Hector Thompson, Deputy Commissioner, International, Support and Programs
Speech at the Tax Institute's National GST Conference
26 October 2023
(Check against delivery)
Introduction
Good morning, everyone, it is a pleasure to be here at the 2023 National GST Conference.
I’d like to start by acknowledging the traditional owners and custodians of country across Australia. Here in Sydney that is the Gadigal people of the Eora Nation and I pay my respects to their elders, past and present. I would like to extend that respect to other Aboriginal and Torres Strait Islander people here today.
Thank you to the Tax Institute for the opportunity to speak. This is my first time speaking about the GST at this conference and an ideal opportunity to talk directly to so many leaders in the GST community. I would also like to thank Mahmoud Nabulsi and Kathryn Slade-Frankcom from our GST team for their assistance in preparing my remarks today.
My theme for today is the future of GST compliance and as we delve into that, it is crucial to acknowledge that tax systems evolve alongside the world in which they operate. So our ability to adapt, innovate and stay ahead of change will define our success in the years ahead.
Tax Systems must adapt to change
It has been 23 years since Australia introduced its version of a broad-based consumption tax, the Goods and Services Tax. The year was 2000. It was a new year, a new decade, a new millennium. Cathy Freeman won Gold at the Sydney Olympics, Coldplay released their first album and Barbie had her second crack at running for US President. I was a young public servant working for the Department of the Prime Minister and Cabinet and looking back, the introduction of the GST and associated changes remain a highlight of my time there.
In the 2000s, the GST system was being finetuned and modified to align with the Australian landscape; everyone was learning to walk. The ATO adopted a flexible administrative approach in the transition period regarding lodgment deadlines, payment arrangements and taxpayer mistakes, as well as an ongoing openness to reducing compliance costs for businesses wherever possible.
In the 2010s, there was a focus on enhancing the client experience, while maintaining effective compliance. This led to innovations like the introduction of the indirect tax self-assessment system and later, the simplified Business Activity Statement. The world-first low value imported goods measure was introduced, as was GST on settlement, a first for Australia in terms of requiring a purchaser to remit the GST directly to the ATO.
Today, we find ourselves in a time of rapid and extensive digital transformation. The rise of e-commerce, the global nature of supply chains, the evolution of payment systems and the massive increase in electronic transactions – in real-time. When the GST was introduced, the iPhone was still 7 years away, so the idea that we could make a purchase on our phone and have it delivered from the other side of the world in a few days was not even a twinkle in the eye of those who designed the system.
But the system has adapted well. In the 2022–23 financial year, GST cash collections were over $81 billion, consistent with softer-than-expected consumption over the final 2 months of last financial year. This financial year, the Treasury has forecast that GST receipts are expected to grow by 5%, to $86 billion.
The Australian Bureau of Statistics reports that over the last 15 years Australian consumers’ spending habits continue to change. From 2008, we have seen a clear trend of consumers spending a larger proportion of their income on GST-free items, such as health, education, and fresh food.
As the 2023 Intergenerational Report highlighted, as we look to the future, a prominent trend is the ongoing shift from a goods, to a services-orientated economy, which presents several challenges. We are seeing an increase in the number of participants in the National Disability Insurance Scheme, with a projection of over one million participants by 2032. Our ageing population will further drive the demand for aged care-related services, many of which are GST-free. More generally, services are diverse, intangible, and often have exemptions and special provisions, which can result in misuse and abuse of the system.
Adapting and evolving to change is not an option, but rather a necessity to ensure our GST system remains efficient, effective, and sustainable.
Our tax system is underpinned by the community’s willing participation. In 2021–22, more than 80% of income tax returns and 70% of activity statements were lodged on time. Our most recent estimate shows that the net GST gap (i.e. the gap after ATO compliance activities) was 3.6% (or around $2.8 billion) in 2021–22. The GST gap has declined significantly in recent years due to COVID-19 impacts such as a shift to online transactions, reduction in the use of cash and changing patterns of consumption, including greater consumer spending on items not subject to GST.
In comparison, in 2022, the European Union’s VAT gap was estimated at 10.3% and the Organisation for Economic Co-operation and Development (the OECD) reports some nations suffer a 34% VAT gap.
