Working together to deliver good outcomes for the community

Second Commissioner Bruce Quigley’s speech to the Tax Institute of Australia,
Tasmanian chapter, 16 October 2009

Thank you, I’m very pleased to be participating in this convention.

Two months ago I spoke to your Western Australian colleagues, and provided an overview of what people and their agents could expect from the ATO this year. I thought I’d develop this theme today and give an update on our compliance focus areas for 2009-10.

While some commentators are willing to call the global recession a past event in light of early signs of recovery, the G20 nations are of the view that the global economy remains fragile, and our own Reserve Bank noted recently that some uncertainty remained about the outlook both abroad and at home.¹

The ATO’s compliance program is responding to this environment. Our compliance program this year is a continuation of the approach we set 12 months ago, in which support for taxpayers seeking to do the right thing is the key priority. We are finding that the community has a stronger need for assistance in meeting day-to-day obligations and as part of our support for the majority of people trying to do the right thing, we are putting in place a number of measures that could be described as ‘prevention is better than cure’ initiatives.

We believe our focus areas for 2009-10 address the current major risks to the tax and superannuation systems while fostering an environment that promotes high levels of voluntary compliance.

Our four focus areas are:

• supporting people and businesses in financial distress
• promoting a level playing field
• paying a fair share of tax whatever your income, and
• preventing abusive use of tax havens.

The 2009 Budget provided an additional $595.2 million over four years to support this approach.

Another ongoing focus for us is how we can support you better, and I will discuss a few things in that regard as well.

Our approach in the current environment

Recent research on the current environment shows that although things are moving on from the gloomy forecasts of a few months ago, there is still a degree of fragility about the market.

Our latest Business Perceptions Survey shows that 49% of businesses believe the current financial conditions will make it more difficult to meet tax obligations over the next 12 months.

This wave of research was conducted in May and involved 1,500 micro and small to medium businesses.

The May results contrast strongly, at least on the face of it, with the business confidence survey conducted by the Telstra company Sensis. The Sensis Business Index conducted in late August/early September reported a record improvement in business confidence during the September quarter, with confidence now at its strongest level since August 2007. Nevertheless, the main issues reported by respondents continued in line with the previous quarter’s Index, that is, a lack of work or sales, followed by cash flow and the economic climate. So the environment is somewhat unpredictable.²

We adjusted our approach to reflect this difficult operating environment by:

• engaging early with people and businesses who are struggling to remain viable but trying to do the right thing
• refreshing our help and advice to ensure it addresses issues relevant to changes in the economic climate (for example, people and businesses may be less familiar with calculating losses, and the tax consequences of redundancy payments), and
• promoting a level playing field for business by dealing firmly with those who deliberately avoid their responsibilities and obligations.

Supporting people and businesses in financial distress

The challenging economic environment has put additional pressure on individuals and businesses to remain viable, placing some in serious financial distress.

In this year’s Budget the Government provided us with additional funding to ramp up our support for people who may be struggling.

We are doing this through tailored, targeted assistance programs aimed at helping those who are trying to do the right thing, and preventing problems before they occur.

Small Business Assistance Program

One of the ways we are doing this is through our Small Business Assistance Program.

In recognition of the importance of small businesses to the Australian economy, we established the program to help small businesses stay on top of their obligations and – most importantly – help them prevent problems from arising in the first place.

In the 2008–09 financial year we assisted almost 102,000 small businesses via seminars and workshops, outbound education calls, and on-site assistance visits.

And the results have been pleasing. In a recent assessment of the effectiveness of the program, we found that small businesses that received assistance from the Tax Office improved their compliance with tax obligations significantly. For example:

• business people who ask us to visit them lodge their activity statements sooner than other businesses
• the average debt for those who have been assisted is decreasing at a faster rate than the general micro small business population
• after receiving assistance and advice from us, over 10,000 businesses have cancelled their GST registrations - reducing their compliance costs, and
• of those businesses who received assistance, 29% revised their activity statements after we finished, which indicates that taxpayers identified that previously lodged activity statements contained errors that they self-corrected.

