Warning: This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
Speech by Michael D'Ascenzo, Commissioner of Taxation
on the launch of the Compliance Program 2007-08
Sydney, 16 August 2007
The release of the 2007-08 Compliance Program is very much about an open and accountable Australian Taxation Office (ATO). It also illustrates that the art of tax administration is not static. The program reflects changes in Australia's dynamic social and economic environment and the growth in complexity and globalisation of business dealings. What is static and enduring are the values and aspirations that underpin our corporate goals1. These include being fair and professional; applying the rule of law; supporting taxpayers who want to do the right thing; and being consultative, collaborative and willing to co-design.
The themes of this year's program include the implementation of the 'Better Super' changes; reviewing the tax implications of the increase in international dealings right across the community; greater assistance for small business; and widening our focus on an expanding body of high wealth individuals.
As you know, our approach to compliance is based on our Compliance Model, which has been described as best practice2. This model differs from the more traditional enforcement pyramids3 in that it is based on "a deeper understanding of the motivations, circumstances and characteristics of taxpayers so that enforcement can be effectively tailored to deliver compliance."4
By compliance, we refer to adherence to Australia's tax and superannuation laws. Given that risks are not limited to non-compliant behaviour, the 2007-08 Compliance Program takes a balanced approach. This approach applies simultaneously to a number of complementary strategies - one being help, education, and assistance to get back on track; another being deterrence in the form of potential sanctions and a real possibility of being caught; and another being to make compliance easy and fair5.
For example, a much wider use of data matching and third party information-sharing is bringing greater sophistication to our compliance activities. This, in turn, is helping us to not only better identify areas of concern but also to better differentiate the causes of non-compliance and to deal with them accordingly.
In Australia we have a strong culture of voluntary compliance. For example 95% of tax revenue is derived from those who comply with their obligations to register, file and pay on time. That is why it is important that we foster this culture by aligning "what" we do with a "how" approach that reflects our corporate values. And if you position our mission in terms of contributing to the wellbeing of Australians, then it is equally important that we minimise taxpayer compliance costs.
Many of our best known successes in making compliance easier, cheaper and more personalised rely on innovative technology. A well known example is
e-tax which we have refined each year with the help of its dedicated users - some of our most satisfied 'customers'. This financial year we expect nearly 15% of individuals to use e-tax.
The Tax Agent Portal is another very popular innovation that has provided direct access to our systems and given agents significant savings and efficiencies.
However, while technology offers many exciting possibilities there is a lot more to creating an environment that promotes high levels of voluntary compliance while minimising compliance costs. You will find in this year's program initiatives ranging from supporting individuals and small businesses, through to tailored information and services for our largest corporates and wealthy individuals.
This support is based on practical guidance and assistance; encouragement to increase certainty prior to lodgment; initiatives to support improved tax governance; and an expansion of pre-filling options for the preparation of tax returns.
In recognition of the vital role of tax practitioners, this year we are introducing a series of improvements to our services for the profession and are looking to further personalise our service to agents through a more professional to professional approach, including increased access to ATO experts.
These improvements to our administration could not happen without the exceptionally wide network of ATO sponsored consultative bodies - currently over 50 - representing amongst others, the tax profession and large and small business. High levels of consultation, collaboration and co-design assist in developing these initiatives and build community commitment to their tax and superannuation systems.
All this represents a program designed to anticipate problems before they arise, and if problems do arise, to help resolve them before they get bigger.
This is not to say we are lessening our capacity to being firm but fair where needed. Indeed you will see in this year's program ample evidence of major changes being driven by information technology to make our enforcement activity more rigorous, focused and effective. Deterrence strategies of this type promote a fairer system for all.
Data matching and information-sharing systems are enabling us to develop far more sophisticated tax risk profiles of individuals, firms, companies and institutions.
This year we will identity match over 220 million records. At the same time, we are expanding our network of collaborative arrangements with third parties including government, regulatory bodies, private sector organisations, law enforcement bodies and financial institutions.
The message must be clear: our capacity to identify tax risk is being progressively enhanced. That said, the 'gotcha' mentality is not what we are about. Our approach is 'prevention is better than cure' so that being open and accountable is central to our compliance strategies.
