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Speech to Commonwealth Director of Public Prosecutions Luncheon
Tasmanian Club, Hobart
12.30pm, 14 March 2007
Our aspiration is to work with the community in the fair administration and effective management of the tax system to add value to our nation1
A fair, efficient and effective tax administration adds public value. Not only in helping to fund necessary public goods, infrastructure and services, and making government payments, but also in making Australia more competitive globally by minimising compliance costs within the parameters of the law.
We also influence the cultural norms of our society by promoting fairness and ethical standards in accordance with the rule of law.
Fairness in accordance with the law, integrity, accountability, professionalism and transparency - these are core values underlying our administration of the community's tax system. As the administrators of the community's tax system, our approach is founded on consultation, collaboration and co-design with taxpayers, tax professionals and other key players in the tax system.
On many measures, the Tax Office is recognised internationally as a successful tax administration. But we are not complacent. The challenges of government in today's world have grown with the increasing expectations of citizens for government to be not only reliable but also innovative, adaptable and accountable. Citizens also want government to achieve these more complex outcomes with less use of government authority and money.
Our Strategic Statement 2006-10 sets out our aspiration to meet this challenge and to lift the bar in excellence in tax administration in the years ahead.
By listening to and co-designing with taxpayers and others, we can build community trust in our administration and reduce compliance costs. This more empathetic, user-based approach ensures that administrative solutions are designed and built around what works for taxpayers.
Our approach is about fairness for taxpayers and ensuring that business can operate on a level playing field. We will do everything possible to make it easy for people to comply with the law, and will support those people who want to do the right thing - while ensuring there are real and tangible risks for those who don't.
This approach reinforces a key feature of Australia's tax system: that the vast majority of tax collected is paid spontaneously by or on behalf of taxpayers, with only a small proportion being directly added through enforcement actions.
Voluntary compliance is a fundamental hallmark now as it has been in the past. Hence when Jean Baptiste Colbert famously said more than 300 years ago that the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing, he might have added that the trick is to minimise the amount of plucking needed and apply it where it will be most effective.
What this means for the Tax Office is twofold. Firstly, that supporting taxpayers, and their agents, so that they can be compliant is at least as important as acting to deter or respond to non-compliance. And secondly, that risk assessment needs to inform decisions on the allocation of limited resources.
Innovation is crucial to our operations.
We are developing sophisticated data mining and analytics capabilities with the prospect of reducing the compliance burden on compliant taxpayers.
The recent Study Group on Asian Tax Administration and Research in New Zealand with commissioners and senior officers from 13 countries in the Asia-Pacific region confirmed that Australia has a well developed approach to risk management and intelligence analysis. We shared our experience in data mining, which is essentially about finding relationships and patterns in large volumes of data. We explained that our main data warehouse contains 4.5 terabytes of data.
Last financial year we used data matching to review more than 10 million taxpayers. By integrating data matching work with our risk profiling we are able to make this work happen without the Tax Office contacting people and wasting their time.
When the program began, our first priority was to deliver some immediate improvements that would make a big difference to how taxpayers and tax professionals interacted with us. This work included introducing the tax agent and business portals, improving some of our letters so they were easier to understand, and improving our phone services to provide taxpayers and their intermediaries with more personalised and accurate information, quicker responses and better service.
Our client relationship management system - introduced between September and December 2005 and enhanced in June 2006 - means we can provide a more personalised service, more accurate information and quicker response times. When taxpayers call us, we can view a growing list of their phone and mail interactions with us (and for tax agents, those of their clients).
During 2005-06 we introduced new work and case management systems to assist in managing our correspondence and audit cases. These systems help ensure our efficiency, minimising your costs and providing you with more timely responses.
Much of our work in 2007 centres on building on the case, work and client relationship management systems to re-engineer our processes to further improve your experience with the community's revenue and superannuation systems.
One of the main features of our three quarter of a billion dollar Change Program is a new processing system to replace all our registration, accounting and processing systems for goods and services tax, income tax, superannuation, excise and other revenue products. Significantly, this will provide a single account for each taxpayer that correctly records all tax liabilities, entitlements and payments as well as correctly calculating and recording general interest charges and penalties. It will also eliminate many irritants and provide enhanced real-time online capabilities.
We are also committed to deliver a new superannuation system by July 2008 to implement the Government's superannuation simplification initiatives.
