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

BENTWITCH, Mr Alan, Principal, Bentwitch & Co.

HRNJAK, Mr Brian, Director, GHR Accountants & Financial Planners

SULLIVAN, Mr Peter Martin, Principal, LCD&Co. Accounting Services

CHAIR: I welcome representatives of local accounting firms. I have to advise you that although the committee does not require you to give evidence under oath, 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.

For the public record, I would like to disclose that Mr Hrnjak is my personal accountant. Do you have a brief opening statement for the committee?

Mr Hrnjak : I am happy to make one. With regard to the topic of the committee, disputes with the ATO, my firm prepares about 2,500 taxation returns annually across 400 companies, various small businesses and 300 self-managed super funds. We have been in practice since the early 1970s. I have to say that in all that time, we have had very positive relationships with the ATO. Instances of disputes are very minor and infrequent. In most cases, they have been able to be resolved quite efficiently. As a practitioner dealing with the ATO on a day-by-day basis, we have some issues with communications, case management, approach and procedure, but, as I said, they are minor and infrequent issues. As far as small business is concerned—and that is a particular interest of mine—they seem to generally express a positive working relationship with practitioners to look after instances of requests for extensions of payment and extensions of time. In the majority of those cases, they exercise their discretion in favour of the taxpayer. So, as I say, over a nearly 30-year career in accounting, my instances of dispute with the ATO are minor and I am quite happy to praise them in probably 99 per cent of cases.

Mr Bentwitch : I have about 800 clients. They range from self-managed super funds to small businesses and companies. Generally, my view of the tax office is positive. However, we do have an issue with penalties for late lodgement and failure to lodge. It appears as though the tax office has stopped processing requests for remission of penalties. I do not know why, but they seem to have stopped or delayed those requests over the last month or two. Whether it has anything to do with this committee, I have no idea. Generally my view of the tax office is positive, but we do have instances where foreign source income is incorrectly assessed based on data they receive and it takes quite a while to convince the tax office that, in all instances that I have been involved with, the information that they have received is incorrect. Apart from that, in regard of tax debts, they do take a positive approach and allow time to pay, but it is very difficult to have interest penalties withheld and it is very difficult to have failure-to-lodge penalties remitted. That is what we have noticed.

Mr Sullivan : I recognise that the ATO is currently going through a significant change process through the new tax commissioner. I would also agree with the previous speakers that the incidence of problems is infrequent and generally minor. As a practice, we try and engage with the tax office along the process to reduce the incidence of any tax disputes. Then we would actively use an objection process at the end when disputes do arise. The case management is probably the biggest issue that we would come up with, including the time taken to resolve disputes and possibly the time taken to actually get it to a decision maker who is in a position to make that decision.

CHAIR: That has been a consistent comment—the time taken initially and then to get engaged with a person who has the technical expertise and is in a position to make a decision. Could you elaborate on that or make suggestions for solutions?

Mr Sullivan : I do not know the intricacies of the tax office, but quite often the person you are dealing with over the phone is not the person making the decision and it appears to take them some time. They may not even be in the same physical premises as the person who will make the ultimate decision—the technical person or supervisor or whatever. So I think that sort of process within the ATO could be refined.

Mr VAN MANEN: That was one of the comments in one of the submissions: the fact that if you do have a dispute, the actual ATO officers involved in a lot of instances, in almost all instances, do not have the capacity to meet with, say, yourselves as advisers plus the taxpayer to sit down and have a meeting, because they may be based in Melbourne or Hobart or Adelaide whereas your clients are based here in Sydney.

Mr Bentwitch : If we request to speak to someone senior, the junior officers tend to get their noses out of joint, and it is very difficult to go up the line. I think the larger firms have an ability to go higher up rather than the smaller practitioners. It takes them a while to find their way up the line.

Mr VAN MANEN: Is that because the bigger firms are regularly dealing with large companies and the higher echelons of the ATO anyway?

Mr Bentwitch : Yes, I think so. They have contacts higher up the echelon, whereas the smaller practitioners to not. It just takes us a while to find the right people.

Mr VAN MANEN: Yes.