One purpose of our annual Compliance Program is to invite the community to comment on the risk management choices we have made with the resources the community entrusts to us. Another purpose of transparency is to build integrity, confidence and trust in our administration of Australia's tax and superannuation systems.
I am confident that the 2007-08 Compliance Program meets these objectives.
The following provides a high level summary of this year's program, aimed at optimising voluntary compliance effectively and efficiently for the community.
Individuals
The electronic lodgment of tax returns through e-tax continues to grow strongly. With extra funding from Government, we aim to drive electronic lodgment further this year by expanding the range of pre-filled data for those using e-tax to include details of salaries, wages and allowances, dividend and interest income, and payments of entitlements from Federal Government departments and agencies.
This will make income tax returns significantly easier for the 1.8 million taxpayers expected to use e-tax in 2007 and the 8.7 million who are projected to lodge electronically through a tax agent in 2007. For about a million taxpayers with simple tax affairs, they will need to do nothing other than simply lodge their return.
Superannuation
Superannuation is a key focus given the important changes under way. A Government funded program is in train to inform the community of these changes.
Between 11 May and 6 June 2007 we ran a major advertising campaign on television, radio and in the press highlighting the changes to superannuation. We also developed the 'Better Super' booklet to provide individuals with details of the Super Simplification changes.
We wrote to 740,000 employers to explain what they needed to do to comply with the changed law. We have also provided guidance on the changes on www.ato.gov.au and in handy brochures.
The growing popularity of self managed superannuation has created a need to better skill trustees and auditors. We are developing support tools for trustees and guidelines for approved auditors on preparing audit contravention reports. Our concerns include requirements relating to in-house assets and loans to members.
Capital gains tax
To help people in this area, we will be writing to new property investors and those who have sold property, on how the capital gains tax rules operate.
We will be matching reports from super funds on the contributions they have received to individual tax returns to identify unreported capital gains or under- reported income.
We expect to conduct 6000 reviews or audits relating to possible under-reporting of capital gains made on the disposal of shares, investment properties, vacant land, holiday houses, and capital distributions received from managed funds.
The main residence exemption will continue to receive scrutiny. Take the taxpayer who tried to claim a vacant warehouse as his main residence. We found the warehouse had no electricity, water or telephone connected and there was no heating or cooling, and indeed the family did not live there!
Work related expenses
- In 2005-06, 7.1 million individuals claimed $12.5 billion in work related deductions6 - an increase of 9.3% over the previous year.
- This year we will pay special attention to claims by tourism workers, travel consultants and guides, together with employees in the fitness and sporting, construction, security and mining industries.
We will conduct 15,000 reviews or audits and visit 300 tax agents to examine their approach to these claims.
Rental income and expenses
We continue to see discrepancies in claims relating to rental income and expenses. We will examine 6000 cases involving issues such as repair and renovation costs and incorrect apportionment of interest deductions.
Top executives and company directors
The number of highly remunerated executives and company directors has been growing and so has the sophistication of their remuneration arrangements. Consequently, we are increasing our focus on this group. In the coming year we will be examining the tax affairs of top executives of large companies with total remuneration of $1 million or more. Of particular interest will be options and rights issues, cash bonuses and non-income capital benefits, as well as lodgment of their tax returns.
A case in point is the senior executive who stopped lodging returns after his retirement from a large company in 1998. He subsequently took up a directorship in a small company which expanded rapidly from 2001 to 2006. His remuneration (made up of fees and options) rose substantially in value over that time, but he did not lodge returns. After action by the ATO, he lodged outstanding returns and paid $168,000 in taxes.
Lodgment of returns
Risk profiling helps us identify people who are likely to lodge late or ignore this obligation altogether. As well as high income executives and professionals, we will also be focusing on those with child support obligations, promoters of tax schemes and those using tax havens.
Micro enterprises
We are ready and willing to assist micro businesses stay on top of their tax and superannuation obligations.
The Small Business Assistance Program
A very important initiative in our compliance program for small business this year is an expansion of support and assistance strategies for this sector. The Federal Government provided $40 million over four years in the recent Budget to provide increased assistance to those new to business.
Our Small Business Assistance Program aims to help businesses get on the right track from the start and develop good tax habits early. It also offers assistance to established businesses who may have previously been reticent to contact the ATO. It's about engaging with businesses as early as possible to ensure that any problems, such as debt, do not escalate and become unmanageable, and if they do get into difficulties to help them over the line where we can.
