Second Commissioner Jeremy Hirschhorn
Address to The Tax Institute Tax Summit on 20 October 2022
(Check against delivery)
Hello, I am Jeremy Hirschhorn, here on behalf of the Commissioner, who is in Malaysia this week meeting with other tax administrators and commissioners from Southeast Asia to discuss how we can better work together. He is sorry he can’t be here today.
I know this event is always a highlight in the Commissioner’s calendar, and I was honoured when he asked me to attend in his stead, and even prouder to represent the twenty thousand or so ATO Officers who faithfully and diligently serve the Australian public every day.
This is my first keynote address to the Tax Summit, though I am very at home in the Tax Institute community – having been a proud member for just on 25 years, having joined following the “Younger Members Tax Trivia Night” in 1997!
The ATO has a deep respect for the work of the Tax Institute and, of course, its members. This annual address always serves as an opportunity to reflect on our relationship and share with you our plans going forward.
If you have heard me speak before, you will know that I am passionate about tax and the tax system. I could talk at length about the important role of the tax system in Australian society, and how the ATO and you as our partners are leading the way when it comes to improving tax performance for the benefit of the Australian community, but given the limited time available, I will be focusing on just a couple of aspects of the system.
I would also like to acknowledge the other ATO speakers across the program – I am pleased to see so many sessions are being co-presented with representatives from the private sector, a positive sign as to quality of relationship, but also that we are working on the most important areas of the tax system.
Since you last heard from us
This time last year when the Commissioner gave this address, it was delivered via a livestream. Sydney was emerging from a long lockdown, as was Melbourne.
Not long after, the Omicron wave disrupted the holiday season for many and then the East coast was battered (and continues to be battered) by severe weather.
I don’t need to remind you what a difficult time it has been.
At the ATO we did what we could to help, using our administrative levers to provide some relief to those who were affected. We thank you for helping your clients navigate the system and acknowledge it hasn’t been easy for you either.
Indeed, we know how busy you are: deferrals are at the highest they have ever been, and many of your clients are coming to you stressed and worried, and that can be a lot to carry.
I want to say at the outset that we see you and we appreciate you.
Today I will share some thoughts on:
- the current state of the (administrative) tax system in Australia, noting that as a representative of the ATO I cannot speak to policy matters, nor be seen to be advocating for or against proposed measures (and particularly in the lead up to the incoming Government’s first budget!)
- some immediate challenges and priorities
- the longer term, including thoughts on digitalisation and the future tax professional.
The current state of the tax system in Australia
The short story is that the Australian tax system is in very good shape, both relative to other countries, and in terms of a steady improvement over the last eight years. I will shortly go into more detail about our “tax gap” or “tax performance” program, and what our findings mean for the tax system.
But before I go into the numbers, I am often asked by my (often envious) international peers how Australia has achieved this level of performance in its tax system.
And to me, the core driver is the attitude of the Australian community. Although not necessarily enthusiastic or exuberant about paying tax, the vast bulk of Australians understand that paying their tax is a small price to pay to live in a country like Australia. This has been reinforced by the last few years, where Australian has weathered the health and economic aspects of COVID as well as (or better than) any comparable country.
Our job, as tax administrators is to create a tax environment where this attitude can be realised: by making the “user experience” as easy and positive as possible for those who are happy to participate (“tax just happens”), to reduce points of temptation, and to hold to account those who attempt not to participate fairly. This becomes a mutually reinforcing virtuous circle.
Our philosophy and aspiration is to sustainably improve tax performance, primarily by continuing to improve voluntary compliance. Even when we have to focus on things that have gone wrong, a key focus is on how to make it right not just in the past, but also into the future.
The tax performance program
Our tax performance program helps us understand performance across different markets, informs us about where we should focus our efforts and helps us better understand the impacts we are making on voluntary compliance.
Tax gap estimates are what we call ‘lagged indicators.’ They measure the performance of the tax system in the past and are better viewed over a longer-term (like a 5-year period) than year-on-year due to statistical variation (or “noise”) and revisions.
Critically, tax gap estimates measure against the law “as is”. They do not measure against some sort of “ideal” policy.
