National Tax Liaison Group key messages 26 November 2020

Key highlights

• Members noted their observations and highlighted issues arising in practice in relation to compliance in the current and post COVID-19 world, the impact of the ATO’s current approach to debt collection and on the recent release of the tax gaps and the ATO Tax Gap program.
• Discussion of the next steps for the draft Terms of reference for Treasury’s consultation arrangements for new legislation and related guidance.
• Overview of the ATO’s Economic Stimulus Branch and its critical role in administering the COVID-19 stimulus measures.
• Update on OECD Pillar 1 and Pillar 2 noting the release of the Inclusive Framework Reports on the Pillar 1 and Pillar 2 Blueprints for consultation.
• Annual update on the operation of the General Anti-Avoidance Rules Panel.
• Reflections on the achievements of the National Tax Liaison Group (NTLG) for 2020 included positive feedback on the NTLG members’ valuable contributions to Treasury and ATO consultations related to the Government’s COVID-19 response and emerging issues on the Stimulus Package measures in a challenging and difficult environment.

Opening comments

Kirsten Fish, Acting Second Commissioner, Law Design and Practice Group, ATO; and Grant Wardell-Johnson, Chartered Accountants Australia and New Zealand

NTLG Co-chair Grant Wardell-Johnson welcomed members and advised that Jerome Tse has joined the NTLG representing The Tax Institute. Grant noted that this is the last meeting for Justen Nixon who is transitioning out of the NTLG secretariat support role. Grant thanked Justen for his work, guidance and contribution to the NTLG and wished Justen all the very best in his new role.

Grant Wardell-Johnson commented that there have been positive developments this year moving into a period with an increased multilateral focus. This includes developments in relation to Australia’s response to COVID-19 and vaccines, and the stimulus measures as well as the recent Budget measures, that are intended to be short term but will operate for the next two years. Grant noted that it is remarkable what the ATO and the tax community have achieved this year.

NTLG Co-chair Kirsten Fish thanked Grant Wardell-Johnson for his comments and agreed that it has been a challenging and interesting year adapting to new ways of doing things with changes most likely continuing through next year.

Compliance in a current and post COVID-19 world

All members; and Deborah Jenkins, Deputy Commissioner, Small Business, ATO

Members were asked to provide their observations of issues arising in practice in relation to client behaviour risk tolerances, expected adviser assurance levels and the impact of period of review changes.

Members’ comments included:

• Compliance will be a shared problem for practitioners and the ATO, mainly impacting micro and small businesses. There is an expectation of a larger tax gap due to incentives created by the stimulus payments.
• Advisers are getting better at quality assurance and observing ATO guidance. There is less tolerance around risk taking behaviour.
• JobKeeper and other stimulus measures have had a positive compliance effect. It has brought agents and clients closer and, in some cases, has resulted in the active consideration of the business of the client. However, there are cost issues for professional services and the level of support that a business can afford may be reduced.
• There is a concern about using benchmarks in the current economic environment as these may result in false positives.

The ATO noted:

• Our small business benchmarks are indicative only, but we know that tax agents and taxpayers use them – around 30,000 hits to the ATO’s benchmark performance check homepage each year.
• The small business benchmarks are not used in case selection. We continue to evolve our risk profiling and use a number of sources of information for this purpose including third party data and other intelligence.
• We delayed the release of the 2018 benchmarks due to COVID-19 but the 2018 and 2019 benchmarks will be published in early 2021. We are about to pilot a 2018 benchmark-derived real time nudge message for the 2020 income tax returns for late lodging, self-preparing, sole traders who are well outside of the benchmark trend.
• Entities with a turnover of $10 to $50 million will have the benefit of a two-year amendment review period. There is no change for small businesses (those with turnover up to $10 million), noting that the four-year amendment period still applies for business activity statements.
• The digital Cash Flow Coaching Kit will be released at the end of November. This tool is designed as a value-add advisory service for tax professionals and business advisors to use with small business clients.

Debt collection

All members; and Vivek Chaudhary, Deputy Commissioner, Debt, ATO

At the 8 September 2020 NTLG meeting, Deputy Commissioner Vivek Chaudhary briefed members on the ATO’s current approach to debt collection in the current climate and post-COVID environment. Related to that discussion, members provided their views of the impact of the ATO’s approach and how it is operating in practice in the community.

Members’ comments included:

• They appreciated the ATO’s case-by-case approach to debt collection.
• A concern is how the ATO will adapt to the proposed insolvency reforms and whether it will take an active or passive role in relation to debt and insolvency.
• Advisers are working with clients regarding the payment of debts with many conditions requiring the approval from creditors, including the ATO, to determine the way forward.
• A whole-of-government approach to the measure and greater coordination between the relevant agencies would be beneficial. Members queried whether there will be more structure around advocacy/consultation in the future.