Another measure we use to monitor compliance is the GST voluntary compliance ratio. The voluntary compliance ratio is a strict measure of compliance, where any instance of non or late lodgment or payment classifies a taxpayer as non-compliant. It may be a surprise to find that fewer than half of Australian taxpayers are fully compliant with all their annual GST obligations. However, the good news is if we allow for one indiscretion, like a single late lodgment or payment, there is a significant improvement in the voluntary compliance ratio, with over 80% of taxpayers doing the right thing and this number has been improving over time.
Overall, these metrics suggest Australia’s GST system is in relatively good shape.
Digitalisation, data and fraud
The ATO’s vision is to be fully digitalised by 2030. This aligns with broader Australian government strategies, as well as the OECD’s Tax Administration 3.0 initiative where seamless, integrated, and automated systems allow data to flow from taxpayers’ systems, to ours, without any extra effort or intervention.
As the Commissioner stated recently at the Tax Summit, our vision is a future where ‘tax just happens’. In our vision, this means you and your clients will be able to interact with us through your software and tools. This is what we mean by natural systems.
One of the ATO’s key focus areas in 2023–24 is to improve small business tax performance. We are collaborating with key partners to drive improved tax performance of small businesses by digitalising small business taxation.
We are focused on how we integrate the tax and super system into the operating environment of a small business, and the digital products and services they use on a daily basis. As I mentioned, our work is guided by the OECD’s Tax Administration 3.0, where the timing of taxable events, reporting and payment are aligned and there are real-time compliance checks.
We are piloting concepts to streamline the tax experience, in consultation and co-design with external stakeholders. This includes piloting right-time GST payments and voluntary monthly reporting of GST.
Integrating the tax and super system into a small business’s operating system offers a key opportunity to improve the tax performance of the small business market by:
- placing greater assurance in the system
- increasing digitalisation to reduce errors and mistakes, and
- decreasing new debt as payments move closer to events.
We see this as a win-win for small business owners who will have more time to work in or grow their business and tax agents to focus more on value creation.
While the ATO is recognised as a leading agency for our advances in the digital transformation of tax administration, we continue to seek ways to enhance our systems, administration, and compliance, to try to stay ahead of potential challenges.
We use the data available to the ATO, including the taxpayer’s lodgment history, their nearest neighbours, GST at settlement and comparable property data, to prompt taxpayers in real time to check or confirm if they have reported the right amount before completing the lodgment. Nudge messaging has yielded impressive results with around $143 million saved since June 2021 and a further $95 million protected by auto-adjustment of ineligible claims. This approach has reduced the need for extensive follow ups and has led to a significantly more streamlined process.
In 2019, the ATO started on a path to modernise our capability to manage GST compliance risk by designing new analytical risk models to target risks and behaviours that impact on the integrity of the GST system. These risk models are data-driven and utilise statistics and algorithms to look for patterns and relationships in data. Our machine learning models aim to stay on top of rapid evolution in GST fraud behaviour, such as that managed under Operation Protego. Machine learning works by successive models trying to reduce the errors in the previous model and is critical to combating GST fraud.
It is worth noting that GST fraud is not new. Any area where there is the possibility of receiving a cash refund is susceptible to fraud. In many ways, underlying fraud strategies remain constant, but the digital environment magnifies them. For example, Operation Protego combated first person fraud (that is taxpayers committing fraud in their own name) on a scale we have not seen previously. Similarly, in a paper-based system transaction costs are higher, so there are limits on the number of fraudulent claims that can be made. Whereas a digital environment allows fraudsters to lodge tens of thousands of fraudulent claims at little cost; to them, at least.
Fraud in the digital environment is a problem that tax administrations around the world are grappling with. I have recently returned from the annual meeting of the OECD’s Forum of Tax Administration and was struck by the correlation between how digitally advanced a tax administration is and how much it must focus on the increased volume and magnitude of fraudulent claims.
These improvements increase our ability to identify risks of incorrect reporting and identify high-risk registrants. This allows for early intervention and implement modelling to differentiate treatment, but we recognise that there are still opportunities that can be harnessed to improve GST compliance and we are developing further analytical risk models so that we can more effectively target those attempting to commit fraud against the GST system.
GST registration is the front door to the GST system; it serves as the first line of defence against potential fraudulent applicants. In recent years, we have experienced an increase in registrants entering the system to attempt to gain refunds to which they are not entitled. This behaviour starts with offenders setting up Australian Business Numbers, or ABNs, for businesses that don’t exist.