What this work shows is that Australia’s tax and super system is in good shape, and Australians should be proud. Our most recent publicly available estimate for 2018–19 shows the Australian tax system is operating at close 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 compliance actions. This shows a steady improvement in the performance of the tax and super system over the past few years, a positive trend which I expect will continue when we release our next estimates in our annual report later this month. Tax officers and advisers alike should be proud of all the work that has gone towards this strengthening of the tax system.
Although most countries don’t measure tax gaps as comprehensively or often as us (or even at all), I think it’s fair to say we are the envy of the world when it comes to voluntary compliance. We have also made a strong commitment to being open and transparent about the performance of our tax and super system.
However, even with 93% performance, a 7% gap is still about $33 billion, which can’t be ignored. And it’s when we start examining tax performance according to our markets, you can start to see where some of the challenges lie and where we really need to focus our efforts.
While our gap program covers a suite of 19 transactions, income based or administered program gaps, I would like to call out three continued areas of focus for us.
If I turn to the individuals’ market, we continue to see high levels of voluntary compliance at lodgment and improving performance over time. This year, we estimate that individuals are correctly paying about 94% of the tax they should be at lodgment. That said, there are three areas where we need to shift the dial on community attitudes and behaviours to have a lasting impact.
First, we need to create a common community understanding about what an allowable work-related expense claim is. WRE claims account for almost $4 billion of the individuals not in business tax gap – or 44%. So many claims are an optimistic characterisation of personal expenses as work related, while others are even more creative claims. How can we work together to create a common community understanding of what is allowable? Moreover, how can we shift the culture so that clients don’t shop around for agents that get them the biggest returns based on the most creative claims?
On this issue, and more broadly across tax advice, we recognise that for the vast bulk of advisers there is a ‘goldilocks’ spot. You want to give your clients good, solid advice that is neither overly aggressive, but also not overly conservative. We understand that at the ATO and we want to help you get that balance right.
Second is omitted income, particularly cash wages and income from the sharing economy. Some people don't declare income and payments to avoid paying the right amount of tax or super. We see this with some businesses paying their employees 'cash-in-hand’ and some taxpayers not reporting all the cash income they earn. We estimate the portion of the tax gap for 2018–19 attributable to unreported income was over $1 billion.
Finally, property investments, which covers the full spectrum from true investment properties through to holiday homes which are occasionally rented out. Currently rental income and deductions contributed over $1 billion to the net tax gap. In the 2020–21 tax return (as of 30 June 2022), over 2 million rental property owners declared over $45 billion in income and about $43 billion in expenses. The Random Enquiry Program that helped determine this estimate showed that 9 out of 10 returns reporting net rental income required adjustment. This is startling and clearly something we need to address.
Help us help your clients by educating them about what is a valid rental deduction and what is not. That may involve asking one or two further questions – perhaps inquiring whether there has been a refinancing/redraw to buy a new family car or go on a holiday.
If I turn now to small business, we know most Australians running small businesses try to do the right thing. They simply don’t always have the capabilities and resources like many large businesses though, so mistakes can happen. Small businesses are also more sensitive to the economic shocks caused by events such as natural disasters, the coronavirus pandemic and, more recently, inflationary pressures.
That’s why we are focused on supporting them to get it right up front, and we encourage our staff to be empathetic and understanding even when things have gone wrong.
Of course, we also know that a minority of small businesses deliberately try to stay out of the system (in whole or part) and participate in the shadow economy. Often this is driven by potential employees seeking cash wages, and then the business being sucked into cash and off the books transactions.
As a result, the small business market has always represented a high proportion of the overall tax gap – most of which is driven by the relatively small number of businesses operating in the shadow economy, but also the relatively large number of businesses who make simple mistakes (often due to poor systems or poor advice).
Our most recent figures estimate it to be over $12 billion of the overall $33 billion tax gap. Given the real challenges faced by this sector over the past few years, and the deferral of much of our compliance work during COVID, I would not be surprised to see performance stagnate or perhaps deteriorate slightly over time.
We see huge opportunity for digitalisation of the tax experience of small business, in fact it is one of our key focus areas “Improving Small Business Tax Performance”, which I will discuss later.
The other element where small business disproportionately contributes is the “payment gap” element of the tax gap or, in other words, where a liability has arisen (usually self reported) but has not been paid.
