Keynote delivered to Financial Review CFO Live
Second Commissioner, Jeremy Hirschhorn, Client Engagement
Keynote delivered to Financial Review CFO Live
28 November 2022
(Check against delivery)
Good morning, it’s good to be here today to provide an update on the Australia tax system, especially as it relates to large public and multinational businesses.
At the outset I want to acknowledge the closer attention being paid by CFOs – and in fact CEOs and boards – in their company’s tax affairs. This is evident in the increased engagement and transparency we have had with large corporates in recent years.
We have also seen a significant increase in tax paid by large companies and, as the tax administrator, I am pleased to say we are more confident than ever before that the great majority of large corporates operating in Australia are paying the right amount of tax. For many large companies, we have been able to provide a high assurance rating that, from our perspective, those companies are paying the correct tax.
As CFOs looking to operate in a post-pandemic economy, a high assurance rating means you can focus on growing your business, and don’t have to look over your shoulder at tax risk.
That said we want to work with you to not only maintain this momentum but strive to do even better. The Australian community rightly expects us to.
Today I will focus on the:
- economic contribution of large corporates in Australia
- benefits of being a high assurance taxpayer
- ATO’s ongoing areas of focus
- shared challenges and opportunities we face as large organisations, particularly around data and,
- developments in the international tax landscape.
The economic contribution of large corporates
I might first reflect on today’s theme ‘reinvigorating business’ and what we are seeing play out in Australia’s tax system.
Despite the economic challenges in Australia over the past few years, our recently released annual report showed net tax collections in 2021–22 were $515.6 billion, up $64.2 billion (14.2%) over the previous year, and $93.1 billion (22.0%) above the amount expected at the time of the 2021–22 Budget. These results reflected stronger-than-expected economic conditions across most taxes. Company tax was up about 26% which – as you would expect – was highly influenced by commodity prices.
Australia’s almost 1,800 large corporate groups account for about $2.2 trillion total business income and contribute around 64% of all corporate income tax reported, which is about $67 billion or so per annum, give or take depending on commodity prices. This is more than 14% of total ATO tax collections last year. Company tax continues to be highly concentrated with the largest 10 corporate groups covering about 33% of all income tax reported.
Australia’s tax system is in very good shape, with our latest estimate for 2019–20 showing the overall tax system is operating at to 93% tax performance. This is about 91% at lodgment (including the effect of prior year interventions) and a further 2% through the ATO’s post lodgment compliance actions. This shows a steady improvement in performance over 5 years.
The latest estimate shows voluntary compliance in the large market segment is the highest it has ever been at 93% for 2019–20, which is up from under 90% in 2014–15, immediately prior to the start of the Tax Avoidance Taskforce. Overall performance is about 96% after compliance activity.
However, as a point of comparison, the individuals segment is performing at 94% voluntary compliance (with an extra 0.4% after post-lodgement interventions), higher than the voluntary compliance of large corporates. Given your influence on smaller players and community attitudes towards paying tax in Australia, and the resources you have available to meet your tax obligations, we need to continue to drive higher levels of voluntary compliance, at least higher than that of individuals. Our aspiration is to sustainably increase voluntary compliance of large corporates to 96% at lodgement (and 98% after compliance activity).
Corporate tax transparency
Earlier this month we released our eighth Corporate Tax Transparency report which showed Australia’s largest 2,500 foreign-owned, Australian owned public and private entities paid over $68 billion in tax for 2020–21. This this is nearly 20% more than the previous year. About 68% of companies named paid income tax for the reporting year. From an administrator’s perspective we are seeing less community disquiet arising from the report and a more informed debate, thanks in part to a number of individual companies being more transparent about their affairs.
Gas and coal
Not yet reflected in our tax reporting are the record levels of tax payments expected to be made this year by large companies in the gas and coal industries.
For the gas industry this is due to the economic impact of the large gas investments coming online, together with currently high gas prices. A number of major gas taxpayers have now utilised their establishment tax losses and have started to pay income tax. We have received income tax payments of $1.3 billion in relation to the 2022 income tax year, and we expect many billions more to flow through from 2022–23 and beyond.
