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  • Commissioner’s address to the Tax Institute National Convention 2017

    Commissioner Chris Jordan, AO
    Keynote address to the Tax Institute 32nd National Convention
    Adelaide, 16 March 2017

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    Good morning to you here at the convention and to those receiving this via streaming.

    This is my fifth year as Commissioner and my fifth annual address to the Tax Institute. I am joined by ATO colleagues who also have a presentation role at this convention:

    • Second Commissioner Andrew Mills and Chief Tax Counsel, Kirsten Fish presented the Roundtable discussion yesterday afternoon
    • Deputy Commissioner, International, Mark Konza will present later today on Global information gathering powers and implications for Australian businesses
    • Assistant Commissioner James Beeston will talk to you about Stapled Securities
    • Assistant Commissioners Fiona Dillon and Fiona Knight will cover Private businesses and what’s attracting our attention, and
    • Assistant Commissioner Anne Edwards will present on Multinational Anti-Avoidance Law and the Diverted Profits Tax also later today.

    These ATO officers will be presenting to you as peers and colleagues – in the interests of a more effective and transparent tax system.

    Our presence and contribution here demonstrates our willingness to work with the tax profession, key players and the community more generally – through thick and thin.

    And it is also an invitation to continue together on the transformation path for Australia’s tax administration.

    I am going to talk to you today about the past, present and future – reflections, lessons and aspirations; and how we have made, and can make even more of, a positive difference to the tax system, its integrity and the confidence that Australians have in it.

    Let me just recap the journey so far…

    In 2013 when I started as Commissioner, we started questioning the status quo, encouraging people to ask ‘why are we doing this?’, opening up, and de-cluttering the place. We also set up the independent review function and revved up our efforts on better dispute resolution. We changed our consultation arrangements to ensure better results with the right people discussing the right issues at the right time; and stopped meeting for meeting’s sake.

    I changed some leadership positions and reconstituted committees including the ATO Executive to be more diverse in capability, perspective, gender and location.

    We also started talking about embracing a customer service ethic – like many of you have heard me say – my wife’s analogy of the modern dentist – service that is quick, infrequent and painless.

    Even in these early days, many in the tax profession and across business, large and small, told me they were pleased to hear of, and see, signals of change.

    In 2014, we shared with you our new directions in the form of our vision and mission and established our transformation program to put clients at the centre of everything we do. We also began a year of consultation with the community about what kind of experience they wanted when dealing with the ATO.

    We opened up new channels of communication for small business in particular, and on the international stage we also began to lift our profile and contribution.

    At your 2015 convention, we released our Blueprint for change and set about transforming the experience of clients, stakeholders and staff. And very importantly, and probably the most challenging, we embarked on significant cultural change within the ATO.

    We continued our consultations with the community including tax practitioners, and although this was happening, unfortunately we did not get the design or implementation of some of our services right – particularly those relating to myGov correspondence. Tax practitioners told us that some of our actions disrupted the relationship with their clients.

    In response to this feedback and other commentary about portal irritants, we visited around 100 practitioners to actually sit down with them and observe their practice in operation to better understand what was going on and what needed attention. We also took on board feedback from our regular consultation forums.

    This all gave us a much better appreciation of what we could do to improve the experience of practitioners and to respect the client-agent relationship.

    So over the last 18 months for practitioners, we:

    • introduced our complex issues resolution service
    • increased our open forums and webcasts
    • improved information on the tax agent newsroom and Let’s Talk
    • published the portal dashboard, and
    • created a much richer Roadmap, with more details of relevant activities, milestones, events, service updates and releases affecting the profession.

    And as promised to you last year, we set about fixing the major irritants with the portal and Client Correspondence List. We began to implement the new Practitioner Lodgement Service, and developed additional online functionality available through practice management software.

    We also made good progress working with the profession to develop and test new online services for 2017. However, and as you would appreciate, these further developments are on hold until we have stabilised the performance of our systems for Tax Time 2017 to match the service and experience of last year.

    So we have only partly delivered our commitments from last year’s convention. We did fix the major irritants with the portal and replaced the Correspondence list with the Client Communication List; we progressed implementation of the Practitioner Lodgment Service with software providers, albeit with relatively slow take-up; but we are yet to provide the enhanced online functionality.

    I commit to you that we will be delivering on these enhancements, however today I cannot give a confirmed delivery date until we have finished the re-plan of our IT work program.

    Right now we are focused on full remediation from the recent outages, readying for TaxTime 2017 and implementing other mandatory policy and legislation changes. We are taking a very measured and considered approach to minimise risks, to ensure that the experience of Tax Time 2016 can be matched, that we meet our commitments to government and that we offer you stability in our portal service.

