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JOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT
Biannual hearing with Commissioner of Taxation
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JOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT
CHAIR (Ms Grierson)
Biannual hearing with Commissioner of Taxation
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JOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT
(Joint-Thursday, 22 April 2010)
Content WindowJOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT - 22/04/2010 - Biannual hearing with Commissioner of Taxation
CHAIR (Ms Grierson) —I welcome everyone here this morning to the committee’s seventh biannual meeting with the Commissioner of Taxation. These meetings are an opportunity for the parliament to hold the tax office publicly accountable for its decisions and its operations. This hearing will also provide an opportunity for the tax office to tell its side of the story on tax administration. I remind participants that the committee will be looking at policy and administration matters. We are not seeking to act as a review panel for any individual case studies or grievances with the tax office, but we certainly are interested in the big issues. By law, the tax office cannot disclose details of an individual’s tax matter. I again welcome members from the Australian Taxation Office before the committee and welcome Ms Granger back into the fold of taxation. Does anyone have any comment to make on the capacity in which you appear?
Mr Olesen —I am the Deputy Commissioner, Superannuation.
CHAIR —Commissioner, do you wish to make a brief opening statement before we proceed to questions?
Mr D’Ascenzo —Yes, thank you. I am pleased to appear before this committee, our seventh such appearance, and report on our performance so far during 2009-10. Prior to this hearing, we provided the committee with a brief report that highlights our performance and some current issues which may be of interest to the committee.
As you will see, the current financial year has been a busy one for the ATO and is shaping up to be a watershed year. Our transformational change program underwent its largest and most complex release earlier this year, with implementation of a new income-tax-processing system. In late January we converted and verified 27 million taxpayer accounts, 32 million accounts and 282 million forms. Our new system was largely self-funded in order to improve our efficiency and to allow us to better respond to the needs of taxpayers and their agents. The new system also provides a more flexible platform that will allow us to better respond to new policy proposals, so critical at a time of major reviews to Australia’s tax and superannuation systems.
With a system deployment as large as this, some transitional issues are unavoidable. We have continued to work closely with the tax profession, government agencies and taxpayer representatives to minimise these disruptions. We are keeping the community updated on our progress through our online updates and expect to be back on track early next month.
I have previously reported to this committee the pressures we have faced to manage within our budget. We commenced the financial year facing the prospect of an overspend. I am pleased to report to you that, through strong financial management and thrift, we are now planning to end the year within budget. Our strategies for managing the budget position included a review of our corporate functions, development of a national property strategy to identify efficiencies, and tight control over recruitment and overall staffing levels.
We have continued to support the community to meet day-to-day tax obligations as the country recovers from the recent economic downturn. For small business we provided immediate assistance and included 12-month interest-free payment arrangements and deferral of activity statement payment due dates. While this has contributed to increased levels of collectable debt, up from $10.5 billion at 30 September 2008 to $12.2 billion at 28 February 2010, the approach we have taken has been recognised by the International Monetary Fund as best practice. For large business we continue to promote our platform for an enhanced relationship based on good corporate governance and early full and frank dialogue on tax risks and issues.
Our performance against service standards has dipped in the face of increasing workloads, the priority given to the delivery of the tax bonus and the deployment of the change program. We are meeting 15 of the 27 service standards. To improve our performance on the others we are streamlining processes and shifting resources to areas of need. However, while we expect to show strong improvement in our monthly performance, we are unlikely to catch up on our annual averages for this financial year.
On the international front, as vice-chair of the OECD’s forum on tax administration I have seen some real progress in the willingness of tax administrations around the world to cooperate on common risks. At a political level this is also reflected in the 23 tax information exchange arrangements that have been entered into by Australia.
This year is the ATO’s centenary. To mark the beginning of our new century we are refreshing our strategic statement, which sets the directions for our future. Consistent with the tenor of my submissions to the committee during its recent review of tax administration, our vision is for Australia’s tax and superannuation systems to be valued as community assets and for willing participation in these systems to be seen as a hallmark of good citizenship. We believe that any progress along that path promotes the wellbeing of Australians. It is an open and accountable administration. We welcome the committee’s views on our performance and on the path we are headed. I would, however, like to ask Mr Butler to provide more detail about the new income-tax system.
CHAIR —Could we defer that. We will certainly move to that now. I thank you for the statement and the highlight you have given to many of the challenges being taken on in the last six months. But I think we do need to ask you the questions directly regarding the many constituents of members of parliament sitting here who are certainly seeing your service standard in a very negative way. We do know that over 140,000 taxpayers have not received their refunds. Is that correct?
Mr D’Ascenzo —I think the 140,000 related to one of the two glitches in our bedding-down processes. That one related to the provision of notices without the cheques attached. But when we found that—
CHAIR —Let us get the picture on the record first. You have got over 140,000 who did not receive their refund. What about the number of people who have experienced a delay in receiving their refund? What is the number on that?
Mr Butler —Can I very briefly give a bit of an overview of what we have put in place, because it will help answer those questions.
CHAIR —Let us get the figure first and then we will go on to the strategies.
Mr Butler —There were 140,000 cheques that were not printed. We identified that Friday the week before last and then we moved during that particular week, last week, to understand that fully. By Friday of last week we had cheques already with the printers to be printed and sent to taxpayers. By Monday of this week the final batch of those cheques were with the printers. So during this week those cheques will go out.
CHAIR —And when does that error date from? When would the first tax assessment have gone out without a refund included?
Mr Butler —That varied. There were some that would have occurred literally the day before we found the problem and some back to late March. We had a period where we could not process returns and 22 March we started processing again. These were not all taxpayers; they were just taxpayers in a particular situation where they had what is called general interest charge on their account. Other refunds were absolutely going through.
CHAIR —So the ones that did not have any deviation from a normal refund there was no problem?
Mr Butler —That is right.
CHAIR —But you have now identified that it is a specific type of taxpayer who has been caught up in this, as you say, glitch. The other question was how many taxpayers have been delayed by this failure in the system to receive their return?
Mr Butler —We do not see it as a failure in the system. There are two delays. I can explain. The first one, as I just explained, was to do with the 140,000 cheques. As the commissioner mentioned, there was a very large conversion back in January. Self-preparers of tax returns should have filed their returns by October last year. So we had extensive information go into the community last year. But it really focused on tax agents who have a lodgement program. As the commissioner alluded to earlier this morning, we encourage them to file returns before Christmas if they want to get a refund. We could not process returns at all for the whole of January, and we made that clear. We also made it clear that we were not sure how long in February we would need before we could start processing returns.
CHAIR —What was the reason that you could not process any returns?
Mr Butler —Because we were taking multiple millions of accounts out of an old system and converting them to a new system.
CHAIR —So it was because of your system overhaul—it was not because the Taxation Office was closed down or everyone was on holiday.
Mr Butler —No. The system we have is integrated with a range of other systems within the ATO and outside the ATO—including Centrelink and the Child Support Agency, just to give two examples. We had no choice but to stop processing returns for all of January and the first two weeks of February. We made very clear to everybody in the community that there would be at least a six-week delay.
CHAIR —And has there been in excess of six weeks delay?
Mr Butler —Yes. In the third week in February we started processing returns. In the first part of February we literally put through five or 10 returns to check them. In the last two weeks of February we actually processed quite a lot. We started processing lots of returns, and assessments and refunds were going out. Then, on 9 March, we identified a problem. We do what are called e-fixes; we have done over 400 e-fixes since we started with this system.
CHAIR —So this is when you see something and you have to modify it?
Mr Butler —Yes. So on 9 March we identified an issue that unfortunately did take us longer than we thought—it took us almost two weeks to fix that and be very confident that it was not going to occur again.
CHAIR —Why did it take two weeks?
Mr Butler —It was complex. It was difficult. We had returns part way through the system. We had to back them out, put the fix in place and thoroughly test that it was not going to cause any more problems. We told the community about that particular issue on 15 March, on our online update—that there was this problem which delayed us. We resumed processing on 23 March.
CHAIR —And since you resumed, can you assure us that there have been no further problems?
Mr D’Ascenzo —Well, we have the 140,000 cheques.
Mr Butler —The 140,000 occurred after that. The assessment went out, but there should have been a statement of account with a cheque. So those are the two issues that happened which have caused delays. As I said earlier this morning, we are very confident that the calculations are correct in the assessments—which is very important, of course, for a tax administration. I guess the environment that we were in was one where, as the commissioner alluded to, there was an increase in the filing of returns before Christmas, though it was not substantial. Tax agents are quite used to getting refunds on electronic returns within two or three days, although our service standard is 14 days. We could not process returns for six weeks and then another two weeks—we had, effectively, eight weeks in which we could not process returns. There have been four months since Christmas, and during the two months we could process them we have tried to do four months’ work. We have worked very, very hard to catch up. Normally we would have 200,000 to 300,000 returns going through our system at any one time; that is the normal turnaround. Of those, many go straight through and the assessment is very quick. That is the case now. Agents who filed a return last week could get the refund today or tomorrow—that is how quickly they are going through now, for returns without any errors and things. We do stop returns. At the moment, we have 188,000 returns we are examining for all sorts of different issues. There could be an error in the return; there could be a high-risk—
CHAIR —But you are saying this is normal processing. You are not going to highlight to us now some real problems in those at-risk calculations?