Whole-of-government solutions can offer real benefits for the community by minimising red tape and reducing compliance costs.
We work with Centrelink and Medicare Australia to pre-fill tax returns and exploring what other data held in third-party systems can be incorporated, such as data from share registries and banks. The 1.6 million taxpayers who used e-tax to lodge their 2006 tax return were able to download their Centrelink payment information, child care rebate information and net medical expenses information from Medicare Australia. Some taxpayers have also participated in a pilot to download bank interest information from the larger financial institutions.
Tax agents can access their clients' Centrelink and child care rebate information through the Tax Agent Portal. We plan to expand this initiative to include payment summary information from employers, and next year, for this group of taxpayers, we plan to pilot the concept of 'sign here if the income information we have reflects your circumstances'.
We are also working with Commonwealth and state agencies to better link our systems through the Australian Business Register so that businesses have a one-stop-shop for changing their address and other details. This also opens the possibility for a single authenticated entry point or portal for business to government. Another priority is to progress work on the Standardised Business Reporting initiative.
Our aim is to become less visible to those who comply, but highly visible to those who don't.
For example, our joint efforts with the Commonwealth Director of Public Prosecutions (CDPP) and law enforcement agencies including the Australian Federal Police (AFP), the Australian Crime Commission (ACC), the Australian Securities and Investment Commission (ASIC), and AUSTRAC, signal that the Commonwealth will bring to bear its full arsenal of sanctions to counter tax fraud.
Project Wickenby is a prime example of this joint taskforce approach. By working in joint taskforce arrangements, we are able to apply a very powerful range of remedies and powers to combat fraud and evasion. For example, the police have access to surveillance and intercept powers, the ACC has compulsory coercive examinations powers, the Tax Office has access to civil powers of audit and financial penalties and ASIC has powers to prosecute for breaches of corporations law. The CDPP plays an advisory role and has the call as to whether prosecution action is in the best interests of the Commonwealth.
The immediate focus of Project Wickenby is to take decisive action against an identified promoter, its Australian associates and clients. When the additional funding for Project Wickenby was announced, there was a clear message that participants and promoters shown to be involved can expect to have the full force of the law applied to them.
The strategic approach that has been jointly taken in Project Wickenby, that exemplifies the roles played by respective agencies, is outlined below.
1. Encouraging voluntary disclosures
The overall project strategy is to maximise the incentive for voluntary compliance (including voluntary disclosure) and to establish a strong deterrence to future promotion and participation. The tax law provides significant penalty discounts where taxpayers make a full and true voluntary disclosure. In Wickenby matters we expect any voluntary disclosure to include the provision of known details of the promoters who designed, sold or implemented the scheme, and the known details of the methodology employed.
Where taxpayers do make a voluntary disclosure and that disclosure indicates possible criminal offences, and where:
- the case does not exhibit a significant degree of criminality,
- the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and
- the taxpayer cooperates with the investigation and consequential proceedings,
the CDPP has indicated that he will give favourable consideration to the granting of an indemnity from criminal prosecution, in relation to the taxpayer/s involvement in the scheme.
2. Civil Investigations
The Tax Office audits (civilly investigates) taxpayers to identify tax avoided on income taxable in Australia. There are substantial penalties and fines for non-compliance.
ASIC investigates matters on a civil basis to ensure proper corporate regulation, market transparency and consumer protection. International schemes can involve false dealings with securities, false accounting and breaches of directors' duties.
3. Proceeds of Crime
Under Commonwealth legislation, proceeds of offences against Commonwealth laws (such as the tax law) can be forfeited to the Commonwealth by order of a court. The police and other agencies investigate proceeds of crime matters, whilst the CDPP has the function of conducting the litigation.
In cases involving serious offences the CDPP is only required to prove proceeds of crime matters to the civil 'standard of proof' (on the balance of probabilities). In such cases it is not necessary for any person to be charged, and sometimes these matters are resolved in advance of related criminal prosecutions proceeding.
In Wickenby, one proceeds of crime matter has restrained in excess of $10m in assets. Other proceeds of crime matters are likely.
4. Criminal Investigations
Criminal investigations are being managed by the ACC and the AFP.
Serious alleged offences under consideration in Wickenby include:
- Defrauding the Commonwealth
- Corporations Act offences including
- Breaches of directors' duties
- Market offences
- Financial services industry offences
- Obtaining a financial advantage by deception, and
- Structuring or money laundering offences.