We are working alongside our Australian Business Registry Services colleagues to coordinate strategies and disrupt fraudulent behaviour at the point of ABN registration. Our systems use data-driven rules to determine the appropriate treatment for all ABN applicants and where we have questions around their entitlement to an ABN, we will request they contact us and undertake a review. Our aim is to take a proactive approach in ensuring fraudulent applicants are not granted entry to the system in the first place, supported by appropriate fraud controls at every point of client interaction. We are designing a system hardened to fraud that effectively keeps those who shouldn’t be in the system out, while making it easier for those who should.
Our evolving compliance activity focus
While we strive to ensure compliance across all industries, our compliance focus at a particular point in time is informed by economic factors and the risks we identify.
For example, this year we will be implementing a targeted industry strategy in relation to privately owned high wealth groups focusing on retail, construction, and retirement village industries. The retail and construction industries are the 2 most significant industries for GST activity and were both significantly impacted by the COVID-19 pandemic.
Retail experienced rapid growth and an increased reliance on online sales, however we have concerns about whether some retailers’ systems, controls and governance have kept pace with their growth and changes in business model. Some may lack systems that are capable of handling shifts in sales volume, product classifications and intragroup transactions.
More broadly in the retail sector, we will continue to crack down on the use of illegal electronic sales suppression tools, which contribute to the shadow economy and are unfair to honest retail businesses doing the right thing. These tools are used to mask, understate, or delete the transaction at the point of sale, resulting in fraudulent records and evasion of taxation. As a member of the Joint Chiefs of Global Tax Enforcement, or J5, we are co-ordinating with our counterparts at His Majesty’s Revenue and Customs and the US Internal Revenue Service on Operation Flutter, a global crackdown on those who supply and use these illegal tools. We worked alongside the Australian Federal Police to undertake raids at 35 premises across Australia.
Retirement villages present a challenging landscape in terms of GST, and we are undertaking a broad review of the issues impacting the sector to develop a greater understanding of industry operating models, including emerging business models, and to identify opportunities to provide comprehensive and fit-for-purpose guidance to the sector. The demographic shift associated with the ageing of the Australian population underscores the importance of this work.
This targeted industry focus will allow us to understand the unique challenges facing each industry. We can pinpoint areas of risk to develop tailored approaches to ensure entities within particular industries are paying the correct amount of GST, detect risky behaviour early and apply appropriate treatment.
Our GST assurance program continues to seek to provide assurance that the top 100 population is reporting and paying the right amount of GST using the justified trust methodology which my colleague, Megan Croaker spoke about yesterday.
A focus on early education
As the recent intergenerational report noted, today we have a much more dynamic labour market than in the past. Many of us won’t have just one job for life, nor a clear transition to retirement, but multiple jobs, part-time jobs, or flexible jobs that span a longer time period.
Particularly for the labour market’s newest entrants, research suggests that many intend to start a business or at least a side hustle. So it makes sense to get people engaged in tax and super as soon as possible.
Our bespoke educational products 'Tax, Super & You' and 'Paying it Forward' are fantastic learning products developed for schools. They are designed to help future generations learn about our tax and super systems, including GST, and are in the Year 8 curriculum for all Australian students. With the Treasury, we also developed the money managed product for teenagers and their parents to provide information to help teenagers make smart financial decisions and learn about tax and super.
How we can build willing compliance together
Tax systems are complex and so advice and guidance available to taxpayers to be able to comply with their tax and super obligations is critical. This advice and guidance comes from not only the ATO, but also from you, the tax professionals.
The critical role of public advice and guidance is supporting taxpayers to get their GST obligation right up front. The ATO has produced an extensive base of public advice and guidance over the life of GST to support taxpayers and even after 23 years there continue to be areas where further clarity is needed as businesses evolve and new issues come to light. We work collaboratively with industry, advisers, and associations to identify and prioritise public guidance that is fit for purpose, easy to understand and timely.
A good example of this is the update we did this year to the foundational GST Ruling on financial supplies (Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions). This update addressed new law in relation to digital currency and cross border rules, as well as industry developments in relation to buy-now pay later products.