Mr Butler —No. As I say, normally there are 200,000 to 300,000 going through the system; that is normal at any one time of the year. At tax time it is even higher. And then some drop out that we need to scrutinise.
CHAIR —Has there been any problem around calculation and accuracy of returns?
Mr Butler —We do not believe so. That has not been brought to our attention, and we do not believe so.
CHAIR —For us, representing the people of Australia, you may have tried to warn your tax agents and the taxation community that there could be delays, but that does not mean that they would have absorbed that. There is always planning around getting that tax return back, whether it is by a small business, an individual or the agents who depend on that for their income. So there will be genuine hardship cases. Could you tell us what you are doing to assist in that matter?
Mr Butler —We have been quite overt from early March about what we would do. We actually caught up with the processing at the end of February. So we were very pleased, but we had this one problem and lost two weeks. Right from that point, we made it very clear what we would do around hardship. We have produced some refunds in 1½ hours from the time someone raised a concern with us. We have had agents approach us who might have been waiting on assessments. We have checked those thoroughly and processed returns as quickly as we can. We have just over 3,800 cases processed as hardship. It is not a long period since we started processing on 22 March. People ring us and say that they need the money quickly. We can tell from the system that the refund might go out on, say, next Monday, or something like that, and they have chosen to wait for that. In strict hardship cases we have applied the criteria very openly. We have basically said, ‘If you need the money, tell us and we will do everything possible to get you the refund.’ There are 3,800 cases—
CHAIR —What do you mean by ‘do everything possible’? Do you do an advance? Do you take that matter out and process it individually?
Mr Butler —We would manually process some things to get them through quickly and make sure the refund gets out. I said we did one in 1½ hours. We take what people say as it is and we certainly process them very quickly.
CHAIR —You take an empathetic approach?
Mr Butler —Very much so.
Mr D’Ascenzo —I have four case studies that were made from actual situations.
CHAIR —We could have those tabled and circulated to the committee.
Mr D’Ascenzo —That is what I had in mind.
Ms LEY —Can I start by congratulating you on your approach to those who owe money and on your collections policy. As you reflected in your opening statement, you have taken an empathetic approach, and I agree that you have. So I would like to thank you for that. As a member who represents a lot of drought affected constituents, it has been very important for farmers and small businesses.
Mr D’Ascenzo —Thanks very much.
Ms LEY —The chair just mentioned hardship cases. How many approaches hardship regarding hardship have been made to the tax office in the context of the recent change program?
Mr D’Ascenzo —As Mr Butler said, sometimes people would ring us and then be happy, and not take it further. And there are those who said, ‘We really desperately need it.’ We have had in order of 4,200, and so far in the last couple of weeks we have been able to fast-track 3,843 of them.
Ms LEY —I have some particular instances which I may table later who approached you regarding hardship and have not been helped—at least I hope they have by now. They have been through a long, frustrating 10 days when they were promised that money would be placed in their account on a certain day and it wasn’t.
CHAIR —I am sure the commissioner will look at those separately.
Ms LEY —The history of that would be interesting. Given the struggle that this has been, would additional staff and resources have been of assistance?
Mr D’Ascenzo —To the extent that we have now found ourselves with unanticipated extra work because of the two-week extra delay that occurred, we have been putting on new staff to push that through. At the earlier point in time, we had not anticipated the fact that we would have the glitch that Mr Butler raised: one of our normal e-fixes impacted on what was going through the system. We had to black out all the systems and that added an unavoidable two weeks to what was already a planned process.
Ms LEY —Which two weeks?
Mr Butler —From 9 March to 22 March.
Mr D’Ascenzo —We do now have cases that we would like to push quicker and we are doing everything we can to put on some new staff to do that.
Ms LEY —Is your inability to have those staff on deck now a resource constraint or a training and availability constraint?
Mr D’Ascenzo —We put priority onto doing this work, so within our own budget we have been able to allocate money for that to occur. It is now just a matter of bringing them on board.
Ms LEY —How many people’s returns today that you would not be examining for legitimate reasons, in other words because there are issues, are outside your normal service standards. How many of those returns could you identify as being late because of the change program as of today?
Mr D’Ascenzo —They may not be all just because of the change program.
Mr Butler —As I mentioned before, there can be various reasons that a return does not go straight through the system. This can be that there is child support obligation, there is a Centrelink obligation, there is a high-risk refund, which we check very thoroughly, there could be incomplete information on the return, the taxpayer may have made an error, there are all sorts of things that could happen. Just by way of information we have now issued 915,000 refunds for $4.2 billion since the system started so a significant amount of work that we needed to do has been done—
Ms LEY —I appreciate all that, Mr Butler, but I want to know how many are outstanding today.
Mr Butler —As of today for individuals, where most of the concern has been, there have been 15,000 refunds—
Ms LEY —When you say individuals I do not just mean individuals, I mean returns. They may be company returns; they may not just be individual returns and trust information as well.
CHAIR —Can you try to tell us how much of that figure would relate to the change program and the failure with the system.
Mr Butler —The system has not failed.
Ms LEY —How many are outside the service standard? If you would normally have some outside the service standards then maybe that is a number you could include.
Mr Butler —There are 108,000 outside the service standard today.
Ms LEY —At the moment?
Mr Butler —Yes.
CHAIR —How many of those can you attribute to a problem with your e-fixes?
Mr Butler —None. We know all these cases. We are working through them. They are all cases where there is a high-risk refund, there is an error in the return. Our fixes have not caused this problem.
Ms LEY —But they are delayed because of a backlog—would that be fair to say?
Mr Butler —We stockpiled returns for six weeks, as I mentioned, so we had 700,000 returns when we started to use the system again. We have caught up with most of those. They started the processing in the system by the end of February. As of today, there are 15,000 individual taxpayers who are waiting on a refund above 50 days in our system, but they are all cases where there is a good and valid reason the assessment has not gone out.
Ms LEY —How many are above 14 days that would normally go through tax agents?
Mr Butler —I do not have that information with me today, I am sorry.
Ms LEY —Of course you appreciate that tax agents earn their income from returns. Although you may have suggested that they try to do as much as possible before Christmas, given the nature of their workload and their lodgement program, that is very difficult. What would you say to tax agents who I have been talking to for the last couple of weeks some of who have not received any income since Christmas, who are still waiting for returns since Christmas and some who have a large proportion of their work still outstanding, not just the odd one or two. Do they have any recourse for the fact that they have not received income because of the backlog and they have spent in many cases a long time trying to chase up individual refunds something they cannot charge out to their clients. I spoke to someone yesterday who had the tax office on hold for an hour and a half before it went to the engaged signal. Those stories are not uncommon because the hotlines are obviously absolutely flooded with people with questions, but it is adding significantly to tax agents’ workload. What would you say to them? Maybe that is the question for you, Commissioner?
Mr D’Ascenzo —I think we are appreciative of that. I can understand the situation where people do rely on the refunds to make their income. The gap of the six weeks that we told them about was already going to hurt some of them in some ways. What we have tried to do is to speed the processes up so that assessments have gone out, both refunds and debits. As Mr Butler said, we now have two million assessments out the door and we are hoping to be back on track in the short term. We are appreciative of the fact, but I am not sure what you do when you close a road to improve it for the future and you say to people, ‘Look, there’s going to be some delays.’
Ms LEY —Is there anything you can offer tax agents? I know that you probably do not have it within your powers to make compensation payments, but is there anything else that you can offer tax agents to compensate them for what have been in many cases unacceptable delays? I have actually got 12 pages of feedback from members of the Taxation Institute which I will table. It really does express serious frustration on behalf of an enormous number of tax agents.
Mr D’Ascenzo —I can understand that. As you mentioned beforehand, our approach in relation to people who are in need is to be as sympathetic as we can.
Ms LEY —But that does not necessarily include tax agents in need—or does it?
Mr D’Ascenzo —We have a very strong relationship with tax agents. Again, we are very efficient in providing them with a very good service, so, when they have something that is not of the high standards they expect, it is a little bit different for them. We have people talking one on one with tax agents and tax agent firms right across the country to see what we can do individually to try and ameliorate the situation as much as possible. If there is a high percentage of their people in one area, then that can be a priority area for us to speed that up, if that needs to be done. So we can target people who are really struggling because of the profile of their firms, on a firm by firm basis, and say, ‘We’ll see what we can do with these clients and push them forward.’
CHAIR —Are you doing that?
Mr Butler —Yes.
Ms LEY —They have been waiting since December, so if you start doing it now and you only have, as you tell us, 108,000 returns outstanding then I think they are very much experiencing the problems now, and anything you might do in the future would have to relate to that period of time.
