Speech by the Commissioner Michael D’Ascenzo to
Deloitte Touche Tohmatsu, Tax Perspectives Breakfast, Sydney,
30 June 2009
(check against delivery)
In preparing for this presentation Deloitte kindly canvassed a range of questions that may be of general interest to large businesses , some of which have relevance to the wider taxpaying community. The purpose of my presentation is to provide some answers to these questions. However, a few questions may also be added along the way.
We naturally keep Treasury informed on what we are seeing on the ground and that information is taken into account in Treasury forecasts and in other official materials. For example, Australia bucked the trend of other OECD nations in delivering a small positive growth in the March quarter.1 Nevertheless it is clear that Australia continues to be impacted by the global economic downturn.2 Overall 2008–09 was a tough financial year for many people.
Discussions with 77 large businesses suggest that their overall income tax payments in 2009 are unlikely to exceed those in 2008. Earnings are on a downward trend for the coming year, and most businesses are expecting the cost of funds to increase. Most companies, however, have not varied their instalment rate to reflect their tax expectations.
The expected impact of the global economic downturn is a $210 billion write down in Government revenues.3
We are encouraging businesses with short term cash flow difficulties to vary their instalment rate downwards in line with their likely end of year tax performance. They can be confident that shortfall penalties will not be imposed if reasonable steps are taken to get the variation as right as possible in the circumstances.
Generally, for a variation to be reasonable, the taxpayer should base their calculation on the best available information. If a taxpayer was queried in relation to a variation, we would look to see if there was a logic or method behind the calculation. This could include a calculation of likely tax payable and a comparison to instalments already paid. In any event, given the current uncertain economic climate, the ATO will give fair latitude as to what is reasonable – particularly where the taxpayer has a good compliance record.
The ATO approach in the current environment is firmly based on delivering a balanced program of help and assistance on the one hand and vigilance and deterrence on the other, in accordance with our Compliance Model.4
For some time now we have outlined a platform for an enhanced relationship with large businesses based on core elements such as good corporate governance and full and frank dialogue on tax risks and issues. In addition, the private ruling system and the advanced pricing procedure for transfer pricing matters exist to provide the highest levels of certainty.
In seeking to promote a level playing field we have made our understanding of risks in the system transparent in our annual Compliance Program. We have sought feedback from you and your representatives on whether our identification of risks hits the mark as to what is occurring in the market.
It is important for our economy that we support viable businesses at a difficult time for them.5 As one large company put it: ‘We are very grateful to the ATO for granting [us] a payment arrangement. The payment arrangement allowed the Group to better manage its cash flows at a time when it was in serious financial trouble and liquidation was a very real possibility.’ As a footnote, the company group was subsequently able to refinance and has paid their outstanding liabilities earlier than the completion date under the payment arrangement.
We continue to apply our 3Cs of consultation, collaboration and co-design to produce good, practical and commercial outcomes, including the reduction of compliance costs. In enhancing this approach we recently superseded our Compliance Co-operative Committee with our Large Business Advisory Group. For example, we commissioned an independent review of our advanced pricing agreement program.6 While we consider that the ATO’s APA program compares favourably with programs overseas, we looked for improvements in pursuit of excellence. We are building on the recommendations in conjunction with the Large Business Advisory Group and the Transfer Pricing sub-group of the National Tax Liaison Group.
In order to provide a single primary point of contact to help coordinate and streamline your dealings with us (and vice versa) we are introducing a new role of Lead Relationship Manager for our largest companies, particularly those that have shown a genuine desire to work collaboratively with us.
The Lead Relationship Managers will coordinate a company’s interactions with us, fast track critical issues and seek ways to remove irritants. They will also facilitate access to specialists and technical support. In short, they will provide the ‘cut through’ to achieve more timely resolutions of tax issues.
Of course, the relationship must work both ways and be grounded in trust and co-operation.
Similarly our Annual Compliance Arrangements (ACAs) offer high levels of support and practical certainty to our largest taxpayers. Based on good corporate governance that takes material tax risks into account, and a sharing on a full and true disclosure basis of our respective assessments of tax risk, they help to minimise with unwanted surprises. Under an ACA we can ‘sign-off’ on your annual tax risks, giving you practical certainty to the extent that there has been full and true disclosure.
Special mention should also be made of our efforts to assist taxpayers who are potentially exposed to double taxation arising from international transactions through the mutual assistance procedures under Australia’s double tax treaties. While this is typically a slow and uncertain remedy, we are proud to have assisted more than 100 companies over the past 10 years.