The ATO noted:

• The ATO encourages taxpayers facing difficulty meeting their obligations to come forward and discuss this with the ATO.
• There will be firmer activities next year for taxpayers who have not engaged with the ATO regarding the payment of debt; particularly those where there are outstanding lodgments.
• If enacted, the insolvency reforms will commence on 1 January 2021. A key feature of the new rules is that business owners will work with a restructuring professional to develop a plan with a 15-day turnaround period for this to be accepted by creditors.
• The ATO’s approach to potential insolvency remains the same with the ATO working with taxpayers and pursuing action on a risk-based approach.

Tax Gap program

All members; and Anthony Siouclis, Assistant Commissioner, CEGS Performance and Tax Gap, CEG Services, ATO

The ATO reported its 2017–18 tax gap estimates in the 2019–20 ATO Annual Report. Members were asked to highlight any specific issues in relation to the release of the tax gaps and the ATO’s Tax Gap program.

Members raised the following issues:

• Is there a program of work to identify a specific gap, for example, work-related expenses or rental?
• GST assurance and self-audit requirements in the large market – how does this fit in the original design of Justified Trust which should lead to a less intensive approach.
• Is there a mechanism whereby the ATO can suggest a legislative change that may assist in closing a gap?

The ATO noted:

• This year sees the full release of our tax gap research program.
• A tax gap is a lag indicator of past activities.
• The GST gap is estimated using a top-down approach where GST collected is compared to an external benchmark. The major contributor to GST tax gap in the large market is accounting system issues.
• An emerging consideration for the ATO’s approach to addressing tax gap is the sensitivity of each particular component of the overall gap, that is how responsive is that component to increased or decreased ATO activity (audit or other mechanisms including behavioural nudges) and weighting ATO activities to those which are most impactful.
• The small business random inquiry program identified that the tax gap is less where there is good record keeping.
• Impact of COVID-19 is expected on the tax gap program in the future.

Treasury update

Kathryn Davy, Principal Adviser, Corporate and International Tax Division, Revenue Group, Treasury

Kathryn Davy noted:

• five tax measures have passed Parliament and have received royal assent
• four measures are currently before the Senate
• there are no tax measures awaiting royal assent.

Update on OECD Pillar 1 and Pillar 2

Kathryn Davy, Principal Adviser, Corporate and International Tax Division, Revenue Group, Treasury

Kathryn Davy noted that on 8–9 October 2020 the OECD–G20 Inclusive Framework on Base erosion and profit sharing publicly released the Inclusive Framework Reports on the Pillar 1(PDF 4.1MB)This link will download a file and Pillar 2 (PDF 4MB)This link will download a file Blueprints.

The Blueprints were released for consultation on 12 October 2020 with written comments from stakeholders by 14 December 2020. The OECD also released a related public consultation document (PDF 480KB)This link will download a file on the Reports on the Pillar 1 and Pillar 2 Blueprints.

Virtual public consultation meetings will be held in mid-January 2021. A key issue is the US approach to the ongoing negotiations.

Kathryn Davy noted that Treasury is actively involved with this work. Members noted they can assist with any technical issues if required.

Consultation arrangements for new legislation and related guidance (related to action item NTLG 1903/3)

Paul McCullough, Division Head, Individuals and Indirect Tax Division, Treasury; Simon Writer, First Assistant Secretary, Law Design Office, Treasury; Louise Clarke, Deputy Commissioner, Policy Analysis and Legislation, ATO; and Andrew Orme, Deputy Chief Tax Counsel, Public Advice and Guidance, ATO

Paul McCullough provided a brief outline on the background of the NTLG action item noting there were several issues that were raised related to ATO guidance products and their interaction with the Explanatory Memorandum for new law. NTLG members submitted a consultation paper to the Assistant Treasurer in May 2019 raising their concerns.

Treasury is reviewing its processes from policy development to the introduction of the legislation to identify if there are any gaps in the processes. The Law Design Office is reviewing its processes for Explanatory Memoranda across all of Treasury’s portfolios.

Paul McCullough noted that Treasury has mapped the purpose and scope of these elements of advice and support for the legislation and would like to test the approach on Explanatory Memoranda to ensure that they are used for the purpose that they are designed.

The draft Terms of reference for the mapping process for consultation were circulated to members for their feedback. It was agreed that members will provide their feedback to Treasury out-of-session and that a further discussion be held at the next NTLG meeting.

Economic Stimulus Branch

James O’Halloran, Deputy Commissioner, Economic Stimulus Branch, ATO

James O’Halloran provided an overview of the Economic Stimulus Branch including why the branch was established and its approach regarding the new JobKeeper measures.

The Economic Stimulus Branch plays a critical role in administering the COVID-19 stimulus measures to assist taxpayers and agents access services and provide guidance and assistance to meet their obligations.

The temporary branch was established from 1 October 2020 bringing together 600 to 700 staff to form a centralised hub with three streams:

• Engagement and Assurance
• Advice and Guidance
• Program Governance and Management.