A significant component of the overall ATO debt book belongs to small business – 65% in fact. It represents over $24 billion of the over $37 billion collectable (i.e. not disputed) debt. In addition, 86% of the outstanding superannuation guarantee debt is owed by small business employers. I would note here that most of the small business debt is self-reported and therefore undisputed, so our focus continues to be on how we can help those with significant debts to stay engaged with the system and use payment plans to pay off past debt while meeting new debt as it becomes due.
I will touch on the debt book challenge later.
With large business tax performance close to 96% (importantly, as compared with current legislative settings), we have one of the strongest corporate tax compliance levels in the world. But this doesn’t tell the whole story.
First the glass half empty perspective: notwithstanding all their in-house and external tax resources, tax performance of large companies at lodgment in percentage terms is still below that of individuals not in business (92% versus 94%). There is also significant community concern that there is something lacking with the fundamental tax policy settings around large business taxation, which I will touch on later today
Looking at the glass as half full, early engagement with large business is designed to reduce uncertainty, get high levels of assurance and promote confidence in the community that large business is paying the right amount of tax. Through the Top 100 justified trust program the number of taxpayers achieving a high assurance rating has increased from 6% in 2019 to 51% in 2022.
We are now starting to see the impact of our assurance programs on the tax gap, specifically the gross gap, which is the true measure of voluntary performance of large business. Gross tax performance is a measure of how well large business get it right when they lodge, not after our intervention. This has significantly improved since the inception of the Tax Avoidance Taskforce.
Talking only on matters in the public domain, an example in point is our recent $1 billion settlement with Rio Tinto – 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.
At an even larger scale, demonstrating the importance of resolving the future, our interventions in relation to related party finance arrangements have seen a (conservatively) estimated $40 billion of past and future debt deductions removed from the system. Much of the $12 billion tax impact will be paid by oil and gas companies over the coming few years. 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.
Indirectly we also know that community attitudes towards paying tax in Australia are still heavily influenced by the actions of the ‘big end of town’ and smaller players in the economy look at best practice approaches. Transparency is key.
A key strategy in this market is around 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)
- to the community around the market.
In this vein, last week we released a suite of reports that show the state of compliance in the large market, as well as the prevalence of key corporate tax risks. Positively, these latest findings support the continuing positive improvement in tax gap for large corporates. The Top 100 population, which includes the very largest economic groups in Australia is showing signs of improved compliance levels. Justified trust assurance ratings continue to improve and the prevalence of high risk or tax avoidance arrangements appears to be on the decline.
In what has become a signal of the tide turning when it comes to the social responsibility of large business, more and more companies are wearing their tax compliance like a badge of honour, and we are seeing some of Australia’s largest companies publish their ATO assurance ratings to their shareholders and other stakeholders.
But the job is not done – as above, the tax performance at lodgment of the large corporate market is still below that of individuals not in business, and 20% of the market are still only at low assurance.
I also noted earlier that there remains community disquiet about some multinationals, and that this is reflected in the policy platform of the incoming Government, as well as the “BEPS 2.0” policy stream of the OECD. Although there is probably less impact of BEPS 2.0 in Australia than in some other countries due to the combination of a strong, well-funded administrator and pragmatic implementation of best practice “BEPS 0.0” and “BEPS 1.0” measures, the Government has committed to speedy implementation.
Maybe making one final observation, the community understands that not all profits of a multinational will be taxed in Australia, but is very alert to when “paying tax in all relevant countries in accordance with the laws of those countries” means that significant profits are booked in jurisdictions where minimal or no tax is paid and minimal activities occur.
JobKeeper and Cash Flow Boost
Before I move away from tax performance, our upcoming annual report will include an estimate of the performance of the JobKeeper and Cash Flow Boost stimulus measures. As far as we are aware, this is a ground-breaking piece of work in extending tax gap thinking to grants.
Again, it is important to emphasise that these estimates are based on the eligibility criteria as legislated, not some idealised policy.
What they will demonstrate is that the designing of these measures around pre-existing digital platforms and system safeguards was highly successful in ensuring that the amounts paid to those not entitled was very small in percentage terms.