Mr D’Ascenzo —As I said, there was always going to be disruption associated with the conversion. That is unavoidable. We have tried to make that as clear as possible. The chair rightly said we did everything we could to explain that to people. But most people will not understand the complexity of moving off one major platform to another. As Mr Butler said, what we did was a big endeavour by global standards and what we have been able to achieve has been quite spectacular in a lot of ways.
CHAIR —What is important is that the six-week planned disruption that was anticipated does not now blow out to three or four extra months of delay.
Mr D’Ascenzo —I totally agree with that.
CHAIR —Can you tell us if extra staff and better responsiveness to call centre calls will assist to make sure it does not blow out even further?
Mr D’Ascenzo —That is what I was saying. Mr Butler has said that, at this point in time, our planning is that we should be back on track in terms of normal processing times for cleanskin returns—
CHAIR —Will the interest provision apply to these delayed returns?
Mr D’Ascenzo —Yes.
CHAIR —Will there be an interest payment?
Mr D’Ascenzo —There is a statutory provision that applies to the taxpayer where the delay has passed certain periods of time, 30 days for most—
CHAIR —And it is a strict formula and I note it is much lower than the interest rate that you would require from a defaulting taxpayer. You require about 10.25 per cent—
Mr Butler —That is what the law requires.
CHAIR —That is right. There is a bit of a mismatch here, though. So what interest rate is the taxpayer who has been inconvenienced and has had to wait for this going to get?
Mr Butler —It is just over four per cent. It changed on 1 April, in fact, to four per cent.
Ms LEY —That is what you pay people—
Mr Butler —That is right. For any period beyond 30 days, the refund paid would include the interest component.
Ms LEY —But there is a difference in the date from which you pay it. Is it the date from which they should have received it, the effective date, the date of the statement, the date that the tax is actually due?
Mr Butler —The date of the assessment.
Ms LEY —If there is a difference between that date and when the assessment was posted, is that too bad?
Mr Butler —If it goes through the normal course, the post, we cannot anticipate that. But when the dust settles we are going to go back and check that everyone got the right amount of interest. We expect an average refund of $2,600 at this time of the year. Interest on a return assessment sent 60 days after it was lodged, so 30 beyond the 30, is about $7.50.
Ms LEY —If somebody owes you $2,500, how much interest would they pay over the same amount of time?
Mr Butler —Just the statutory rate, but I do not have that figure in my head. We do not prescribe the rate. The laws and the—
Ms LEY —Does anybody know the statutory rate that taxpayers would pay?
Ms Vivian —The current general interest charge is 11.16 per cent. That is a standard figure of seven per cent on the 90-day bank accepted bills, which is 4.16 per cent for this quarter. But I also stress here that we work very closely—a bit like what you are talking about—with people in difficulty with paying their debts. People can come in and talk to us and, if we can remit it, then we certainly look at where we can remit interest as well.
CHAIR —Before you finish your questions, Ms Ley, are there any other committee members who wish to ask questions on the change program before we move to other areas?
Senator LUNDY —Yes.
Mr BRADBURY —Yes.
CHAIR —Ms Ley, you have one more question.
Ms LEY —It is on the change program. I want to focus again on the numbers. On radio last week the Assistant Treasurer said the backlog would be cleared by the end of next week, which, as I understand it, is a week tomorrow. Is that going to be the case?
Mr Butler —Yes. We know all of the returns that are not going through the system without any stoppage and, as I said before, with all of them there is a good and valid reason why they have not gone through. We had the 140,000 cheques that were not printed and there was lots of media coverage about that last week but, as of Friday next week, the figure I gave before was that, going through the checking process, there are 188,000—
Ms LEY —188,000?
Mr Butler —Yes, not 108,000. I just want to make that clear.
Ms LEY —So it is 188,000 that are in the backlog?
Mr Butler —They are actually going through the system. Some of those could have been filed two weeks ago or a week ago and some could have been later. They include high-risk refunds, errors in the return and all sorts of things like that.
Ms LEY —But you are not able to say how many are outside the 14-day return period, late because of the backlog?
Mr Butler —108,000 are beyond the 30-day standard.
Ms LEY —So, out of that 188,000, there are 108,000?
Mr Butler —That is right. We normally would see about 100,000 going through that process, so we have got about 88,000 more than we would normally have. By Friday of next week, we will be absolutely on top of that and they will not be there.
Ms LEY —Commissioner, inquiry terms of reference have been released for the Inspector-General of Taxation to look at the change program. That would include the delay and the reasons for the delay. What is your response to that, given that you feel the systems are A-OK?
Mr D’Ascenzo —It is probably good to get verification of my thoughts.
CHAIR —We note that the inspector-general has been asked to do that. We applaud the work he does and he obviously meets with us regularly in his role. We are pleased to see he has been particularly active in other areas. We will come to some of those today.
Mr BRADBURY —Mr Butler, do the figures you were just quoting—the 188,000 and the 108,000—all relate to refunds or are they returns?
Mr Butler —They are company returns, taxable trust returns, superannuation returns and individuals. There are about 15,000 individual refunds. Typically half of these cases are refunds for individuals. A lot of those would be debits and things like that.
Mr BRADBURY —In terms of access to the phone service—the hotline, the toll-free number—we have heard anecdotal reports of people having difficulty getting through. What can you say to the community to reassure people that, if they have difficulties, if they are facing hardship, they can get prompt service?
Ms Vivian —We became aware that people were having difficulty getting through. One of the things we have done—and I would urge the community to take note of this—is, at certain times if our phones get overloaded, put a message up saying, ‘You can’t get through at the moment; ring back later.’ However, sort of overnight late last week we put in a special service. We said, ‘However, if you’re concerned about getting your refund, ring this number.’ People ring that number and we ask them to book a time when we can call them back. We have people working late at night and on the weekends to call back and deal with them. I would urge people to use that service. We put that in place from Friday morning. We had people working over the weekend, and people have booked calls at different times during this week when our staff will call them back to try and make sure we can deal with any hardship issues.
Mr BRADBURY —What is this extra number? I am assuming it is advertised prominently on the website.
Ms Vivian —Yes. Also, when people ring up they are given the number. The number is 1800150150.
Mr D’Ascenzo —One of the problems with people spending a lot of time ringing up to find out about expected delays is that it has put a lot of pressure on our people in responding, and that is why we are seeking further resources. Ms Vivian may want to mention the numbers we have in mind.
Ms Vivian —As an example, you asked earlier about resources. In terms of processing our returns, normally we would have around 300; we have about 960 people doing the work at the moment and we are bringing in another 380. There is an element of training to undertake, and it is the same thing on our phones—we have an additional 120 people in training now. We also have a provider that we are pushing as many calls to as we can to help people during this period.
Ms LEY —How many people would you save if the change program was working properly? You said that normally you have 300 people processing returns.
Mr Butler —We are dealing with a peak. So, regarding the numbers that Ms Vivian just alluded to, we have put more people on to deal with the peak. It is just that the volume of calls and returns right now is so high while we catch up. That is why we have the additional people.
Ms LEY —Would you save staff if the IT system was working really well? Would you improve the numbers of processed returns? Would there be fewer people processing returns than previously instead of three times as many?
Mr Butler —Yes, because they would have been processing returns in January and February and those two weeks in March, during which they could not process returns because we did not have the system available for the first six weeks.
Ms LEY —Would you have fewer people allocated to processing returns?
Mr Butler —During the whole time—
CHAIR —Commissioner, are you able to tell us that you can quarantine this so that other areas of tax administration will not be delayed and affected? Are you able to quarantine this process now so that it does not spin off and delay other important payments to taxpayers?
Mr D’Ascenzo —Again, we have got to a situation where we believe that by the end of this month normal clean-skin returns—in other words, returns that do not have any errors and are not picked up through our risk filters—will go through the system in normal processing times. I can give you that assurance on the information that we have available at this point. That is what we are planning on. In relation to the backlog, it is partly associated with the fact that we have had to turn the system off while we converted to the new system, and we are also working through the glitches we have had and hope to have that cleared in due course as well—within this month.
CHAIR —And projecting into the new tax period at the beginning of the next financial year?
Mr D’Ascenzo —I wanted to make the point about what that has done. It has impacted our service standards. While we are planning to have our service standards on a monthly basis back to the level of our regular performance measures, we are unlikely to meet the annual averages given the dip that we have had to go through in the conversion stage and some other issues that we had with further backlogs earlier this year. But next year we shall start on a process where we have a new system that is working well. We will have our staffing levels trained on the new system, because it always takes a level of training on new systems as you go into the future. We will have every opportunity to meet our service standards and also I do not think there will be such high call volumes because I do not think there will be the issues that we are currently facing with people who legitimately are concerned about their refunds or the impact of the refunds on them in terms of tax agents. I said that this year was going to be a watershed year because, in a lot of ways, we have put in the hard effort to build a platform that allows us to move into next year with the sort of base that will allow us to respond as well as we can to whatever might come out of different changes or different expectations.
CHAIR —I ask that a member move that the ATO submission be authorised and also that the documents table by the ATO—the case studies we have been given—and Ms Ley’s exhibit be authorised for publication. Thank you, Senator Bishop.