    It is such a shame that we ended last year with the outage. 2016 had been a very positive year with:

    • an excellent Tax Time
    • the beginnings of PLS
    • ongoing collaboration with the tax profession including the development of a statement of intent for working together into the future
    • new funding from government for the ATO for the Tax Avoidance Taskforce
    • new functions given to the ATO under the Foreign Investment framework; the Land Register and Water Access register – in addition to the compliance work for foreign investment in residential property and the register of foreign investment in agricultural land
    • leadership of the Joint International Taskforce on Shared Information & Collaboration (JITSIC) network under the umbrella of the OECD’s Forum for Tax Administration
    • progress and new levels of collaboration with the Panama Papers Project – producing the largest ever simultaneous exchange of information between international tax authorities
    • progress with the Serious Financial Crime Taskforce – including following through on Panama Papers findings
    • second year of tax transparency for large corporates and private groups
    • progress on compliance cases that will help build confidence in the system, and
    • good results in the courts.

    So up to December 12, I was feeling very proud and pleased with the progress of transformation, our performance results, the confidence of stakeholders in our capability, our connection to client segments, and importantly our relationship with the tax profession.

    I’ll talk now about the outages, explain what happened and apologise to those of you who have been inconvenienced or impacted. I am sorry for the inconvenience caused.

    I should point out that none of our new online service offerings under our Reinvention Program contributed to these outages. It was purely the result of faulty equipment.

    Extraordinarily, the outages were caused by hardware faults in our primary SAN (storage area network) provided and maintained by Hewlett Packard Enterprises (HPE) on our behalf. This SAN hosts ATO applications such as the Tax Agent and Business Portals and the Australian Business Register (ABR), and its failure caused the initial disruption to a range of ATO services on 12 December.

    The outage in February was related; as part of the work to stabilise the faulty SAN following the December incident, an element of critical hardware became dislodged when a faulty cable was being replaced. This in turn caused the SAN to enter into shutdown mode, which disrupted a range of critical ATO services, similar to the scope of systems and services impacted in December.

    The SAN is not old equipment, and in fact had only just been installed in November 2015 and was seen to be ‘state-of-the-art’ at the time.

    The 3PAR SAN hardware provided to us as a data storage facility by HPE is similarly installed in many large organisations here and around the world. In fact, there are 67,000 of these SANs around the globe, of which we have two; supporting major business operations including mission-critical ones like trading floors and banking platforms. Nothing like the failure we experienced has been experienced by any HPE client before. So this was an extremely unusual and unfortunate event.

    I have commissioned an independent end-to-end review into the nature of the failure(s) and their root cause(s), the adequacy of back-up and contingency arrangements, and what needs to happen to minimise the risk of the ATO and the community being exposed to this type of incident in the future. PwC are conducting this review and will assist the ATO to fully understand the causes and impacts of the outages experienced.

    This review will report back to me around the end of March. We expect this report to be constructive and informative for our data storage strategies in this area moving forward, but to manage expectations, I flag it is likely that not all of the report will be published due to legal and commercial sensitivities.

    I point out that HPE too are undertaking a root cause review of the outages. Their investigation will involve forensic testing of the faulty SAN once we have shifted our data to a new one. HPE advise that the forensic analysis will not take place until about June this year – when the hardware has been removed physically from the storage facility and sent to HPE labs in the US.

    In the meanwhile, we are focussed on:

    • providing stability, full functionality, and capacity for all of our systems and services
    • replacing the faulty SAN with a new and better system
    • readying ourselves for Tax Time 2017

    So far we are on track. Hewlett Packard have confirmed they are confident that the SAN storage array has been stabilised, and will perform as required to handle the usual volumes and traffic of lodgement cycles. The significant February lodgement date for activity statements has just been processed – without a hitch.

    As you probably already know, when we replace the faulty SAN equipment and migrate data to the new one, we will be deliberately taking our systems offline to minimise any risks to future performance and stability. We hear loudly and clearly how important that is to you.

    As per our advice last week, our schedule for these planned outages is intended to occur at Easter, in addition to our usual scheduled outages on the first weekend of April and May. From consultation, we understand these are the most sensible and least inconvenient times for the tax profession and the broader community.

    We will work with you to ensure that you and your clients are not disadvantaged and we will provide support for ‘catch up’ on any work delayed through the outages.

    The experience of the outages caused me to reflect on how much all of us are now reliant on technology and digital services – seemingly regardless of what industry you are in. It is a fact of life – we are all dependent on our phones, computers, and 24/7 systems availability, and the reality is that occasionally, they will fail.

