National Tax Liaison Group key messages 12 December 2017

Introduction

Second Commissioners Andrew Mills and Neil Olesen briefed members on the ATO’s highlights and challenges this year which included the IT systems outages, Operation Elbrus, Tax Time 2017, tax gaps, the introduction of Single Touch Payroll, Practitioner Lodgment Service (PLS) and Simpler BAS.

Environmental Scan

All members; and Will Day, Deputy Commissioner, Private Groups and High Wealth Individuals, ATO

Members noted various matters that are on the horizon and may have an impact on the taxation and superannuation systems. Topics included:

¦ ATO guidelines for professional services – Will Day noted that there appears to be some misunderstanding on the application of the guidelines for professional services so a review of these guidelines is being undertaken.

¦ Panama and Paradise papers – Will Day noted that the ATO is in the early stages of analysing information from the Paradise papers with collaboration occurring domestically and internationally.

¦ Cryptocurrencies – Bitcoin.

¦ Pre-insolvency advisers.

¦ Private groups contact strategy has been launched which has been well received.

Treasury report

Maryanne Mrakovcic Deputy Secretary, Revenue Group, Treasury

Maryanne Mrakovcic provided an update on Treasury matters:

¦ Stapled structures and Petroleum rent resource tax – both matters are currently with the Treasurer

¦ Hybrids – Exposure Draft was released for consultation on 24 November 2017 with comments due 22 December 2017

¦ Beneficial ownership issues – the Government is considering what action may be needed to increase the transparency of beneficial ownership of companies. Next steps will include development of any necessary legislative reforms and their implementation. A member queried if this has been considered in the context of treaty negotiations. Treasury took this on notice and will provide an update.

Maryanne Mrakovcic noted there is a large amount of legislation in various stages of development with a significant timetable for introduction in Parliament.

Other matters raised by members:

¦ Proposed Division 855 amendments announced in the Budget – members noted this has not progressed and that taxpayers are still applying the law as it stands.

¦ Stapled structures – query whether Treasury has made recommendations to the Treasurer. Maryanne Mrakovcic advised that Treasury has prepared a report and has provided additional information requested by the Treasurer.

¦ Use of private sector drafting resources – members queried the status of this. Maryanne Mrakovcic advised that Treasury is using private sector drafters and is evaluating the efficiency and cost effectiveness of this approach.

Tax Practitioner Stewardship Group’s sub-group: Work-Related Expenses working group

Paul Drum, CPA Australia; Alison Lendon, Deputy Commissioner, Individuals, ATO; and Adam Kendrick, Assistant Commissioner, Individuals, ATO

This item was raised by members for an update on the work undertaken by the Work-Related Expenses working group, its initial findings and likely next steps.

Alison Lendon advised that compliance activities have identified that claims for work-related expenses (WRE) are a concern for individual self-preparers and tax agents with the incidence of incorrect claims being higher for tax agents.

The Work-Related Expenses working group includes Treasury representatives, tax agents and representatives from professional organisations to help the ATO design the strategy to deal with these issues. At its first meeting on 10 November 2017, it was noted that where mistakes are seen in agent-prepared returns, key drivers have included:

¦ time pressed and cost-driven practices – agents not taking appropriate steps (reasonable care) to verify claims

¦ lack of technical expertise – substantiation exceptions appear to have become the ‘standard deduction’

¦ deliberate over-claiming for competitive advantage.

The working group has identified four areas for work:

¦ influencing community attitudes

¦ influencing tax practitioner behaviour – for example, support tools, greater transparency of risk profiles, targeting higher risk agents and publicly demonstrating the consequences of non-compliance

¦ technology – for example, nudge messaging for agents

¦ simplifying WRE rules, in particular those relating to higher risk areas.

The next meeting for the working group will be on 14 December 2017.

Cost of managing tax affairs

Paul Drum, CPA Australia; and Alison Lendon, Deputy Commissioner, Individuals, ATO

The tax provision relating to the costs of managing tax affairs (label D10) has received significant public attention. Members requested if the ATO was able to provide a more detailed breakdown of the types of expenses that taxpayers claim under these provisions.