Despite the economic challenges in Australia over the past few years the recently released Final Budget Outcome 2021–22 showed positive signs, particularly with company and personal taxation receipts being significantly higher than expected, off the back of stronger-than-expected commodity prices and employment outcomes, and lower-than-expected utilisation of COVID-19 business support measures.
As the economy finds its new normal, the ATO similarly is re-focusing on its more traditional goals.
This means getting back to normal, but not normal as in a steady state where things stay the same. Or even normal as in the way things used to be. It’s getting back to a steady trajectory of improvement, which we had to put on pause while we were responding to the pandemic.
In a practical sense, you’ll be seeing us undertaking targeted strategies to address collectable debt, engaging with clients to tailor solutions to their circumstances, and doing so with empathy and understanding. And it also means continuing with our transformation program.
In the current environment though there is only so much we can do. Like many businesses, we are operating within limited resources and need to focus our efforts. In our corporate plan we have outlined 7 focus areas to guide us for the coming year (and further into the future):
- Improve small business tax performance
- Deliver innovative business registry services
- Implement targeted strategies to address collectable debt
- Expand the use of Single Touch Payroll data
- Transition to the new data centre
- Manage cybersecurity
- Enable data and digital investment through sustained efficiencies
You will hear me touch on some of these in the course of this speech.
What is happening in the debt book
Our supportive posture with the community these past couple of years has meant we have done fewer audits of small business and individuals, chased fewer lodgments and recovered less debt.
As a result, the total of taxes owed has increased from around $39 billion in January 2019 to almost $61 billion as at January 2022. Of this, over $37 billion is defined as collectable (not disputed or insolvent).
From November 2021, we resumed stronger actions for taxpayers resistant to managing their debts and engaging with the ATO.
But we’re not returning to the way we did things pre-pandemic. We have a more sophisticated approach underlined by our commitment to engagement and transparency; ensuring advisors and clients are aware of their obligations, the assistance available to them and actions we may take if they choose not to engage.
We have also renamed our debt area to ‘Lodge & Pay’, reflecting our changed approach. Our emphasis is now on keeping taxpayers engaged, getting them to lodge so they know their position, and supporting them to set up a plan to manage their payments.
We have also taken the opportunity of the last few years to review all our processes under an approach called “Highest Client Impact Actions”. At its simplest, we have tried to identify all the things we do where a mistake could cause a disproportionate impact on a client, and to make sure we have procedural and cultural safeguards to minimise these mistakes. In practice, it might mean having one more conversation to make sure that the client understands what is coming next if they do not engage. There is also a sense check of “even if we could, should we?”
We are starting to make gains, but we need your support. As tax practitioners, you can play an important role in helping your clients manage their tax debts. You are often privy to more information and you are in a unique position to have the right conversation. And let’s face it, your clients would probably much rather have that conversation with you than with us!
Over 22% of our debt book is on a payment arrangement. On one hand, this shows how we are working with taxpayers to develop tailored solutions, but, on the other hand, it paints a stark picture of how many taxpayers are struggling to meet their obligations (and perhaps not just with the ATO).
Many stakeholders have also made clear to us the system-wide role that the ATO has in helping struggling businesses understand that they should move to finalisation of the business rather than struggle on as “zombie businesses”. Obviously this is very challenging to many who have poured their efforts and resources into that business, and is another area where we really seek the assistance of tax and other professional advisors.
In this regard, our analysis shows a strong pattern of clients who are missing multiple obligations are also at high risk of trading while insolvent. We estimate somewhere between $6 billion – $9 billion of our collectable debt book includes debt that will ultimately be found insolvent and not collectable. The focus of our debt recovery approach this year is targeting high value debts, with a priority on those who have multiple outstanding obligations.
If your clients are in debt, help them set up a payment arrangement and encourage them to come to us earlier. Importantly, please remind them not to ignore us if we reach out – that will raise a red flag. After an uncertain few years, mutual engagement and transparency are paramount.
Digital and data as the key to our success
Looking forward, I am excited about the opportunity we have to harness advancements in digitalisation and data to achieve a future state where ‘tax just happens’.
We also see the move to simplify and streamline interactions as an opportunity for professionals to focus even more toward value creation, which is a win-win for you and your clients.
