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Standing Committee on Tax and Revenue - 18/08/2014 - Tax disputes

CROKER, Mr Michael John, Tax Australia Leader, Chartered Accountants Australia and New Zealand

[10:12].

CHAIR: Welcome. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege.

Do you have an opening statement?

Mr Croker : Just a brief one. First, we have not appeared before this committee before, and I wanted to take the opportunity to state that, from the perspective of Chartered Accountants Australia and New Zealand, this relatively newly formed committee is a valuable addition to the oversight of the Australian tax system. We think that increasing the awareness of parliamentarians more generally about tax issues and engagement with parliamentarians are good things. We know that the ATO is a much-scrutinised organisation and to some extent there are reports and submissions going on, but we think this is a very valuable addition to the ranks of the parliamentary committee system. We look forward to working with you in the future.

On this topic in particular we took the view that our organisation is probably best placed to give you insights gained at the bigger-picture level. Unlike other parties appearing before the committee, we lack the coalface interaction with the ATO; but, by the same token, we do hear a lot about disputes from our members through emails and direct contact, and we also engage regularly with the ATO in a host of consultation forums, where we seek to speak not just on behalf of our members but also in the public interest. In that regard we have recently been doing some work with the ATO in a number of areas which touch upon disputes.

Our submission reflects some of the concerns we hear, but we also, in the spirit of cooperation and collaboration, put forward some ideas and suggestions which the committee may want to take on board. Other than that, the submission speaks for itself.

CHAIR: Thank you. Some submissions have stated the ATO auditors sometimes make repeated requests for large volumes of information which greatly increase taxpayers' costs. Does your organisation have any views or experience in this area?

Mr Croker : We have no direct insights on that particular issue. To reflect on some of the comments the committee has already heard: we do know that there is sometimes a feeling that the ATO is non-specific in that its information requests are too broad and not well thought out in advance. That can happen at the direct taxpayer interface and it can also happen in a more general sense when the ATO sends out what you might call broadcast requests for information as part of a preliminary step in targeting a particular type of behaviour. I will give you a recent example. There was concern within the ATO that dividend access share arrangements were being used in a way which was contrary to part 4A of the general antiavoidance provision, so practitioners were given a letter which was basically designed to identify all clients who had recently issued shares for reasons which may or may not have had anything to do with tax planning at all. That was an example where our organisation on behalf of our members said: 'Look, we can see that you're concerned about this dividend access share arrangement, but can we start off this process with a more targeted information-gathering exercise? Perhaps by engaging with bodies like ours or a selection of practitioners the ATO can drill down to the nub of what it is really interested in—the particular features of a transaction—and then can put out into the community a more targeted information-gathering request.' Our members are in business too and our members find it difficult to cater for requests for bulk information in a way which allows them to recover their costs. You can probably imagine the client is not prepared to pay fees for what they see as a general information request which is not necessarily relevant to their particular tax affairs.

Mr VAN MANEN: Is that a piece of information that could also be obtained from ASIC, or does the ATO not have the legislative power to work with ASIC to obtain that information?

Mr Croker : The ATO has very broad information-gathering powers, can obtain information from ASIC and probably has already done so. What it lacks is an understanding of the purpose or rationale for the particular transaction. This is an area where we get into information gathering which is seeking to ascertain a taxpayer's purpose, a taxpayer's planning motivation. Nonetheless, some attempt to narrow it down to the particular circumstances or egregious behaviour they have in mind and seek the involvement of the practitioners to identify features would be much more helpful than broader information requests.

Mr TAYLOR: I think in your submission you suggest that the independent reviews that are there for large taxpayers could be pushed down to smaller taxpayers. Do you want to expand a little bit on that idea?

Mr Croker : The commissioner is conscious of the 80-20 rule—the Pareto principle. Senior ATO officers know that they get most of their tax from a smaller group of taxpayers—the larger companies, the high-wealth individuals et cetera—so it is understandable that the initial focus of the independent review process and the alternative dispute resolution process is targeted at the bigger end of town. Nonetheless, our members, who you might say are in general practice and who service the SME sector and individuals, feel strongly that the expertise that is targeted at the top end of the taxpayer segment does not necessarily translate to their segment. They are most keen for our submission to urge quick implementation of a drill down in that expertise. For example, when I was in practice we had individual taxpayers who may have made a gain on the disposal of shares. For months you would be arguing with the ATO. 'Is it on a capital account?' 'No, it's on a revenue account.' Back and forth we would go. It seems to me that the same logic that the commission is applying to quickly resolve disputes at the top end of the taxpayer market is applicable to a lot of other sectors; it is just that the dollars are not as big. That commonsense intervention we are seeking from independent review processes and alternative dispute resolution would be very much welcomed at the smaller end of the taxpayer segment to get these troubles off people's minds.