Mr Hrnjak : I would note that we have an ATO account manager, if you like, assigned to our firm. I am presuming that the other practices here may have something along those lines as well?

Mr Bentwitch : We used to have an account manager, but I have not heard from an account manager in at least five to 10 years. Maybe it is because I have 800 clients; maybe because you have got 2½. Do you have an account manager?

Mr Sullivan : No, I do not.

Mr VAN MANEN: Do you find that having an account manager makes a difference, because you funnel everything through that person?

Mr Hrnjak : You do make use of that person. A lot of inquiries and a lot of issues can be dealt with at the call centre level. But I am presuming that the ATO is like any other organisation—for example, a funds management firm, a bank or whatever it may be. If I want to deal with that institution I am more than likely going to deal through a business development manager, an account manager or someone who knows the workings of the organisation and is the interface with the client. For us the account manager provides or identifies the pathways to solutions. That is really what it comes down to. They do also come along and advise you of your ongoing lodgement statistics, which is something of concern to them and of concern to us. But I found an account management type role within the ATO—there is absolutely no reason in my view that the ATO could not operate on a more customer focused level, us being the clients. We do quite a lot of, if you like, ATO work for the ATO. We provide a filtering process as professionals and advise people of what is within the guidelines and obviously try to provide a professional service so that they have no issues with the ATO. An account manager to us is someone who provides pathways to resolutions of problems. I think that has been a good program and perhaps it could be enhanced.

Mr VAN MANEN: Some of the other submissions touched on the fact that ATO auditors sometimes make repeated requests for large volumes of information, almost in a scattergun type approach, rather than focusing on the particular issue. Do you have any views or experience of that personally in your practices?

Mr Hrnjak : It depends on the authority. From my point of view I think that would be more of a fishing expedition. I think if they are coming out to undertake a GST audit in relation to a specific client then they should concentrate on the GST audit on the specific client; if they want to undertake a fishing expedition, then that is another matter.

In my general experience over the years audits have been infrequent. We have quality processes internally that obviously satisfy the ATO with regards to our output. So the incidence of audits is quite low. I think I have only ever seen two self-managed super fund audits in my entire career. We have seen more audits towards the building and construction trade, and certainly those cases where they are looking at contractor payments, they will ask for large volumes of information. But I have found them to be in the context of the issue and not a fishing expedition. For example, if they want to deal with contractor payments for a business turning over $5 million, then payments to all those contractors is going to be a large volume of information. It is going to be boxes and reams of information. In this day and age it might be a CD—it is still a lot of information of them to deal with. I think if something arose during the course of that audit and they discovered it, that is their prerogative to follow it up. But in my experience it has been contained to the issue. I have not had the experience of a scattergun or: 'Give me everything to do with the company. Give us that it client's entire ledger and we will just have a look through that.'

Mr Bentwitch : I have not had any problems. We have only had a couple of GST audits and they were specific to the point and not a scattergun or this or that. They just looked through the ledger and said, 'This is what we want.' That is fair enough.

Mr Sullivan : No fishing expeditions, no.

Mr Bentwitch : It is probably the larger firms that have got an issue. With large volumes of data, any competent auditor would be looking at those larger items to see what is going on.

Mr VAN MANEN: I have had feedback from a couple of accountants in my patch that the ATO is getting particularly aggressive with outstanding amounts and not lodgments.

Mr Bentwitch : They are. I will give you an example. I have a client that has health issues. For two years doctors could not resolve the problem—it was heart issues. She got behind on her BASs and got behind on reporting. We explained to the tax office and they said they would remit the penalties. There is still $34,000 outstanding and they are doing nothing.

Mr Hrnjak : Can I give a contrasting view. I had a client who walked in only a matter of six or eight months ago who, due to diagnosed depression and circumstances, did not lodge a return for 20 years. In fact, I would call it the record in the office. That was the longest period of outstanding lodgement that I had ever come across. There were penalties in the order of $70,000. With the provision of evidence and following the pathways and their approach, all of those penalties were remitted.

Mr Bentwitch : Really?

Mr Hrnjak : Yes.

