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  • Commissioner's address to the National Press Club

    Commissioner Chris Jordan AO 

    Address to the National Press Club, Canberra 

    5 July 2017 

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    Good afternoon,

    What a great time it is to be the Commissioner of Taxation!

    The Australian tax system is in good shape and overall the tax experience of Australians is quite positive.

    You might or might not agree with this statement, you might say ‘yes, but’, or ‘what about’…

    I’m telling you this today from the perspective and position of Commissioner – what it looks and feels like across the whole system as I see it from the ATO; from the position of vice chair of the OECD’s Forum on Tax Administration, as a member of the Board of Tax, as someone who has been part of the profession and in the tax arena for more than 30 years (in fact, closer to 40), and as someone who has provided policy advice to both sides of government.

    I tell you this from the various roles I hold as Commissioner; as adviser and educator, facilitator and enforcer, and as CEO of the ATO.

    I do not make this statement about the health of the system lightly, nor with my head in the clouds, pretending that all is well, and that there are not imperfections, risks and issues.

    I say this to give you reassurance and a sense of confidence that what we experience here in Australia compares very well internationally and is performing well, domestically and on the world stage.

    When I look at other jurisdictions and compare our performance, I see us match and surpass many others. I make these judgments based on the levels of compliance, in particular voluntary compliance, cost of revenue collection, the number of disputes, the relative ease with which people can fulfil their obligations, the concept of tax gaps, litigation results, coverage across the different client segments, the tools we have at our disposal to deal with behaviour, and the capability of the ATO.

    By all these measures, we are in a very good position and internationally respected. But I want to be in a better position, and today I want to share with you some insights into how the system is currently working and where we will be turning our attention next.

    Before I get into those, I will turn to the topical matters of Operation Elbrus and the ATO IT issues that have raised their heads in a very ugly way over the past six months or so.

    There is no getting away from the fact that these two matters have had a negative impact on the ATO’s standing in the community – one questioning our integrity and the other questioning the stability and availability of our systems.

    I understand only too well that we have ground to make up. While we may have had some credits and credibility from the positive changes we have made in the last few years, we’ve lost a bit of ground with Elbrus and the systems outages.

    Operation Elbrus, the joint operation between the ATO and Australian Federal Police assisted by the Australian Criminal Intelligence Commission, has been an excellent piece of investigative work to date; to piece together a very complex and opaque set of arrangements; with a web of many entities and individuals. Together, we have uncovered staggering amounts of rapid wealth accumulation for members of a syndicate allegedly engaged in fraud, phoenix activity and tax evasion.

    The involvement of Adam Cranston, son of former Tax Office Deputy Commissioner Michael Cranston, has been difficult to comprehend. The charges against Michael Cranston too, have been equally hard to believe, and at the ATO we are dismayed by the events that have unfolded in this regard. The connections with, and alleged actions because of his son, have ruined his career and reputation, and have compromised our standing and raised questions about the integrity of others within the ATO.

    This is a precarious situation. I am keen to defend our reputation and that of the people in the ATO, but have to remain open to looking at whether our processes, controls or systems need to be bolstered. You would be aware, the Inspector General of Taxation has been asked by the Senate Economics References Committee to look into these matters.

    In the meantime, I want to reinforce some facts as I know them. Findings to date show Michael Cranston is not suspected of being involved in the syndicate and its activities of defrauding the Commonwealth. I refer to the AFP’s quotes:

    “The AFP always needed to consider whether Michael Cranston was involved in the conspiracy, however, subsequent investigation clearly demonstrated he was not involved… Michael Cranston is not being considered for conspiracy to defraud the Commonwealth.”

    Evidence to date shows that at no time did Michael Cranston directly access taxpayer data systems or the audit cases under this investigation. There is no evidence of actual intervention or influence on the audit cases, or of money being refunded, or of tax liability being changed. And no deals were done.

    It was captured well by Neil Chenoweth in the AFR earlier this week:

    “When Adam did reach out to his father for help last February, it was far too late. For Michael Cranston, the tension that drives a father to ignore the faults of their child, to want to help them no matter what, was overlaid by the overwhelming guilt and recriminations that are inevitable in any family break up”.

    We have had an extremely low incidence of fraud by ATO staff in the ATO’s history and it is a very rare thing for there to be any doubt about the honesty of the people in the ATO.

    We have a very strong culture of integrity and our procedures, controls and monitoring systems work well. In this case, when the family link was identified, the ‘tension’ referred to above was anticipated and safeguards were put in place. Those safeguards worked.

    Just to reiterate and conclude on this issue; to the best of my knowledge there has been no fraudulent or corrupt activity by ATO officers in relation to Elbrus and I will be delighted to have that independently confirmed by the reviews and investigations that are under way.

    Now I will turn to the other big issue we’ve been dealing with; the availability of our IT systems, readiness and performance for Tax Time.

    So far, and without a hitch, we have received lodgments of more than 210,000 returns – from individuals through myTax, and from agents online.