The difficulty is resourcing. The commissioner has targeted some very-high-value resources at the top end of town—retired judges et cetera—but to drill down into the smaller taxpayer segment, we understand, the ATO is starting to develop expertise or train up its own in-house facilitators to try to take the learnings from the initial program down into the lower market. But it is taking some time to do that. We only encourage the commissioner to do it as quickly as he can.

Mr TAYLOR: Do you know of models from around the world that are doing that well and that we could copy here for the small end of town?

Mr Croker : You could start off with a very big picture and say that there should be fewer disputes in the first place. The bigger-picture approach would be to say that the ATO, which prides itself on its data analysis and is reputedly very good at it, should identify very quickly in the course of a small business activity whether that small business is operating within benchmarks—allowing for the start-up phase and the initial struggles that every small business has at the beginning. They could that business in an educational sense and say: We can see the initial statistics and that perhaps you are not operating within benchmarks we have gathered from comparable businesses operating in the comparable sector. What's going on here?' That is starting it off as a conversation which is more about what is going on in your business planning—'Where you are in the start-up phase, how are things going and what information do you need from us to make this business look from our perspective in the ATO as if it is conforming to established benchmarks?' They are not just tax benchmarks, of course; they are also benchmarks which identify soundly performing businesses.

So that early intervention could perhaps be one which is more focused on collaboration and education rather than necessarily going for wins on a technical argument. We support that. We think it is a very complex tax system but only one of many, many issues that small businesses face in this country. To be frank, a lot of small businesses struggle to keep on top of everything, let alone the tax issues involved. So early intervention which is educative and helpful would be one.

Our submission also highlights areas where disputation could be avoided in the first place by the adoption of benchmarks. This is part of a broader issue which you, as our political leaders, will grapple with in the tax reform debate which is coming. One of the arguments for tax reform is that, if we can make our system simpler, there would be fewer disputes. For example, one way to do that, which would require legislative change but could nonetheless be supported by the commissioner and Treasury officials, would be the adoption of benchmarks.

As an example, if I pay my lawyer for some advice to do with my corporate structure, that could be regarded as being on capital account and non-deductible. But, if I pay my lawyer to sort out an HR problem that I have with a poorly performing staff member, that relates to the day-to-day conduct of my business and is on revenue account. These capital and revenue distinctions come up a lot in tax. One way that a benchmark could operate would be to say: 'If you are a business operating within this segment of the taxpayer population—for example, small business as defined or medium business as defined—then any legal cost that you incur which is below a figure of, say, $5,000 or $10,000 will be accepted as being on revenue account. You do not have to turn your mind to these issues.' There are pros and cons with this, but it removes any argument about those small legal fees, avoiding disputes. By the same token, there might be concern in some quarters—perhaps within the ATO—that that simply enables everyone to ramp up their legal costs to the tune of $10,000 or whatever the threshold is and simply claim it is an outright deduction. We are not suggesting that. We are saying that the expense must still be legitimately incurred. We are not giving people a free kick. We are just trying to say that a safe harbour approach might say, 'Let's not argue about whether it is on capital or revenue; let us just accept that it is relatively small and therefore on revenue account.'

Another way of reducing disputation, apart from what has already been mentioned, could be, as we cover in our submission, looking at bright-line tests. I think the commissioner may be empowered to do this sort of thing in, for example, the area of documentation. If a small- or medium-sized business is brave enough to go offshore and start to expand its markets there, that raises transfer-pricing issues. We believe that transfer-pricing disputes are just diabolically complex. They take one helluva long time and require enormous amounts of documentation. We are pleased to see that the commissioner has authorised a project which would look at some bright-line transfer-pricing documentation rules—acceptable mark-ups, for example—which would perhaps make some transfer-pricing disputes go away or at least reduce their complexity.

Again focusing on the small end, our submission highlights an ongoing issue which you have probably heard about from your constituents, and that is this cursed distinction between contractors and employees. The marketplace in various industries now is such that many payers would like to engage contractors not employees. I am thinking in particular of the building and construction industry. Yet Australia has a system which does not stand behind the ABN brand, if I can put it that way. We can go to the Australian Business Registrar and seek an ABN. We can put our case that we are genuinely starting up a business. But that is not necessarily trusted as the final determination. Payers must be constantly vigilant about whether they are really dealing with a contractor or an employee. This is not just an issue with income tax; it also an issue with GST and payroll tax. As a community we do not have this distinction right and we do not have validation of the ABN categorisation. We need to have a more trusted ABN brand. The commissioner has every right to target the payer, the business making the payment, rather than the recipient and say, 'You got this categorisation wrong.' But the businessman says: 'Hang on. They had an ABN. What was I supposed to do?'