Mr Bentwitch : I am surprised at that.

Mr Hrnjak : I think what you are seeing is maybe an inconsistency in approach, which is frustrating if you are a practitioner, because you would like the certainty of being able to deal with those types of things. I can sit here and say that they took account of the taxpayer's situation—with medical evidence on board—and remitted all the penalties almost immediately.

Mr Bentwitch : What was their financial position?

Mr Hrnjak : It was payable.

Mr Bentwitch : No, I mean if it did not remit them, would the person be bankrupt or had the financial capacity?

Mr Hrnjak : The person would have had the means to pay the penalties. However, the circumstances arising were quite tragic actually. In the process of mopping up their affairs, if you like, the ATO extended that discretion towards the taxpayer. But it does highlight an inconsistency.

CHAIR: This is a very pleasant engagement, because often we have been dealing during the inquiry with people with problems. To that area, the ATO has stated that taxpayers often hold back in providing all necessary information to enable the ATO to make a proper assessment. Once this information is received it is then easy for the ATO to come to an arrangement and the dispute resolved. Do you accept this? The allegation by the ATO is that tax practitioners advise their clients to hold back information, because you are not going to get anywhere in these initial efforts to resolve issues. But it would appear that you are all happy campers.

Mr Sullivan : Generally the ATO would not apply any discretion until the client is up to date. It is not much point telling the client to hold back. We would tell them to actually get it up to date.

Mr Bentwitch : Yes, they generally say that, if you are up to date in your lodgments, we will look at it. So it is: 'Get it up to date or else; if you don't get it up to date, we'll go after you. If you get it up to date then we will consider.'

CHAIR: But when you are going into a dispute resolution situation—the provision of information at that point.

Mr Bentwitch : This is prior to the dispute resolution. At a dispute resolution they want everything up-front so that they can clear the air so that they know what is going on. Yes, we advise clients to be up-front and supply them with everything so that there are no hidden agendas.

CHAIR: And it would appear that you all have that same position and it is working well.

Mr Hrnjak : Professionally we would not be in a position to lodge a return unless it was complete. If someone is looking to lodge their 2010-11 or 2011-12 or 2012-13 tax return, it needs to be complete and the information that is contained in there—unless you were completely unaware or the client was not aware, and some clients certainly do forget to include information. But you would not lodge that return as a professional knowing it was incomplete.

CHAIR: But what we are inquiring into here is when there is a dispute and there is an inquiry underway and the ATO is asking for certain information. Some tax practitioners, according to the ATO, are advising to hold back information. Because there is a feeling that the ATO is just building their case against them and it is not until you get further down the track when you can get into a position of being engaging with a decision maker or person with technical expertise that you are going to really engage.

Mr Sullivan : I have never encountered that.

Mr Hrnjak : I think it is possible, but I think the dispute normally arises because the ATO has received information which causes them to believe that an issue may be there. We were chatting just earlier about the prevalence of foreign income audits. Foreign income audits seem to have authorised in the last couple of years. The approach is that you receive a letter from the ATO. It relates to a client who is allegedly got undisclosed foreign income. What they do is write and say you have 28 days to reply to this letter or do nothing and we will assess that income as assessable income. Usually it relates to a period three or four years ago. Basically you have a situation where you need to drop everything, go back into history, establish what the nature of that foreign income is. In most cases that foreign income will be a transfer from another bank account from overseas. I have quite a number of pilots who have Hong Kong based bank accounts. The transferring of money from Hong Kong to Australia is caught by AUSTRAC. That then alerts the ATO that the is a cross border transfer of funds. They deem that to be income and you have 28 days to prove it is not the case.

That type of information has arisen because another authority—AUSTRAC in this case—has reported a transaction which they have deemed to be something, which is possibly incorrect, which then you need to deal with. So you need to actually supply information in that case to disprove it. It is in the taxpayer's interest to provide a full and frank disclosure in that case or otherwise be taxed on that income, which was really just capital and therefore not taxable.

CHAIR: Can you tell us your perceptions of the independence of internal review within the ATO? Are taxpayers only going to receive a truly independent review at the Administrative Appeals Tribunal, for instance?