Results such as these highlight that we are on the right track when it comes to helping businesses stay afloat during difficult times. Equally reassuring are these results that show our assistance has been welcomed:

• there has been a 34% increase in requests for assistance visits between July and November 2008, compared to the same period in 2007. We expect this trend to continue for July to November 2009
• there has been a 221% increase in the number of hits to the ‘Assistance visits for the small business’ webpage
• the ‘Your small business calendar’ was the second most downloaded Tax Office publication as at June 2009, and
• for the three months ending September 2009 we provided over 13,000 outbound education calls.

We received further endorsement of the program last month when the International Monetary Fund highlighted our Small Business Assistance Program as a shining example of the provision of targeted and proactive assistance to taxpayers during an economic crisis.

Community-first approach to tax debt

In 2008-09 we re-balanced our approach to debt collection to recognise the impact on the community of the economic downturn and recent natural disasters. In the face of these challenges, we focused on containing the growth of collectable debt while also providing support to taxpayers facing genuine financial difficulties.

Reflecting this challenging environment, the value of collectable debt grew by 11.6% in 2008-09. This is consistent with what other government agencies and private sector organisations have experienced. There were also increases in the number (up 6%) and value (up 8%) of payment arrangements in 2008-09.

We are still seeing the impacts of the current environment, particularly among small businesses. Our response is to maintain the focus on early intervention, which allows us to help taxpayers address their outstanding debt while it is more easily managed and to help get the business back on track quickly. We also continue to provide targeted support to viable businesses facing serious financial difficulties.

This targeted support includes the new measures to help small businesses with an annual turnover under $2 million which was announced in June 2009. Namely, 12-month GIC-free payment arrangements and deferrals of payment due dates for activity statements. At 25 September 2009 we had granted almost 86,000 payment arrangements worth $1.88 billion and over 1,500 deferrals of activity statement payment due dates.

Promoting a level playing field

An important part of supporting those who are trying to do the right thing involves cracking down on those who deliberately avoid their obligations.

Those who avoid their responsibilities do so to the detriment of the Australian community, which isn’t fair to all those who are doing the right thing.

In a system that relies on voluntary compliance, ensuring we are all paying tax from a level playing field is vital for the system to have credibility and be effective. It’s also a key factor in helping us emerge from the economic downturn.

Unfortunately, evidence suggests that when times are tough, businesses may be tempted to cut corners to stay afloat or prop up their cash flow.

This is especially relevant when it comes to employer obligations.

Our strategy for tackling non-compliance in this area focuses on businesses that do not withhold from payments to workers as required and fail to make superannuation guarantee contributions.

This can be through deliberate and straightforward non-compliance by payment of cash wages and can also involve using an Australian business number to mask underlying employment relationships.

Some contemporary employment arrangements have characteristics of both employment and business. In these cases, particularly in times of higher unemployment, it is often the employer who decides whether to treat the worker as a contractor or employee.

Increasingly it seems that many employers prefer to treat workers as contractors as it can enable them to cut costs in terms of workers compensation, payroll taxes and superannuation guarantee. They can also negotiate pay rates outside of normal wages and conditions, and do not withhold tax.

While some commentators, mostly unions, argue that these arrangements are ‘bogus’, some may well be legitimate under current law.

The Tax Office has developed an online decision support system to assist businesses in making the correct decision as to whether a worker should be treated as an employee or contractor for tax and superannuation.

The following case studies look at cases that are non-compliant with the current law. Evidence suggests that the current tighter economic conditions have increased the prevalence of such arrangements as more businesses feel the need to cut costs, and labour market conditions can make employees more vulnerable to these practices.

Case study 1
A telemarketing business claims its several hundred workers are all independent contractors. They are required to quote an Australian Business Number. No tax is withheld under PAYG and superannuation guarantee is not paid.

Workers are contracted to perform the work personally at the premises of the business, using equipment and information supplied by the business. The telemarketers do not provide any assets. They have very limited control over how they perform their duties.

The telemarketers are not contracted to achieve a specific result or outcome by working on their own account or in their own business but are contracted to work in, and are integral to, the business, and are paid on an hourly basis.

Case study 2
A chain of five pizza restaurants pays staff in cash. No tax is withheld under PAYG and superannuation guarantee is not paid. Staff are paid slightly better than the minimum rate. They collect their pay weekly in a zip lock bag containing cash and labelled with the worker’s first name only. The business does not ask staff to complete tax file number declarations.