    Pleasingly, Tax Time has begun well!

    As you may know, the lead up to this Tax Time has been different to years past, with the ATO experiencing unprecedented and unplanned outages in December, February, and just last week. These outages were highly unusual and disruptive for the users of our systems, particularly the tax profession, and the superannuation and software industries.

    I wish I could give an iron-clad guarantee that all systems will work 100% of the time. But that is not reality when you are talking about very large and complex systems. And while we believe we have done everything we can, and expect things will go smoothly, we are ready to respond quickly if there are any hiccups or unexpected outages.

    We also have under way an independent analysis of our entire IT infrastructure, platforms and services to identify and reduce the risks of future unplanned outages. We are well aware that if we are to offer and encourage the use of digital services, then we have to have our systems available when people need them.

    I’ll now return to where I started; with intentions of making a good system better, and making the overall tax experience quicker and less painful for Australians. I share this intent with the Treasury, the Board of Tax, the tax profession, and staff of the ATO – all of whom play an important role in making the system work.

    This is not about some silver bullet or simplistic reform, but about reforms, a number of which have been implemented, or are being implemented now – to make our system and our administration stronger, fairer and more contemporary.

    Both sides of government have made systemic and significant reforms over the past few years that have fundamentally changed and improved the tax landscape in Australia. For example, amendments to our general anti-avoidance provisions (Part IVA), better transfer pricing rules, the Multinational Anti-Avoidance Law, and the Diverted Profits Tax.

    The Organisation for Economic Cooperation and Development (OECD) too, has been driving reforms to modernise the international tax framework which was designed for the League of Nations in the early 1920s.

    The ATO will also continue with administrative reforms under our Reinvention Program, such as:

    • earlier engagement, greater transparency and cooperation with clients and partners
    • prevention and early warning, rather than correction and ‘gotcha’
    • more sophisticated use of data for both service and compliance purposes
    • increased digital service offerings and streamlined interactions
    • better appreciation of, and empathy for taxpayers, and
    • a sensible risk management framework.

    We remain committed for the long haul to improving the client experience and reinforcing a service culture in the ATO.

    Now, let me share with you ‘what next’; the next big challenges we are facing:

    • Influencing community perceptions and attitudes about tax; and,
    • minimising tax gaps.

    I’ll talk first about influencing attitudes about tax.

    We know there are perceptions in the Australian community about tax and the behaviour of taxpayers that undermine confidence in the system and stop it from working more effectively. People say things like:

    • The big end of town doesn’t pay its fair share
    • Everyone cheats a bit, so I can too
    • Others won’t care if I cheat
    • I claim deductions (legit or not) to make sure I get a refund

    These views are people justifying their own behaviour by assuming mischief by someone else; and thinking no one else gets hurt by their non-compliant behaviour. These views have a negative impact – on the tax system and on the behaviour of others.

    When these perceptions are reinforced through headlines and stories, they erode trust and confidence in the system, and the ATO; and to my great concern, discourage people from doing the right thing.

    I want instead, to support mindsets where people feel more positive about their total tax experience – satisfied with their interactions and confident that the ATO is taking action against those who are not paying what they should.

    Let me turn to that now – paying the right amount and minimising tax gaps.

    A tax gap is an estimate of the difference between the amounts the ATO collects and what we would have collected if every taxpayer was fully compliant with the existing laws.

    Tax gaps exist in all countries and they are driven by economic, cultural and human factors, globalisation, complexity in business and legal systems, the quality of tax administration, clarity of tax law, the behaviour of those who take aggressive tax positions, and genuine misunderstandings and errors.

    The reality is that no tax system has, or ever will have, zero gaps. The multitude of factors that are at play are impossible to control and consequently tax gaps will always exist. The challenge is to reduce or minimise them.

    Tax gap estimates are an important part of the performance and accountability story for any modern tax authority. We have been publishing some gap estimates (including GST) for the past couple of years, and over the coming year, our intention is, for the first time, to publish estimates for corporate tax and income tax for the different market segments.

    The first cab off the rank will be the large market corporate tax gap which we will release formally next month.

    In the lead up to that formal release, today I will share with you the gap we have estimated, based on 2014–15 data.

    It is approximately $2.5 billion; equivalent to about 6% of the collections for that market, and similar to the gap estimated for large corporates in the UK.

    This $2.5 billion gap is way below the numbers that have been thrown around by various commentators – some wildly claiming it to be up to $50 billion.

    The gap tells us that we are getting around 94% of the corporate tax we should from this market – approximately 91% coming in voluntarily and 3% through compliance interventions. From all indications, 94% is around global best practice, and many countries aspire to this level of compliance. 

    We know the tax gap (especially that based on 2014–15 data) for large corporates is assailable. With a number of recent law reforms in this market since then; the MAAL, DPT, the BEPS Anti-Hybrid Rules, the exchange of information, much better sharing of data between international tax authorities, and the corporate transparency measures, we are better placed to ensure that what is earned here is taxed here.