    It highlights how important it is to have business continuity and contingency plans – what do you do when the system goes down? The power goes off? A telco shuts down? Or the bank is offline?

    We all need to be able to turn to alternative productive work while awaiting normal business resumption. We should all have at least rudimentary business continuity plans for when there is some kind of outage, whether it is our systems, your data and phone provider, your bank or electricity company. Being offline should not mean that people have nothing to do.

    We will learn from how well our business continuity and resumption processes worked and I encourage the Tax Institute to do the same to help you understand what options may be available to enable productive work to continue in your practice.

    So, my intent is to get the data storage systems sorted, revise our IT work programs and resume our transformation efforts – to offer you better services.

    Late last year we developed in collaboration with the associations in the tax profession, a statement of intent for ‘working with the tax profession’.

    This statement was developed like a ‘code’ for working together into the future. It was written to help us all succeed in the context of a fast changing world; increased automation and digitisation, reduction in transactional requirements, increased transparency through data sharing, changing demographics, changing communications practices, and changing expectations of consumers – just to name a few.

    The statement is clear that taxpayers, particularly individuals, can choose to use a tax professional to help them meet their taxation and superannuation obligations or they can deal directly with the ATO to seek advice and self-prepare.

    With such a complex system, the reality is that most Australians use the services of a registered tax or BAS agent. They choose to do so for a variety of reasons including time, complexity and the peace of mind of having a professional managing their affairs. Around 74% of individuals and 95% of businesses use a tax agent or a BAS agent. This high usage makes it clear that tax professionals have a critical role as intermediaries, conduits and influencers of behaviour.

    The statement talks about how the ATO and the tax profession can add value to the community and the economy by providing expert services that help Australians and businesses prosper – at the same time as meeting their obligations.

    The statement recognises that greater automation and digital business will cause a shift in our roles – from a focus just on compliance obligations to a broader, more strategic advisory role – it will not be just form-filling or pressing ‘send’.

    I was interested to read President Matthew Pawson’s column on this very topic just last month. In his column ‘Investment in the Future’ he very aptly encouraged Institute members to implement strategic plans around digital engagement. He also captured it well when he said we are ‘on an irreversible path to a future profession that will likely look very different’.

    I know that many practitioners already provide holistic, value-added services; often preparation of taxation forms is only a minor part of their overall service – and over time I think this will become the norm. I liked the analogy someone used to describe it to me recently – working with a tax professional will be like having a ‘virtual CFO’.

    As both the ATO and the tax profession modernise, new products and services will need to be co-designed to suit the majority of people who choose to use the services of a tax professional. I commit to you that we will not be designing products and services impacting on agents or the relationship with their clients without consultation and involvement of the tax profession. We will respect the choice that a taxpayer has made to utilise the services of a tax practitioner and design our interactions to reflect that choice.

    While I am talking about new services, let me tell you about something new we are implementing from today in our Review and Dispute Resolution area – Fast Intensive Triage (or FIT).

    Experienced staff will now work on the new triage service for all incoming objections. Within a few days, these triage staff will be able to make early, meaningful contact with taxpayers and their agents. They will:

    • assess all cases at the earliest opportunity to determine if the matter looks quite straightforward, can be resolved relatively quickly and make that happen, or
    • if the matter is more involved or complex, they will allocate it directly to the right person in RDR for resolution. Sometimes other experts (like ATO Tax Counsel Network members or economists' practice or even external counsel) may be involved in providing guidance to the RDR decision maker.

    The triage team will also be able to provide guidance to the objections case officer about how to manage the case, and provide an estimation of the likely timeframe to finalise the dispute.

    With this new triage process in place, we estimate around 1/3 of all cases can be resolved and finalised fairly quickly – a pleasing breakthrough in our timeliness of handling disputes.

    We also anticipate the triage service will give us a better understanding of the drivers of objections which in turn can help us prevent them occurring in the first place.

    While we’re on the topic of dispute resolution, let me give you an update on our recent litigation stats.

    Like last year, the proportion of disputes compared to overall ATO activity remains very low. In 2015-16, there were:

    • over 34 million activity statements and returns lodged,
    • 338 000 audit adjustments,
    • Around 27000 objections completed,
    • 481 appeals lodged (85 to the courts and 396 to the tribunals) and
    • 151 litigation decisions in the AAT and the courts.

    It is pleasing to see a big reduction in appeals to the AAT, falling from 922 in 2013-14 and now only 240 so far this year.