From our perspective digitalisation means:
- integrating ATO systems with natural systems as much as possible
- moving tax reporting (or payment) closer to the tax event (which may require policy changes)
- designing the tax system around verifiable data rather than using external data to bolster the system
- to provide transparency (often in real-time) around our risk settings to minimise errors.
It’s not just Australia that is headed in this direction. Last month we hosted the OECD Forum on Tax Administration here in Sydney, where the key focus was the ongoing transformation of tax administrations.
The ATO is a leader in this space, and the Commissioner has spoken recently about our new digital strategy that sets out deliverables for the next 2–3 years and a vision for 2030. Our digital strategy is aligned with the OECD’s Tax Administration 3.0, where seamless, integrated, and automated systems allow data to flow from the systems taxpayers already use, to ours, without any extra effort or intervention from them.
Rest assured; we won’t be driving the design on our own. We want you in the front seat with us. You can expect to hear more about this as we start co-creating what the roadmap could look like to help increase tax performance through a digitalised system that lowers unnecessary “paper shuffling” compliance costs.
Importantly, it does not mean that all data must sit in ATO systems and be analysed there. In fact, almost the opposite. Digitalisation requires consideration of the entire ecosystem, and also looks for the natural place for functions to sit. In many cases, it may be more natural to move some of our functions to the natural systems, rather than require clients to send us information. This may not only reduce data requirements, but also allow clients to minimise their chance of making a mistake and coming to our attention.
Someone recently described to me that data is not gold it’s uranium: before you get it you better know how you’re going to use and store it and there needs to be very good reasons to take the risk!
I would also acknowledge here that we recognise not all tax professionals (or their clients) have the same level of capability or access to digital services. We have to make decisions around design and investment that we think are best for Australia’s tax system into the future and align to government and community expectations. So, for those who are feeling uneasy that they will be left behind, unfortunately I don’t have the answer for you today, except to say that is something we are grappling with and will continue to engage with you on into the future as we design our systems and service offerings.
We have some bold ambitions in this space and I wanted to briefly talk you through what the future might look like.
It also helps to think not of tax return forms but of quality assured and attested data streams.
Designing the system around verifiable data – prevention first
Digitalisation and data exist hand-in-hand, so with digitalisation comes an ever-expanding store of data for us to leverage.
To better understand the importance of data in the tax system, we often talk about the 3 phases of data evolution in tax systems worldwide.
The first is a ‘pre-data’ world where data was wholly in possession of the taxpayer. Revenue authorities relied on taxpayers to provide us with a bespoke data set (that is, a tax return) whose accuracy relied on the honesty of taxpayers, reinforced by the threat of audit or penalty. We then moved to the second phase of what we call ‘data testing’ where third-party data became available at scale. As administrators began to access more and more data sets, we could undertake more comprehensive data matching and could cross-check what taxpayers were telling us to identify those tax filings which were most likely to be most incorrect. This in turn led to the identification of anomalies that require further investigation through audit programs.
The third phase, which we call ‘data driving’, is what the ATO and other leading revenue authorities are now in – that is where the system is primarily designed around verifiable data, rather than relying on bringing data to the system. This saves time and minimises the risk of inadvertent errors that have to be addressed later.
At the ATO, we are now starting to think about data on a curve: from ‘not verified’ data, through increasing levels of confidence in the data to ‘fully data-driven policy and system design’.
In Australia this is most evident in our individuals market where we can access and use data at an industrialised scale:
- Level 0 is where there is no bulk data set available.
- Level 1 is where we can obtain other data after the event to check that data, but maybe not at scale.
- Level 2 is where the data can be sourced to be used as a risk indicator pre- or post-lodgment but it is not of a quality or type that would be productive to expose to taxpayers.
- Level 3 is where the data is of a high enough quality that it can be used to assist taxpayers to comply as they lodge.
- Level 4 is where the data is very high quality and can be used to pre-fill returns as presumptively correct.
- Level 5 is where the data is so reliable that the tax system is actually designed around the data.
When looking at whether we should access data or how we should use it, we are focused on moving it “up the curve”, at least to Level 3, helping clients to comply in real time.