In cases like each of these, the Tax Office response is not retrospective, but is designed to ensure employers comply into the future. In such cases we visit the business and review their employment arrangements. Where the workers are employees as in these examples, we explain the employers’ responsibilities to withhold under pay as you go and to pay super for their workers, and make clear our expectation that they comply into the future. We also tell them that we will be monitoring their compliance and, where it appears they aren't meeting their obligations, we will be back and will impose penalties. Where employers continue to disregard their responsibilities, they will be treated more severely by prosecution where warranted.

We also capture details of amounts paid to the workers and check our systems to make sure they have correctly reported their income.

Another top concern of ours is employers who withhold as required but do not pay the withheld amounts to the Tax Office and also fail to meet their super guarantee obligations.

Recent checks prove we have good reason to be concerned. Of the 6013 high-risk employers reviewed under our Employer Obligations audit program since 1 July 2008, over 4,600 had not complied with their PAYG withholding obligations and almost 3,000 had not met their superannuation guarantee obligations.

When businesses start to experience difficulties, they should contact us as soon as possible to work out a better, fairer strategy to address their financial problems. Using money that is an entitlement of their employees is not the answer, and is only going to land them in hot water down the track.

New small business benchmarks to address the cash economy

The cash economy is another area that we need to watch closely when times are tough and businesses are struggling to make ends meet.

There is no doubt that the economic downturn has increased competitive pressures on small businesses and created a climate where some taxpayers may seek an unfair competitive advantage by not recording and reporting all of their transactions, especially cash transactions.

As part of promoting a level playing field, we have stepped up our support for small business and their obligation to report all income, particularly cash transactions.

In the 2009 Budget we received extra funding to expand our range of benchmarks over the next four years by developing new performance benchmarks based on information supplied in the income tax returns of particular groups. The new performance benchmarks join our existing input benchmarks.

I’m pleased to release today our expanded range of benchmarks, known as Small business benchmarks.

Small business benchmarks provide a snapshot of what, on average, is happening in particular industries by providing a measure of various business costs in relation to turnover.

The benchmarks are a tool that can help business:

• track performance against other businesses in the same industry
• check they are meeting their tax obligations, including the recording of all cash transactions
• work out whether they need to adjust their business and record-keeping practices, and
• assess whether they are likely to be selected for an audit or review.

We will also use the benchmarks to identify businesses that may be avoiding their tax obligations.

If a business is found to be falling outside the benchmarks for that particular industry, they will be more likely to attract our attention.

That said, we understand there are times when the performance of a business will decline for valid reasons, and when that is the case we’ll respond by helping those businesses who are trying to do the right thing.

However, consistent, long-term performance outside the benchmarks could be a sign a business is not meeting its tax obligations. When we see this, we’ll take the necessary action required to help restore the level playing field.

We’ll be alerting businesses to the Tax Office’s use of benchmarks and guiding them on how they can use them to monitor their performance. Fifty-eight benchmarks and a fact sheet are published on our website, and we’ll also be talking to businesses through forums and our Small Business Assistance Program.

As tax practitioners, you also play a key role in helping make businesses aware of their obligations. Where you can, please promote the benchmarks to your networks and clients.

You’ve been a great help in the development of the benchmarks, and I thank you for that. We consulted extensively with tax professional associations throughout the development of the benchmarks and we want to continue that relationship.

By making it clear what we expect from small businesses across a range of industries, we are giving taxpayers the tools to voluntarily meet their obligations. We will also be making it harder for dishonest operators to get away with unreported cash income – and therefore making it fairer for everyone else.

The benchmarks at work: case study 3
A Melbourne-based concreter received a tax bill for $115,953 after an audit showed he had omitted $142,000 from his tax return.

The taxpayer came to our attention because he had been reporting very low levels of income for a number of years. The concreting benchmark helped us to understand the taxpayer’s business relative to the industry.

During the audit, the taxpayer said his business was based on smaller suburban work, for which he received very little cash. He said he always issued tax invoices to his customers.

The concreter had declared a taxable income of $18,000 for the year. He recorded only four concrete purchases during one of the quarters.

Third party data acquired from his supplier for that quarter showed eighteen concrete purchases some of which were paid for in cash. Further examination showed many of his jobs were for cash; they were not recorded in his records; and his customers did not receive tax invoices.

Using information gathered from all sources, the auditors formed the view that there was significant unreported cash income and expenses.

