Fostering a "prevention is better than cure" approach for Tax Time 2008

Speech by Jennie Granger, Second Commissioner
to the National Institute of Accountants
NSW State Congress and Business Expo 2008
Wednesday 4 June 2008

A couple of years ago a journalist in a metropolitan newspaper suggested—somewhat tongue-in-cheek—a new Australian holiday celebrating tax time.

There was no good reason, he said, not to enjoy paying tax.

He even penned some lyrics for a festive song titled Tax Sub Clause is coming to town:

They’re making a list, they’re checking the lot.

They’re going to decide if they audit or not.

Now I’m not sure that the Henry Tax Review will get to consider the merits of a tax time holiday and the compliance effect of a companion ditty, but I am sure that the tax lives of Australians are getting more complex reflecting the world becoming more complex and diverse.

Economic conditions, globalisation and enabling technologies are creating new challenges. People are managing a greater range of tax risks and these risks present challenges for you and for the Tax Office.

Luckily for Australia we have a strong culture of voluntary compliance.

Our role is to continue to foster that.

I know it challenges the stereotype, but auditing is rarely our activity of first choice. Much of our work is aimed at keeping the community informed about our focus, what concerns they need to pay attention to and providing practical help.

We believe in and promote a ‘prevention is better than cure’ approach to tax and superannuation compliance. Of course it must be supported by a high quality, well-targeted audit program.

And fostering ‘prevention is better than cure’ is what I’d like to talk about.

Today I’ll be providing an ‘early bird’ view of some of the areas that our Compliance program 2008-09 will be addressing.

Firstly, I’ll be providing an overview of our tax time focus for individuals and, briefly, small business. I then want to update you on our initiative to encourage people to come clean about hidden offshore income and profits. Last but definitely not least I’ll give you an update on services and support for you.

Community trends

There have been significant changes in the community in how people earn their income and what claims they can make — all of which mean many have more complex tax affairs than in the past.

The number of investors in the community has grown significantly.

Ten years ago, 34% of people owned shares. The percentage is now 46%. That’s 7.26 million people.

In the space of two years the number of taxpayers with rental properties increased by 100,000 to 1.6 million people in 2006.

Further, employees are claiming increased costs associated with their jobs.

Each year we report growth in the number and value of claims for work expenses.

The types of claims have broadened too with home office and technology tools featuring in recent years. These days 6 out of 7 employees claim work expenses, and the figure rises to 9 out of 10 across the higher income ranges.

These trends in the community are reflected in our tax time focus for 2008.

Just briefly – before we go there – I’d like to ‘fly the flag’ for pre-filling in helping people get it right.

Pre-filling in e-tax and the Tax Agent Portal is not only a huge success as a service, it is also our secret weapon in ‘prevention is better than cure’. Pre-filling means people can check their records, easily, quickly and with a high degree of accuracy. They know or their agent knows what the official records hold, which goes a long way to helping people stay on the right track.

Now, back to the now of tax time 2008.

Traditionally tax time messages have focussed on work expenses of employees. That’s still on our agenda but we have a much more varied focus these days reflecting those community trends.

For tax time this year we will be paying particular attention to:

• investors, particularly
• rental properties
• dividends and interest
• sale of investments
• avoiding dodgy tax schemes
• saving for retirement
• salary packages of executives and directors, and
• employees and their work expense claims.

Investors

The investor community is growing and changing. The three key areas of risk continue to be rental properties, the stock market, and the capital gains events that occur on the sale or transfer of these assets.

Rental properties

Rental income and expenses has been a strong focus for a few years, because of the large number of new entrants and the wide range of common mistakes being made in claims.

We do have a booklet – we think of it as a bit of ‘a renovator’s delight’ with the creative title – Rental properties! It provides straightforward, easy to understand guidance on tax obligations for property investors.

Over 1.5 million people claimed more than $24 billion in rental deductions in their tax returns last year, almost 170,000 people claimed for the first time.

We will soon be writing to last years new entrants with information on the dos and don’ts and to let them know where to get more information.

We’ll also be writing to some people who have been in the investment property market longer. They have been selected because they have some of the following characteristics:

• unusually high claims for rental deductions
• low rental income in relation to rental deductions
• high claims for interest expenses, and
• high claims for borrowing expenses.

So far this year we have completed over 6,800 reviews and audits of rental property claims. As of the middle of May we have identified $8.6 million in total revenue owing, with $5.6 million collected.