Similarly, coal companies are starting to pay many billions of tax, profiting from high prices and the exhaustion of carry forward losses.
The intense scrutiny of the ATO on these sectors has ensured major gas and coal companies will pay the right amount of tax now and into the future.
Direct ATO intervention has had a clear impact on the quantum of corporate tax payable and has brought forward some of these taxpayers commencing paying corporate tax by years.
A clear example of this is our interventions in transfer mispricing or tax avoidance associated with related party finance arrangements. We have removed a conservatively estimated $40 billion of interest charges which would have otherwise been deducted in past and future years. Much of the $12 billion tax impact will be paid by gas companies over the coming few years.
It should be noted that collections under the Petroleum Resource Rent Tax (PRRT) remain relatively low. This is due to the legislated policy settings, which allowed significant uplift of carried forward expenses, so as to only tax super profits. The most recent modelling conducted as part of the Callaghan review suggests that the large offshore gas projects will only start paying PRRT in the 2030s.
The benefits of high assurance
I’ve spoken to you previously about our Justified Trust program, which underpins our engagement with the top 100 large corporates in Australia. Since its inception in 2016 we have assured more than $197 billion of income tax under this program.
Our latest report for the 2022 year shows just over half (51%) of the 100 largest companies operating in Australia have attained an overall high assurance rating, meaning they have provided the ATO with objective evidence that they are paying the right amount of tax. This jumps to 85% if you include those with a medium rating. From an administrator’s perspective it is pleasing that ratings continue to improve and the prevalence of high risk or tax avoidance arrangements appears to be on the decline.
Furthermore, our reports on the Top 1,000show over 84% of taxpayers achieved high or medium assurance overall. Pleasingly, although still early days, this increases to 93% after their second review.
This is a significantly higher level of scrutiny than the previous approach of targeted audits after identifying red-flags and concerning conduct.
We attribute this to a combination of businesses recognising that investing in their tax governance has tangible real-world benefits – as well as a significant investment of time and resources by the ATO in scrutinising structures, transactions and tax governance frameworks.
We are seeing companies committing to long-term behavioural change, including restructuring, changing their business practices and settling long-standing disputes with the ATO.
The benefits of a “high assurance” rating are many, but include tax peace of mind for internal and external stakeholders. In fact, many companies are now publishing that they have received a high assurance rating, with justified trust ratings increasingly forming a part of an organisation’s ESG credentials – tax is the silent “T” in ESG.
For those obtaining high assurance, there is the immediate benefit of a reduction in ATO review intensity, meaning lower compliance costs. Into the future, with the stronger governance frameworks associated with a high assurance finding, it is less likely that a company will stumble into a high risk, high intensity transaction and hence a future dispute.
We continue to pay close attention to low assurance taxpayers through our annual one-to-one engagements. With the lower intensity of interactions with higher assurance taxpayers, this frees up resources and allows us to bring even more focus on these taxpayers.
The ATO’s ongoing areas of focus
Of course, the job is not done and we must continue to focus on driving higher levels of voluntary compliance and more taxpayers towards high assurance.
Expanding the Tax Avoidance Taskforce
In the October 2022 Budget the ATO received a further $1.1 billion to extend and expand the Tax Avoidance Taskforce, which focusses on large public groups, multinationals and privately owned and wealthy groups. The Taskforce is our most significant program, having helped the ATO raise tax liabilities of $29.0 billion and collect $16.5 billion in cash since its inception in 2016.
This funding will allow us to expand the Taskforce to focus on:
- optimising tax performance of large corporate groups (public and private) and ensuring they pay the right amount of tax, with an increased focus on medium and emerging large businesses
- increased scrutiny of private groups and high wealth individuals, with a focus on improving tax governance, and reducing profit shifting and failing to disclose foreign sourced income
- pursue intermediaries and promoters of tax avoidance schemes, allowing the ATO to expand its reach, through increased population coverage and intensity of existing capabilities
- preventing the abuse of trusts and high-risk trust arrangements, by investing in tools to maximise the value of data and enhance transparency in relation to trust distributions.