Our approach to the delivery of our Compliance program involves supporting and improving voluntary compliance through effective engagement with the community, well targeted support and assistance, and credible active compliance activity.
The economic downturn has created a very different and highly volatile risk environment. As a result, we are seeing greater community need for assistance in meeting day-to-day tax obligations and a climate in which some taxpayers may be more aggressive in the search for opportunities to avoid or evade tax, including through offshore arrangements.
When Australia’s economy recovers from the economic downturn, new risks may emerge and existing risks may grow as companies seek to increase market share and maximise profits, particularly in the large and medium business markets. At the level of the wellbeing of Australians, high levels of voluntary compliance need to be a feature of Australia’s economic recovery as the world economy recovers.
Areas of particular concern include:
- cross-border financial arbitrage (for example, the use of hybrid financial instruments, particularly where they have a tax haven connection)
- profit shifting through the use of transfer pricing, thin capitalisation, and other tax-driven business structures
- significant transactions related to corporate restructures, mergers, acquisitions and divestments including failure to declare capital gains or inappropriate generation and utilisation of revenue and capital losses, and
- inappropriate asset infrastructure and investment claims.
Additional funding of $302 million over four years was provided in the Budget to ensure that wealthy Australians and large and medium-sized businesses meet their tax obligations as the economy recovers. 7 The Government’s provision of extra funding is about maintaining a fair playing field in the tax system. High levels of voluntary compliance by wealthy individuals and their associated entities, and by large businesses, are critical in maintaining community confidence in Australia’s tax system. The extra funding will help the ATO better address two of the four risks outlined above, in particular — cross border financial arbitrage and profit shifting through transfer pricing. We plan to recruit more external specialists with expertise in financial products and transfer pricing to bolster our capabilities in these complex areas.
The funding will also see our program of risk reviews and audits expand for medium and large businesses over the next four years. In this regard we are increasing the comparison of taxation performance of entities with economic performance—we will be discussing our findings with relevant entities and their advisors over the coming year. We have moved from a single entity approach to an economic group basis.
I encourage businesses with significant transactions involving the four focus areas in particular to consider seeking rulings where they are uncertain about the application of the law to their facts or to a proposed transaction or arrangement.
We have heard your concerns about the length of time taken to complete our compliance work and we are working with the Large Business Advisory Group and the Corporate Tax Association to co-design practical approaches to reduce timeframes.
We are also issuing timely warnings about aggressive tax planning arrangements, such as loss shifting, and we will undertake compliance activity to address areas of concern.8
We are also increasing our specialisation in working with Closely Held Groups. As part of this work we will be conducting a preliminary income tax risk assessment of all enterprises in the $100 million to $250 million sub-segment over the next four years. This represents approximately 1500 businesses involving 8000 entities.
In late 2008, 370 letters were sent to tax practitioners with clients in the $100 million –$250 million bracket and 1300 letters were issued to companies and heads of groups in the $100 million–$250 million bracket. The purpose of these letters was to inform tax agents and taxpayers of our increased activity in the $100 million–$250 million bracket, in particular the preliminary risk review program and the follow-up visit program.
To date, we have completed 200 preliminary income tax risk assessments with approximately half warranting further consideration, ranging from simple monitoring or phone calls through to follow up reviews and audits. We have commenced another 50 preliminary income tax risk assessments and will start a further 50 in July.
We plan to complete 300 to 400 preliminary income tax risk assessments and follow up higher risk cases with more comprehensive reviews and audits in the 2009–10 year. The balance of the approximately 1500 businesses will be reviewed over the following two years.
The market is predominantly privately-owned and issues identified are similar to those outlined in the ‘Wealthy and Wise’ booklet9 such as:
- variation between tax performance and business performance
- tax payments that don’t match economic indicators
- unexplained losses, and
- lifestyle not supported by after-tax income.
As part of our ongoing engagement strategy of communication, consultation, and relationship building, we have visited key advisers to talk about what attracts our attention, providing them with the opportunity to talk to us about the commercial drivers of transactions and arrangements and what they are seeing on the ground.
Some of the additional funding provided by Government will be invested in more staff examining the tax affairs of High Wealth Individuals (individuals that control wealth of $30 million or more). There will be more audits and reviews and better coverage of complex arrangements and structures.
There will also be an additional 19 audits of HWIs in 2009–10—with 120 audits expected to be underway during the year. In addition we also expect to carry out over 650 reviews.
We have developed a computerised algorithm which enables more automated linking of taxpayers, the groups they control and the assets held therein. The algorithm and the expansion of the use of data available outside the ATO has enabled us to more effectively and efficiently identify private groups and indicative net wealth.