Senator LUNDY —I want to ask some broad questions about the ATO’s commitment to open standards and for a report to the committee on the extent of the use of open source technology within the ATO in attempting to achieve the objectives of the change program.
Mr Gibson —The AGIMO agency within the Australian Public Service is promoting and establishing the government’s adoption of, and compliance with, open standards. We have been very actively participating in that. When those standards are finalised then we would be complying with them as we go forward in time.
Senator LUNDY —As one of the parliamentary members of the National Archives of Australia Advisory Council, I am very conscious of the ongoing effort by the National Archives of Australia to improve compliance with electronic document management recordkeeping. To what extent does the change program address any deficiencies in Tax’s capacity to provide records to the Australian archives? Are you able to report to the committee the level of compliance in the provision of open standard format electronic document records to the National Archives in accordance with your responsibilities under the legislation?
Mr Gibson —The change program being a tax administration system, I do not believe we provide archive records of that to National Archives.
Senator LUNDY —But you are required, as an agency, to provide records to the National Archives of the business of the Commonwealth. So perhaps it is less related to the change program and more related to a general IT systems management issue. I am happy for you to take that on notice.
Mr Gibson —I would rather do that, because I would not want to misrepresent the program.
Senator LUNDY —Yes. I think you should be quite careful about that, too.
CHAIR —Senator Lundy, I am very keen to finish the change program. We have an hour to cover other matters.
Senator LUNDY —Okay.
CHAIR —I know Senator Kroger has other questions relating to the previous questions on the change program. Are you happy for us to deal with that or do you want to continue?
Senator LUNDY —I will take your guidance, because I do want to ask some questions of the ATO about the extent to which they are investing in Web 2.0 or interactive web applications with their clients. I am quite happy to ask that in the general section rather than in the change section.
CHAIR —Alright. We will just finish off on the change program with Senator Kroger.
Senator LUNDY —Thank you.
Senator KROGER —I just wanted to go back to your comments about extra staff that you have taken on. How many do you normally have? What was the figure of staff normally processing claims?
Ms Vivian —I mentioned that normally we would have about 300 staff processing. We can move work priorities across our staff so instead of the normal 300, to make sure we are dealing with this work we have moved all of our staff to focus on this processing area, which equates to around 900 staff. Plus, we are bringing on additional people to assist us with this work over the next few weeks.
Senator KROGER —That was what I was seeking clarification on. Are they coming from areas within—
Ms Vivian —Within the our processing areas to focus on that.
Mr Kukoc —the processing areas to get through the backlog. You have commenced a process of actually taking on more staff. Are they ongoing? Is it an increase in staff numbers to manage the new system?
Ms Vivian —It is not to manage the new system. I also need to say that at this point of time in the year we are starting to gear up for tax time. So there is a mixture, where we are bringing on staff to assist us to make sure that we are pushing this work out as quickly as we can, plus we are starting our normal preparations for tax time—where we bring staff on, train them up and get them ready—because we will start to have peaks in July and August of this year.
Senator KROGER —So what areas have the people come from that you have moved—the 600-odd—to assist in getting through this backlog? What areas are currently not being dealt with?
Ms Vivian —They are in our processing world. We do not move the people; the work gets moved to the people. We have a whole range of work coming through there. It might be processing errors and declarations or fixing up some account reviews that we might want to go back over, so we have made our priority—it is what I think the committee would expect—focusing on getting on top of these errors in terms of the items that we have suspended and which we need to have a look at. We do this work all during the year. We are always re-prioritising when there are peaks and to do what is most important for the community.
Senator LUNDY —I have a general question about the ATO’s efforts to engage with citizens using the web as an interactive environment, or Web 2.0, particularly apropos the ideas and recommendations emerging from the Government 2.0 Taskforce. I want to hear when you are at with these initiatives and the level of commitment in the ATO to improve your interactions with citizens using these technologies and social networks and so forth.
Mr Butler —We are looking quite closely at Web 2.0 opportunities. We are at the moment developing a new information technology plan and we have had workshops to explore how we could move more quickly if necessary into this space. In fact, the head of the government’s taskforce came and presented to our workshops, so we went through that. Also we had a number of our young graduates who are very active in Web 2.0 communications tell us—
Ms LEY —You are on Twitter.
Mr Butler —Yes. So we are very much—I mean, tax administrations are often amongst the first government departments to take up new ways of communicating with people. Our world is electronic in many ways and we certainly explore that fully and will develop some more comprehensive plans over the next few months as to what we want to do there. I do know that, for instance, some of the Scandinavian countries have lots of experience here and we are certainly getting to learn from that.
Senator LUNDY —So is there any documentation or perhaps references in your annual reports that you can point the committee to about progress to date?
Mr Butler —It is at an early stage and I do not want to put words in the commissioner’s mouth, of course, but in this year’s annual report we could perhaps pick that up.
Mr D’Ascenzo —There is mention—I am not sure if it was in our annual report but certainly in some of information we might have provided to this committee or elsewhere publicly—about the fact that we have made use of those technologies in some of our activities and we have piloted out. But, as Mr Butler said, it is still at an experimental stage.
Ms Granger —We will be putting this into this year’s annual report but we have just started our first cautious twitter and will certainly report on that, and that is about learning how to use that communication. We got some quite flattering comments back that it is very cool for the ATO to try to do that, which I guess give you some sense of that. As I said, fairly cautiously but we are actually trying to figure out how we might use that as a communication tool.
Mr BRADBURY —It might be worth following you.
CHAIR —We move to compliance areas now. I raise with the commissioner that you were in your compliance program for 2009-10 tripling your audits of executives and directors, with a stronger focus on private and foreign company executives and directors, and closer scrutiny of individuals with a net wealth of greater than $5 million, which you have reduced from previously $30 million. Could you tell us the progress on that area of the compliance program? We might get to the future compliance program as well. Could you give us outcomes now on the audit of executives and directors?
Mr D’Ascenzo —It is actually two programs. One program is the high wealth individuals program, which is still people with wealth in excess of $30 million. But we now have a separate program looking at what we call wealthy individuals that has that lower threshold of $5 million.
Mr Quigley —I can give you some statistics on the high wealth individual program. From the 2009-10 year, so the year to date, to the end of February, we have raised $275 million in assessments and we have registered 1,096 new high wealth individuals.
Mr D’Ascenzo —If I could explain, what has happened is not necessarily that people are getting richer—
CHAIR —You have identified them.
Mr D’Ascenzo —We have identified them more. That process is really having to go through a whole range companies, trusts and partnerships to understand who the beneficial owner is of those assets. A lot of the investment we have made over the last few years has been in trying to improve our ability to do that. That is why you see a huge increase, from something under 1,000 when we first started to closer to 2,700.
Mr Quigley —This comes about because we are able to better automate our information gathering from third-party information on assets held by individuals and the various transactions they undertake.
CHAIR —Mr Quigley, at the release of the compliance program, you were reported as saying that taxpayers were resorting to illegal practices to offset the effects of the economic downturn, with particular concerned about the micro business sector. Was that real?
Mr Quigley —Yes, we are seeing that. In the micro sector it is more a matter of skimming—in other words, not reporting all income.
CHAIR —So the cash economy we would when d see perhaps being more activity during those harder times?
Mr Quigley —That is correct. On the broad front of wealthy Australians, there is concealment of income and assets offshore. We are certainly seeing more of that. We are getting much more information exchanged. We are able again to build up profiles of where assets and income are apparently being concealed offshore. We now have 25 exchange agreements signed. There was a very significant one yesterday signed with Vanuatu. It comes into force on 1 January and we expect that we will be able to continue that matching and profiling in that particular arena.
Mr D’Ascenzo —To put that in context, when Mr Quigley said we are seeing more, I think it is just because, as you outlined, our ability to see things through change of information agreements, through datamatching and through datamining activities has revealed areas which may have existed. I think the economic downturn has lifted risk profiles across the market. I would not then translate that to say that there has been a decrease in compliance across the community. I think most people at the micro end and at the large end have still sought to apply the law properly, but through our more sophisticated techniques we are detecting those few at all levels of our administration, at all market segments of our administration, who are doing the wrong thing.
CHAIR —Can I draw attention to two areas to which you drew attention specifically. In March, you were quoted as saying that a quarter of large company boards are failing to take tax laws seriously and that multinational groups are increasingly shifting offshore losses into Australia to avoid paying tax. Also, in a speech earlier this month to the Australian Bankers Association you were very critical of the activities of some banks engaged in complex offshore swaps, transactions designed to shift profits to lower tax jurisdictions. How does that sit with compliance?
Mr D’Ascenzo —That is a good way of putting it into context. We try to look at the population at, say, the large end of town to work out who are high-risk taxpayers, who are low-risk taxpayers or medium-risk taxpayers. We try to treat people differently. It is an approach based on tailoring our responses to levels of risk. When I am sending those messages, I am sending them in relation to the few. In my speech I indicated that people who are high risk are a small proportion of the wider population. I am saying to that small proportion, ‘Hey, we have our focus on you.’ The same applies to a lot of the work we are doing in all our market segments—profiling those who are higher risk and trying to take tailored approaches in that regard.