Our new brochure 'Helping small business stay on track' is an example of this new approach, which is being developed collaboratively with small business and industry groups. Assistance and advice will be available to businesses on start up and at various other points in the business life cycle - and will be practical and accessible.
We'll also engage more with local industry groups, business assistance centres and chambers of commerce to ensure small businesses get the help they need, and how they need it7. This will include a mix of personal assistance visits, seminars, workshops and telephone support.
Cash economy
We are continuing our focus on the cash economy with a range of new strategies. This year we contacted more than 62,000 businesses in response to tip-offs from the community and our own intelligence, raising more than $157 million in liabilities.
Strategies for 2007-08 include more effective follow-up of information from third parties to identify those whose lifestyles are out of step with their reported income.
Business-to-consumer cash transactions will get special attention - especially retail businesses where non-reporting of cash transactions is facilitated by high volume, low value cash transactions.
Other businesses attracting our attention will be those where there is a high risk of non-reporting of cash income including tradespeople and sub-contractors in the building and construction industry, restaurants and cafes.
A new initiative is our development of industry benchmarks for some trades and industries where there is a high volume of cash transactions. We will work with industry organisations to determine these benchmarks. They will be used to communicate to taxpayers what income levels might be expected based on their business activity. Where we see taxpayers who do not fit within benchmarks that relate to them, we can take a closer look at their activities to see whether these involve non compliance.
Benchmarks will be published and regularly updated. This approach will provide an opportunity for taxpayers who are outside benchmarks to adjust their behaviour, where necessary.
Debt collection
Micro businesses currently account for about two-thirds of outstanding collectable debt, and have done so for a number of years now. Recognising this, the Federal Government provided $125.7 million over four years in the recent Budget to expand our debt collection capability. We will do this by using dialler technology to contact more taxpayers, external debt collection agencies for small debts, and by dedicating more staff to recover superannuation guarantee charge debts for employees.
These initiatives will enable us to intervene earlier in debt cases, contact more taxpayers with outstanding debts, and significantly reduce debts which are over two years old.
Anyone having difficulties is encouraged to call us on 13 11 42 so we can work together to get things back on track - we will take your circumstances into account and be as reasonable as possible8.
Superannuation
The number of do-it-yourself super funds is continuing to grow. We are developing support tools for trustees and auditors while increasing reviews and audits, and pursuing outstanding lodgments.
We will conduct compliance checks on any reported issues with new registrants.
There will be a significant increase in compliance activities focusing on regulatory issues including in-house assets and loans to members. Auditor contravention reports will continue to be examined. Where funds do not meet the definition of a self managed superannuation fund, we will work with the trustees to restructure the fund so that it can meet the definition.
Employers
We will continue to help employers with their record keeping requirements and inform them of their need to manage their cash flow so they are able to meet their tax and superannuation obligations.
We use data matching and information from people such as employees to identify employers who may not be complying. We will undertake 2700 field audits, 1300 phone reviews, and contact 26,000 employers by letter.
We are increasing our assistance to fast growing enterprises to help them meet reporting requirements relating to international dealings, capital management, trusts and beneficiaries. Practical guidance materials will be available to these businesses, as well as our more technical products designed mainly for tax professionals.
An important new measure is the introduction of a uniform eligibility test for small business in relation to concessions covering capital gains tax, GST and the Simplified Tax System.
SME audits and reviews
In 2007-08 we will undertake 390 audits and 460 reviews focusing on issues including capital gains tax, losses and wealth extraction.
We will contact 2500 SMEs to verify FBT and income tax issues and undertake 6000 checks of income tax returns where claims for refunds appear excessively large or unusual.
Capital gains tax
With inter-generational change leading to an increase in owners disposing of their businesses, we are working to raise their awareness of tax risks around this key stage in the business lifecycle.
GST
Real property transactions, including unreported sales and the correct application of the margin scheme, will continue to be a GST focus for SMEs. Our activities will be facilitated by data matching from third parties.
We will continue to examine high risk refunds both pre and post issue to ensure the integrity of the GST system.