Alison Lendon advised the ATO has not been concerned about label D10. Label D10 on the individual tax return currently aggregates a number of different expenses including tax litigation costs and ATO interest charges (GIC and shortfall interest charges). The aggregation of these expenses can distort interpretation and analysis of what costs are actually being claimed.

For Tax Time 2018, the ATO will implement a change to split deduction label D10 into three categories:

¦ cost of managing tax affairs

¦ deductible ATO interest charges

¦ litigation costs.

Communications have been provided to software developers and some professional organisations regarding this change.

Members queried:

¦ if a communication is available for members to provide to their organisations to use with the media to clarify the misunderstanding of what is included in label D10

¦ if there is a published breakdown of the data of the types of expenses that taxpayers claim.

The ATO will develop messaging and share some data with members.

Tax Expenditures Statement

Tim Neilson, The Tax Institute; and Maryanne Mrakovcic, Deputy Secretary, Revenue Group, Treasury

Members raised this item to discuss the concept of ‘tax expenditure’ in setting tax policy. Members were interested in how Treasury uses and applies ‘unavoidably arbitrary’ measures.

Maryanne Mrakovcic advised a paper on tax expenditure analysis was recently published on Treasury’s website Treasury Working Paper on Tax Expenditure Analysis – Origins, Debates and Future Prospects .

The Tax Expenditures Statement is an important resource to help facilitate analysis and scrutiny of the federal tax system. It is a way of thinking in which the tax system could be used to make expenditures outside of the grants or expenditures systems. This can often be challenging, for example, within the individual tax system with multiple rates and thresholds. Benchmarking could be at a given rate or against a structural benchmark.

Occasionally measuring the tax benchmark does not take into account behavioural change driven by the policy change and there could be a measurable revenue impact and a behavioural response. At times this can be clearly defined and at other times it is arbitrary with no clear answers to what is the right benchmark. This can lead to misinterpretation of the information.

The intent of tax expenditure reporting is to identify tax expenditures and quantify their impact on the Government’s Budget, allowing similar scrutiny of the revenue side of the Budget to what is provided for the expenditure side in Budget papers. Maryanne Mrakovcic noted that the Tax Expenditures Statement is included in the Charter of Budget Honesty.

Carrying on a business – draft ruling TR 2017/D7

Tim Neilson, The Tax Institute; Andrew Harnisch, Public Advice and Guidance Centre, Tax Counsel Network, ATO; and Mathew Hanscombe, Director, Individuals, ATO

Members were concerned the draft ruling is narrowly focused and raised this item to discuss the scope of the draft ruling and the possibility of extending the scope further.

The ATO recognises that the principles have potentially broader relevance but each provision has its own particular context. Any ruling given must provide guidance on the particular provision being addressed. The ATO welcomes feedback on issues or the examples where the ATO could provide further clarity.

Members noted that while the ATO was preparing the draft ruling the government changed its approach. Members were keen to understand the reasons and context for this and requested a briefing on the timeline of the ATO’s work and deliberations through the development of the draft ruling. It was agreed that this would be provided to members out of session. Members also raised the issue of intractable examples in the draft ruling.

SMSF event-based reporting

Tony Greco, Institute of Public Accountants

Consultation for matter 201757 Transfer Balance Cap and SMSF event based reporting framework was undertaken to outline the ATO’s position on how SMSFs will report under the new transfer balance cap measure in the 2017–18 year and onwards, and to seek industry feedback in relation to how often SMSFs will be required to report events impacting an individual member’s transfer balance account from 1 July 2018; based on two possible alternative options.

Members raised this item to compliment the ATO on the consultation process undertaken. Members noted this was an example of an effective consultation achieving a good outcome.

^[PartA]Whistleblowers exposure draft

Grant Wardell-Johnson, Chartered Accountants Australia and New Zealand; and Tony McDonald A/g Division Head, Corporate and International Tax Division, Treasury

An Exposure Draft on the Treasury Laws Amendment (Whistleblowers) Bill 2017 was released for consultation on 23 October 2017 with comments due by 3 November 2017. Members wanted to discuss the threshold set by draft section 14ZZT(2).