And while generally on the topic of data, leveraging data and analytics (D&A) does not replace the human element: rather it frees up our people to focus on tasks requiring human judgement and empathy. I want to stress that, in particular when a decision may be unfavourable to a client, our people make the final decision assisted by the D&A. Where judgement is required, the D&A can only assist, it cannot replace humans. This is why I think it is useful to refer to ‘bionic arms’, not ‘robots’.
But going back to digitalisation, rather than simply abstract concepts, I thought I would set out some areas that we are thinking about.
We are most advanced in our digitalisation journey in the individuals market as we can access and use data at an industrialised scale.
At one end of the spectrum, most income in individual tax returns is now pre-filled using high-quality third-party data sets which we can rely on as being presumptively correct. We know about 90% of these boxes pre-filled on a tax return remain unchanged by the taxpayer.
Other more complex information, such as capital gains, might only be able to be partially pre-filled but even this can assist taxpayers get their affairs right at lodgment.
But there are opportunities to further explore areas requiring substantiation, such as work-related expenses. This could be a policy change (creating some form of optional or mandatory standard deduction), but it could be through fostering the ecosystem. For example, the natural system for expense payments is bank accounts, so a future here might involve banks providing facilities for individuals to tick items as potentially deductible, with a direct feed to their tax agent for further consideration or even directly into the individual’s tax return. We are also obtaining data on significant percentages of the rental market and seeking to display that to clients.
We know that digitally engaged small businesses perform better pre-tax and also meet more of their tax and super obligations. There is a huge opportunity for us to work with key players to build an ecosystem where ATO systems are integrated with the natural systems of businesses.
So we’re starting to imagine a future which includes small businesses no longer having to prepare a separate tax return or activity statement: rather, there is a periodic direct data feed from their accounting software to the ATO. Of course, this will require clients and their advisers to review and vouch the data feed for completeness and correctness, but will minimise the “paper shuffling” element.
As part of this, the ATO may provide certain risk models to the digital service providers (and hence the advisers) so that clients and their advisers might identify mistakes (or simply understand whether they may attract our attention) prior to the data feed being submitted. It should also be possible to align instalments and payments to the amounts generated from the natural system.
These concepts are being worked on under the banner of “Improving Small Business Tax Performance”, one of our key priorities.
As an interim step, we will be looking to pre-fill the BAS for PAYGW obligations based on STP data.
I also wanted to take the opportunity to talk about e-invoicing and our positioning around e-invoicing data. We strongly support e-invoicing as a micro-economic reform assisting business, especially small business, and have a stewardship role. But we do not see it as the natural system for obtaining information about small business’ tax affairs, and not of great use in either identifying non-compliance or assisting small businesses e.g. through pre-fill – as such, unlike in many other countries, we will not be taking this data onboard.
The delay between the event and payment and the complicated rules as to what is subject to superannuation guarantee or not, are longer term opportunities for change and digitalisation. In the short term, harnessing digitisation and data will be a game-changer for ensuring SG entitlements are paid. STP data (together with other data sources from super funds) forms one of our focus areas in our corporate plan.
If I look at STP – over 845,000 employers reporting through STP in the 2021–22 financial year, covering 13.2 million employees.
We’re looking at how we harness the benefits of STP reporting to ensure employees can engage with their super in real-time through better visibility of their payments into their accounts.
But also, we also know that falling behind in SG payments can often be an early sign a business (of any size) that is struggling and this in close to real-time information will help the ATO and advisors alike engage earlier with employers failing to meet their obligations.
At the other end of the spectrum, the sheer size of large businesses, the bespoke nature of their business systems and the complexity of their affairs means we are still quite some way off from getting to this level of data integration in real-time driving risk analysis or compliance approaches. In short, for most aspects of their tax affairs, there is no natural system, let alone a scaleable one.
Instead, we continue to drive more sophisticated analysis of bespoke data sets and are increasingly enabling these taxpayers to undertake their own more complex risk analysis to shape their own behaviour based on ATO or industry wide expectations, rather than driving them to audit.
So in the short term, a digital future for them will be around digital reporting interfaces, but then a focus on data and analytics solutions (whether ATO or private sector), often shaped around the ATO transparently setting out its risk parameters.