    I should also point out that of the 151 litigation decisions in 2015-16, 85% of the cases were found either fully or partly favourable to the ATO. And for the first half of the 2016-17 financial year, that increased to 89% of cases.

    Litigation remains an important part of our approach to dispute resolution. It is needed when there is a contentious point of law that requires law clarification or where taxpayer behaviour is such that we cannot resile from taking such action and we need to send a strong message to the taxpayer and the community.

    We have noticed an increase in complexity in the tax dispute matters proceeding to determination by the courts. Complex matters now often include the recovery side of a tax dispute, especially in taking measures to preserve or recover available assets which are the subject of complicated structures.

    Many of these matters involve deliberate tax evasion, often using overseas tax havens or complex corporate structures to avoid detection and recovery. One recent example was the Hua Wang Bank matter, where the Australian resident taxpayers sought to avoid tax in Australia by setting up overseas Boards to implement the instructions of the Australian resident beneficial owner.

    That matter involved 19 interlocutory applications by the taxpayers – which were ultimately unsuccessful. The taxpayers have since unsuccessfully appealed to the Full Federal Court and the High Court. 16 other cases and five appeals have been determined against related taxpayers, with a further eight cases and another special leave application currently on foot. In excess of $300 million in tax is involved in this one scheme.

    The message from the court about unacceptable behaviour was very clear …. In his judgement, Justice Perram commented: “The facts I have found strongly suggest widespread money laundering, tax fraud of the most serious kind and, possibly in some instances, insider trading. The conduct revealed in this case is disgraceful.”
    – (Hua Wang Bank Berhad V FCT [2014] FCA 1392 (Federal Court, Perram J, 19 December 2014).

    These recent decisions confirm that we are applying the tax law correctly and that following through on litigation has been the right course of action. Not only have we had success in the cases, but we are demonstrating our preparedness to take on taxpayers and their advisers who are not transparent, uncooperative or who engage in aggressive game-playing and egregious behaviour.

    This message is precisely what the majority of the community needs to hear. People who do the right thing need to be reassured that we are taking appropriate action against those who warrant it. This influences people to stay compliant.

    The sentiment in Australia is very strong in this regard. The stories and coverage of BEPS (Base Erosion and Profit Shifting) related issues over the past couple of years have led to unprecedented levels of interest in the tax behaviour of large corporates, especially multinationals.

    As a result, the new Multinational Anti-Avoidance Law (or the ‘MAAL’) was introduced from 1 January, 2016 and the Diverted Profits Tax (DPT) bill is currently being considered by Parliament. Both the MAAL and DPT have been introduced to ensure that companies pay tax on the profit they earn from the economic activity carried on in Australia.

    The government also invested in us last year with the establishment of the Tax Avoidance Taskforce. The Taskforce was set up to extend the current compliance programs targeting multinationals, large public and private groups operating in Australia as well as high wealth individuals.

    As part of the work of the Taskforce, we have been working with hundreds of multinationals potentially in the scope of the MAAL to provide greater certainty on its application and, as appropriate, to help them to transition with some certainty into compliant arrangements.

    We are also working to help control tax avoidance by supporting clients to voluntarily get it right. We have done this through releasing a series of guidance products to provide early warning of areas of concern about higher risk tax arrangements and behaviours. Through this work we are noticing an encouraging change in approach with clients reaching out to us to make changes to be more compliant. We have also worked with them to develop new transfer pricing safe harbours which have been very useful in reducing the compliance cost for those smaller scale foreign companies restructuring to comply with the MAAL.

    Pleasingly, we are seeing positive changes in behaviour from taxpayers and their advisors. They are abandoning their contrived structures and restructuring to models whereby the sales are booked in Australia. They are changing transfer pricing methodology and amounts to better reflect the value creation within Australia, recognising a taxable presence here, and removing shell entities and long term foreign agency arrangements. They are also engaging with us on the GST application to their new arrangements and over $80 million in additional GST revenue has been received.

    Other progress under the Taskforce also reinforces the message that we are dealing with the minority of those who are not doing the right thing. Some of you may have heard that we now have 71 audits under way in the large business area covering 59 multinational corporations.

    At least seven major multinational audits are expected to come to a head before 30 June, four in e-commerce and three in the energy and resource industries. We expect liabilities to total in excess of $2 billion from these seven companies. Some might be expected to be settled by the companies and some may go to litigation. 

    Work on Private Groups and Wealthy Australians including High Wealth Individuals (HWI), Trusts and Promoters is continuing with over 260 audits under way. This work has raised almost $550 million in direct liabilities with nearly $290 million in cash collections so far this year.