Mr Bentwitch : I have never been to the Administrative Appeals Tribunal, so I cannot tell you. Maybe you have been there?

Mr Hrnjak : No, I have not been to the AAT.

Mr Bentwitch : It is too expensive. That is the problem.

CHAIR: Then that is a problem if it is too expensive and people are being denied their hearing. So do you feel that you have had clients who would not pursue what they believe was right because of the cost?

Mr Bentwitch : Yes. The amounts involved are only minor so we would not recommend that they would pursue that track because we perceive it to be, we think it is too expensive because of the lodgments and then the issue with solicitors. In the end they are going to lose, regardless. The answer is yes.

CHAIR: So even if they are proven right the cost would be more than the money returned?

Mr Bentwitch : Yes. Cut your losses.

CHAIR: That is the fault of the system. You seem to be accepting the system.

Mr Bentwitch : Yes.

Mr Hrnjak : It needs to be big issue to go to the Administrative Appeals Tribunal or to go to a Federal Court or to take down the pathway. I have got instances where I have sought rulings from the ATO. One item springs to mind. It was in relation to a transfer of licences to a self-managed super fund, which I argued where leases over crown land and therefore transferable. I took advice from a tax barrister in the first instance. That cost the client some money to prepare. Despite a number of different attempts to the ATO to challenge that, the client really accepted it. It was a negative ruling to the client, but they copped it on the chin—and that is the nature of it. I think it would have to be a large amount of money to warrant—

CHAIR: So your client has made a commercial decision.

Mr Hrnjak : They made a commercial decision—and I think many clients do. I cannot say I have come across an issue that is so ethical that you have to go to the Administrative Appeals Tribunal; otherwise, it would be so unjust. Most people accept that the tax office is the dominant organisation, and to take them on would be a very, very—no-one wants to be a test case, let us put it that way. It would have to be a significant issue, an important issue or a very expensive issue to justify that pathway.

Mr Sullivan : Where there is a dispute over the facts, we have generally been able to convince the ATO of what the actual facts are and, therefore, we have not needed to go as far as the AAT. Where there are issues of law, we would generally either steer the client away from those issues—if we are aware of it in advance—or get outsourced advice prior to the appropriate time, with the ultimate aim of keeping the client out of that sort of a dispute position.

CHAIR: The new tax commissioner is wanting to be seen to give more access to alternative dispute resolution mechanisms—not a full separation; that debate is ongoing. Do you see it as a step in the right direction to separate it within the ATO, or do you think dispute resolution should be handled by a separate body? There has been some feeling expressed that there is a perception among taxpayers that those who are involved in dispute resolution are close to the auditors, who are working to achieve revenues for the ATO.

Mr Sullivan : Should there not be both—that is, a stepping-stone process of dispute resolutions with, in order, internal, external and independent resolution? Obviously, internal resolution would be cheaper for the client to achieve a result, and external is a commercial decision based on the amount of money at risk.

CHAIR: In an ideal world, justice should be for everyone, not just those who can afford it—if we treasure our taxpayers equally.

Mr VAN MANEN: I find that an interesting point. According to one of the submissions, in 2012-13 there was about $17.7 billion in collectable tax debt, some 60 per cent of which was owed by small business. We do not know how much of that was in dispute, but it is a very significant amount of money. We have been having an interesting discussion here. We have received testimony that, generally, your relationships with the ATO seem to be pretty sound and, as a consequence, outcomes for your clients can be resolved in a reasonably respectable time frame for all concerned. But obviously there are plenty of others for whom that is not the case. All three of you have been in the business a long time. Where do you think the accountancy industry and the tax office can improve their relationships to minimise that figure and minimise the number of disputes?

Mr Bentwitch : Case managers for all disputes—that should be done. It would speed up the process. We would know who we are talking to. We would not have to talk to one, two or three people before we get further up the line. A lot of the problem with the amounts outstanding is the failure of the tax office to address delinquent taxpayers. By the time they catch up with them it is 10 to 15 years down the track, when large debts are mounting and people just cannot pay them. If they were able to get to the people earlier and not just leave them to their own resources, it would be far better. In your example, it was 20 years. I have got one at least 20 years old that has come out of the woodwork.