So, in the cash economy area, we are targeting industries, taxpayers or others where our data seems to suggest that cash and the improper use of cash, in terms of not declaring it, is more prevalent, and therefore we are taking some more approaches. I can say that I can be quite tough where we see high risk and still quite confidently say that, by and large, the broader population is still trying to do the right thing.
Ms LEY —An issue in the last budget was that the ATO received $302 million for compliance purposes in order to realise $1.3 billion in increased compliance. How long before we see that revenue? To what extent have we progressed along the path to $1.3 billion?
Mr D’Ascenzo —I think that is an over-a-period-of-time figure.
Ms LEY —Over four years.
Mr D’Ascenzo —In the report we provided to the committee I think we gave a reasonable rundown of where we are tracking. At the moment, in terms of the raising of liabilities, I believe that across the board we are on track. There is always a lag with collections. We are still working on that and are on track to meet those targets over a period of time.
Ms LEY —I know it is difficult to make specific measurements, but surely you must have some measurements, no matter how imprecise. Since the budget papers say $1.3 billion, how are you going to measure that that outcome has been achieved after four years?
Mr D’Ascenzo —We do that. We track all our measures. In fact, when I reported to the committee that we have 18 specific commitments, they are tied to commitments that the government has specifically funded for some of our activities. We track each of those activities religiously. You would have seen it also in our plenary governance papers that we sent to the committee, where we go through every one of those and indicate how we are tracking. I am happy to refresh that for the committee, if you wish.
Ms LEY —In those tables you would be able to see how much income has been realised in the last 12 months since the budget?
Mr D’Ascenzo —It is broken down usually in terms of the commitments. It is not necessarily always about liabilities; sometimes it is about provision of help and a range of other services. In those where you have an expectation of the ATO raising certain liabilities and our expected collections for that year, we do track that.
Ms LEY —You are on track to get to $1.3 billion in four years?
Mr D’Ascenzo —There are pluses and minuses across the whole range of it but, by and large, we are meeting the commitments substantially.
CHAIR —You say in your report that you would claim that there has been a significant increase in voluntary compliance because of the investigations you have in, say, the Wickenby task force. Can you quantify that it all?
Mr Quigley —Could I give a couple of examples?
CHAIR —Yes. We would be interested in any advances on the Wickenby operations as well.
Mr Quigley —Sure. With Wickenby, it is important to understand that effectiveness is not necessarily just by raising assessments through audits, although we have conducted over 665 audits and 26 criminal investigations specifically under Wickenby up to the end of February. We have raised liabilities of $573 million and cash collections of $479 million. There are the effectiveness measures that would look at beyond the pure dollars. For instance, there has been a 30 per cent reduction in the flow of funds between the areas that Project Wickenby focuses on—in other words, Vanuatu, Lichtenstein and Switzerland.
CHAIR —The tax havens.
Mr Quigley —Yes. Those three tax havens are three areas that we focus on under Wickenby. We can compare that to the general trend of only a five per cent reduction in other high-risk, tax secrecy, jurisdictions. That is one example. Another example is about taxpayers on whom we did audits under Wickenby. If we look at subsequent returns, there has been an increase of 257 per cent on income voluntary returned. That is on the basis that we look at a comparison of the top four per cent of taxpayers. Their tax payable has increased by 30 per cent, so there is quite a significant difference. We have looked at associates of taxpayers who have been touched by Wickenby and there has been a positive change. Our early analysis shows that their average debt, the tax payable, increased by 153 per cent. They are some examples, not necessarily just because an audit on—
Mr BRADBURY —I was going to ask a question about Deputy Commissioner Killaly’s comments earlier this year about the mismatch between the underlying strength of companies and the tax position of those companies. But I would first like to pick up on a point that was just made. I was wondering whether we might be able to get a little bit more information about the so-called amnesty. More particularly, is it an amnesty or is it not an amnesty? For whom is it an amnesty?
Mr Quigley —It is not an amnesty; it is an opportunity for people with offshore funds to come forward and receive reduced penalties. So it is certainly not an amnesty from primary tax.
Mr BRADBURY —So everyone who comes forward has to pay, as a minimum, primary tax and interest?
Mr Quigley —Primary tax, interest and—
Mr BRADBURY —And penalties—or are there no penalties?
Mr Quigley —Reduced penalties.
Mr BRADBURY —So, as a minimum, primary tax, interest and some penalty, but the penalties are being reduced?
Mr Quigley —That is correct.
Mr D’Ascenzo —For old materials, we might cap, or reduce or remit some of the interest so that the amount payable equates to something in the order of 70 per cent of the income that might otherwise have been payable if they had done the right thing in the first place.
Mr BRADBURY —Do you have any figures on what this exercise has already yielded? Obviously it is ongoing.
Mr Quigley —I can give you the total figures for the first initiative, the OVDI, which was launched in 2007. We have had over 3,600 disclosures and that has resulted in just over $69 million in liabilities. Since the refresh initiative at the end of November, we have had 89 disclosures, and that has reflected $5.4 million in omitted income. Under refresh, we expect to get a rush at the end. That is certainly the experience of overseas jurisdictions that have had similar programs. In the discussions our officers have had with some of the advisers who deal with the people with offshore accounts, they are saying they are working through it. It does take quite a bit of work to see what the moneys are there for. It could be just a gift. Some of it is income earned from assets. It is all sorts of different things. Some of it has been bequeathed. Advisers are telling us that they are working through that. We are telling them that, if they advise us by 30 June, it will come within the arrangements.
Mr BRADBURY —I think it was in February this year that Deputy Commissioner Killaly made the point that tax collections had flatlined in respect of large corporates, even though the underlying position of those corporates seemed to be improving. I think he said that, since 2005, 40 per cent of large business tax returns lodged had zero tax payable, half of which had declared losses. If we have a look at the relative strength of the economy over that period, taking into account that there has been a global financial crisis, we would anticipate more losses being recorded in income years from the global financial crisis onwards. It is obviously even more important that the community have some confidence that those profits that were yielded in the periods when the economy was booming are also being reflected in tax being paid as and when it is required to be paid. The commissioner mentioned earlier the issue of transferring offshore losses. Are there any other practices that are coming in for particular scrutiny as part of your audit activity that might go to the heart of what on the face of it appears to be a large number of corporates not paying the amount of tax that the strength of their underlying economic performance would warrant?
Mr Quigley —I will just make a couple of points. We do recognise that large corporates, in the main, are performing well. I think over the many years I have been dealing with large corporates there has been quite a shift in the attitude in a positive sense.
Mr BRADBURY —Performing well in complying with their tax obligations or in underlying economic performance?
Mr Quigley —I meant in complying with their tax obligation. But there are pockets or areas where we do see risks, and we will continue to address those risks. What Mr Killaly was referring to were those sorts of pockets. We are seeing areas that we need to explore. We need to understand why it is that these things are occurring.
The fact that there are a large percentage of nil returns is not out of the ordinary. For a whole range of reasons companies lodge nil returns, including for quite bona fide losses. If you have a look at the period just prior to the global financial crisis, there were a whole range of things that we believe affected corporate profits/tax payments, not the least being the extraordinary appreciation in 2006-07 of the Australian dollar and the impact that had on export earnings. There was the impact of the large increase in oil prices around that time and the steady rises in interest rates. Adverse effects of drought and flood also had a direct effect. So there are a whole range of reasons we look at, and really they are consistent with analysis that external bodies are doing and then saying, ‘This seems to be a fair trend.’
Getting back to the other part of your question—are there areas where we see there are problems?—there were. Cross-border financial arbitrage, for instance, is one area. Transfer pricing is another. None of that is new, and that was the point that Mr Killaly was making. I wrote to the President of the Corporate Tax Association explaining the comments as a result of some communication he had with the commissioner and me on that matter.
Mr BRADBURY —So you actually clarified these matters in correspondence to the Corporate Tax Association?
Mr Quigley —I did.
Mr BRADBURY —Is that a document that can be shared?
Mr Quigley —I would probably have to take some advice on that and, obviously, speak with the Corporate Tax Association. I do not see a problem, because he actually distributed it to his members, which I did not have a problem with.
Mr BRADBURY —Can I also probe the issue of tax risk and the extent to which there may be some accountability on boards to disclose tax risks. In fact, Commissioner, I think you made some comments recently on this point. Would you be able to give the committee some background on where things are heading in that direction?
Mr D’Ascenzo —I think we have been raising tax risks as part of a corporate governance framework for some years now and I think there is now common understanding and acceptance that material tax risks should be looked at, as any other material risk is part of a governance process. You might say, ‘Well, that’s simple and obvious,’ but before the dialogue and discussion in this area people were looking at tax risk as though it was an arcane, black box area to be looked at by others. We have said, ‘No, these are risks just like any other risk and you apply the same level of common sense and commerciality to those decisions.’ I think that is now becoming much more prevalent among Australian boards. Certainly my discussions with a number of companies and boards and associations suggest to me that that is the case. There were some recent surveys done by some of the big four firms which said something like 67 per cent accepted that and had good processes in place and the others were looking at what they needed to do to strengthen it.