We issued just over a 1000 letters in March 2009to potential HWIs identified through this process to confirm our information and understanding of their individual circumstances. From the responses received to date, we have already identified 114 new HWIs and expect, based on these results to identify around 600 new HWIs in total from the batch of 1000 potentials.
In the new financial year, we expect to send a further 1000 to 2000 letters to a further batch of potential HWIs.
We are also looking to increase our use of external data such as in media reports, AUSTRAC, ASIC information and so on, in order to identify significant tax events and then pro-actively seek further information before lodgment of tax returns by the taxpayer. It is envisaged that by doing so we will also make it clear to the taxpayer that we will be considering the issue when they do lodge their returns—an example of ‘prevention is better than cure’.
All of the areas of focus I have outlined above are complex and each has inherent difficulties in encouraging high levels of voluntary compliance. The expansion of our compliance activities in these areas requires the ATO to build additional capability. While we will buy some in, we also have to grow our own internal capability. As an initial step, we are strengthening our information matching work to identify unreported income and obligations by employers, investors and highly paid executives.
In addition to the risks referred to above, we will expand our focus on high income company executives and directors and individuals with a net wealth of between $5 million–$30 million.
The active compliance element of this latter initiative will take a holistic approach incorporating all entities within a private group structure to determine the overall level of compliance. This will include risk reviews and audit activity. We will look to learn from the work we already undertake, including mail outs to segments of the population requiring the completion of a questionnaire to assist in identifying members of private company groups. The information collection needs associated with this activity will be differentiated based on the individual’s circumstances.
In addition, profiling activity will be aimed at leveraging off other work including our reviews of:
- partnership and trust distributions
- employee share schemes
- AUSTRAC information regarding income received from overseas
- previous tax scheme participants – matching against the $5 million–$30 million population and following through on potential repeat offenders, and
- rentals/capital gains tax – to identify those in the $5 million–$30 million population with most properties under control and review for rental income/expense plus capital gains tax on disposal of real property.
Deeper cooperation among nations is tipped to be the next big thing in tax administration, particularly with a focus on preventing abusive use of tax havens. The compliance risk with tax havens includes tax avoidance and evasion, investor fraud, manipulation of markets and sometimes more serious crime like money laundering.
The pieces are moving into place. At the global level, the G20 heads of state agreed to act against tax havens that impede legitimate tax enforcement.
The United States has moved to put international tax issues centre stage. In May, the President outlined a suite of international legislative proposals to bring this to life. These proposals are directed on the one hand at corporations using the complexity of the tax code and the international capital markets to push the envelope too far, and on the other at individuals avoiding tax by hiding income in offshore accounts.
In this regard note also the findings of the US Senate permanent sub-committee on investigations relating specifically to tax havens.10
The May 2009 meeting of the OECD’s Forum on Tax Administration confirmed that improving taxpayer services and tax compliance both nationally and internationally continues to be the key focus of its work.11
The 34 nations represented at the meeting agreed that their three top priorities are:
- To work together to improve tax administration, taxpayer services and tax compliance – both nationally and internationally.
We are determined to improve taxpayer services and will undertake further work to share information and expertise to enable revenue bodies to prevent, detect and respond to non compliance, including in relation to offshore arrangements.
- To promote strong corporate governance in the area of tax.
We will continue to engage with business and with the agencies responsible for the development of corporate governance codes and guidelines with a view to ensuring tax compliance is included as an aspect of good governance.
- To support tax administration in developing economies.
We will increase our understanding of the needs of developing countries in the area of tax administration and share relevant FTA products, experience and expertise.12
All 84 jurisdictions in the OECD’s global forum have now committed to international standards for transparency and information exchange. This increased transparency – covering ownership of entities and bank accounts under the OECD guidelines – will help revenue authorities unravel more quickly the use of international shelters for aggressive tax planning and tax evasion.
The Budget provided $122 million over three years, starting from 2010–11, to the Project Wickenby 13 multi-agency taskforce to continue the investigation and prosecution of tax haven abuse.14 This extends the original Project Wickenby measure which has increased tax compliance by almost 60 per cent among the target population.
As at the end of April 2009, Wickenby had raised $301.67 million in liabilities, collected more than $102 million and restrained over $75 million from the proceeds of criminal activity. An additional $76 million has been achieved through tax liabilities in subsequent years from people who have been subject to Wickenby action.
So far 43 people have been charged and 23 criminal investigations involving multiple parties are underway.15
We are also working with the New Zealand Inland Revenue Department in the collection of significant unpaid income tax. This is the first time we have engaged the assistance of an overseas revenue agency in the collection of tax debts. We utilised the new ‘mutual assistance in collection’ provision in our bilateral tax treaty.