    We have dedicated and ongoing attention on the top 100 companies, who happen to pay half the corporate tax for this market, and under the Tax Avoidance Taskforce we will closely scrutinise the entire 1,400 businesses in this segment.

    As we have told the Senate, in the last year we raised $4 billion of additional liabilities against large businesses and multinationals. $2.9 billion of this was from seven large groups in the e-commerce and energy & resources sectors, and most of it emanated from matters related to transfer pricing, pricing of related party debt, and marketing hubs.

    We know however, we can’t simply audit our way to success; and audit yield, while a headline catcher, is no longer the key measure of success. Now; when we work with the large taxpayers, our approach is to not only resolve the past, but to assure the future, by locking in compliance arrangements – increasing voluntary compliance for years to come.

    This is a much more desirable approach – it gives certainty and reduces the need for as much intervention. Instead of success being tied to finding more entities doing the wrong thing, a better measure is that we have assurance there is nothing ‘wrong’ to find.

    In terms of the large market, while never complacent, I am satisfied we have the law, the funding, the capability and strategy to reduce the large market gap over time; and importantly, to sustainably raise the baseline of voluntary compliance.

    Let me now talk about a couple of other markets and activities where additional attention is now warranted – small business, the black economy, phoenix activity and the Individuals market.

    Our early work and preliminary findings on the gaps for small business and individuals are telling us that there are likely to be bigger gaps in each of those markets than in the large market.

    For both of these client segments, we have made a concerted effort over the past few years to improve our support and services to help people get it right.

    However, we need to make sure we have the right balance of help and enforcement. Our compliance coverage for small business is currently mainly focussed on people not reporting all of their income and the black economy (or the cash economy).

    The Black Economy Taskforce led by Michael Andrew is an opportunity to refresh our approaches; to better leverage data, increase use of community referral information (or dob-ins as many would call them), increase visits to locations that have high proportions of ‘cash only’ businesses; and continue to follow through on prosecutions for those who are blatantly doing the wrong thing.

    Talking about bad behaviour, I also want to comment on phoenixing. This is the activity of creating a new company to continue the business of a company that has been deliberately liquidated to avoid paying its debts. It is what we have seen in Operation Elbrus and it has a dire impact on many innocent suppliers and sometimes employees, as well as the tax take for the community.

    I am conscious that it is initially difficult to distinguish between genuine business failure and starting a new venture with good intent versus fraudulent activity. As part of the whole-of-government Phoenix Taskforce, we are looking at the various ways we can much earlier identify those who may be potential phoenix operators or facilitators; disrupt and remove them, protect the public and enhance debt recovery. I am keenly aware this is an ongoing risk and will ensure that we follow through on Taskforce recommendations.

    And lastly, but definitely not least, I will talk about the Individuals market. You and me.

    The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud.

    In 2014–15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant – in the vicinity of, or even higher than the large market tax gap of $2.5 billion – and that’s just for this category of deductions, work-related expenses.

    We are concerned about the large number of incorrect claims being made where record keeping requirements have been simplified (for example $150 for clothing and laundry expenses and cents per kilometre method for car expenses).

    In 2014–15, around 6.3 million people made claims against clothing expenses totalling almost $1.8 billion. That would mean that almost half of the individual taxpayer population was required to wear a uniform or protective clothing or had some special requirements for things like sunglasses and hats.

    While many of these claims would be legitimate, I wonder how many people have assumed that they can just claim $150 regardless of whether or not they have spent that amount on the required items?

    Similarly, we are seeing claims being made by individuals for car expenses where their employer informs us there is no requirement to use their car for work; or where their claims are excessive and made with the assumption that ‘no explanation’ is required.

    Even though we have not concluded our tax gap research, I want to indicate to you this is well and truly in our sights and we will be lifting our education, our support, our attention, our scrutiny and enforcement in this area. We will also work with Treasury and government if we feel there needs to be policy change.

    We want people to get what they are entitled to – no more no less. Our message during Tax Time is this, and I ask you to heed it:

    • Remember to declare all your income
    • Don’t claim a deduction when you didn’t spend the money
    • Don’t claim a deduction for private expenses, and
    • Keep records to prove your claims.

    As Commissioner, I want to assure you I am here to protect the interests of Australians, to keep the tax system healthy for the long term. We’ve made substantial progress with the large market and we will continue to deliver under the Tax Avoidance Taskforce. In the coming year, you will see us increase our attention on small business, the black economy, phoenix operators and the individuals market.

    I acknowledge that we are starting from a position of disadvantage – we take money off people – never a great starting point for any relationship – and some people just don’t like it. But given that, I want people to think that their dealings with us are about as good as you could ever expect from a tax authority.

    I do not want to compare the ATO’s performance with other tax authorities or government agencies. I want to compare the ATO with the best of any large organisation interacting with a large and diverse client base anywhere in the world; and for people to think that whilst they didn’t want to deal with us, their interactions were as good as they could ever expect.

    Watch the speech here.

    Last modified: 05 Jul 2017QC 52817