To be fair to the ATO, they do have a decision-making tool, and you can go through their website and do that. There must be a better way, we feel, to enhance the quality of the ABN brand, perhaps in a tax reform process, so that it is a trusted brand. You have it, it was hard to get, but once you have that ABN then people who deal with you can trust it. Periodically, perhaps through the annual tax return form, the ATO can ask certain questions of the contractor to verify whether they are still satisfying the criteria for being a contractor.

I think the commissioner is alert to these ideas, and he is constantly talking to us now about the so-called light-touch approach, so that if, again, we can identify compliant taxpayers in compliant industries who are within benchmarks and if we can give them some guides like safe harbours and what have you then the commissioner is starting to indicate that the reward, if you like, or the recognition, of that compliant status would be to save that particular business or high-wealth individual, or whoever, who will hear less from the ATO. They will hear less in the sense of fewer risk reviews, fewer contact points from the ATO.

I do not think that, as a community, we can dispense altogether with ATO risk reviews and random audits. I think there is always a need to periodically gauge whether compliant taxpayers are still compliant, but nonetheless that would be a good initiative on the part of the ATO. The interesting question from our organisation perspective is: how much of that can be done by the ATO and how much relies on going to Treasury, getting Treasury support, and then Treasury going to our parliamentarians and saying, 'Can we get the law changed?' As we have seen, tax law is very hard to change, as per the announcement of the not yet enacted measures issue that came up before Christmas in 2013.

Mr TAYLOR: Going back to when disputes actually happen—and I realise that you are arguing that we should do everything we can to stop them happening in the first place—for the Small Taxation Claims Tribunal, at the moment I think the threshold is $5,000, do you think that one way of accelerating and simplifying the process of resolving disputes would be to raise that threshold?

Mr Croker : Yes, I think we would support that. That is not canvassed in our submission, but I think we would support that. A lot of these thresholds do not get reviewed very often.

Mr TAYLOR: That is not indexed or anything. That has been fixed for a long time.

Mr Croker : Yes. They quickly get out of date.

Mr VAN MANEN: In your submission you talk about technical tax disputes, and I touched on them in earlier questions to previous witnesses. You made the note that the ATO and tax advisers could do more to communicate with each other, and I touched on the fact that the taxpayers, their advisers and the ATO do not seem to have an initial meeting when there is a dispute or a query about their tax. Could I get your perspective on that as a way to resolve a lot of those issues very early on in the piece?

Mr Croker : There is a sense, I think, that the new way of doing things involves too much reliance on data collection, data analysis and research, which is obviously necessary, but there seems to be less and less engagement. I started my career in the ATO way back in the early eighties, and I only stayed there for one a half years, so I am not an expert on how the ATO operates. In those days it seemed to me that they were much more active in the ATO in going out and visiting taxpayers, getting to know their business, getting to know their accounts and understanding the taxpayers' affairs more than happens now. To some extent we feel that the engagement between practitioner and ATO now occurs after a whole host of research has been done by the ATO, within the ATO on the quiet if you like, and then practitioners are often confronted with, 'Now, tell us about this, this and this'. We have a sense from some of our members of, 'Where did this come from?' Whereas, if it were a conversation, if it were a more, perhaps, confident ATO official who could engage in a business discussion, that would be a way of understanding some of the motivations, purposes and commercial drivers for the way of the tax planning or a particular transaction has been done. That would be a much more collaborative way.

You have to understand that training within the ATO is very good, but chartered accountants know that even the brightest young chartered accountant who joins a professional firm still has a lot to learn. They learn from experience, by going out to clients, going to the factory and looking at how things are made, walking around and talking to, not just other accountants, but also the other people who run businesses. Then you actually learn about the business. That sense of learning and understanding, I think, has tailed off a little bit in the way that the ATO conducts its investigations.

Mr VAN MANEN: You said that one of the other submissions makes reference to ATO officers. If I have a business in Brisbane and there is a query on my tax, that ATO officer could be based in Melbourne, Adelaide or Hobart. Is that part of the issue too because they are in a completely different arena and there is no capacity for them to meet with that person individually as well?