ATO analysis of information from the Australian Transaction Reports and Analysis Centre (AUSTRAC) is focused mostly on activity involving tax havens, with some interest in jurisdictions involved in routing funds from Australia to havens, and on the preferential tax regime countries not classified as havens by the OECD.16
We have established monthly, quarterly and annual reporting systems based on unusual or abnormal transfers and trends. Identified risks are referred to the appropriate areas for investigation.
Monthly analysis reports give us a close to real-time analysis of transfer activity.
Quarterly analysis reports identify any unusually high activity occurring in a country which may signal a new risk or an unusually large transfer by one of the larger multinationals.
Annual reviews of the macro trends in transfers involving tax havens are very useful in putting the broader picture together, including behavioural patterns.
Most of the referrals from these processes relate to tightly held private companies. Large public companies with strong tax risk governance arrangements in place tend to steer clear of secrecy havens because their governance requirements in Australia make their use more difficult. Consequently, our focus is mostly on privately owned businesses and individuals17, and large companies involved in aggressive tax planning.
AUSTRAC intelligence assists in targeting audits and investigations by the ATO and Wickenby partner agencies.
AUSTRAC data, for example, revealed an Australian taxpayer in receipt of almost $20 million from secrecy havens including Switzerland. These transfers contrast starkly with his reported taxable income of $25,000 and $6,000 in 2007 and 2008 respectively.
AUSTRAC data has assisted in creating typologies around tax haven schemes and arrangements. The typologies are very useful in detecting and treating compliance risks more efficiently which is important given the investigations and processes are time and resource intensive for everyone involved.
The relatively new Anti-Money Laundering and Counter Terrorism Financing Act 2006, extends AUSTRAC’s role to that of regulator, with compliance and governance responsibilities. Under the first tranche of legislation, 17,000 reporting entities in the banking and finance sector are required to provide requisite data including information on suspicious transactions and implement compliance protocols, including ‘know your client rules’.
With ‘100 points of identity’ required, the legislation also requires that companies, and particularly financial institutions, know their clients better.
The legislation means that the quality and quantity of data is going to be exponentially greater. Subject to secrecy and privacy laws, this will enhance our strategic intelligence capability and result in more targeted investigations.
In short, this is to make clear to investors and participants in the Australian economy, and to the wider community that your rights under the law will be respected by the ATO. In this way we distinguish the high level of security of investment in Australia from that which may exist in some other countries. It is a guarantee that people and businesses will not be dealt with arbitrarily or capriciously by the tax administration in this country. It also reflects the value we place on our integrity and probity.
In this context it is disappointing to hear unsubstantiated criticism from a few, which is not generally reflected in our independent surveys or face-to-face discussions with taxpayers, that the ATO may at time be overly legalistic or not commercial. If the criticism is that we apply the law, and thereby promote certainty, then we take it as a compliment.
If commercial merely means an enhancement to a company’s bottom line, then under that definition the dodgiest of schemes are commercial. Surely this cannot be what is intended?18 As our Large Business and Tax Compliance publication and the governance guide for board members and directors show we regard the commerciality of the arrangement in whole or in part as one of the most important criteria of tax risk.
We may sometimes get it wrong, although the statistics in terms of wins and losses before the courts are in our favour. Given that the decision to commence legal proceedings on substantive tax matters is always with the taxpayer, this result is not altogether intuitive. However, it may be that the underlying policy intent of the law is clearer to the ATO, given our close working relationship with Treasury and access to source materials, than it might be for some advisers. While the policy intent can only inform the interpretation of the law, and cannot override the plain words of an Act, it is relevant to the purposive approach to interpretation favoured by the courts.19 The ATO has long been a strong supporter of consultative arrangements in the development of new laws and hopefully such arrangements may give taxpayers a better understanding of policy going forward.
It was surprising that one participant at a recent Corporate Tax Association conference was reported as finding it ’outrageous’ that the ATO should consult with Treasury on the policy intent of complex laws.20 However, that concern may have been an erroneous perception that we apply policy rather than the law. If that is the case, and at the risk of criticism that we are legalistic and not commercial, let me emphasise that the policy intent can only inform the proper interpretation of legislation21. Depending on the drafting of the law, the relevant statutory provision properly interpreted may result in a particular taxpayer paying less or more tax than might have been expected having regard to the policy intent. Where this is the case, we would advise Treasury. It is import to repeat in this regard that we would do so whether the result produced more or less tax, and the reason for this goes to a mature and sophisticated understanding of the role of the ATO.