A current example is the draft GSTD 2023/D1 Goods and services tax: supplies of combination food that we published for consultation this month. This draft GSTD is a timely response to the recent Administrative Appeals Tribunal decision in Chobani and aims to explain the Commissioner’s view clearly and simply across the range of scenarios where the issue of combination food arises to support businesses to get their classifications right. As Gordon Brysland noted yesterday, food classification is a very challenging area for various reasons and the ATO is keen to receive feedback on this draft GSTD by 10 November to ensure it provides the clarity business need to classify their products. We recognise and appreciate the crucial role that the tax profession plays in our tax system. We will continue to work with and support you.
This year we are introducing a program to provide tax professionals with our insights around potential GST risks. Over the next 4 years, we will undertake early intervention engagement activities with registered tax agents who may have clients that exhibit potential GST-related risks. The aim of the program is to educate and leverage agents’ relationships with their clients to positively influence their behaviours and ensure compliance with regulations.
We will deliver risk alerts to some tax agents providing a view of potential risks in their client base. The intention here is to encourage agents to review their processes and interactions with their clients, and take corrective action, where appropriate. We will also undertake virtual engagement with agents to provide them with the ATO’s view of GST risk within their practice and support their understanding and approach to GST risks in their client base.
We believe that this program will not only improve and strengthen compliance, but also foster a deeper understanding of GST regulations among tax professionals. It will allow us to work closely to detect risks early and take corrective action.
Tax professionals play a critical role in supporting the administration of GST and ensuring compliance. Your expertise, knowledge and dedication are pivotal in maintaining our GST system. You serve as guides and are the point of contact for many businesses and individuals when it comes to dealing with GST issues.
You see the early signs when your client is struggling or operating a business with potential GST issues and can advise them on the best course of action.
While the ATO collects the GST, it is distributed to the states and territories, and funds the government services we all use, such as roads, schools, and hospitals. Similarly, businesses that collect GST on goods and services are only temporary custodians; it is not theirs to keep.
We are seeing more and more businesses reporting, but not remitting GST. GST debt is growing. As at 30 June 2022, GST collectable debt was $12.3 billion, having more than doubled in 3 years. While this increase in debt has been experienced across all taxes the ATO administers, GST debt is growing the fastest. We understand that recent times have been challenging and there will be more challenges ahead. However, reporting, but not remitting GST creates an uneven playing field for businesses that do remit the GST.
At the Tax Summit last month, Deputy Commissioner Vivek Chaudhary spoke about what we are doing to re-establish the culture of paying tax on time and how you can help us given your roles as a trusted adviser. To shape this culture and help clients avoid bill shock by setting up habits that see them put aside GST they have collected, so they can pay it when it’s due.
Our aim in resetting our approach is to prevent businesses falling behind in the first place and position them better to be able to recover if they do. Vivek’s request was that you help your clients understand that it is in their best interests to pay on time and engage with us, rather than waiting for us to engage with them. Engaging with us means we don’t mistake ‘no engagement’ as evidence of behaviours we are concerned about.
Please encourage your clients to talk to you if they are genuinely experiencing financial difficulties, or to contact us as soon as possible if they need our support.
Conclusion
In conclusion I would like to leave you with three thoughts.
The first is that while the environment the GST operates in today is very different to that of 2000, the GST remains an efficient and reliable source of revenue for governments. Indeed, it is hard to conceive of what other parts of our tax system would look like without the estimated $86 billion the GST will raise this financial year. As such, the future of GST compliance is both assured and digital. The ATO is committed to digitalisation, as are other leading tax administrations around the world. A world where ‘tax just happens’.
The second is linked to this, because in a digital world the risks of fraud are greater. Whether it be an increased appetite for first person fraud, or more sophisticated and frequent attacks at scale, the ATO will use analytical risk models to look for patterns and relationships to defend the GST tax base. Our machine learning tools will make sure that today’s risk models are more effective in detecting and combating GST fraud than yesterday’s.
The third is that while we are experiencing rapid and extensive digital transformation, there are some things that don’t change. The ATO needs to continue to collaborate with you as tax practitioners to ensure the integrity of our GST system, whether this be through education, our suite of advice and guidance products or your insights and guidance to us and your clients around reporting and payment obligations.
Once again thank you for the invitation to speak with you today and I’m happy to take questions in the time that remains.