To achieve this, we are funded to recruit the equivalent of about 1,200 more resources across our compliance, law and data areas.
Encouraging sound advice
It is pleasing to see the advisor community is also seeking to strengthen and publish their own agreed expectations on working in the tax system. As foreshadowed last year, in August 2022 the Big 4 published the Large Market Tax Advisor Principles. Publication of these governance principles provides transparency over the way in which the Big 4 govern their tax advisory practices, to provide confidence that they are not aiding the sale or promotion of tax avoidance or high-risk tax arrangements.
The principles provide a credible standard by which the clients, the community and other stakeholders can have confidence in the quality and standard of tax advice. We worked closely with the largest four tax advisory firms to facilitate their development. Annual confirmation statements are anticipated to be published in mid-late 2023. I should note the principles are not limited to the Big 4 and are able to be adopted and followed by other firms that provide tax services. The principles give you, as a CFO, confidence your advisors aren’t engaging in illegal or unethical behaviour, which poses a threat to the integrity of the tax system.
What does – or doesn’t – constitute legal professional privilege (LPP) also remains an area of focus for us. Around 10% of our large market audits currently involve LPP disputes – these include about 62,000 individual LPP claims. After significant consultation over the past few years, we published our legal professional privilege protocol in June 2022. The protocol supports the right of taxpayers to keep their legal advice confidential, while enabling the ATO to have confidence that all other relevant documents have been provided. Recent decisions in the federal court have confirmed the ATO is able to request particulars in relation to privilege claims and that only legal advice provided by lawyers is in fact privileged and advice of non-lawyers cannot become privileged by simply routing it through a lawyer.
I have taken the opportunity to set out a separate “CFO tax risk checklist” collated from observations over the last few years. But specifically in relation to these two developments, I would suggest that as CFOs you should ask these two questions: firstly, are we using a firm that has signed up to (or in the case of smaller firms, has adopted the intent of) the Large Market Advisory Principles and, if not, why not? And how do their standards differ from the LMAP? And secondly, if in dispute with the ATO, and considering our privilege claims, are we asking our lawyers to apply the LPP protocol and, if not, why not?
Locking in future compliance outcomes
We recognise that no one wants to be under audit, but tax is complicated and at times there will be disputes.
Negotiated settlements will continue to play a role in the ATO’s approach to resolving disputes in the large market. We continue to be firm with taxpayers looking to settle with us and making it clear we will only do so where we can also lock in future compliance to achieve certainty of appropriate tax outcomes, which is particularly relevant for transfer pricing matters.
You would be aware of our $1 billion settlement with Rio Tinto earlier this year – one of the largest in Australia’s history. It follows other significant settlements with companies like Chevron, BHP, Bupa, ResMed, Google and Microsoft. Importantly these settlements over legacy issues have also locked in future tax outcomes and will help ensure the right amount of tax will flow in the years ahead. From the taxpayer’s perspective, settlements on this basis are a great opportunity similarly to gain future certainty, but also move past reputation-harming tax disputes.
Continuing to support economic recovery
I would also mention we continue to administer two measures introduced during the pandemic include temporary full expensing and loss carry back, finishing in the 2022–23 year. If eligible, please take advantage of them!
Temporary full expensing (TFE) allows eligible businesses to claim an immediate deduction for the business portion of the cost of eligible assets in the year in which they are first held, first used, or installed ready for use for a taxable purpose. We have received almost 200,000 TFE claims worth $22.7 billion, relating to 2.2 million assets.
Loss carry back (LCB) was introduced to support cash flow of previously profitable businesses that had fallen into a tax loss position during the pandemic. We have received over 30,000 claims for $3.3 billion.
I note these numbers are set to increase as the majority of businesses are yet to lodge their tax returns for the 2021–22.