I think the experience in Australia is that the boards in Australia are taking more heed of that area than is the case in some other countries, but that is beginning to build. We now have the OECD recommending that boards around the world take an interest in this tax risk as part of their governance. Having the framework is the first step and then making sure that the framework works well is the second step. Part of my ongoing dialogue with boards is about saying, ‘It’s good that we’ve got the framework; are you comfortable it works well? When you have major arrangements of the type that Mr Quigley talked about, where you have a range of cross-border arbitrage arrangements and complex transactions that have a whole range of different steps and processes are you comfortable about asking the very simple and commonsense question: what is the commercial reason for doing all these different steps in these complex transactions, barring the sole purpose of avoiding tax?’ If you can answer that then you do get a level of comfort in terms of your tax risks.
CHAIR —What advice to you give to government at the moment about tax revenue in terms of a trend? Is it returning to trend? Is it still lagging behind because of the GFC? What are your projections regarding tax revenue?
Mr D’Ascenzo —We provide all our information to Treasury as part of the government revenue modelling. It is really more a Treasury matter to provide that. I think in the latest government announcements they indicated that they increased the forecast by some $40 billion over the four-year period. But again that was starting from a much lower base, when the expectations were a little bit more dire.
Senator FEENEY —I was interested in asking a further question regarding Mr Killaly’s speech of 17 February. I guess it flows from the questions that Mr Bradbury was asking you. In that same speech it was reported that there were fairly wide disparities between the levels of tax being paid by companies in different sectors of the economy. By way of example, the financial insurance sector companies were paying an average tax rate of 20 per cent while companies in the education and training sector were paying an average of 30 per cent. I was wondering whether you could explain why disparities like that exist. Do you have any remarks about that phenomenon?
Mr Quigley —It is a difficult one because it depends on what is happening in the economy and the various deductions and offsets that may be applicable to one industry that are not applicable to other industries. Sometimes you find that earnings in one particular part of the economy are offset by other things. For instance, the resource tax payments fell in 2009. They were offset against the ripple effect that we saw through the stimulus payments for the financial, manufacturing, retail and service sectors. In 2008, for instance, the impact of the GFC on financial, manufacturing, retail and services were offset the other way with the resource sector.
Senator FEENEY —So it is something you track over time?
Mr Quigley —Yes; we certainly track that. It is more relevant to track anomalies within the industries than trying to make comparisons across industries, because of the many varied factors that play out and the various policy positions that governments have taken over the years on incentives to particular industries for various reasons. It really is quite a difficult thing to make broad-brush assumptions based on differences.
Mr D’Ascenzo —But, if I can add something, I think that the essence of Mr Killaly’s speech was to indicate to people, ‘Hey, we have a look at a range of these macro and micro indicators, at a company level in terms of profiling, at a group level and at an economy and segment level.’ So, when you see these variances, one of the roles for a tax administration is to ask this very question: can that be explained? Is it just questions of either the economic or the legal framework that provide those differences, or is it levels of noncompliance? I think it is our job to make those sorts of judgments, and that is why we are making it quite overt: this is what we are seeing. Part of that helps us in our dialogue with the various segments about explaining why those differences occur.
Senator FEENEY —In your recent community perceptions survey, it was found that there was an increasing belief that our tax laws allow wealthy individuals and companies to evade paying tax at the expense of ordinary taxpayers. As you say, through your own work you have been able to demonstrate that, at least in the period from 2007 to 2009, our large business sector essentially had a flat tax profile during a period when there was strong underlying economic performance. So my question to you is: what was your response to that finding, and do you have any remarks around it?
Mr D’Ascenzo —I recall that back in the eighties, when we set up the large case program, the findings were very similar. There is this underlying belief in the community that some people are able to avoid tax whereas others cannot. Part of our openness and transparency is to try to, in a sense, say that that is not quite true in a lot of respects. Some of the underlying beliefs do not necessarily reflect reality; they are too broad-brush to apply across the board. As Mr Quigley said, if you look at the amount of tax paid by large businesses in Australia relative to, say, GDP, we have a very high ratio, and that ratio is not just because of our rates; quite a lot of it has to do with compliance. Part of that has to do with the laws, framework and administration and also questions of imputation tax that encourage people to pay tax here and then track their dividends to the shareholders. So there are a wide range of reasons. One of the benefits of openness and transparency is to try to put those broad-brush stereotype responses into some sort of factual context. The best we can do as a tax administration is to put it on the table and be as transparent as we can. It is very hard to change some stereotypes.
Senator FEENEY —If you are combating a stubborn urban myth here, what is your cunning plan for doing that?
Mr D’Ascenzo —That takes us right back to our strategic statement. It comes back to saying, ‘Hey, look: let’s treat the tax and superannuation systems as assets for the country, and let’s have a look at these myths.’ I am not saying they are entirely myths; there is always some truth in perceptions. ‘Let’s have a look at them and see how we can address them.’ I suppose the first strategy, which is a very obvious one, is to try to make ourselves as open and transparent as we can be in what we do and encourage you, the media and other people of influence in our community to push the same sorts of arguments about how important it is that we all work together to ensure that the system is working as intended.
Mr Quigley —Here is one way of trying to get the facts out. For instance, in the 2007-08 year, large corporate tax collections were around $38 billion, and that was around the same in 2008-09—just under. So it is fairly significant. That is actual collections. There is a lag period with collections. So it is a fairly significant part of—
Mr D’Ascenzo —You would have learned from some of the speeches that Ms Grierson pointed out that we are quite tough where we see people at high risk. We are going to be there and we are going to focus on those to protect the others.
CHAIR —Let’s move to that, because I think that the ordinary pay-as-you-earn taxpayer loves to see you take a few scalps. We have raised with you before at previous hearings matters around phoenix companies, and we noted that just 10 company directors have been prosecuted under phoenix company prohibition since 2000. Commissioner, you expressed your frustration with the relatively light sentences that have been given and in your submission you state that the government intends to provide you and ASIC with more powers to address phoenix practices. I know you have some litigation with High Trade, which has caused great individual loss to contractors and to workers et cetera. Could you update the committee on your proposals and activities around phoenix companies and court cases that might have been undertaken since we spoke last?
Mr D’Ascenzo —I think there was some development in two ways. In the May 2009 budget we did get some extra funding to do some work with phoenix activities. That was minor funding but it was focused on some specific risks. The plan was that we would recover something like $5.7 million from that extra funding. So far we have raised in terms of assessments something in the order of $20 million, so we have made some good work out of that.
Very significantly, I think, has been the discussion paper for consultation. I understand that there were 27 submissions made to Treasury on the discussion paper and that the Treasurer will be advising government on that. Basically, that is pushing forward the proposals we spoke about in providing more powers to regulators like ASIC and us in relation to phoenix activities. There was also the announcement by the Assistant Treasurer on 17 March in relation to the use of security deposits. All that starts to build a framework of concerted action in relation to phoenix activities. From July 2009 to 2010 we have also raised in total liabilities about $200 million.
CHAIR —Has there been any prosecution for deliberate tax misbehaviour?
Mr Quigley —At the risk of correcting the commissioner—
CHAIR —Go for it!
Mr Quigley —the tax and penalties in that particular period, July 2009 to February 2010, were actually just over $47 million. But there are also unpaid liabilities raised. Including that $47 million there is a total amount of $164 million. So the difference between $47 million and $164 million are for activities that happened prior to that July 2009 to February 2010. Of that, based on around a 30 per cent collection rate—and we have discussed with this committee before the difficulty in collecting under the circumstances—we expect to collect approximately $50 million out of that amount.
Mr D’Ascenzo —And I totally agree with Mr Quigley!
CHAIR —Have there been any prosecutions?
Mr D’Ascenzo —We have four briefs of evidence currently with the Commonwealth Director of Public Prosecutions, and we are considering another five.
CHAIR —That is obviously an increase on normal previous practice.
Mr D’Ascenzo —It reflects the concern that was raised by this committee, which was shared by us, to take strong action in this area.
CHAIR —We are very pleased to see that this is being pursued—genuinely pursued—and with some good outcomes. It is a case where we can use public concerns at these hearings, bring them to you and see some action, because this one certainly has slipped off the radar for everyone but the public out there.
Mr D’Ascenzo —We agree.
Senator LUNDY —I just want to go back to the issue of open government and transparency that you were describing. Do you think there is a possibility of enabling the use of the TFN for identity verification purposes?
Mr D’Ascenzo —Basically—and this is my own break-up of when you look at specific identifiers—I break up the community in terms of individuals and businesses and, wearing my hat as the Australian Business Registrar, I believe that the use of the ABN/ABR system is really the key to unique identifiers for business. A lot of the developments in the whole-of-government’s sphere are based on using the ABR/ABN as that unique identifier. I think that is core to us. In terms of individuals, that runs a policy agenda that impacts on other government agencies so we have taken a back seat in terms of that wider question of unique identifiers for individuals. The other area in terms of individuals, that runs a policy agenda that impacts on other government agencies, so we have taken a back seat in terms of that wider question of unique identifiers for individuals.
