our day-to-day lives.

The GST has had a special impact on the states and territories, given that it was designed to replace state-based duties in return for commonwealth funding.

Legislative changes

Like all tax reforms, it is a living entity that requires continued observation, assessment, and (potentially) adjustments and adaptations as our economy evolves. Accordingly, the Board of Taxation conducted a review of the GST in 2008, and made 46 recommendations for changes to the legal framework for the administration of GST in its report to the government.

As a result of this review several pieces of new legislation have been passed this year. The new legislation seeks to reduce compliance costs and to clarify a number of areas of GST that have concerned businesses.¹¹

One of the major measures is to replace the original rulings system with a ruling system for GST and other indirect taxes - more akin to the income tax model. The legislation also adopts a general rulings system for GST and other indirect taxes. As we transition to this new framework, in the first 12 months we won't be pursuing compliance activity around issues where businesses have relied in good faith on GST advice published on our website prior to 1 July.

We have updated the ATO website to identify for taxpayers the relevant sources in our publications that advise the ATO's view, and we have labelled some material as 'public rulings'. In addition, we are reviewing precedential material not labelled as a public ruling with a view of determining the priorities for converting some of these products into public rulings¹².

The ATO will advise taxpayers, tax professionals and industry associations of the steps they need to take via a number of channels, including:

• writing directly to all tax professionals
• writing directly to industry associations who have previously received GST advice for the benefit of their members
• publishing information in the regular ATO communication channels such as eLink, BAS Service Providers newsletter, Business Activity Statement Update, Large Business Online Bulletin, Tax Agents Magazine and ato.gov.au
• and providing information to the various industry forums in which the ATO participates.

Administrative changes

The ATO is also making some administrative changes by merging two of our business lines - GST and Excise - into one new line called Indirect Tax. This is an important streamlining measure that will create synergies and efficiencies across these taxes.

Some compliance initiatives

You would be aware that in the federal budget in May, the ATO received additional funding of almost $338 million over four years to encourage voluntary compliance in the area of GST. Our integrated strategy, involving several of our business lines, is aimed at increasing our ability to deal with the linked problems of inflated or fraudulent GST refunds, systematic under-reporting of GST liabilities, non-lodgment and non-payment. The key components for the program include:

• working together in defending the tax system against organised attacks and fraud by applying additional resources to protect the integrity of the Activity Statement refund system
• promoting a level playing field for Australian businesses and investors by responding to community concerns about serious evasion of GST obligations
• supporting citizens in their compliance by increasing contact with taxpayers, and by addressing rising rates of Activity Statement non-lodgment
• maintaining funding for strategies which have proven effective in dealing with expanding levels of unpaid debt.

We are also concerned about a small number of businesses engaged in merger and acquisition transactions adopting non-commercial arrangements. These arrangements result in claiming GST credits the business would not normally be entitled to.

We have issued a taxpayer alert (TA 2010/1) outlining our concerns about these arrangements. We continue to work with industry to clarify the law relating to international transactions, and to improve business understanding of the GST treatment of such transactions. For example, we are continuing our work with Treasury in relation to the Board of Taxation recommendations for the review of the application of GST in international cross-border transactions.

Litigation

With GST now into its 11th year, we continue to see a steady stream of litigation in the Administrative Appeals Tribunal (AAT) and the Federal Court. For some years now, the profile of GST litigation has been relatively constant, with the following features: around 90% of GST litigation is in the AAT; most of the litigation is in the individual, micro and SME markets - less than 10% of cases are brought by the largest enterprises; about 35% of cases involve property and construction issues.

However, we have moved into what might be termed a 'testing phase' in GST litigation in which fundamental GST concepts are being tested in the courts. The ATO continues to co-operate with taxpayers and fund appropriate test cases with a view to obtaining law clarification in relation to these issues.

Some of the fundamental GST issues before the courts include:

• How is the character of a transaction for GST purposes determined?
• What is the nature of the requisite connection (nexus) between a supply and consideration?
• What role do so-called 'practical business tax' considerations play in construing the GST legislation?

The recent majority decisions of the Full Court of the Federal Court in the Victorian Department of Transport¹³ and Gloxinia¹⁴ cases touch upon some of these issues, as may the High Court's decision in the Travelex case¹⁵.

Conclusion

To return to the pub, we want to hear the kinds of conversations where people talk about the outstanding support they received from the ATO; where their interface with us was easy, and where it made their lives better, not worse.

We want to hear conversations about the simplicity of dealing with a modern ATO; about the ease of access and low cost of compliance.

We want to hear conversations about the beauty of dealing with a joined-up government, where revenue authorities are synchronised, where associated agencies talk to each other, where information is harvested painlessly and used fruitfully.

We would be even more satisfied if the conversation was about anything but tax because the good compliance culture of the community (and the expected good service from the ATO) made it a non-issue.

That's not quite where we are now, but it is where we want to head. It is where we'd rather be.

In travelling there, we'll need the cooperation and partnership of all the state and territory revenue offices, and of the tax professionals who are potentially our best advocates and surest measure of how well we're doing against our goals.

I want to invite you to join us on that journey, and I thank you for your company this morning.

Footnotes

¹ Prepared Remarks of Commissioner of Internal Revenue Douglas H. Shulman before the OECD Business and Industry Advisory Committee, 8 June 2010, Washington, D.C.

² Promoting Transparency and Exchange of Information for Tax Purposes: A Background Information Brief, OECD, 21 June 2010.

³ Op cit.

⁴ Background Briefing for Joint Standing Committee On Treaties (JSCOT) Hearing, 29 June 2010.

⁵ G20 Communiqué: The Global Plan for Recovery and Reform, 2 April 2009, London.

⁶ JSCOT Briefing.

⁷ Letter in Smart Company, 21 June 2010.

⁸ Australian Financial Review, 'Tax evaders' sentences doubled', 17/5/2010, p10.

⁹ 2010 Intergenerational Report, Executive Summary Part 1: An Ageing and Growing Population

¹⁰ ATRO CC action item arising from 3 June 2010 meeting.

¹¹ Press Release from the Assistant Treasurer, 18 June 2010.

¹² Includes 59 issues in issue registers, 17 products, and 9 ATO advices.

¹³ Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84.

¹⁴ Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46. For the purposes of seeking clarification of the law, the Commissioner has applied for special leave to appeal to the High Court against this decision. At the time of writing this paper, the application for special leave had not been considered by the High Court.

¹⁵ On 21 May 2010, the High Court reserved its decision on the taxpayer's appeal against the decision of the Full Federal Court reported as Travelex Ltd v Commissioner of Taxation (2009) 178 FCR 434.