GST compliance activities will examine serious evasion risks, for example arrangements involving alleged exports of services where actual consumption occurs in Australia, and whether the non-resident entities providing those services are required to register and pay GST.
Extracting wealth from businesses and business exit strategies
Business owners trying to extract value from their business without paying the correct tax will be closely examined. This has added importance given the legislative changes affecting the treatment of shareholder loans9.
A number of arrangements will be subject to close examination. These include loans, payments and debts forgiven by private companies that in effect, distribute company profits to shareholders in a non-taxable form; divestment of business assets via mechanisms such as share buy-backs, capital reductions, the sale of shares; and the application of the demerger provisions where the purpose of business efficiency is not clear.
Wealthy individuals
More individuals now fit into the wealthy category - defined by us as those controlling assets of $30 million or more. The number now exceeds 1100.
A new strategy for 2007-08 is the release of a booklet for high wealth individuals setting out what attracts our attention, what we consider to be a risk and details of our information collection and compliance processes. We are working with representatives of these taxpayers on this initiative.
Enhanced data matching will substantially improve our profiling and risk assessment of wealthy individuals. We have developed new automated ways of using and accessing third party information on large financial transactions and capital holdings, together with a tool that maps relationships in data and helps identify connected individuals, entities and transactions.
We will conduct 200 risk reviews and commence 40 audits of high wealth individuals this year.
Large business and International
The flow of international transactions by large and many medium sized businesses has increased in recent years. We are expanding our scrutiny of these transactions, especially those that may be producing artificially generated tax benefits.
We will be examining the use of tax havens, cross border arbitrage, transfer pricing and profit shifting, as well as corporate restructuring which shifts assets, functions and risks offshore.
We recently announced that we will be writing to a number of Australian resident tax haven account holders to encourage voluntary compliance10.
You might have also seen some recent press in relation to the tax performance of some foreign banks. In our program of work for 2007-08 we will review those foreign banks branches and subsidiaries where there has been consistently low levels of taxable income or generation of large losses. We will use these reviews to develop a better picture of the business models used and tax risks in this sector. We intend to continue our close working relationship with the Australian Financial Markets Association to ensure we incorporate industry insights in these reviews.
It will come as no surprise that mergers, acquisitions and divestments are a key focus given the sharp increase in use of these activities in recent years11.
The role of private equity capital in leveraged buyouts where substantial amounts of debt are employed will also receive scrutiny, as will the proper application in these cases of the business profits article in Tax Treaties.
More attention is being paid to corporate tax performance at odds with economic performance. Disclosure of large accounting profits to shareholders but low levels of taxable income or sustained tax is a risk indicator for us, requiring a reconciliation of the different outcomes.
Compliance of large corporate superannuation funds will come under scrutiny given that 70% of income tax collections from all superannuation funds come from this large business sector.
As a way of encouraging voluntary compliance and reducing compliance costs for businesses, we initiated a program in 2006 to foster good governance in large business. We are also exploring with the Corporate Tax Association ways of helping large companies to better manage their tax risks.
Non-profit organisations
Many non-profit organisations rely on volunteers with limited tax experience to help manage their financial affairs. We support these organisations with tailored publications and consultative forums. Again our emphasis is on practical support and problem resolution, rather than legal advice.
An issue of concern is that we are seeing some cases where there is an unintended blurring of boundaries between legitimate activities and those which may threaten endorsement as non-profit organisations. We are focusing on political lobbying activities, commercial operations, and the operation of prescribed private funds.
Another priority is assisting clubs to better understand their tax obligations. This year we will issue a workbook and online products for clubs to help them gauge their tax status.
Tax practitioners
Tax practitioners play a vital role in influencing voluntary compliance. If the long awaited regulatory framework for tax practitioners12 is passed, we will work with the professional bodies and other government agencies to ensure that it achieves its policy intent.
Our approach is to support tax practitioners to be self sufficient, through ease of access to information and advice. Through our collaborative processes we have co-designed a number of new services through a professional to professional package that offers, among other things, better access to ATO specialists and a stronger voice for regional concerns and issues. The latter is being heard through a new service role that is being piloted in Melbourne, North Queensland and Tasmania, and a revitalisation of regional tax practitioner forums.