Mr Hrnjak : The interesting point is: how can someone be left for 20 years yet other people, if they are late one quarter, get a penalty notice and perhaps even a phone call? So it is about consistency of approach. There are some metrics in the tax office that I am not familiar with that are obviously risk profile or risk rank issues. I think we have probably all got examples of clients where you would think: how on earth could that person have gone for four, five or 10 years and not have had a phone call, a query, a letter or something?

Mr Bentwitch : The only conclusion I can reach is that maybe they got refunds for a couple of years and then the tax office has left them alone. If you get a refund or two, year in year out, for two, three or four years, the tax office would make a decision and say, 'This guy's late, maybe he's going to get refunds.' Although now, with their portal and information being transferred from business, it should improve a bit, you would think.

Mr Hrnjak : In theory, yes. The information is far more timely.

Mr VAN MANEN: In those examples where the tax affairs have not been done for 20 years, were they self-employed?

Mr Bentwitch : In all instances they were self-employed.

Mr Hrnjak : That 20-year case was a mixture of pay as you go, with outstanding group certificates. Obviously there is a focus on current information. For things that go back 20 years, we struggle to find copies of group certificates and evidence that those types of things. I mean, it is a miracle if a taxpayer has kept those things for that long. So there is definitely a focus on the current period—probably a two- to four-year focus. But that is not to say you will not get the odd one from time to time that takes you to the edge of the boundaries.

Mr VAN MANEN: In the last few years the tax office systems have improved significantly to record much more data in a much more timely fashion. That is probably going to help that process in due course.

Mr Hrnjak : It does. During the GFC, when taxpayers were offered an incentive amount to buffer spending, I think the requirement was that everyone had to have their tax returns up to date. So, suddenly, you had a rash of people coming out of the woodwork to get their affairs up to date so they could get their $1,100 or $1,300.

Mr Bentwitch : And as they came out the woodwork, there would be little letters in the mail—'We know you exist'!

Mr Banks : That's right.

Mr VAN MANEN: One other thing that was pointed out in some of the other submissions, again with respect to the AAT, is that the minimum threshold there is $5,000. And as you have all pointed out, it is quite a costly exercise. Do you think there would be any value in increasing that limit to keep disputes of, say, up to $25,000 out of the AAT to keep the costs down and to get them resolved in a more expeditious manner?

Mr Hrnjak : My difficulty is that I have not taken a dispute into that forum. If the threshold there is $5,000, the reality is that it is going to cost you a lot more to prosecute that through the AAT. So people will make a commercial decision on their affairs and what they feel is right and what they are trying to do. In most cases, they were just accept the outcome. They will go to the point of objection, and they will go to the point of objecting again. But to take it to a forum, where you have to brief specialist people to appear on your behalf, you are taking it into uncertainty; the costs are open ended. So I do not know. I agree that it would be nice if, in issues of dispute, you could have a case officer to work with. That would probably resolve things in a much more orderly and efficient way. I also accept that that is very difficult to do, from an organisational point of view.

Mr VAN MANEN: And preferably a case officer with whom you can meet face to face.

Mr Hrnjak : Meeting face to face and in the context of the issue. So if you have got a small business capital gains relief—for example, on the sale of a business—you would like somebody who deals in that area more often than not so that they are familiar with the issues and so that you do not have to educate the case officer on the issues that are involved.

CHAIR: Thank you very much. Do you have a closing comment?

Mr Hrnjak : I would just like to thank you for the opportunity to appear before the committee.

Mr Bentwitch : Generally our contact with the ATO is positive; it is just the penalties and interest that I have an issue with. The conduct of the people we talk to is always positive. They are always polite and they try to help you. If they cannot help you, they always tell you to request a private ruling—and clients may not want to request a private ruling. Generally it is pretty positive. But, as I mentioned, it is the penalties and interest that I have an issue with—and not getting the right people or being unable to go up the line to the right people. It takes time and energy.

CHAIR: Thank you all very much.