While there are great benefits in the multi-agency approach, care must be taken to ensure that legal processes are complied with. Two areas that have had to be tightly managed are information sharing and separation of powers.
Information sharing
Information sharing between agencies is possible but is currently very tightly controlled. This particularly applies to tax information.
The Government has announced that they propose to amend the law to enable the Tax Office to share information for the purposes of the Wickenby multi-agency taskforce.
Soon we will also sign a new Memorandum of Understanding with ASIC that will give effect to a closer relationship. Greater information sharing, within statutory parameters, will help us manage risks to the community tax system and better ensure a level playing field.
Separation of powers
The Tax Office provides a clear separation between the role of an auditor and that of an investigator.
An auditor can use the administrative powers under sections 263 and 264 of the Income Tax Assessment Act.
An investigator cannot use these administrative powers. An investigator must seek to use search warrants issued under the Crimes Act or Excise Act to gather evidence for prosecution purposes.
In working in cross-agency task force arrangements, where audit and investigation actions may be undertaken concomitantly, there is a need to closely monitor our adherence to these legal requirements. Multi-agency operations of this scale place substantial pressure on ensuring tight compliance with due process.
The ability of the Commonwealth to address attacks on revenue is highly dependent on all agencies having the collective capability to respond and collaborate. To make it work, however, takes a significant shift in agency cultures at both operational and senior management levels. The most difficult issue being faced is how to get outcomes faster. The traditional linear ways of managing casework are no longer appropriate. There are multiple options for achieving an outcome and the most efficient and effective outcome may result from handing the case over to another agency and allowing their remedies to apply.
To support this approach, it is necessary to have the right infrastructure in place. This has been achieved in Wickenby through the early development of agreed governance arrangements.
The Project Wickenby Terms of Reference, which clarify the objectives and the broad strategic approaches, were jointly agreed. These provide an agreed basis under which the participating agencies undertake and coordinate their Wickenby activities.
The Project Wickenby Cross-agency Advisory Committee meets monthly and includes senior representatives from each partner agency (including AUSTRAC and the Australian Government Solicitor) and is chaired by the Tax Office. The Committee focuses on strategic risks, cross agency approaches, legislative or other impediments, improving cross agency working arrangements and assists with planning and reporting, including reporting to government.
The Project Wickenby CEO Meeting meets quarterly to review progress on implementation. In particular the CEO forum seeks to resolve any cross agency impediments that arise.
There have also been cross agency forums established at the operational level, such as the Project Wickenby Joint Management Group which oversees the approach for the criminal matters which are under the management of the ACC.
Figure 1: Governance for cross agency arrangements
Results to date
The Wickenby investigation is progressing well, with more than 10 criminal investigations being conducted by the ACC or the AFP and more than 100 civil or criminal investigations being conducted by the Tax Office or ASIC. More recent activity includes more than 20 search warrants or Tax Office access visits.
Some examples of the progress made include:
- Arrests/charges:
- Three company directors were arrested and charged in Southport, Queensland on 20 July 2006 with two counts each of conspiracy to defraud the Commonwealth of some $6.6 million.
- In another investigation, one person of interest has been charged with a breach of the ACC Act for allegedly refusing to take the oath and take part in an ACC examination.
- An individual faced court on 1 February 2007 in relation to serious tax offences. While not yet charged, the individual has advised the Court he will plead guilty to tax related offences and is scheduled to face a pre-sentencing hearing in the Victorian County Court on 2 July 2007.
- Legal challenges:
- Since the establishment of the ACC, 20 challenges have been finalised in the Federal and High Courts in relation to ACC's Operation Wickenby, and the ACC has succeeded in all of those challenges. The ACC is currently defending a number of matters in the Federal Court in favour of the Commissioner of Taxation that disallowed claims for legal professional privilege.
- There is also an appeal by a taxpayer against a Federal Court decision in favour of the Commissioner of Taxation on legal professional privilege.
- Audits:
- More than 100 audits have commenced. Assessments totalling $26.95 million have issued with $24.9 million either collected or under payment arrangements.
The media is also picking up on the intent of Project Wickenby. For example, in The Age on 9 February 2007 there was an article headed 'The national sport that's not very sporting' with the message that tax avoidance may be lauded by some but means there is less for all.