Mr Croker : Yes. This is felt keenly in our profession, and there is a great sense of loss about having that local ATO contact, that person or group, that you could ring up and try to sort things out quickly. The move to a centralised model or a centre of expertise model happened many, many years ago and we are stuck with it. It has been replaced by models which include centralisation of expertise within certain offices or groups, increased reliance on the chief Tax Counsel Network—a group of highly talented ATO officers who help determine the commissioner's position on technical matters. At a regional and capital city level, members bemoan the fact that they do not have the go-to people any more at that local or regional level. It is also reflected in the consultation process. The commissioner has reduce the number of consultation forums down to some key stakeholders, and our job now is to work very carefully with those reduced forums to try to get across the views of our members at the coalface. The commissioner has been very receptive to our concerns, and operating within a new consultation model seems to be working okay.

CHAIR: The ATO develops a position on a tax matter in various ways such as at public ruling or a precedential view, to what extent should these positions be revisited in an internal review?

Mr Croker : What we tend to find is that chartered accountants are engaged by the ATO at the start of a process. So, a new ruling is first drafted, it is tested within the ATO, perhaps with some external expertise, then it is launched as a draft ruling or as a draft guidance statement. Then organisations like ours get to comment before that draft is finalised. That is generally the end of a matter. If and when, say, a court decision casts doubt on a particular ATO ruling or guidance, the ATO then issue decision impact statements which provide, again, an opportunity for us to say, 'Well, this decision changes this ruling, or this guidance, and we need to talk again.'

So, by and large, the system seems to work reasonably well. The difficulty, when it comes to tax disputes, is that, as we point out in our submission, although we are very supportive of the resolution of tax disputes quickly and effectively using settlements and what have you, when you have a settlement it is invariably a confidential settlement so you do not get the insights, if you like, arising from the positions taken by the various parties and how the matter was settled. What we have raised in our submission is that it is very important, if these settlements do not have any visibility—and we understand that they should not have any this visibility—nonetheless the ATO's internal knowledge management systems have to be up to speed to say, 'Well, with that settlement that taxpayer raised a new issue and that is an issue that we have not thought of before. Now we have to feed that back, somehow, not just into our internal knowledge management systems, but also perhaps look at rulings and other guidance that we have so that other taxpayers and other tax practitioners, who are not privy to that particular settlement, gain the benefit of that insight.' We are very conscious of the fact that that obligation rests on the ATO. The client is not going to talk about it, the professional firm involved in that settlement cannot talk about it because of confidentiality, so we are relying heavily on the ATO's review of its own settlements to see whether any new interpretations or any particular circumstances are being uncovered which need to be shared with the rest of the community. We think that is a very important feature of the ATO's work in the settlements area.

Mr TAYLOR: When a private ruling is made to what extent does the professional community understand that there is opportunity to take similar cases to a dispute resolution process and get a good outcome?

Mr Croker : In a private ruling, the ruling is issued to a specific taxpayer, the taxpayer who asked for it.

Mr TAYLOR: Right, the professional firm.

Mr Croker : The professional firm knows, and the professional firm needs to exercise a great deal of care in a situation because of the client confidentiality duties, which are set by the Tax Practitioners Board and by the ethical standards of organisations like ours. So, the databases or the knowledge sharing within professional firms can be quite restricted as well as individual practitioners say, 'Well, I'm sorry, but that's not something that I can share. That is information that belongs to my client and it can't be shared.' To get it out in the public, as I said, it is important that we update the public rulings or the public guidance that is on display for all to research.

Mr TAYLOR: Do you know of cases, without citing specific cases of course, where a private ruling was made and no comparable public ruling was made that made the visible? Whereas, perhaps on reasonable grounds, you would expect that there would have been a public ruling.

Mr Croker : Yes. I do not think I could say that it happens often, but it does happen often enough to suggest that some greater vigilance is required. The recent front page on the Financial Review talked about the ATO's ruling on the transfer of property from a private company to a spouse as part of a settlement of a marital dispute. The ATO now has a public ruling in final form—it was finalised in recent weeks—saying that that is a dividend. But the ruling itself acknowledges that some private rulings existed beforehand which took a contrary view. So practitioners now have to take account of the public ruling and those private rulings, while they were great for the tax payers who got them, cannot be relied upon by anyone else. Dividend washing was another example where we understand there was one private ruling on the topic, but then the commissioner came out and said, 'No, I'm now going to issue a public ruling saying that dividend washing is unacceptable and part IVA will be applied.'

This is a horrendous knowledge management exercise. You cannot believe how many private rulings are out there and how many public rulings are out there. It is just mind-boggling, but, nonetheless, in the process of developing opinions, the ATO does often research its extensive database and identify views it has taken in the past. That knowledge management and getting those more modern rulings or interpretations out into the community is a very important exercise so that we can avoid disputes. The last thing you want is to say, 'I relied on what I heard over here only to find that the commissioner's view has changed.' It is a problem if that occurs.