In contrast, albeit in relation to proposed legislation, one of the questions canvassed by Deloitte is, ‘When does the ATO expect to get clarification from Treasury in relation to managed investment funds?’ The answer here is that this is a matter for Government.r.
Now the period between the announcement of proposed legislation and its enactment is a real problem for taxpayers and is at the core of some of the criticism levelled at the ATO. It is not however something over which we have much control. In order to assist taxpayers we developed a Practice Statement Law Administration22 on the administrative treatment of taxpayers affected by announced but unenacted legislative measures.
This practice statement is an example of a practical and commercial approach in these circumstances. The principles at paragragh 18 provide the context of what the ATO could do in these circumstances. Reference to the ATO’s Law Administration and General Administration Practice Statements reveals the wide range of circumstances where the ATO takes a practical and commercial approach. However, as explained previously, there are currently limits to the extent that the Commissioner can make extra statutory concessions.23
In relation to managed investment funds, the ATO’s approach, based on risk management, had always been to focus on the higher risk cases.24 If the law is retrospective, then we would move on to other risks in the marketplace.
Reverting back to the general thread of criticisms, and without averring to the possibility that some of the originators of these criticisms may have vested interests,25 it may be that we need to do more in explaining our role and approach in relation to the laws we are responsible for administering. Our corporate value of openness and accountability will help us modify the stereotyping views of some.
Approach can refer to different dimensions, as I explained in my first speech on becoming Commissioner.26
One goes to philosophy, where there has been a gradual shift on our part, accelerated in recent times, from after the event adjustments to one that emphasises 'prevention as better than cure'. We have for a long time been prepared to make public our view of contentions issues, a process formalised in 1992 by the introduction of a binding public ruling system. We continually invite taxpayers through their representative bodies to raise specific tax issues about which they are genuinely uncertain. We’ll provide our view of the law and we are bound by that view where it is advantageous to taxpayers, whereas taxpayers have the protection of the law, whatever happens to be our view. No-one would claim that taxpayers are being overly legalistic in being afforded that protection or indeed taking advantage of the law even where the legal outcome is inconsistent with the policy intent.
Similar protection is afforded to taxpayers under the private binding and reviewable private ruling system.
Tangentially, one of the matters asked to be included in this presentation was ‘an update on the issue of the interaction between transfer pricing and the thin cap rules’. I spoke about this recently in my address to the Corporate Tax Association on 15 June 2009.27 Taking a practical and commercial view of this issue, problems of interaction only arise where the capital structure of a group’s subsidiary is lower than would be expected in the marketplace. Taking only a commercial perspective, why should a group structure itself in a way that leaves a subsidiary undercapitalised and with high levels of non-arms length debt compared to market norms? A commercial response would be to allow an interest charge that represents what the group as a whole could obtain from arm’s length lenders. We have provided that safe harbour to corporate groups.
More generally, we have also sought to put out more flags of areas of potential risk. The annual public release of our Compliance Program is one example. Another is the more frequent use of Taxpayer Alerts.28 We have also sought to reduce risks for taxpayers through initiatives such as Advance Pricing Agreements and Annual Compliance Arrangements, as well as our support of good corporate governance practices that include material tax risks.
Another approach goes to procedural fairness. Together with the Corporate Tax Association, we developed the Large Business and Tax Compliance publication in 2006.
A lot has happened since. The ATO has introduced a number of new products and approaches to enhance how we work with large business on tax risk management. The Large Business Advisory Group tells us that the booklet is a valuable resource. We will work with this group to refine the next edition (which we may make web-based to better facilitate regular updates). However, what remains constant is our desire to develop a close and constructive working relationship with large businesses, including the efficient and proper resolution of disputes. As I said in 2006, ‘An environment that values consultation and co-design on the implementation of new measures, and full and frank feedback to us on how the system is working in practice, also encourages voluntary compliance, and provides the opportunity for improvements to the tax system’.29
We have, with others, championed this thinking on the international stage.30
A tax administration that operates in accordance with the rule of law promotes certainty for taxpayers. Our approach to the application of the tax law to the particular facts of a case is to have regard to the words of the Act read in the light of the scope and purpose of the Act, and the history and objects of the relevant provisions. In legal terms this is referred to as a ‘purposive’ approach.
Where the law is clear, and the risk is material, we have a duty to apply that law, even if it produces inconvenient outcomes for the revenue or for taxpayers. For example, the law may give rise to unintended consequences, anomalies, or significant compliance costs inconsistent with the policy intent. In such circumstances we see it as our responsibility to advise the Government (usually through Treasury) of the outcome (whether the existing law favours taxpayers or the revenue), giving the Government the opportunity to consider legislative change.