Dealing with tax crime and aggressive tax planning
We are dealing with tax crimes through a range of strategies including improved data matching and profiling, analysis of third party information, participation in multi-agency taskforces such as Project Wickenby13, through to enhanced cooperation with foreign tax administrations.
Increasingly, we collaborate at a strategic and tactical level with other agencies to deal with the use of stolen identities, fraudulent behaviour by tax practitioners and refund fraud.
Recent sentencing statistics for serious tax evasion and fraud highlight how seriously the courts perceive these offences.
In 2006-07, the courts convicted 102 people for tax fraud and evasion with identity crime and activity statement fraud dominating the sentencing statistics.
Our main focus in relation to tax exploitation schemes, is on their promoters. We are also vigilant for emerging schemes, and will issue taxpayer alerts where they are encountered.
Conclusion
So some of the important messages from this year's Compliance Program14 include the following.
First, we are applying considerable resources in keeping abreast and making adjustments to our compliance strategies to meet the challenges of the global economy and emerging risks.
Second, the program's initiatives are very much a product of collaboration through a network of consultative forums covering wide spectrums of the community, including tax professionals, small business and large business, and industry representative bodies.
Third, the program balances deterrence with assistance and support. The program is responsive to the needs of taxpayers to understand their rights and obligations in relation to tax and superannuation, and supports taxpayers by co-designing processes with them that reduce their compliance costs and make it easier for them to comply.
Fourth, the program's effectiveness is also underpinned by putting greater resources into data matching and analytics. Given our more sophisticated risk and profiling tools, there is now a greater chance of detection of non-compliance and there are serious consequences for those that have not exercised reasonable care or who chose to be non-compliant.
Finally, in implementing our 2007-08 Compliance Program, we will live our corporate values, supporting taxpayers who want to do the right thing and being fair but firm with those who don't.
1 See ATO Strategic Statement 2006-10 and Corporate Plan 2007-08.
2 Sagit Leviner, "A New Era in Tax Enforcement: From 'Big Stick' to Responsive Regulation", University of Michigan Law School, Public Law and Legal Theory Working Paper Series, Working Paper No.68, November 2006.
3 See for example Anthony Ogus, "Risk Control Strategies and Regulatory Enforcement", paper presented to the Australian Law Reform Commission Conference (ALRC): Penalties, Principles and Practice in Government Regulation, Sydney 2001.
4 Sagit Leviner, op. cit.
5 See the review of regulatory theory in Michael D'Ascenzo, "Getting the Balance Right", ALRC Conference, op. cit.
6 These figures relate to 2005-06 income tax returns processed during the 2007-08 financial year.
7 Micro and small businesses have told us through our various consultative forums that they want practical support not technical legal advice. Nevertheless, where there is a need, we will also continue to provide binding legal products primarily directed to tax professionals.
8 See 'Helping small business stay on track' brochure.
9 Exercise of the Commissioner's discretion under section 109RB of Division 7A of Part III the Income Tax Assessment Act 1936. See ATO Media Release and Practice Statement on Division 7A.
10 This initiative involves branches of some Australian financial institutions sending letters to people with offshore accounts and the ATO sending letters to people identified using AUSTRAC data or who have an offshore debit or credit card issued by a financial institution in Jersey, Guernsey or the Isle of Man to encourage voluntary disclosure. See ATO media release " Tax Office announces offshore voluntary disclosure initiative" July 2007.
11 The value of announced merger and acquisition activity in Australia in the first six months of 2007 was US$74.026 billion (A$86.3 billion). This was up from US$30.368 billion (A$35.4 billion) for the same period in 2006 - a 144% change. Source: Thomson Financial, Mergers and Acquisitions, 2nd Quarter 2007.
12 The Government has released draft legislation for a new regulatory framework for tax practitioners designed to improve their registration and regulation. That will include the establishment of a Tax Practitioners' Board, regulation of entities providing BAS services, and a legislated code of professional conduct to govern tax practitioner services, and importantly, a safe harbour from penalties for taxpayers who on a bona fide basis use the services of registered tax agents.
13 A multi-agency taskforce to set up to address tailored tax avoidance or evasion arrangements promoted by off-shore providers.
14 A copy of the Compliance Program 2007-08, summary of priorities and key activities are available on the Tax Office website www.ato.gov.au
Last Modified: Thursday, 16 August 2007