Whole of government initiatives
We are also playing a leading role in significant whole-of-government digital initiatives which are intended to make it easier for businesses to operate in Australia:
- More than 23,000 businesses are already taking advantage of eInvoicing, mentioned above, which makes business transactions easier and fairer, and less prone to scams.
- Over 1 million director IDs have now been issued under the Australian Business Registry Service which seeks to make it easier for businesses to register and meet their ongoing obligations as well as make business information more easily available, trusted and valuable – I would remind you that all directors will need to register for a director ID by 30 November 2022.
System integrity and security
The increased digitalisation across government brings many opportunities that are exciting, but also significant challenges.
In fact, 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’ but also increasingly cyber enabled fraud (such as identity and information theft). This is unsurprising given an organisation of our size, our digital infrastructure and the data sets we hold.
We know we can’t simply haul up the drawbridge and protect our castle, especially as we move into an integrated tax ecosystem. We want clients and their advisers to be able to continue to interact with us digitally, and with relative ease.
But as we harden our systems, criminals are seeking to access the broader tax system both directly and 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. The recent Optus data breach has really brought home how vulnerable many businesses and organisations are to attack and the need to evolve our controls as threats arise. We continue to strengthen our safeguards in preparedness for the increased threat and urge you to take this very seriously.
The future and you: adding value to your clients
We know digitalisation is not a silver bullet for tax compliance. Some areas of tax law are just too complex to digitalise and need to be addressed through our public advice and guidance products and/or expert professional advice.
A recent example you would all be aware of is our guidance on Section 100A / Division 7A. These are tough areas of the tax law, where behaviour sits along a spectrum (visible to us, but maybe not to advisors), but the tax consequences are binary (and can be severe). Often they are not well suited to traditional rulings, which will either be too wide or narrow to be useful.
Our perspective on these tricky areas of law is that it is that it is better for you to know the ATO risk parameters. We ensure our risk parameters are available to the whole community, not just to those selected for audit trying to reverse engineer why they were selected. It can help you (and your clients) understand where your advice stands relative to the market. In some cases, this may help prevent you from making a mistake, or at least give pause for thought. In other cases, your client may want to avoid the risk of getting caught up in a dispute with the ATO.
Beyond our formal public advice and guidance program we are also seeking to provide certainty by being more transparent around how to effectively work with us. A good example of this is our protocols on Legal Professional Privilege which outline our recommended approach to respond to formal notices requiring production of documents.
It’s also pleasing to see that the advisor community is also seeking to strengthen and publish their own agreed expectations on working in the tax system. In August, 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 about the quality and standard of tax advice. The principles are not limited to the Big 4 and are able to be adopted and followed by other firms that provide tax services.
What clients will need into the future is a good advisor who can add value. They need someone who:
- has up-to-date skills and knowledge
- has high practice and professional standards
- encourages them to understand and embrace technology
- asks that extra question if their position doesn’t make sense, maybe even protects them from themselves
- provides sound business advice – not just tax advice
- helps their client understand where they stand in relation to their peers.
Taxpayers take their lead from their advisors and therefore we are grateful for your modelling high standards of integrity, supporting tax morale in your clients and calling out bad behaviour if you see it.
We recognise there isn’t a one-size-fits-all approach to working with the tax profession. You are as diverse and different as your client base and our support for you needs to reflect that.
We are also very grateful to hear from you and get your real world experiences. We need voices providing perspectives on the system in operation, particularly areas of uncertainty or pain points as they emerge (and not years later!). As partners, we achieve so much more when we work together constructively.
I’m coming towards the end of my speech now and am mindful of leaving time for questions. Before I finish though I would like to say a big ‘thank you’ for your continued support of the Australian tax system and your clients.
The past few years have tested us all and our relationship has endured and remained strong.
Now, as we enter a post pandemic phase and return to our core priorities, we need you to move with us.
You’ve been there every step of the way, and we know you will continue to be.
Like me, I’m sure you’ll all be tuning into the Federal Budget next Tuesday night to hear more on the government’s priorities for the years ahead!
Thank you, let’s move on to questions.Second Commissioner Jeremy Hirschhorn addresses the Tax Institute of Australia, reflecting on the ATO's current agenda.