As the taxpayer’s record keeping was inadequate, the auditors calculated his income by applying his normal sale price per square metre to his actual purchases of concrete.

The audit resulted in tax liabilities of close to $67,000 and additional penalties of nearly $50,000.

Paying a fair share of tax whatever your income

As Australia’s economy recovers from the economic downturn, risks may emerge or magnify as individuals seek to increase their value and wealth.

Directors and Executives

This year we are expanding our checking of executives and directors who receive remuneration from overseas.

We are seeing issues with the under-reporting of income, in particular by executives of multinational companies who:

• participate in global incentive schemes, or
• have previously worked overseas and recently returned to Australia but are still receiving benefits from long-term incentives relating to that overseas work.

This income is often directly paid from an overseas entity, sometimes from a tax haven, and we have seen instances where payments have been directed by the executive to a spouse or associated entity.

Case study 4
In one recent case, an executive had more than $2.5 million in income from Jersey directed to his wife. He failed to declare the income personally and then his wife omitted nearly $50,000 of interest earned after it was deposited to her Australian bank account. We responded to this case by raising assessments with high penalties for both taxpayers.

We are using our information gathering powers to identify where people have received these sorts of payments and, if they don't appear to have been returned correctly, commencing review or audit activity.

Along a similar line, we are also identifying capital gains being made, and not declared, when some Australian resident executives are selling shares in their employer company on an overseas stock exchange.

It is timely to remember that as the global economic downturn results in more Australians returning home after working overseas that, as an Australian resident, they are taxable on all their income, wherever it is derived.

Case study 5
One retired executive returned to Australia after a successful career overseas but failed to resume lodging tax returns for four years after his return, and then only after enforcement action was taken. Substantial liabilities were raised when he lodged returns but his worldwide income was still not fully declared. This case is still under investigation, with high penalties expected for the taxpayer.

Preventing abusive use of tax havens

Preventing the abuse of tax havens continues to be a high priority as more people are lured into dodgy behaviour due to the current economic climate.

In the 2008 income year $16 billion was sent directly from Australia to havens and $29 billion was sent from these jurisdictions to Australia. While these fund flows can relate to legitimate trade and tourism, our intelligence suggests that this haven risk in Australia is in the order of hundreds of millions of dollars.

Our mitigation strategies include working in partnership with international revenue authorities and through international tax bodies, including the OECD. This includes our support for G20 initiatives to shift secret havens towards reform, transparency and cooperation.

Bilaterally, Australia has signed seven tax information exchange agreements (Bermuda, Antigua and Barbuda, Netherlands Antilles, British Virgin Islands, Isle of Man, Jersey, and Gibraltar) to assist in the collection of information. At the rate we’re progressing, we’re hoping to have hit the 20 mark for international agreements by 30 June next year.

Our active compliance work involves over 600 audits and reviews and 23 criminal investigations. Our audits continue to deliver results, including over $407 million in Wickenby liabilities and one recent case, involving a high wealth individual, where we raised $242 million in liabilities.

Forty-six people have been charged with serious criminal offences, including some alleged promoters and intermediaries who designed or implemented these haven schemes. In one criminal case, the two defendants entered guilty pleas and recently faced a sentencing hearing in the NSW District Court, with a decision expected in November.

Criminal investigations are ongoing and further sanctions (including charges and action to confiscate criminal assets) are expected.

Australia has had some success with encouraging people with overseas bank accounts to come forward and clean up their tax affairs, and we are now in discussion with advisers about their clients’ fear of prosecution under our current arrangements and we are reviewing these.

Managing risk to support and promote high levels of voluntary compliance

Most of my talk so far has been to provide some fresh detail around our four key focus areas for 2009-10.

I would now like to provide an overview of how the Tax Office manages risk and then turn the focus on our services to support you.