Some of the most common mistakes we see are:

• claiming deductions for rental properties not genuinely available for rent
• not apportioning expense claims where the property is only available for rent part of the year, such as a holiday home
• overstating interest claims on loans taken out to purchase, renovate or maintain a rental property, and
• claiming the full cost of a visit to inspect a property when it is combined with a private purpose, like a holiday.

Tip 1– A letter from us is a big hint! If your client receives a letter from us in relation to rental property deductions, please encourage them to check carefully all the information they provide, as we’ll be checking carefully too!

Dividends and interest

Investment income and expense is another area where we heavily publicise our datamatching capabilities and remind people not to forget to declare all their interest and dividend income – including income they have earned overseas.

The good news is that it’s an area where we have a great breakthrough strategy for prevention – in the form of pre-filling individual returns and reports to tax agents.

Pre-filling involves fantastic synergy with the banks and other financial institutions and companies who are required to report interest and dividend information to the Tax Office. Many have agreed to lodge their reports earlier so as to improve the comprehensiveness of pre-filling as a winning initiative. As a result, self preparers and tax agents can look up their or their client’s dividend and interest details in a jiffy.

On a sombre note, we still need to follow up significant numbers of cases. By the end of May we had completed over 160,000 review and audit cases with a further 20,000 still in progress and a small number yet to be started. These cases have identified $123.5 million in total revenue owing, of which $82.9 million has been collected.

Sale of investments

We have reason to believe that compliance with capital gains tax is improving but we also think there is still room for further improvement.

As at 31 October 2007, approximately 1.2 million people declared around $16.26 billion in capital gains in their 2006 tax returns.

The number of taxpayers who declared net capital gains rose by 3.8% in the 2006 tax year. This is a pleasing result and suggests that more Australians are aware of their capital gains tax obligations. Of course it no doubt also reflects activity in the market.

These gains came mainly from shares and property sales. They may also arise from share buy-backs and capital returns.

Improvements in data matching techniques and access to more data are making it much easier for the Tax Office to identify unreported gains on sales of investments.

We now have access to all state and territory property registers and we have recently secured share trading information from the three primary share registries. We heavily publicise these risks and the tools available to us to check as we really do prefer to alert people rather than catch them out.

We know this area can be daunting for people and we have developed a number of products to assist. Particularly popular are:

• our guide to capital gains tax – with approximately 40,000 requests per year, and
• online assistance – our capital gain or loss decision support and calculation tool receives 100,000 requests per year.

Unfortunately, our review and audit work is still rich pickings. By the end of April we had completed 6,393 audits and reviews for capital gains tax which have resulted in revenue adjustments of $50.2 million.

Dodgy schemes

Now is the time when people are looking for ways to reduce their tax bill. History shows they are vulnerable to temptation!

Unfortunately it is also a time when the sharks are out offering tax ‘minimisation’ schemes. We have already published 10 taxpayer alerts this year to provide early warnings on issues and arrangements that we are assessing. We are also planning more alerts in the run up to tax time.

We monitor advertising and follow-up intelligence leads on dodgy schemes as soon as we become aware of them. We seek intelligence from many of you in the tax profession. You are telling us people are much more wary of schemes and especially offshore ones. The promoter penalty legislation also seems to have curbed much of the dodgy promotion.

This is good news but the nature of the beast demands we must be proactive and continue to raise the community’s awareness of the risks. We are writing to Federal and State Members of Parliament in targeted regions with copies of our Don’t take the bait! brochure for their communities. We are doing the same for mining companies with operations in key areas and tax agents in these areas too. We will also be contacting regional media outlets and liaising with specialist publications for vulnerable industries and occupations to get broad coverage on this important issue.

Tip 2 – Don’t take the bait! Our advice is don’t get caught up in these schemes. If you are approached, bring them to our attention early by phoning the Tax Agent Integrity Line on 1800 639 745. You would be doing your clients a service by reminding them that offers that sound too good to be true probably are just that!

Saving for retirement – Superannuation

For your clients who are eligible for superannuation guarantee, tax time is a good time to remind them that they need to actively monitor their super. It is a sad fact that we deal with many complaints from distressed ex-employees who have not kept an eye on their super and discovered only too late that their employer has not kept their contributions up-to-date.

Right now, following on from super simplification, you will have clients who may need to know about the changes to personal super contributions, excess contributions and contribution splitting.

The removal of the age-based limits for claiming a deduction means more people can claim a full deduction. Reasonable benefit limits have also been removed but caps on contributions now apply.

Tip 3 – Superannuation caps The caps on super contributions mean that your clients will need to take care to avoid the excess contributions tax. Clients who plan on contributing more than $50,000 to their super fund should check the details on www.ato.gov.au.