Maintaining transparency in the system
It wouldn’t be a CFO Live event if I didn’t briefly reiterate that in Australia’s tax system, transparency of large corporate taxpayers is vital. Community attitudes towards paying tax in Australia remain heavily influenced by the actions of the ‘big end of town’ and smaller players in the economy continue to look to you for best practice approaches.
We continue to focus on boosting transparency to:
- taxpayers about their own affairs, and in many cases obtain confidence around their tax affairs (and in a form it can be communicated to other stakeholders should they so wish)
- taxpayers about their peer group (so they know where they stand and can self-moderate)
- the community around the market.
We encourage you to be open about your affairs within your organisation and to your board and investors, but also to your customers and the community more broadly.
Shared challenges and opportunities
We also recognise that community expectations go beyond your tax affairs and are increasingly your social contract with customers and partners in an increasingly digital and data driven economy. As a large organisation it would be remiss of me not to share some brief observations from an ATO perspective given increased community attention over recent months, as evidenced by some of the sessions on the agenda throughout the day.
System integrity and security
Operating in an increasingly digital environment means we must consider how we ensure the reliability of our digital services and safeguard our systems from ever-evolving cyber threats and fraud attempts.
One of the biggest challenges we face as an organisation is hardening our systems and controls against what we think of as traditional ‘cyber security’. Recent examples have dispelled any hubris in this area – no large organisation should feel complacent.
To give you a sense of scale, the ATO holds about 50 petabytes of actively used data and processes about 20 billion transactions each year. On any given day, our systems block an average of approximately 90,000 malicious (attempted) connections per day – this is even higher during tax time – so about 3 million per month or one per second.
An important development is the rise of cyber enabled fraud at scale (such as identity and information theft). Many organisations have focused on traditional cyber security, but may have a blind spot in relation to cyber enabled identity fraud (identity fraud may have been treated as a series of 'one-off' events). However, as criminals become more sophisticated, and large data leaks more common, the risk of an 'at scale' cyber identity fraud has dramatically increased.
What we have also found is that as we harden our systems, criminals are seeking to access the broader tax system through other channels, like tax agent systems, superannuation funds or even taking over the identity of directors. Increasingly, we are seeing cascading penetration attempts, where criminals attempt to obtain information from different places before putting it together for fraud attempts.
For example, we’re seeing unprecedented, and increasingly sophisticated, efforts by criminals to impersonate legitimate users (such as authorised representatives of large
businesses) to lodge fraudulent returns or gain access to data that they can make money from. One of the ways we are boosting our front-end controls is by changing the process for a client-authorised agent to link to a taxpayer’s account.
One tangible way in which you can help protect your companies against fraud is to make sure that your directors and employees with tax system access obtain a myGovID credential. Also, if you get a message from us querying around access, please respond immediately – better to waste a little time on a false alarm rather than risk an identity fraud event.
Growing our data holdings and capabilities has only been possible because of increasing advances in technology. But it’s not just technological constraints to be addressed, as we all know there are also legal frameworks and ethical safeguards that need to be considered, and in fact the increase in technological capacity means that ethical questions are now often the critical constraints.
The ATO has been entrusted by the Australian community with extensive information-gathering powers. Beyond the tax law we are also bound by various data laws.
Moving beyond the legal framework to ethics, we have developed a set of data ethics principles which are designed to make interactions easier and ensure our data activities support the integrity of Australia’s tax and super systems. Our six principles are to:
- act in the public interest, be mindful of the individual
- uphold privacy, security and legality
- explain clearly and be transparent
- engage in purposeful data activities
- exercise human supervision; and
- maintain data stewardship.
I would urge senior leaders of organisations to make sure that your people do not get excessively focused on the (necessary) legal and technical aspects of use of data, and forget the ethical aspects.
Developments in the international tax landscape
I can’t stray into policy matters but I will briefly mention the work of the Organisation of Economic Co-operation and Development (OECD). As you would be aware the Government has committed to speedy implementation of the OECD/G20 Two Pillar Agreement.