Members noted that the Exposure Draft focuses on tax (breach of a tax law or anti-avoidance provision) and non-tax (reasonable suspicion of misconduct) disclosures. Members discussed their concerns that the reasonable ground threshold in proposed section 14ZZT(2), namely non-compliance with any taxation law, may be too low and whether it should be refocused to include only disclosures of more serious breaches of tax laws. Treasury noted these issues had been raised in consultation on the exposure draft and the Bill was introduced to the Senate on 7 December 2017.

Taxpayers’ Charter Review

Ben Kelly, Assistant Commissioner, External Engagement and Governance, ATO Corporate, ATO

In its report on the Review into the Taxpayers’ Charter and Taxpayer Protections, the Inspector General of Taxation recommended the ATO consult with stakeholders on updating the Taxpayers’ Charter. The ATO has undertaken broad internal and external stakeholder consultation.

The ATO briefed members on the feedback received on updating the Taxpayers’ Charter. Recommendations and outcomes based on all feedback will be finalised by 31 December 2017. If updates to content are proposed, this work will commence in early 2018.

ATO Corporate Plan 2017–18

Michelle de Niese, Corporate Tax Association; Jacqui Curtis, Chief Operating Officer, Corporate and Enabling Services, ATO; Clifton Bingham, A/g Assistant Commissioner, Performance Measurement, ATO Corporate, ATO

Jacqui Curtis and Clifton Bingham provided an overview of the ATO Corporate Plan 2017–18. Key points included:

¦ The Plan is a key document for the ATO and sets the framework to drive and monitor the ATO’s day-to-day performance, as well as the achievement of the ATO’s long term goals.

¦ It has streamlined the ATO’s priorities so that staff and clients can understand and plan around them.

¦ It contains nine strategic objectives grouped into five perspectives which are linked to performance measures.

¦ There is clear executive responsibility for each strategic objective.

¦ It has clear and concise alignment between the components that together create an overall management view of the ATO’s goals and strategic objectives.

Tax gap, concepts of justified trust and tax assured

Michelle de Niese, Corporate Tax Association; Nicole Dykstra, A/g Deputy Commissioner, Client Engagement Group Strategy and Performance, ATO; and Jeremy Hirschhorn, Deputy Commissioner, Public Groups, ATO

Members raised this topic to discuss the ATO’s approach to tax gap and the interactions between the various published and yet to be published gaps. Members also queried how the concepts of justified trust and tax assured feed into all market segments.

Tax gap

The ATO tax gap research program seeks to estimate the tax gaps for all key taxes in the Australian system. Tax gaps estimate the difference between what the ATO collects and the amount that would have been collected if every taxpayer was fully compliant with the law.

Members were briefed on the status of the ATO’s tax gap program and noted that the Large corporate groups income tax gap was released in October 2017. The Commissioner of Taxation’s Annual Report 2016-17 includes details of tax gap estimates and a summary table of tax gaps. The ATO advised it has a strong media strategy regarding the tax gap program.

Justified trust and tax assured

The ATO has adopted a holistic concept from the Organisation for Economic Cooperation and Development (OECD) called ‘justified trust’ for working with large public and multinational businesses. This approach builds and maintains community confidence that taxpayers are paying the right amount of tax on revenue generated from economic activities related or connected to Australia. The aim is for the right tax to be paid at the right time and to have justified trust in the tax return rather than proceeding to audit by default.

To obtain justified trust, the ATO seeks objective evidence that a particular taxpayer paid the right amount of tax according to law. This is a higher level of assurance than confirming that certain risks do not arise. While the primary aim is to prove the absence of tax risk, appropriate action will be taken where tax risks are identified. Members noted that the application of the justified trust approach will broaden over time into different markets.

To reflect this new approach to tax compliance, the ATO has adopted ‘tax assured’ as a measure of its performance. This measure reports the amount of tax paid by taxpayers for whom the ATO has justified trust that they are complying with all tax obligations and their tax return information is reliable. This enables the ATO to measure where there is voluntary compliance in the tax system and can help to identify where there may be non-compliance.