If you have clients who sold assets to invest in superannuation, they may have a capital gains tax liability which will need to be correctly disclosed in their tax return.

Tip 4 – Superannuation and CGT Clients who sold assets to invest in superannuation may have a capital gains tax liability which will need to be disclosed correctly.

Executives and directors

In the coming year we’ll expand our review of highly paid executives and directors – generally people with income over $1 million.

This year we wrote to 175 executives and directors asking them to complete a questionnaire. As at 16 May, 162 had returned these. Over 57% made a voluntary disclosure at that point.

To date, $20.7 million of net revenue has been assessed from the review so far. Approximately $15.3 million, or 74 per cent, has been paid.

The majority of adjustments relate to benefits acquired under employee share schemes. Other problem areas are capital gains tax obligations, and to a lesser extent, other income tax issues.

We are currently reviewing our publications and information to see if we can assist taxpayers’ understanding of their tax obligations when using employee share schemes as 70% of the cases relate to these.

So far the program has been focussed on public company directors and executives but we are expanding it for 2008-09 to private companies and also resident executives and directors of foreign companies.

Employees

Claims by employees for work expenses continue to represent one of the largest deductions made in tax returns.

This year, the number of claims for work expenses grew by 2.5% and the value of the claims by 8%.

Last year the increase in the average claim was 5.3% — considerably more than the growth in the Consumer Price Index during the relevant period (2.9%).

Naturally that kind of growth is something we are going to take a closer look at.

As you know, we have for many years been undertaking fairly sophisticated profiling of work claim trends for various occupations. Based on changes in the patterns of claims we see, we select a number of occupations for special focus.

They are selected because they have some or all of the following characteristics:

• above average claims
• a high number within the occupation, or
• the ratio of claims is high compared to the salary and wages.

This year we will be specifically looking at claims by:

• nurses – particularly claims for self-education
• medical practitioners – particularly travel and entertainment expenses, and
• chefs – particularly for expenses for travel between home and work, and for pre-vocational courses.

More generally—not just in these occupations—we will be looking at anomalous or ‘out of pattern’ claims for self-education, car and travel expenses.

Alerting the community through our tax time media engagements and special events such as this opportunity today are very important in fostering a ‘prevention is better than cure’ approach.

It is our desire that employees seek to self correct any creeping tendencies to stretch the limits, because then they won’t need to be contacted by us.

Another hint about being careful is when we write to people ahead of lodgment time. This month we will contact more than 380,000 people before they lodge their 2008 return. The letters provide advice on what they can and cannot claim and where they can get further information. This includes contacting some people who claimed work expenses for the first time in last year’s return and others who we think made rather large work expenses claims for their circumstances. Some people will be asked to supply more information with their return to justify any claims they make.

Are employees listening?

We think many are taking the hint.

We do a comparison of claim trends compared to the year before. Last year, the 2007 tax year, the average claim for people to whom we wrote reduced by 15%. The highest average reduction was for travel agents, nearly 24%. Where we asked people to supply more information, claims reduced on average by 31%. In dollar terms the total reduction in claims by people we wrote to was nearly $23 million less than in 2006.

Some taxpayers however seem to have switched off.

Last year we conducted around 17,000 reviews and audits of work expense claims. As of mid-May we found $14.2 million in revenue owing of which $9.3 million has been paid.

The common adjustments relate to:

• car expenses – 1,429 taxpayers have had their claims adjusted by a total value of about $6 million
• travel expenses – particularly those claimed by travel agents
• self-education expenses – nearly 80% of these cases result in an adjustment – the majority are claiming for the first time
• ambit claims for clothing and laundry expenses, and
• a range of other claims, such as incorrectly calculated home office, mobile phones and computers involving over 2,000 taxpayers having their returns adjusted by $8.6 million.

Small business

There are around 2.5 million small businesses in the tax system. Like individuals, how they earn their profits is becoming increasingly diverse. They range from small one person operations to businesses employing significant numbers of employees. Electronic and international trading is becoming more common.

Our ‘prevention is better than cure’ approach is also reflected in our small business program.

We recognise that small business’ financial affairs are more complex and that some – in fact significant numbers – struggle to meet their obligations for a whole bunch of reasons, which puts the business under duress.

Assisting small business to stay on track

Twelve months ago we re-engineered our assistance program with a stronger emphasis on getting small business on track.

If we can help them with some of the basics – in fact any tax issue they may have or perhaps are struggling with – and increase their confidence about managing their responsibilities and growing the business, this may also make your loads a little lighter!

We have online services and support tools such as the business portal, self-help calculators and free record keeping tools.