As we know, the surge in global economic activity has been driven by not only the phenomenal growth in economies such as China but by evolving technology and corresponding production efficiencies, government policy adjustment and increasing demand. This has dispersed corporations' commercial operations to investment-attractive economies and alliances around the globe.
However this accelerated economic activity, coupled with the trend for corporations to integrate their global activities, requires a higher level of sophistication by tax administrations, both to help business get on with business, and also to ensure a level playing field.
In addition, the changing global landscape has prompted the need for tax administrations around the world to put international issues, including international tax avoidance and evasion, high on their agenda.
Mergers, acquisitions and divestments
Many of the corporate tax issues that are of concern to tax administrations relate to the global growth in mergers and acquisitions. Record Australian activity is reflected in the latest direct investment statistics and has attracted our attention.
In the nine months to September 2006, foreign direct investment inflow to Australia totalled $29.7 billion - the biggest nine month inflow in our history. In the same nine months Australian businesses invested $29.8 billion abroad. The flows for this period continued a trend increasingly apparent over the last decade.
Overall announced merger and acquisition activity in Australia in 2006 showed a 56.4% upsurge from US$104.8 billion worth of transactions in 2005 to US$163.9 billion in 2006. The total number of deals increased by 12.1% from 2371 in 2005 to 2657 in 2006.2
The dollar value and volume of deals is significant.
As tax administrators, we need ongoing assurance that the tax outcomes of these significant deals are appropriate. We are increasingly working with business to understand the structuring of the deals and the tax consequences at the point of divestment and at the point where new tax entities are formed for the takeover targets.
We also seek to understand the role played by investment banks and other advisors in developing and implementing the tax structuring, calculations and tax assumptions underpinning these deals.
As part of our review of the tax risks, we check that capital gains tax outcomes on divestment are appropriate and reflect the economic gains made.
Second, post-acquisition, we ensure there is compliance with our thin capitalisation rules so that interest deduction claims comply with those rules. Another focus is ensuring that increased capital allowance deductions due to the increased tax value of assets on acquisition, are not excessive.
We check whether the use of carry forward losses comply with the loss rules. We also seek to ensure that the payment of new international related party fees are not excessive and appropriately characterised for tax purposes and are in line with the OECD's arm's length principle, and where hybrid securities are issued, that the tax treatment of those securities is appropriate.
International cooperation
We are also expanding our work to address the serious risks posed by international tax schemes - especially through stronger cooperation with other tax authorities and international jurisdictions.
Participation in multilateral forums such as the OECD and the Leeds Castle Group (which involves Canada, China, France, Germany, India, Japan, Korea, UK, US and Australia) is critical to staying on top of the game at its highest level. We have a permanent executive officer based in Washington DC where the Joint International Tax Shelter Information Centre (JITSIC) is headquartered.
Disclosure project on offshore bank accounts
We are in the planning phase to pilot a project to encourage people to make voluntary disclosures of undeclared money held offshore.
The Irish Revenue ran a highly successful project to address the same risk. They established a cooperative approach with the banks in which the banks' offshore subsidiaries and branches wrote to their Irish customers with offshore accounts. They asked their clients to consider making a voluntary disclosure if they had not complied with domestic tax requirements. Some 15,500 disclosures were made and Euro800 million in unpaid taxes was raised.
We are consulting with the Australian Bankers Association and the Australian Financial Markets Association to develop our overall approach.
We anticipate working with some individual financial institutions with subsidiaries and branches in countries that are listed as tax havens. The overseas entity would write to its Australian customers encouraging them to make a voluntary disclosure of unreported income. The bank would provide customers with information on how to disclose the income to us.
Further details will be available when the consultations and compliance arrangements are settled.
I invite taxpayers in this situation to contact us before we contact them. Where this occurs, the CDPP has indicated that he will give favourable consideration to the granting of an indemnity from criminal prosecutions to cases that fall within the same criteria as outlined above in relation to Project Wickenby.
In a variety of ways our tax and superannuation systems help build a better Australia.
We are fortunate to have a compliance culture where the majority of Australians voluntarily comply with their tax obligations.
It's up to you and me to ensure that we keep it that way.
1 Strategic Statement 2006-10
2 Thomson Financial, Mergers and Acquisitions, 4th Quarter 2006
Last Modified: Wednesday, 14 March 2007