The branch is responsible for all economic stimulus measures and reports to Second Commissioner, Client Engagement Group. The branch’s program includes governance, workflow management, consistency in procedures and reporting.

Members commented whether this is a model that will be taken forward for future transfer payment schemes. The ATO noted that it has shown capability to deliver a range of services and that it has been useful to bring together a cross-section of people and skills to deliver policy intent.

GAAR Panel update

Peter Walmsley, Deputy Chief Tax Counsel (Special Tax Adviser), ATO

Peter Walmsley provided the annual update on the operation of the General Anti-Avoidance Rules (GAAR) Panel noting that hearings were suspended early in the year due to the interruption to business-as-usual and face-to-face meetings. Sessions recommenced to deal with emerging issues related to the Government’s economic stimulus measures for JobKeeper and Cash Flow Boost. A process was developed that required ATO staff to consult directly with the Chair of the GAAR Panel on issues related to the stimulus measures.

Peter Walmsley noted:

• For JobKeeper there were only nine cases referred that were all considered low risk.
• Cash Flow Boost (CFB) generated around 189 cases. A CFB triage panel reviewed high risk cases and extracted those that may be subject to a rule in CFB for anti-avoidance.
• The Panel has resumed hearings for internal purposes with virtual meetings and some remote appearances with taxpayers.

NTLG action items update

Justen Nixon, Technical Liaison Director, Tax Counsel Network, ATO

Justen Nixon provided a status update on open action items:

• NTLG 1903/3 – Consultation arrangements for new legislation and related guidance

This action item was discussed as an agenda item noting that the draft Terms of reference for the mapping process for consultation were circulated to members for their feedback. It was agreed that members provide their feedback to Treasury out-of-session and that a further discussion be held at the next NTLG meeting. This action item to remain ‘in progress’.

• NTLG 1911/1 – Establishment of NTLG sub-group to consider compliance costs

This action item is on hold until early 2021 and remains ‘in progress’. In connection with the proposed sub-group, Michelle De Niese noted the new regulator performance role that has been established within the Department of Prime Minister and Cabinet which is being managed by the Assistant Minister to the Prime Minister Ben Morton.

Lambourne and the Commissioner of Taxation

Jerome Tse, The Tax Institute

Jerome Tse noted that the Administrative Appeal Tribunal’s decision in Lambourne and Commissioner of Taxation [2020] AATA 4562External Link suggests that it appears the Commissioner is seeking to apply new principles regarding deductions for work-related expenses. It was agreed that this matter would be brought to the attention of Hoa Wood, Deputy Commissioner, Individuals and Intermediaries.

Post-meeting update – Deputy Commissioner Hoa Wood and other ATO officers met with a small group of NTLG members on Tuesday, 1 December 2020 to discuss the issue raised.

Deputy Commissioner Hoa Wood provided the following information that was circulated to NTLG members out-of-session on 8 December 2020:

• The ATO view on ‘discretionary’ expenditure by employees and the relevance of employer requirements is set out in Taxation Ruling TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997. The Ruling says:
  • Employer requirements do not determine the question of deductibility – it is always a question of relevant nexus to earning income.
  • Expenses with a sufficiently close connection to earning income will be deductible notwithstanding they are ‘discretionary.’
  • Expenses without a sufficiently close connection do not become deductible simply because they are encouraged or required by the employer.
  • Employer requirements can be relevant, however, to determine the proper scope of an employee’s income-producing activities, which is relevant to assess the true character of an outgoing (example 8 in paragraph 36 is a good illustration).
   
• The recent Administrative Appeals Tribunal decision in Lambourne and the Commissioner of Taxation does not change the ATO view in terms of the application of section 8-1. We consider that comments made in the decision were not intended to introduce a necessity requirement into first limb of section 8-1. Rather, they were made in response to arguments put for the taxpayer and in light of the specific facts and circumstances of the case. We do not think they represent an expression of any broader principle.

Reflections on the role of the NTLG for 2020 and key outcomes achieved

All members

Members were asked to share their views on:

• the effectiveness of the NTLG
  • do discussions/outcomes meet the intent for the group
  • what works well
  • what needs to be changed
  • is the work of the group effectively communicated?
   
• key outcomes achieved in 2020.

Grant Wardell-Johnson noted that it has been a very important and positive year for the NTLG in a challenging environment. The NTLG contributed to various out-of-session Treasury and ATO consultations related to the Government’s COVID-19 response and discussions regarding emerging issues on the Stimulus Package measures, particularly the JobKeeper scheme. The NTLG had risen to the occasion being very responsive and providing constructive feedback.

Kirsten Fish noted that the JobKeeper consultation processes worked well tapping into the NTLG’s knowledge base and expertise. Kirsten Fish thanked members and acknowledged the NTLG’s role and contributions in the consultations noting that their feedback was valuable and appreciated.

Attendees

Apologies