We have a targeted help and education program where we contact new businesses or businesses with a new obligation to offer assistance.

We provided intensive assistance to over 57,000 businesses between 1 July 2007 and the end of April via seminars and workshops and our visits to them.

We are using risk profiling to detect problems much earlier – for example falling behind in lodgment or difficulty paying a tax debt – so we can make contact and offer help before the problem becomes harder or more expensive to fix.

Tip 5 – Early intervention on tax debt Encourage clients who are struggling to meet their obligations or manage their tax debt to contact us as early as possible so we can help them deal with it.

So what’s on the radar this year?

While we prefer prevention to cure, we are responsible for promoting a level playing field that ensures honest businesses do not suffer an unfair disadvantage caused by those who try to avoid their obligations.

This means we want to make the risk of detection very apparent to those who choose not to comply.

We have increased our enforcement activity – especially in pockets of blatant non-compliance which threaten the health and integrity of the system.

The Commissioner will be talking about our small business program next week, including dealing with key risks such as the cash economy.

So I will just make a few brief comments on our areas of focus.

We will be expanding our coverage of income tax issues this year. This includes:

• sale of assets and investments
• foreign source income, and
• employer obligations.

And a tip for your business clients with employees – we check superannuation responsibilities as well.

Employers need to be aware of their super guarantee and choice eligibility obligations, payments and due dates, and the steps they need to take if they don’t meet their obligations.

You could point your small business clients to our website to find guides and calculators which will help them with their superannuation obligations.

Also, please remind your business clients of the need to pass on employees’ tax file numbers to super funds, and their tax obligations when making employment termination payments.

Tip 6 – Changes to super guarantee calculations Employers will need to use ordinary time earnings to calculate super guarantee contributions for their employees from 1 July 2008.

Planning for retirement

Many small businesses are now investing for their retirement through self managed superannuation funds.

And in common with many of your small business clients, you too may have your own self managed superannuation fund.

Self managed super funds have been growing strongly.

In 2007, 47,000 new funds were established bringing the total number to 372,000.

That’s a lot of learner-plated funds on the road to retirement.

We want to make sure that they get there with their nest egg mature and intact.

As with their tax obligations, we’re here to help.

To help trustees, we have a range of products including the ‘starter kit’ that we send to all new trustees and which includes the Role and Responsibility of Trustees booklet.

We also monitor the lodgment performance of all newly registered funds. It’s a good basic indicator of how they are managing their trustee responsibilities.

It is of concern to us that each year a small number of trustees use their super funds incorrectly. Often this is done without any regard for the rules.

We are developing an electronic auditor tool that is designed to make the annual compliance audit and lodgment of a contravention report easier for auditors. This will be available on 1 July 2008.

Coming clean about offshore income

In the past, the cost of using tax havens was too high for most people. With increased competition and better communications and technology, the cost is much lower, the result being that some more people are drawn to them.

For some time we have been concerned that some taxpayers have been attempting to conceal their income and assets by channelling them through tax havens.

Offshore credit and debit cards and electronic commerce can facilitate this kind of activity. The Tax Office has significantly improved its ability to detect it. It is a story of increasing sophistication in our risk profiling and data matching technologies and of increasingly effective cooperation across government here in Australia, and internationally with other revenue administrations.

Our approach is to first educate people, then help people to get back on track, and finally, to review and audit where voluntary disclosure has not occurred.

To help taxpayers understand their obligations, we released our Tax havens and tax administration booklet. Our taxpayer alerts are another practical initiative to help taxpayers avoid getting caught up in illegitimate arrangements.

Not only do we prefer to prevent rather than cure we also actively promote mitigation strategies. So where people have done the wrong thing we encourage them to contact us or come forward with a genuine desire to cooperate and get their affairs back on track. This is a better option than the alternative of us contacting them.

Under voluntary disclosure arrangements, people who come clean can access reduced penalties. There are some important provisos but if people are unsure they can contact us anonymously to discuss their situation or seek the help of a tax agent.

We are going a step further and writing to some taxpayers encouraging them to make, if required, a voluntary disclosure of undeclared income held offshore. So far, 3,339 letters have been sent out.

So far 733 people have made disclosures involving income of over $31 million. Many of these people have come forward on advice from their agent – which is really pleasing.

These disclosures have mainly been investment income from interest and dividends, wages and pensions.

The people who we are writing to may have an offshore debit or credit card issued by an offshore financial institution, or may have made a higher risk transfer identified through the Australian Transaction Reports and Analysis Centre (or AUSTRAC).