There are times when, regardless of the quality of the legislative drafting, the words in the Act are ambiguous or open to be properly interpreted in a number of ways. In these cases, our approach is to adopt the statutory interpretation, reasonably available, that best promotes the policy intent. If more than one of the available and permissible interpretations promotes the policy intent, we will generally favour the interpretation that reduces taxpayer compliance costs. Of course, these are merely rules of construction and the alternative view may reasonably be arguable in such cases.
In relation to important matters with broad significance, our view of the tax law is communicated to taxpayers and their advisers through public rulings. The types of matters suitable to be covered in our public rulings are identified in consultation with taxpayers through their representative bodies. Public rulings are subject to extensive consultation including advice from private sector tax experts on the ATO’s Public Rulings Panel.
To further reduce uncertainty, a taxpayer can seek a private and reviewable ruling from us – they can ask to be ‘assessed’ in relation to an existing or proposed transaction, including,where appropriate, a ruling on the application of a general anti-avoidance provision.
We acknowledge that it is appropriate for business to reduce costs within the parameters of the law so as to make themselves more competitive and to increase shareholder value. However, underpayment of tax contrary to the law provides a business with an unfair competitive advantage over other businesses. The ATO’s role is to promote a level playing field that fosters competition based on comparative advantage rather than unfair practices, and in this way to encourage high levels of voluntary compliance.
A positive feature of the tax laws is the availability of recourse to the Administrative Appeals Tribunal or the courts in cases of dispute. The ATO’s approach to tax administration reflects our view of the law, which ultimately may need to be reviewed by those bodies.
The ATO is realistic about the fact that disputes will occur and litigation cannot always be avoided. When a dispute about the application of the law does arise, we are ready to work with taxpayers to resolve the issue as quickly as possible. Our approach is consistent with the Attorney-General’s emphasis on alternative dispute resolution. However in order to ensure that we act with probity and integrity we have a Code of Settlement Practice that guides our settlement of tax disputes.31
Recent ATO initiatives to quicken the processes and improve quality include:
- the development of Early Resolution Reports to assist with understanding why cases are being settled or conceded at the litigation stage of proceedings
- a Facts and Evidence Worksheet to improve the quality of audits and objections, and
- a Litigation Risk Indicator to assist with identifying objections that are likely to proceed to litigation with a view to trying to resolve them before they become litigated cases.
This form of continuous improvement shows an organisation welcoming constructive and evidence-based criticism as well as trying to come to grips with whatever kernels of truth exist in any criticism.
In the conduct of litigation we are obligated to act consistently with the Commonwealth’s Model Litigant Guidelines which apply only to the public sector.32
The governance arrangements that apply to the ATO are extensive:
- formal accountability to Ministers and Parliament. For example, while statutory independent in the applications of the laws we administer, we remain accountable to the Treasurer, the Assistant Treasurer and the Minister for Superannuation on our activities and performance. We must also report annually to Parliament33
- oversight by parliamentary bodies (e.g. Senate Estimates and Joint Committee on Public Accounts and Audit)34
- performance and financial statement audits by the Australian National Audit Office
- examination of systemic issues by the Inspector-General of Taxation, and
- Ombudsman Office investigates specific taxpayer disputes.
The Joint Committee of Public Accounts and Audit in its recent Report 410 observed the following about its biannual public meetings with the ATO: ‘Although the meetings give the Committee an opportunity to hold the ATO to account, they also give the ATO the opportunity to demonstrate that it performs at a high standard, to both the community and the Parliament.’35
Formal accountability and governance requirements include a range of certifications which apply only to public sector agencies, for example, the Financial Management and Accountability Act and the Public Service Act as well as a range of Commonwealth guidelines.36 Add to these, informal sources of governance and accountability, such as the ATO’s wide range of consultative forums, independent surveys and media scrutiny, and one might argue that this is significantly more than that faced by other organisations, including public and private companies.
Nevertheless we add to this a robust internal governance framework.37 The ATO has private sector representatives on its Audit Committee and Tax Technical Panels.
In addition we have a high level Tax Policy Co-ordination Committee forum with Treasury.
Did you know that in 2007–08 the ATO won a SAI Global, Australian Business Excellence Award for Governance?
We engage with over 50 consultative forums in all aspects of ATO’s operation. These committees and forums are listed on our website at www.ato.gov/annualreport/quicklinks. They help guide our planning and conduct in administering tax and superannuation laws.
We value that high level of consultation, collaboration and co-design.