The most important task for the ATO is to promote a compliance culture among taxpayers. In his first appearance before the Commonwealth Joint Committee of Public Accounts and Audit, the Commissioner explained this very simply. He said:

“I think the greatest risk to revenue is if we ultimately do not maintain and enhance the high levels of voluntary compliance that we have in this country. The trick to good tax administration is to focus on how you maintain that culture of good compliance, both within your own country and with people who interact with the country. To do that you need high levels of confidence. Those high levels of confidence are reflected by a very well-rounded program that has not just focus on active compliance or enforcement activities but also on providing support, assistance and education. It also focuses on trying to make it easy for taxpayers to comply. It does have, at the end of it, a very important role in trying to ensure that we support honest taxpayers by having effective deterrent strategies.”³

The Commonwealth Ombudsman added independent support for the Commissioner’s view when he said to the Parliamentary Committee:

“In a self-assessment environment, voluntary compliance is a vital component. While this depends in part on the taxpaying community having confidence in the ATO, it also rests in large measure upon the taxpayer community being aware of its obligations, and deciding to engage in lawful, ethical and compliant behaviour. In my view, education and deterrence by the ATO have significant roles in facilitating such outcomes.”⁴

At an overall level, our compliance approach can be characterised as preventative, coupled with firm but fair action where this is not enough. In the current environment, our strong focus on early intervention will make it easier for taxpayers to get back on track and improves the prospects of businesses remaining viable.

Managing risk for the ATO requires choices to be made as to how we use the resources available to us. Generally, we direct resources to areas of highest risk identified through monitoring developments across the market segments and, increasingly, by using techniques such as information matching and profiling.

Profiling involves analysis of taxpayer-reported information, data from other agencies, our own intelligence and publicly available information against risk filters to identify potential compliance risks. The risk filters are periodically reviewed for their effectiveness and changed as necessary to reflect the lessons from our compliance activities.

This approach to risk reflects our compliance model, which is a structured model for understanding and improving taxpayer compliance. It helps us to understand the factors that influence taxpayer behaviour and guides us in applying the most appropriate compliance strategy.

At one end of the model are those who are willing and actively trying to do the right thing; while at the other extreme are those who have made a conscious decision not to comply.

Through our improved data-matching capability, we are better placed to detect those at the non-compliant end.

We have an escalating suite of responses to non-compliant behaviour which range from correspondence and telephone calls to clarify discrepancies, to reviews, visits and audits.

It’s only when a case is detected that is high risk that we consider it necessary to carry out a full audit. Otherwise, we think it is in everyone’s interests to stay out of the affairs of people and businesses who are doing the right thing.

All this means that we ultimately do fewer full audits.

This may leave the impression that the Tax Office has a reduced field presence, and is doing less to detect dodgy behaviour, but I can assure you that this is just an appearance.

The reality is that we are more ‘present’ than ever. Through our behind the scenes profiling and data-matching, we touch more taxpayers now than we ever could with a traditional field force approach.

In 2008-09 alone we were able to screen over 408 million transaction records from third parties and we expect to analyse a similar volume in 2009-10.

The outcomes produced through this work reinforces that we are on the right track. During the 2008-09 financial year, data-matching resulted in the following liabilities being raised:

• income matching of tax returns to third party data raised almost $260 million
• matching conducted to ensure employers met their obligations raised $566 million
• our use of data on real property transactions and share transactions identified capital gains that raised $61 million
• conspicuous wealth projects — data-matching purchases of cars and boats and comparing this to income returned — resulted in total adjustments of nearly $4.5 million, and
• from employee share schemes for executives and directors — by matching the employee schemes data — we raised $44 million last year.

Field teams based in Hobart have a particular focus on ensuring that micro businesses are complying with their income tax responsibilities; and that employers are complying with their obligations, particularly pay as you go withholding and superannuation guarantee. In 2008-2009 we undertook 64 audits on Tasmanian taxpayers, resulting in liabilities of $5.4 million being raised. We also completed 46 GST audits in Tasmania in 2008-09, raising $4.3 million in liabilities.

Desk-based audits and reviews are conducted out of other states for taxpayers in Tasmania. In 2008-09, our Adelaide audit team reviewing employers’ compliance with pay as you go withholding responsibilities reviewed 403 employers based in Tasmania. Of these reviews, 306 resulted in liabilities of $3.38 million being raised. In addition, we completed just over 1000 GST desk-based reviews mainly refund integrity checks that raised $3.9 million in liabilities.

We also undertake data-matching activities to identify discrepancies in data returned by individual taxpayers to that provided by third parties. Last year we issued 6,684 letters to Tasmanian taxpayers with discrepancies, resulting in liabilities of $14.4 million being raised. These discrepancies related to interest, salary and wages, welfare, Medicare levy surcharge and private health insurance matters.

