Voluntary Disclosures: Past, Present and Future
Dr. Niv Tadmore, Partner, Taxation, Clayton Utz
Over the years, we have assisted clients to participate in the ATO's various voluntary disclosure programs, including the most recent Offshore Voluntary Disclosure Initiative (OVDI) which ended on 30 June 2010.
Voluntary disclosures have a strong human dimension which must be taken into account when working with clients and the ATO. Voluntary disclosures therefore involve a number of factors different to those present in our work for corporate, government and project clients.
The golden rule is that if tax planning relies on secrecy, it is not a good idea. Given our independence from such structures and our positive experiences with the ATO during the disclosure process, our clients have felt more comfortable and confident coming forward and taking advantage of the concessions offered under the voluntary disclosure regime.
For clients, the decision to step forward is often fraught with emotional difficulties. In our experience, each matter is underpinned by an unwise decision made years ago, which typically turned on considerations such as succession, migration, family disputes, asset protection or reliance on bad advice. The decision to make a voluntary disclosure can be effected by a number of factors:
The ATO factor
In our experience, the ATO delivers on its commitments under the voluntary disclosure program by acting in a fair and professional manner. However, many people, for various reasons, were uncertain about the 'real objectives' of the program. The market did not sufficiently appreciate that the chief policy objective of voluntary disclosure programs is not punishment but rectification. After prospective clients became aware that the ATO conducts itself accordingly and that the taxpayer's experience has been positive, the decision to make a voluntary disclosure became much easier.
The prosecution factor
Inaction can be significantly riskier than voluntary disclosure. A full and frank voluntary disclosure of a tax shortfall involves little risk of criminal prosecution. By contrast, there are many cases that show that where a taxpayer has been caught, whether through a tip-off, information from unrelated inquiries, an audit or otherwise, even if the taxpayer then cooperates, the risk of prosecution and devastating personal, financial and reputational consequences that are high.
The sleep deprivation factor
The silent toll of hidden assets is the anxiety that becomes part of the taxpayer's everyday life. The ability to clean the slate, regain peace of mind and move on is extremely important.
The commercial factor
A voluntary disclosure may mean writing a cheque, but an alternative audit scenario or criminal prosecution would result in the payment of a much larger sum. Moreover, there is little one can do nowadays with hidden funds. An inability to use hidden funds effectively results in a self-imposed 100% tax rate. The returns on hidden investments are usually minimal and the commissions and fees payable are usually high. The funds cannot be used as collateral in other investment projects. In short, money grows better in daylight.
The Offshore Voluntary Disclosure Initiative (OVDI) ended on 30 June 2010. What will come next? The world is becoming smaller and more transparent, secrecy is weakening rapidly and global co-operation is increasing. This means that the likelihood of being caught will continue to increase and those who are caught will be treated harshly. In coming years, we are likely to see more raids, audits, freezing orders, seizures of assets, arrests, prosecutions and, inevitably, custodial sentences.
However, we are starting to see a cultural shift in attitudes towards tax compliance. Project Wickenby is a direct product of the dynamic and evolving global environment. It has been assessed at times on the basis of tax collections and number of prosecutions, but there is a broader context. Project Wickenby has been successful in terms of compliance awareness and prevention of non-compliant behaviour. In this respect, Project Wickenby has brought about the beginning of a generational cultural change.
The generational shift gives rise to new problems for those who continue to hold hidden assets. They will face new difficulties as they grow older and start to think about succession planning. In this environment, it may not be fair or responsible to leave large hidden assets locked in questionable structures to a younger generation (rather than resolving matters beforehand and putting in place above-board succession plans).
Many taxpayers will reconsider their options and decide to put their affairs in order. The ATO's standard voluntary disclosure program will be available to them. Some of the concessions may not be as generous as those previously offered, but the standard program is still based on the policy of rectification over punishment and the above rationales encouraging voluntary disclosure will be equally relevant and applicable.
In conclusion, I make two observations. First, that voluntary disclosure is genuinely embraced by the ATO as an essential element of our tax system and has successfully managed the offshore voluntary disclosure program. The ATO should ensure that this approach is consistent across all levels of the organisation, including operational levels. The risk is that a few instances where the ATO policy is not applied in practice could materially erode community confidence in voluntary compliance.
Second, the ATO should continue to increase community awareness of its standard voluntary disclosure program. This will reinforce the ATO's consistent message that our tax system can be harsh to those who choose not to comply, but on the other hand, it will also support and encourage those who want to change their behaviour. This increased awareness will bring more taxpayers and assets into the system, and moreover, promote the policy objectives of voluntary compliance, efficient allocation of resources, co-operation, and the fair and effective management of the tax system.