Senator LUNDY —I am not asking the question in the context of the TFN being a shared unique identifier at all. I do not want to be misunderstood. Rather I mean enabling the use of a third party to verify that a TFN is associated with a real person without them actually accessing that data; it is really seeking a verification that that person exists in association with a TFN as a point of verification. It is very important that my question is not misinterpreted. I am not talking about the sort of unique identifier that you described, I am talking about a third party being able to ask the tax office whether that TFN is associated with that person and providing a verification as opposed to any detail about that person.
Mr D’Ascenzo —I understand. That is what the ABR/ABN does for businesses.
Senator LUNDY —So can you do that?
Mr D’Ascenzo —We have done some of that in our work with superannuation funds in relation to a super fund having to know whether or not this taxpayer might want to roll over or might want to take out funds from their super fund—they can look up our TFNs for that purpose. There may be other examples.
Mr Quigley —In those situations we have actually got the legislative power to do that. We have not got it in a more general sense to do that.
Senator FEENEY —The credit reporting agencies have data on individuals or individual corporate entities. Do you avail yourselves of that knowledge, that information, through credit reporting?
Mr Quigley —We do, but not via a TFN.
Senator LUNDY —My understanding is that the sorts of verification purposes enabling verification use of TFN would not require a legislative change, that it is currently within the capacity of the tax office to do that. I am happy for you to take my question on notice, but I would like more detail about what the tax office perceives as potential barriers to this kind of enabling use of the TFN identity verification purpose as opposed to accessing any data that the tax office holds.
Mr Quigley —Maybe I misunderstood your question, Senator. I am sorry.
Mr D’Ascenzo —I think we will take it on notice. I understand the issue. As I said, we have done it in certain respects and I am not sure how much wider or what those applications are. We will take it on notice and get back to the committee.
CHAIR —I am hoping to move through to superannuation. But, Mr Bradbury and Ms Ley, you have a question first.
Mr BRADBURY —Mine is on an unrelated matter. I want to go back to an issue that has previously been discussed at a prior hearing, and that is the issue of the binding nature of the TaxPack. That was discussed previously. One of the reasons that you gave, Commissioner, for I guess winding back the extent to which that document is binding advice was an argument of the increased take-up of the e-tax format, amongst other reasons you gave. It seems to me that, given the outcomes of ROSA, there should be a legitimate expectation amongst taxpayers that there be greater clarity and more binding advice than less. It seems to me in relation to the one area where the everyday taxpayer is likely to rely on advice that you provide, that is in respect of the TaxPack. I know you have qualified that certain parts of the TaxPack will be binding, but I think it would be a much wiser approach to ensure that all taxpayers that were seeking to meet their own obligations by reference to the TaxPack had total confidence that if they were relying on the material set out in the TaxPack they would be protected by that advice.
Mr D’Ascenzo —I have got to say that since ROSA all our surveys, both small businesses and individuals, have gone contrary to that view. They have said, ‘Hey, don’t give us legal arguments that we can rely on, just give us a guide and we will work on that.’
Mr BRADBURY —I am not suggesting it has to be legal in its form. I acknowledge that, once something is given binding effect, you have to take into account arguments that might be made. To the extent that TaxPack is binding, who do you consider it is binding in respect of? Is it binding in respect of all taxpayers in all situations?
Mr D’Ascenzo —If you made it a public ruling, that would be the case, but we have not made it binding. We see it as a guide and we are moving to a guide format. The feedback to us has been, ‘Don’t give us the legal argument, the legal propositions; just give us a guide so we can work on it.’ If you look at TaxPack, you have to ask yourself what is there in TaxPack which is binding? It is a guide. ‘Put your income and a label too.’
When we first introduced TaxPack, we had the same argument being pushed to us: ‘You have to make everything binding. You have to be very precise.’ So we did make it precise. We still tried to use plain English but it became a larger document where we said, ‘If you spend income, it is not spent, it is incurred.’ You start to throw in what is a whole lot of legal mumbo-jumbo for most individuals. What happened was that the size of TaxPack increased and more people went to tax agents because of the size and the wording—which had to be of that nature, because that was the correct wording—became a disincentive for people and made it appear to them that the law was overly complex and difficult. Whereas, before TaxPack they had a guide, ‘Put income here,’ and they followed that guide. If you want to go further, we have the processes behind the scenes. If you want further advice, you can ask for rulings. There are gradations.
Mr BRADBURY —The point I am making is that the people for whom I am concerned with ensuring that they have clarity in what they are doing and confidence that they are complying with their obligations, without fear of anyone coming back to assert that they have not met those obligations, are the people who are not going to come forward to ask for a ruling. Whether or not the current TaxPack is binding, it would seem to me that from page 104 at least those items set out within that section of TaxPack are purporting to be binding advice because it says that:
This section is a public ruling in accordance with Division 358 of Schedule 1—
Mr Quigley —Is that the Special Circumstances and Glossary area?
Mr BRADBURY —That is right.
Mr Quigley —We have looked at that part of TaxPack and we have said, ‘That goes beyond just the guidance material, because it covers things like non-resident withholding tax, foreign employment income, lump-sum payments, dividend and franking credits, those sorts of things which, in a sense, are more complicated and do require a more technical explanation. We have said that goes beyond that guide.
Mr BRADBURY —But why is certainty provided only in respect of the more complex issues canvassed in the document?
Mr D’Ascenzo —The canvassing of those requires a level of technicality which goes beyond most people. In other words, it does not help them.
Mr BRADBURY —Well do not put it in TaxPack.
Mr D’Ascenzo —We will not be in the future. That is where we are heading. You might recall that at the beginning there was this call, ‘Put everything in there, make it all very legally binding and use legal terms.’ Then it became so difficult for the average punter that it was not used by average punters and it pushed a lot of people back to tax agents.
Mr BRADBURY —So TaxPack has never been binding?
Mr D’Ascenzo —Yes, it has.
Mr BRADBURY —Would you not agree that TaxPack has become more legalistic since the time that it was binding?
Mr D’Ascenzo —Yes.
Mr BRADBURY —So is that not the inverse of the argument?
Mr D’Ascenzo —No, we are saying that it is not that useful for a lot of people. That is why you saw the increase in the number of people—
Mr BRADBURY —I actually thought it was useful the way it was when it was also binding.
CHAIR —Can we deal with the TaxPack reforms? You cannot highlight reforms at this stage but you want this clarified.
Mr D’Ascenzo —Basically, the more legalistic you make it, the less useful it is for the majority of people.
Mr BRADBURY —I am not suggesting you make it legalistic. Perhaps the answer is to identify the particular taxpayers who would be the subject of that protection. If the concern is that people are going to rely upon TaxPack to engage in all sorts of tricky—
Mr D’Ascenzo —But I gave you a very classic example: ‘If you receive income, put it here.’ We would have to make it, ‘If you incur income, put it here depending on the year in which you have incurred it.’ That is the difference we are talking about.
Mr BRADBURY —So, if I am Mr and Mrs Smith in south Penrith, and I have answered the question according to the way you have presented it in the guide, and that happens to not comply with my tax obligations, I have not complied with my tax obligations and you have not actually made it any easier for me to do that.
Mr D’Ascenzo —But let me put this to you: we have never had a situation where—under the old guide, where it used to be a guide—people have said to us, ‘What you’ve said to us has meant that how you are behaving now differs from what we have done.’ In other words, it is not really a practical issue. Most people are not using the guide to worry about their legal position. Basically, they follow the guide—and, we are saying, life has gone on!
Mr BRADBURY —So, in that case, in the scenario that you painted, if people had incorrectly recorded their income in the wrong income year, because of when the point of derivation of that income happened to be, then it is not a practical matter because the tax office is not going to do anything.
Mr D’Ascenzo —No, I am saying: people have just said, ‘You’ve got the income; it goes there.’ If they have done it wrong, it is a question of whether or not, ultimately, it becomes a material risk that is picked up in our normal activities. All I am saying is that I just do not think it is a real issue. I just do not think anyone is either disadvantaged or—
Mr BRADBURY —Maybe it is not a real issue, but the way that it exists at the moment, any risk that is to be borne is on the taxpayer rather than on the revenue, the administration, because there is always the ability to go back and enforce that. I guess what I am saying is that there is a very large proportion of taxpayers who, when you assess risk, just do not fit into ‘high risk’, and they probably never will, because of the very simple nature of the obligations that they have to meet. If they want to be able to comply with their tax obligations, and to do that by reading a document that is provided by you, and to submit a return as honestly as they can, then I think that it is not unreasonable to provide them with some certainty.
Mr D’Ascenzo —But then there is all the more reason, when you are talking about 12.5 million individual taxpayers, to make it as simple as you can. And if you want me to be binding I will have to use the legal terms because I cannot bind the Commonwealth other than in accordance with the law.
Mr BRADBURY —But it was previously done.