    Our ‘Top 320’ Private Groups Tax Performance Program is progressing strongly with one-to-one intensive engagements underway or complete with 156 of the 320 Private Groups. In excess of $860 million of tax has been assured to date and full coverage of this population is expected by the end of the financial year.

    The Tax Avoidance Taskforce represents coverage of a number of compliance risks in different markets. We also have significant other compliance programs such as our Cash and hidden economy strategy, and work under the Serious Financial Crime Taskforce.

    Since July 2015, we have contacted more than 140,000 businesses (and their agents) in the cash economy risk industries – with short contacts for help and assistance, checks and reviews to verify information, through to comprehensive audits. From this work we have raised almost $320 million in taxes and penalties.

    Across all of our compliance programs, for the first half of this financial year, the ATO has successfully prosecuted 1,157 taxpayers under the Taxation Administration Act 1953. These have primarily been non-lodgment prosecutions related to outstanding activity statements and income tax returns.

    For the same period, the Commonwealth Director of Public Prosecutions has also successfully prosecuted 18 tax cases, resulting in 14 custodial sentences.

    These cases were related to refund fraud and serious evasion and included the claiming of false income tax credits, undeclared income and fraudulent income tax return claims. One of the cases was a café owner who did not declare over $2 million in business income. Sentences have included terms of imprisonment and reparations and fines of more than $250,000.

    Under the banner of the Serious Financial Crime Taskforce, we are working through the data we have from the leak from Mossack Fonseca, known as the Panama Papers.

    We are leading the 37 countries working together on data analytics and intelligence, typologies, identification of common intermediaries, compliance approaches and exchanges of information.

    In January this year we chaired meetings with our international colleagues from the other revenue authorities as part of our Joint International Taskforce on Shared Intelligence and Collaboration (or JITSIC) network. This network allows us to share our findings on investigations into the role of tax intermediaries, including financial institutions, advisers, lawyers, and accountants, who facilitate tax evasion.

    We will be going after those providing the advice, orchestrating and facilitating tax avoidance and evasion in Australia. We will be after those advisers (some of them registered tax agents) who are putting people in these arrangements and we will be taking action to prosecute where appropriate.

    The Panama Papers is just one set of data. We are currently working on 10 more data sets provided to us directly or from other countries, and we continue to receive information through our exchange-of-information arrangements – with more than 100 jurisdictions. In the last four years we have been able to raise more than $1 billion in liabilities from these exchanges.

    Last year, I put to you that we can make Australia’s tax system the envy of the world through truly contemporary service, expertise and integrity – and every one of us here has a role to play.

    Our international counterparts see Australia’s tax system and administration as healthy, robust and high performing.

    We are in a strong position:

    • We have high levels of voluntary compliance
    • There are relatively few disputes and complaints
    • We have unprecedented global collaboration and action
    • Our costs of collection are good – in 2015-16, the cost to collect $100 was 0.77c gross (and 0.84c net)
    • There is widespread community interest and support for a good tax system
    • There is support from government in the form of new laws and investment in our Tax Avoidance Taskforce to ensure integrity in the system.

    I propose to you that now is the time for us to go to the next level. We can do more and better to increase the confidence in the system and increase levels of willing participation (or voluntary compliance). We, the ATO and you the tax profession, have the most influence on how this system works and on the perceptions of how it works.

    I have spoken to you over the years about drivers of taxpayer behaviour, such as the quality of service people receive, the complexity and costs of compliance, the risk of getting caught, the confidence they have in the ATO and the system, and social and cultural norms.

    It is time to start looking at what we can do to address the more intangible and less controllable influences like social and cultural norms.

    We know from our research that there are some commonly-held community perceptions and attitudes to tax that are influencing taxpayer behaviour. Things like:

    • The big end of town doesn’t pay the right amount
    • Everyone cheats a bit, so I can too – others won’t care
    • I am not hurting anyone
    • When I lodge I should get a refund.

    At the ATO, we are currently contemplating these views and considering options for how we might be able to change such thinking.

    I invite you to think about your role in changing these attitudes – in changing the taxpaying culture in Australia.

    While we will continue with our drive for a better client experience, better services, greater efficiency and smarter use of data, how do we take on this challenge, of social change and community attitudes that it’s not ok to facilitate cash jobs, have off-the-book sales or to cheat on deductions? How do we build the confidence in the system so that people are naturally compelled to participate and comply?

    We are contemplating this and the actions we can take and would like your insight, perspective and constructive suggestions.

    Thank you.

    Last modified: 16 Mar 2017QC 51518