Referral of tax agents to the Tax Practitioners Board

Tony Greco, Institute of Public Accountants; and Colin Walker, Assistant Commissioner, Practitioner Risk and Strategy, Intermediaries and Lodgment

Members raised this item to discuss the ATO’s approach for the referral of tax agents to the Tax Practitioners Board (TPB). At a TPB meeting in November 2017, the TPB highlighted there were increasing referrals of tax agents being referred to the TPB for possible disciplinary action.

The ATO advised there has been no change in the protocol for referral of tax agents. The ATO refers agents to the TPB when it considers that the agent has breached the Act under which the agents have been registered. The ATO also provides evidence to support its concerns and the TPB will then investigate the agent. Examples of issues where tax agents have been referred include excessive claims, records amended without client approval, lack of substantiation, false or misleading statements (for example, patently false claims under client pressure, inventing refunds), lack of knowledge or incompetence, obstruction of the ATO by the agent and where an agent does not meet their own tax compliance obligations. The ATO has been working in the last 12 months to improve the quality and coordination of any referrals made.

Other business

Review of FIRB Guidance Note 47

At the 19 September 2017 NTLG meeting, members discussed the Foreign Investment Review Board (FIRB) and FIRB Guidance Note 47 . Members were concerned about the additional tax conditions being placed on applicants which are not part of the standard tax conditions.

Members noted they would like the guidance note reviewed or some other form of guidance to be available to provide advice on additional tax conditions. Members advised they are able to assist with this work and nominated Tim Neilson (The Tax Institute representative), Clint Harding and Adrian Varrasso (Law Council of Australia representatives). The ATO agreed to follow-up with Treasury and Mark Konza, Deputy Commissioner, Public Groups and International. It was noted that a discussion regarding this be scheduled on the agenda for the 21 March 2018 NTLG meeting.

Foreign government lobbying

Members noted there is new draft legislation and raised their concerns at the impact of dealing with agencies. It was agreed that Michael Croker discuss this issue with the ATO General Counsel Johnathon Todd. NTLG secretariat to advise the ATO General Counsel of this issue and, if required, schedule this item on the agenda for the 21 March 2018 NTLG meeting.

NTLG action items update

Carlo Paje, Senior Technical Adviser, Tax Counsel Network, ATO

Carlo Paje provided a status update on ongoing action items:

¦ NTLG 1703/1 Impact of taxpayer alerts on large corporates and how the Taxpayer Alert system may be improved to manage unwanted impacts.

Members noted that due to the holiday break, the consultation period on the draft PS LA was short and requested an extension to provide feedback.

Post-meeting note: The due date for providing comments and feedback has been extended to 28 February 2018.

¦ NTLG 1709/1 updates on:  

– Corporate Collective Investment Vehicle (CCIV)

– whistleblower legislation

– beneficial ownership issues

¦ NTLG 1709/2 Regulatory reform impacts.

Members noted the information and requested if there was information available on the additional costs and reduction in costs. The ATO agreed to follow-up if this information was available.

Members agreed to close action item NTLG 1709/1 and that action items NTLG 1703/1 and NTLG 1709/2 remain open and ongoing.

Attendees

Organisation	Name
Australian Taxation Office	¦ Andrew Mills, Second Commissioner, Law Design and Practice (Co-chair) ¦ Neil Olesen, Second Commissioner, Client Engagement ¦ Carlo Paje, Senior Technical Adviser, Tax Counsel Network ¦ Robyn Theacos, Senior Director, ATO Consultation Hub, Design and Change Management (Secretariat)
Treasury	¦ Maryanne Mrakovcic, Deputy Secretary, Revenue Group ¦ Tony McDonald, A/g Division Head, Corporate and International Tax Division, Revenue Group
Chartered Accountants Australia and New Zealand	¦ Grant Wardell-Johnson (Co-chair) ¦ Michael Croker
Corporate Tax Association	Michelle de Niese
CPA Australia	Paul Drum
Institute of Public Accountants	Tony Greco
Law Council of Australia	¦ Adrian Varrasso ¦ Clint Harding
The Tax Institute	¦ Tim Neilson ¦ Bob Deutsch
The Tax Institute – Professional Bodies Coordinator	Stephanie Caredes

Apologies

Organisation	Name
Treasury	Rob Raether, Division Head, Corporate and International Tax Division, Revenue Group
The Tax Institute	Matthew Pawson