CHAIR —I think we are going around in circles here. Did you want to make a final point on that area, Mr Bradbury?
Mr BRADBURY —No.
CHAIR —I do not know what 840,000 people relied on last year for the 840,000 extra tax returns last year—whether they used the TaxPack or something else—but how are you going to manage the fact that almost a million people lodged a tax return last year who had not done so before or for some time, because of the tax bonus payment? What are your anticipations or predictions, and how are you responding to that for future years?
Mr D’Ascenzo —Two points: one is that we had an increase, but some of that increase was a bring-forward from the next year. As you know, 73 per cent of individuals lodged through tax agents, so they are on lodgement programs. So, for the benefit of their clients, they would have lodged refund cases earlier, to ensure that their clients fell within the eligibility requirements of their tax bonus. So I do not think that it is the full number. There are a number of cases where we would have seen taxpayers, either directly or through their tax agents, lodge multiple returns—in other words, they had not lodged last year but have now lodged this year. Some of those are new starters, but we estimate that there are something in the order of 130,000 taxpayers who were probably not lodging and should have been—some of whom were entitled to refunds and some of whom were not entitled to refunds but actually owed some tax back.
CHAIR —So the challenge for you is to keep them in the framework?
Mr D’Ascenzo —We have written to all of them and said, ‘Thank you for lodging last year, and we look forward to you continuing to lodge in accordance with your obligation.’ So we have sent them a friendly follow-up letter.
CHAIR —The GFC brought superannuation into very sharp focus. We saw a major increase in self-managed super funds; therefore, we saw people trying to get early release of their moneys or people being fined for putting too much in under the laws. Can you give us a bit of an update on what you have done around those issues of superannuation and what the picture is looking like at the moment?
Mr Olesen —You are right that the number of self-managed super funds continues to grow. There has been a healthy growth rate in registrations of new funds, which is continuing at around 2½ thousand a month. There were a range of concerns raised with us as a result of the financial crisis, including some of the rules around where you can invest and how asset values would affect those rules. We published some information on our website earlier in the period to explain to people that we would be taking a sympathetic approach to those situations where asset values—
CHAIR —And you have been? There are significant penalties attached to putting in too much money or exceeding those limits.
Mr Olesen —The issue of caps is a separate one, in a sense, from that of self-managed super funds. The issue of how much superannuation you can put in applies equally whether your super is in a self-managed fund or a large fund. We have been following through on the caps that were introduced in 2007. There was a transitional period and we have been active in enforcing the caps for that transitional period. We are now moving on to the ongoing years in relation to those caps. You will recall that the caps were reduced in the recent budget, and we have been moving under that area as well. If you would like some more information about the things we are doing, then I am happy to share that with you.
Ms LEY —Commissioner, when are you going to decide how you intend to apply the provisions of division 7A to corporate trust beneficiaries, given the conclusion of the Bamford case at the end of last month?
Mr D’Ascenzo —In terms of the Bamford case we will be applying the High Court’s decision in accordance with its tenor. In relation to division 7A there are a whole range of issues. I do not know whether Mr Quigley knows more about it than I do.
Ms LEY —What I would like you to reflect on, Mr Quigley, is the uncertainty that many tax agents on behalf of their taxpayers are facing at the moment, given the draft ruling issued in December that canvassed the possibility of the new regime being retrospective, which is quite a horror scenario. There is a lot of uncertainty around this issue. Can we have a time line for its resolution?
Mr Quigley —I do have a time line, which I am struggling to find at present. To clarify one point, the final ruling will be out by 30 June. We also intend to issue a practice statement around the end of July, maybe into August. That draft ruling made it clear that a significant part of that ruling will actually have prospective effect. My understanding is that was the main sticking point with the taxpayer community. We have actually had a series of workshops in conjunction with the Institute of Chartered Accountants. There have been about 30 workshops around Australia where senior people from the tax office have gone with people from the Institute of Chartered Accountants and explained to tax practitioners what the rules are, and they have been received very well.
Ms LEY —It is one of the top three issues that were raised by accountants’ representatives when I talked to them. Over 400,000 small businesses use this trust structure with corporate beneficiaries in order to provide ongoing working capital. If the rug is pulled out from under them in the way that it appears it might be, we are facing a very difficult and unfair situation for those small businesses. If the final ruling is due on 30 June, is that it? Is there any room to move? Could there be something that might come out in the Henry review? Is that part of the reason for the delay?
Mr Quigley —I will just confirm that it is 30 June that we are looking for, and 31 July is the date for the practice statement. The idea of the practice statement is to guide people through the issues that are not addressed in the final ruling itself but will need some practical guidance. That is what we are trying to achieve. There are the two issues there. I do not know how much you want to get into the technical issue.
Ms LEY —I am happy to.
Mr Quigley —Okay. There is the issue of the unpaid present entitlements and whether they are treated as loans from the company to the trust. There is the issue of distributions that are used for private purposes. That is the one where I think we are saying that that has always been our view. We are acknowledging that on the side of the UPEs it might have been a different thing, but that was reflected in the ruling. It is all reflected in the draft ruling. Certainly it has taken up the feedback that we got in the consultation process.
Ms LEY —I have not read the draft ruling very closely, but I think it reflects some business-to-business scenarios which would be caught in what some tax agents say would be a previously unheard-of fashion. Of course, if it is distributions privately, that is another matter, and I know that has always been the case. But, if those business-to-business distributions are caught, can you give us a clue as to whether that is going to happen, whether those scenarios in the draft ruling are going to be reflected in the final ruling and how much time agents will have to adjust to this?
Mr Quigley —I cannot specifically tell you what is going in the draft ruling.
Ms LEY —I understand.
Mr Quigley —What I can say is that taxpayers who have made an honest mistake or an inadvertent admission that might lead to, say, double taxation can request that the ATO exercise its discretion.
Ms LEY —So, for those that have relied on previous guidance in your frequently asked questions—I think you have even given this the tick, but perhaps it is not binding—are you going to walk away from that? If they have relied on that previous guidance to set up structures like this to support their small business clients, surely you can comprehend that to suddenly shift the goalposts is quite a remarkable thing to do.
Mr Quigley —But our view on UPE is that it will apply prospectively from 16 December last year, when the draft was actually out. So it does represent—and we have acknowledged this—a change in our practice, and that will have a prospective effect. But the other issues, which you have acknowledged as a mischief, around the distribution for private purposes will have a retrospective effect, because that has always been our view.
Ms LEY —When you release the final ruling in the practice statement, is it possible that there will be any changes to that as a result of any feedback either from government, from the Henry review process or from stakeholders?
Mr Quigley —All I can talk to you about is what we are doing as part of the administration, which is the ruling and the practice statement. What government wants to do through Henry or otherwise is outside our jurisdiction.
CHAIR —Since we met, there have been several external reviews. Obviously the Inspector-General of Taxation has looked at advice, rulings, U-turns and those sorts of areas where the ATO changes its view and it applies retrospectively, and he has made some particular recommendations. Would you like to comment on how you will be responding to the inspector-general’s report?
Mr D’Ascenzo —The report that was out there did not actually find that we had made any retrospective applications. He said he could understand that in some circumstances people’s perceptions that we might have done that could be legitimate, in the sense that that was understandable in the context that there was a difference of view as to whether or not we had a practice out in the marketplace or there were delays in our identifying issues in the market that were there but were not brought to our attention or issues about how fast we moved when there was an issue in the marketplace that we identified and we took some action. I think there were five recommendations.
CHAIR —He has recommended consultation between you and the tax community.
Mr D’Ascenzo —That is right.
CHAIR —Is that underway?
Ms Granger —Yes. We have already started having meetings with some of the tax profession to start to talk about two areas. One is how we clarify the criteria in terms of deciding when to be prospective or not, and the other is how we service the issues where there are views on one side that there is a practice and on our side we may not know about it. So both of those aspects are under consultation as we speak.
Mr D’Ascenzo —There were five recommendations. Four applied to us and we have agreed to those four and we are working on those. I gave you my paraphrase of the inspector-general’s words. That reflected the clarification that the inspector-general gave to an Atax conference a couple of weeks ago.
CHAIR —Thank you. You have said, Commissioner, that this is a watershed year for the ATO. We note that you have acknowledged some slippage in service standards, with a high complaint environment at the moment and some particular issues around the change program that we wish you success in resolving for the good of the people we represent here today. I thank you very much for giving evidence today. This is likely to be our last hearing before any election, I imagine, so I thank you and your staff for your ongoing support of these biannual hearings and acknowledge the work you have done in this particularly difficult period, when much has been asked of the Australian Taxation Office. There may be some additional questions that we put on notice, which the secretariat will forward to you. We thank you for answers received previously to those sorts of questions. That concludes our hearing today.
Mr D’Ascenzo —Thank you, Chair, and I thank the committee for its questioning and insights.
Resolved (on motion by Mr Bradbury):
That this committee authorises publication, including publication on the parliamentary database, of the transcript of the evidence given before it at public hearing this day.
Committee adjourned at 1.07 pm