Supporting tax professionals

In challenging times like these we are also working hard to find new ways to better support you with services that enable a capable, sustainable and well-regulated tax profession.

Tax Practitioners Board

As I’m sure you’ll all be aware, it’s an exciting time in the tax profession with the establishment of a national board that will improve the professionalism and integrity of the industry.

The new Board will provide a consistent, nationwide system of tax agent and BAS agent registration and regulation.

It will supersede the current state-based structure and operate independently of the Tax Office, with the Commissioner of Taxation providing administrative support.

One of the ways the Board will bolster the integrity of the industry is through the establishment of a code of conduct which all registered practitioners must comply with. Breaches of the code can result in practitioners being ordered to undergo training, work under supervision or having restrictions placed on their work. Civil penalties may follow if they continue to fail to comply.

The Board will also help improve consumer confidence by offering greater protection to taxpayers who use a tax agent who is found to not have acted properly on their behalf.

Pre-filling and the portal

The Tax Agent Portal is a gateway to our online services, and continues to be your preferred channel for interaction with us. In fact, recent research found that 90% of tax agents use this service.

Our pre-filling service is a relatively new feature of the Portal, and is a great tool for improving the accuracy and speed at which you can complete returns for your clients. Some recent stats around pre-filling include:

• In 2008–09 there were over 6 million reports downloaded, an increase of almost 113% from the 2007/08 year.
• As at 25 August 2009, tax agents had downloaded over 1.9 million pre-filling reports, an increase of 51% on the same period last year.

Professional to Professional Service

In response to your feedback saying you wanted better access to technical advice, we introduced the Professional to Professional Service.

The program gives agents access to technical experts, giving them the opportunity to seek advice on a range of complex tax topics, such as GST property issues, trust losses and CGT events.

Access to this service was first offered to those agents who have the most interactions with us. Currently, we have 543 agents, including 20 in Tasmania, registered to use the program.

Now that we have a representative number of agents, we will be evaluating the program in the next year in terms of the outcomes for agents and the Tax Office.

If anyone is interested in being added to the program give me your details and I will see that it happens.

Boosting SMSF auditor competency

Many tax agents are involved in the self-managed super fund market as approved auditors.

We consider auditor competency to be a critical element in identifying non-compliance.

We will help and support auditors of SMSFs that act in a professional, competent and independent manner. However, we will take firm action against auditors that do not do the right thing.

We have prepared a large range of tax and super information that is designed to help you and your clients.

For example, last year we launched eSAT to help you with the compliance aspect of the audit, we published information to provide you with guidance around what contraventions need to be reported, and we expect to release an updated version of our publication Role and responsibilities of an Approved Auditor (retitled Approved auditors and self-managed super funds) in the near future.

Also you will be aware from the May budget that the contributions caps were halved. Last month we started to send letters to around 300,000 people that might be at risk of exceeding the cap for the 2009-10 year. We will also sent 30,000 letters to people that exceeded at least one of the contribution caps in the 2007-08 year to let them know:

• they may need to pay excess contributions tax
• what their super fund reported to us, and
• what to do if they believe our information is wrong.

Conclusion

The world moves so quickly. We have seen in the past couple of weeks that there are some very positive signs for the Australian economy, not the least of which is on the employment front.

As Australia begins to emerge from the economic downturn, it’s important that we keep up the good work we are doing to support the Australian community.

As I talked about today; supporting people in financial distress; promoting a level playing field for business; paying a fair share of tax whatever your income; and preventing the abuse of tax havens; are the Tax Office’s four key focus areas.

We need to continue to work together to deliver a professional service to the Australian community – a service that supports people and businesses during these challenging times, and helps us emerge from the downturn in good shape.

Thank you for your time today. I look forward to continuing to work with you.

Footnotes

¹ Treasurer’s Economic Note, 20 September 2009.

² Sensis Business Index http://www.about.sensis.com.au/small_business/sbi.php, September 2009

³ First biannual meeting with the Commissioner of Taxation, D’Ascenzo M, JCPAA transcript, 20 April 2007, p 4, Parliament of Australia.

⁴ Commonwealth Ombudman’s submission to the Joint Committee of Public Accounts and Audit Inquiry into Tax Administration in Australia, March 6, 2006

Last Modified: Friday, 16 October 2009