Mr VAN MANEN: Has well is that process communicated and documented by the commissioner and the ATO in the event that they do change it? The example you used of property transfer from a company to a spouse in the event of a divorce settlement is not an insignificant change in view by the tax office.

Mr Croker : No, it was a significant one. The process is delicate because the ATO has to determine a date of effect. Is this the view going forward or is the ATO saying, 'This is the view that we have always held'? It causes some concern in the practitioner community as to, if it is a retrospective ruling, what to do about advice already given. Of course, clients who have already received that advice would say, 'What do I do now? The ATO's going to come after me in view of this new ruling.'

So I think it is important that the group within the ATO who develop these new public rulings are conscious of the fact that, in some cases—not many but some cases—their rulings have quite a substantial impact and greater consideration could be given to the date of effect and also to the implications. If they are going to say that the ruling is retrospective in nature, how are they going to deal with the people who have adopted a different position in past years? We are a big fan of prospective rulings if they change what is quite an established viewpoint within the taxpayer community, but we think more could be done to analyse the impact of changes in ATO thinking when they are published as a new public ruling.

Mr VAN MANEN: In the event that the ATO decide for that ruling to be retrospective, how far back can they go with that retrospectivity?

Mr Croker : Typically, assuming that there is no question of fraud or evasion, they can only go back to the four-year amendment period or, for some taxpayers, it is only a two-year amendment period. And they do not overturn any settlements or anything done in a particular taxpayer investigation. It is those taxpayers who have not been audited and have not had any prior interaction with the ATO on this topic who sometimes can feel a little concerned about the retrospectivity. It is unsettling.

Mr VAN MANEN: If the ATO, other than in the particular case that they make the ruling on, were not able to apply the retrospectivity to anybody else but for everybody it was prospective after that change of ruling, would that assist in adding certainty to the tax system for taxpayers? Would it be fair to say that, in the broader context, taxpayers value certainty about their tax more so than the amount they are paying?

Mr Croker : Yes. In the examples that we have given, it would be very useful. Taxpayers do value certainty. One of the reasons for the high take-up rate of tax agents in Australia is not just to get your tax return done by a tax agent but also to act as that go-between, if you like—to say, 'I've got a tax agent. The tax agent said to do this and that should keep me out of trouble.' There is also an aspect of saying, 'If I've got a tax agent, if I do get contacted by the ATO, the tax agent will be the point of call and the tax agent will sort out the problem, hopefully.' So, yes, there is that community perception that, if the ATO gets in touch with you directly, you are in a bit of trouble when, in fact, it could be just an exercise in checking some data on a tax return. It might be quite minor, but certainly our experience is that the certainty aspect of tax, particularly among small business owners, is held very high—'Just let me get on with the business and hopefully the tax agent or the bookkeeper can work on the tax problems.'

CHAIR: In the event of divorce, rather than making it a dividend, giving the spouse a part of that company—so you are not actually realising a dividend; it is a share of the company—would that get around it?

Mr Croker : There were some suggestions in the AFR commentary that the legislation could be fixed in some way. Normally in a divorce, there is a rollover. If it is an asset transfer, you can take the asset from one party to the divorce and put it into the hands of the other party to the divorce and the cost base carries over. The difficulty happens where there is a company, which is obviously not part of the marriage—it is an entity owned by one of the parties—and we have a transfer of value from the company into the hands of one party of the divorcing couple. That would require legislative change to say, 'We are prepared to treat that transfer of value as not being a dividend. It would be seen, from a policy stance, as saying, 'How are we going to then acknowledge that some sort of value has been transferred to the person in a tax-free sense?' You justify it on a policy basis by saying, 'The community says that divorce is such a traumatic event, so, just to sort these things out quickly and with minimal tax disturbance, we decide, from a policy viewpoint, that that should be allowed to happen.' The ongoing involvement of a partner in a company when they have separated from the party to the marriage who continues to own it would be problematic. There is generally, under Family Law, a desire for a clean break rather than giving people an ongoing interest in the former spouse's entity. So it is problematic.

CHAIR: We will not sort that out here today. Michael, do you have anything else to offer?

Mr Croker : Only to point out that we have some other submissions on valuation disputes in the works. David and the secretariat have been made aware of those. We also have provided this submission to Ali Noroozi, the Inspector-General of Taxation, noting that this committee has referred some aspects of tax disputes to Mr Noroozi as well. The same submission is with both parties now.

CHAIR: Thank you for your evidence today.

Mr Croker : It is a great pleasure. Thank you.