The evidence for the efficacy of our management decisions, and of our approach to administration is reflected in our independent surveys. These show that the community, tax agents and business have substantial confidence and trust in the ATO.38
The major review of Tax Administration carried out by the Joint Committee of Public Accounts and Audit, Report 410, conclude that the main challenge in Australian tax administration is the complexity of the tax system.39 This is, of course, largely a matter for Treasury and Government.
After such an extensive review, the committee’s view of the ATO was generally a positive one. In the foreword to the Report by the Committee’s Chair, Ms Sharon Grierson MP said:
“The report concludes that whilst the ATO is reasonably successful in balancing fairness and efficiency, there is room for improvement. The committee is optimistic that if relevant agencies implement the recommendations in the report and governments deliver simpler tax legislation, then the downsides of tax administration can be minimised.”
I think it is fair to say that the ATO is regarded as a leading national revenue body40, a reputation gained from the strength of its leadership over a lengthy period of time, its capacity for innovation and its success in a range of areas (for example, service delivery and compliance risk management).
Did you know that the United Kingdom House of Commons Committee of Public Accounts drew attention to the ATO’s methodology for differentiating high and low risk businesses, as amongst best practice?41
If one took the time to read the ATO’s Strategic Statement 2006–2010 one might get what could be described as a ‘Eureka moment’. What may be behind the perceptions of some may be a misunderstanding of the role of the ATO. Or it may be a hard-wired stereotype view of our culture which, to the extent that such a culture existed in any part of the ATO, we as an organisation have been pursuing a different culture. In everything we do we are emphasising, as an organisation, the importance of our corporate values.
If you look at our Strategic Statement you will not find a reference to collecting the revenue. Rather you see an emphasis on creating an environment that promotes high levels of voluntary compliance.
The point is that the amount of tax is really a concern for Treasury and Government. This is because it is the policy settings in the law that are the main determinants of the amount of tax collected.42 Yes we have a responsibility of supporting honest taxpayers by having effective compliance strategies in place, but this is more from the perspectives of promoting a level playing field and nurturing high levels of voluntary compliance than the direct collection of tax. Our mandate is only in relation to the liabilities (and benefits) provided under the law. As the saying goes, ‘not a penny more’.43
Given our close relationship with Treasury which often enables us to have a good understanding of the policy intent of legislative provisions (particularly new measures), the inherent need to apply the tax law in the course of our activities and responsibilities, and our long standing tax technical and interpretative skills, we are well placed to deliver on that mandate.44
We are encouraging large business to subscribe to a more open and enhanced relationship with the ATO. Out of that close relationship will emerge a better understanding of our roles, commonalities and tensions. However, in the current difficult climate, some companies may choose to adopt a more aggressive and adversarial stance. That is their option. One path can lead to greater upfront certainty, the other may not.
Footnotes
1 Treasurer Wayne Swan, Media Release No .076, National Accounts – March Quarter 2009, 3 June 2009.
2 Treasurer Wayne Swan, Treasurer’s Economic Note 015, 28 June 2009.
3 Ibid.
4 Tax Administration, Report 410, Joint Committee of Public Accounts and Audit, June 2008, Canberra at pages 111–114.
5 See the empathetic and commercial approach taken in relation to viable small businesses facing short term cash flow difficulties in, A new deal for small business, a speech by the Commissioner of Taxation, Michael D'Ascenzo, to the COSBOA National Small Business Summit, Melbourne, 10 June 2009.
6 Did you know that the ATO and the US Internal Revenue Service together entered into the world’s first APA in 1991?
7 Then Assistant Treasurer Chris Bowen, Media Release No .047, ATO Strategic Compliance Package, 12 May 2009.
8 For example, a recent Taxpayer alert issued to large businesses was Contrived cross-border arrangements that seek to generate debt deductions for non-assessable non-exempt income.
9 Wealthy and Wise: A Tax Guide for Australia’s Wealthiest People, ATO.
10 The ATO, made a submission to the US Senate Committee on the request of the Committee.
11 FTA Communiqué, Paris, 29 May 2009.
12 Ibid
13 The Project Wickenby agencies are the Australian Tax Office, Australian Crime Commission (ACC), Australian Federal Police (AFP), Australian Securities & Investments Commission (ASIC) and the Commonwealth Director of Public Prosecutions (CDPP). Additional support is provided by AUSTRAC, Australian Government Solicitor and the Attorney General’s Department.
14 Then Assistant Treasurer Chris Bowen, Media Release No .047, ATO Strategic Compliance Package, 12 May 2009.
15 Three people have been convicted with custodial sentences applied, two more face sentencing in the near future, with a hearing in the NSW District Court set for August 2009.