Another example of the steps we will take to encourage people back on track is a pilot we undertook in July last year with Australian banks who have branches or subsidiaries in Vanuatu. We asked them to inform Australian account holders of the opportunity to come forward if they hadn’t disclosed their income to us. Response levels to that particular initiative have been disappointing to date. It was a hint that should not have been ignored because this work is now stepping up.

The Tax Office is conducting 80 audits linked to Vanuatu with over $90 million in allegedly false deductions, and we are writing to another 500 Australians with apparent links to Vanuatu seeking more information on their tax affairs.

As part of this initiative, we are sending out questionnaires to taxpayers who have had offshore transactions with Vanuatu.

Under Project Wickenby, so far we have raised over $117 million in liabilities from more than 300 audits. We have collected over $62.8 million and frozen more than $72 million in assets in respect of 20 investigations.

We have experienced unprecedented international cooperation with our Liechtenstein investigations, involving many countries including Canada, New Zealand, United Kingdom and the United States. We are conducting 20 audits and expect to have raised liabilities exceeding $50 million by 30 June 2008.

The message is clear – we want taxpayers to contact us before we contact them. It might possibly need to be louder. That’s where we’re looking to you to help us amplify the message in the community.

Tip 7 – Offshore income and assets Encourage clients with overseas sources of income to disclose these in their tax return.

What are we doing for tax agents?

Now it’s about you!

We have said many times, and we continue to emphasise, how vital your role is to a healthy tax system.

By helping you we influence many taxpayers. By working with you, you help us create a ‘prevention is better than cure’ approach at the grass roots.

So what are we doing for tax agents?

Tax Agent Portal

The Tax Agent Portal is the standout success story in improving services to tax agents.

From our surveys of tax agents, 62 per cent say the portal is their most frequently used tool to assist them.

80% of the same agents say they spend less time contacting us because the portal is their preferred tool.

Since its start-up in 2003, the Tax Agent Portal use has increased by 400 per cent, with logins for this financial year already at over 17.5 million.

In collaboration with agents, we are continually enhancing the portal via new releases and a new portal will be released in 2009 through our Change program.

Pre-filling

You have lobbied for pre-filling and vouch for it with your fingertips.

As at 11 May 2008 there had been over 2.6 million 2006–07 requests for pre-filling reports by tax agents, up from 500,000 in 2005–06.

This year you will be able to access a greater amount of pre-filled data for individual tax returns.

This year the pre-filling options available in the Tax Agent Portal and e-tax will be identical.

New pre-filled information available in 2008 includes ATO-held data on the Higher Education Loan Programme and prior year deductions.

Baby bonus information and a family tax benefit status indicator will also be available, both for the first time.

You will also find some data carried over from previous years’ returns such as personal information and information on some work expense deductions. You can elect to pre-fill if it is the same deduction for the current year.

Pre-filled information will also include payment summaries in cases where the employer provides the details to us electronically.

There will also be pre-filled private health insurance data from Medicare, and information from more financial institutions, such as some dividend and interest pre-filling.

We’re also developing a simple and quick way that let’s you report errors identified with pre-filling data to us so we can improve the quality of the data.

We will also be continuing to improve the existing tax practitioner helpline – which receives 2 million calls annually – and our relationship manager services. For example, in 2007-08 we conducted around 4000 visits and we are planning to make over 7000 visits in 2008-09 by expanding the number of relationship managers significantly.

By the way, the Tax Agent Integrity line is receiving on average 22 calls a month. About 40% of the calls concern unregistered preparers. By the end of April, of the 270 calls had been referred for further investigation 30 had been finalised. This included 15 referrals to the Tax Agent Board and 9 for consideration for prosecution action.

Key dates for the diary

Recently, we added webcasts to our website featuring technical discussions on subjects such as business exits. The webcasts are short videos that can be viewed at any time and provide information on a range of topics. The next webcasts are scheduled for release in August and October.

The June edition of the TAXAGENT magazine will be released to coincide with our annual tax time June seminar and will reflect our tax time messages.

Tip 8 – Tax time seminar Our annual tax time tax agent seminar is being held on 24 June in 200 locations across Australia, including 64 venues in New South Wales.

We are currently developing our Compliance program for 2008-09 and will be releasing it in mid-August.

Conclusion

Tax time is certainly with us again. It is a very busy time for your practices and for the Tax Office. I won’t wish you happy holiday because it is most unlikely any of you will be taking a ‘tax holiday’ at this time.

However I would like to thank you for working with us over the past year and wish you a happy new tax year!

Thank you.

Last Modified: Wednesday, 4 June 2008