I must also mention in passing a very recent 'wildcard', where the UN has agreed to take an increased role in the international tax architecture.
The OECD two pillar solution is a landmark reform to the international tax architecture and reflects the shared challenges of the digitisation of the economy over the past 10 years.
What we call 'Pillar One' will establish a new taxing right for market jurisdictions which does not rely on traditional taxing concepts that typically depended on a permanent establishment being present in a jurisdiction. Put simply, 'Pillar One' is focused on digital companies and the digitisation of 'traditional' companies, and the fact that significant super profits can be made from a jurisdiction, while not conducting many physical activities in that jurisdiction.
Whereas 'Pillar Two' establishes a global minimum rate of tax and will help to stop the ‘race to the bottom’ on corporate tax rates. The ATO has been highly effective at preventing
taxpayers shifting their profits to low tax jurisdictions via transfer mispricing and the migration of intellectual property. Pillar Two will further support these efforts by reducing the incentive for taxpayers to shift profits in the first place and ensuring that they are subject to a minimum rate of tax wherever they operate.
It is critical to note that 'transfer pricing' is a design feature of the international tax framework. The ATO is not concerned with transfer pricing, it is concerned with transfer mis-pricing.
As an aside, the significant attention that the ATO places on the risk of 'transfer mis-pricing' can be readily understood from one simple comparison: Australia’s three biggest trading partners from a 'rea'” trade perspective are China (29%), USA (9%) and Japan (9%). However, in terms of contractual dealings with related parties, Singapore, with its lower headline tax rate, is at 32%, the USA is at 13% and Japan 7%. China is only 3%!
Whilst our Treasury colleagues are leading the response from a policy perspective, we continue to meet with other revenue administrators to work through implementation and administrative issues.
We do this through the OECD’s Forum on Tax Administration (FTA), of which ATO Commissioner Chris Jordan is Deputy Chair.
We recently hosted the 15th FTA Plenary in Australia where tax commissioners from over 40 countries agreed to:
- joint consideration of the detailed administrative and capability aspects related to implementing the two-pillar solution to address tax challenges arising from the digitalisation of the economy
- the digital transformation of tax administration, and
- capacity building to support developing country tax administrations.
Forums such as the FTA helped us greatly improve how we work together over the years.
Thank you for your time today. I’m happy to take questions.
CFO quick tax risk checklist
High level questions for the Board
- The tax governance framework
- The risk stance and structural tax settings of the company
- The current (and historic) relationship with the ATO (including whether the company has achieved “high assurance” and, if not, why not)
- If profits are not fully taxed, understanding why (for example whether due to explicit policy concessions or “grey zone” tax planning)
Questions for general tax positioning
- KPIs for the tax team that support the organisation’s goals and stated tax risk appetite
- Tax corporate governance, and whether it is ‘lived’
- Understanding the relationship between financial reporting and tax, including GST and indirect taxes
- Understanding where you sit relative to peers
- Getting high levels of assurance over your tax ‘infrastructure’
- Conduct in resolution of tax disputes (including applying the LPP protocol)
- Being a transparency role model
- Looking for a wise adviser not a clever one (are they signed up to the Large Market Advisory Principles?)
- Have we received a high assurance rating? If not, why not?
Questions for significant transactions
Second Commissioner Jeremy Hirschhorn's keynote delivered to the Financial Review CFO Live event, 28 November 2022Last modified: 28 Nov 2022QC 70984
- Is the position consistent with the risk appetite of the organisation?
- Is the ATO likely to dispute this position? Have you sought certainty from the ATO in the form of a ruling?
- What would happen to revenue collections if everyone did this?
- What is our level of confidence as compared with that required on our physical infrastructure (with like levels of economic exposure)?
- Has the adviser been given a full scope, or are there areas that have been scoped out that are relevant?
- Are the facts and assumptions underpinning the advice supportable and could be evidenced in Court proceedings? What happens if they are wrong / disproved?