16 Hong Kong, Singapore, Switzerland, Ireland, Netherlands.
17 Since July 2007 we have managed a dedicated Offshore Voluntary Disclosure Initiative under which substantial penalty remissions are available. We have made significant use of AUSTRAC data for this initiative and we are working with financial institutions in Australia to determine what additional information they hold which can assist in identifying people using secrecy havens to avoid paying taxes. To date we have received over 2500 voluntary disclosures, involving over $146 million in undisclosed income.
18 See FC of T v Spotless Services Ltd, Spotless Finance Pty Ltd (1996) 186 CLR 404
19 CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
20 Australian Financial Review, 16 June 2009, page 3.
21 Admittedly, the policy intent is not always clear from the legislation and extrinsic material. In some cases, the contentious issue may not have been considered in the development of the law. Again, robust consultation and testing of new laws can help reduce uncertainty.
22 PSLA 2007/11.
23 Challenging Times, speech by Michael D'Ascenzo, Commissioner of Taxation (delivered as part of a co-presentation with Second Commissioner, Bruce Quigley), Taxation Institute of Australia's National Convention, Sydney, 12 March 2009.
24 See In the Best Interests of Australia, Speech by Commissioner Michael D'Ascenzo to the 2009 Corporate Tax Association Convention, Melbourne, Monday 15 June 2009, for a chronology in relation to this matter.
25 The Inspector-General of Taxation found no revenue bias in ATO private and public rulings in his report, Review of the potential revenue bias in private binding rulings involving large complex matters.
26 ‘Working with business’, speech by Tax Commissioner Michael D’Ascenzo to the Business Council of Australia, Sydney, 30 January 2006.
27 ‘In the best interests of Australia’, speech by Commissioner Michael D'Ascenzo to the 2009 Corporate Tax Association Convention, Melbourne, 15 June 2009.
28 For example, a recent Taxpayer alert issued to large businesses was Contrived cross-border arrangements that seek to generate debt deductions for non-assessable non-exempt income
29 Large business and tax compliance 2006, Commissioner’s Foreword, and see also page 68 in relation to feedback and the Commissioner’s guarantee.
30 FTA Communiqué, Paris, 29 May 2009.
31 Code of Settlement Practice.
32 In 2007–08, at the Australasian Legal Business Awards, the ATO won the Government In-House Legal Team of the Year Award.
33 Regarding my formal accountability to Parliament, did you know that the Commissioner’s 2007–08 Annual Report to Parliament won the Institute of Public Administration in Australia Gold Award in the Financial Management and Accountability Act category and also won their Gold Award in the online category? In addition we won a Silver Award in the Australasian Reporting Awards which included reports from many ‘blue chip’ Australian companies.
34 See the OECD’s Forum on Tax Administration’s Comparative Information Series (2008) on the role of advisory or oversight bodies in some other countries. The introduction of these bodies usually follows new institutional arrangements for tax administration, or there has been major review of operational efficiency with significant negative findings, or changes were made against a backdrop of a significant lack of community confidence in the administration.
35 Tax Administration, Report 410, Joint Committee of Public Accounts and Audit, June 2008, Canberra at page xxiv. See also the Chair’s comments at page x.
36 See Appendix 1 of the Commissioner of Taxation’s Annual Report 2007-08.
37 See Annual Report at page 34 and also Chapter 3.
38 See Annual Report at pages 22 -25.
39 Tax Administration, Report 410, Joint Committee of Public Accounts and Audit, June 2008, Canberra.
40 See page 20 of Tax Administration, Report 410, Joint Committee of Public Accounts and Audit, June 2008, Canberra.
41 House of Commons Committee of Public Accounts, Management of Large Business Corporation Tax, Thirtieth Report of Session 2007-08, 2 June 2008, page 11. See also Q83 and Q84 in the Oral Evidence before the Committee of Public Accounts, 28 January 2008, in relation to transfer pricing.
42 Most commentators would agree that Australia’s imputation system is a major reason behind the high relative levels of company tax (relative to other taxes) returned in Australia. While this is supported by Australia’s general anti-avoidance rules (themselves, statutory safeguards), and by our compliance activities (both help and active compliance), the focus is only on the tax that is properly payable or the benefits that are available under the law.
43 For example, our instructions to our officers are to bring to the taxpayer’s attention a situation where they have paid more tax than was properly owed.
44 Did you know that we are assisted in our interpretative work by amongst others the Honourable Daryl Davies QC and Mr Terry Murphy QC?
Last Modified: Tuesday, 30 June 2009
Subscribe
