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Joint Committee of Public Accounts and Audit
Annual hearing with Commissioner of Taxation

CAREDES, Ms Stephanie, Tax Counsel, The Tax Institute

D'ASCENZO, Mr Michael AO, Commissioner, Australian Taxation Office

DRUM, Mr Paul Joseph, Head of Business and Investment Policy, CPA Australia

GRANGER, Ms Jennie, Second Commissioner, Australian Taxation Office

HALTON Mr Philip, Executive Director, Australian Livestock and Rural Transporters Association, Council of Small Business Australia

HARRADINE, Mr Mark, Executive Director, Performance Audit Services Group, Australian National Audit Office

JEREMENKO, Mr Robert, Senior Tax Counsel, The Tax Institute

LARKINS, Ms Alison, Acting Ombudsman, Office of the Commonwealth Ombudsman

MALKOVICH, Mr John, Private capacity

McLOUGHLIN, Mr Andrew, Deputy Inspector-General of Taxation, Office of the Inspector-General of Taxation

McPHEE, Mr Ian, Auditor-General, Australian National Audit Office

NOROOZI, Mr Ali, Inspector-General of Taxation, Office of the Inspector-General of Taxation

PETERSON, Mr Brett, Assistant Deputy Commissioner, Superannuation, Australian Taxation Office

QUIGLEY, Mr Bruce, Second Commissioner, Australian Taxation Office

RAVANELLO, Mr Robert, Chief Operating Officer, Australian Taxation Office

Committee met at 09:22

CHAIR ( Mr Oakeshott ): I declare open today's public hearing, which is the annual public hearing with the Commissioner of Taxation. I welcome the representatives from the Australian Taxation Office and the many people behind. Participants are reminded that only members of the committee can put questions to witnesses if this hearing is to constitute formal proceedings of the parliament and attract parliamentary privilege. If other participants wish to raise issues for discussion they should direct comments to the committee. It will not be possible for participants to respond directly to each other.

Given the short time available, statements and comments by witnesses should be relevant and succinct. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. I invite you to make a brief opening statement to the committee.

Mr D'Ascenzo : I am pleased to appear before this committee to report on our performance during 2011-12 and on matters of interest to the committee. The ATO supports the committee's broadened approach to these hearings, which provide for additional dialogue between the committee, the ATO, our external scrutineers and industry and community representatives. An important part of sustaining community and government confidence in our administration of the tax and superannuation systems is that we have professional and cooperative relationships with our scrutineers and with representatives of a broad spectrum of the community stakeholders whom we serve. We listen constructively to the issues they raise and the suggestions they make to improve the administration and effective operation of Australia's tax and superannuation systems. I thank the committee for its collaborative effort to deal with issues through its constructive feedback and recommendations in Report 426. The ATO has accepted all of the recommendations that are matters for the ATO and the additional information sought by the committee in recommendation 6 has been provided in our submission.

I would like to take this opportunity to highlight our work in two areas of interest identified by the committee in report 426: the difficulty small business has with compliance, and the work the ATO is doing with Treasury on policy development and implementation. The heart of what we do is helping businesses understand their rights and obligations and making it as easy as possible for businesses to properly participate in Australia's tax and superannuation systems. We recognise the diversity of small business and tailor our services accordingly.

Our support for business probably falls under three key themes. Firstly, we support businesses through tangible assistance, such as our business assistance visits and empathetic approach to businesses in short-term financial difficulties. Our approach to tax debts has seen us help taxpayers through tailored payment arrangements for 266,209 small businesses in the last financial year alone. At 30 June 2012, there were 152,007 small business payment arrangements to the value of $1.45 billion in place.

We are interested in the difference between ongoing viability and bankruptcy or insolvency. We help businesses by remitting the interest. As at 31 July 2012 there were 33,270 interest-free activity statement payment arrangements in place to the value of $597.7 million. In 2011-12 we directly helped around 10,000 small businesses through one-on-one, no-strings-attached assistance visits. There were significant reductions in the cost of compliance for those businesses we visited. For example, we found that businesses we assisted during 2010-11 improved the average time they took to lodge activity statements by 11 days. They made 13 per cent more electronic lodgements, had lower tax debt on average than the broader small business population and were less likely to be subject to future compliance action after we had provided assistance.

Secondly, we help businesses facing unfair competition by protecting them from those who seek to abuse the tax and superannuation systems. Our compliance and firmer debt action activities ensure honest businesses are not disadvantaged by the non-compliant behaviour of a few—for example, through nondisclosure of cash income, the nonwithholding of pay as you go or the wilful nonpayment of tax liabilities. This levels the playing field for those businesses making honest choices and trying to do the right thing.

We have also conducted education and marketing activities which provide information to those industries where we assessed employers had a greater risk of not meeting their super guarantee obligations or underdeclaring their income. For example, in 2011-12 we provided information to cafes and restaurants, real estate services and carpentry services. This strategy, together with our efforts from previous years, resulted in voluntary statements lodged for the target industries increasing on average by over 15 per cent in the relevant period.

Thirdly, we are constantly seeking to make it easier and cheaper for business to comply through better ways of reporting information to us—for example, through online channels. We believe there is scope to further reduce the regulatory burden on small businesses and to help them be more efficient by promoting online dealings. We also work with the community in designing products and processes to ensure they are user-friendly.

Our most recent 2012 survey results for the small business sector have highlighted an overall rise in businesses agreeing that the ATO is providing the information and tools needed to manage their tax affairs—that was agreed to by 90 per cent of respondents. Sixty-eight per cent of respondents agreed that our service has improved a lot over the past 12 months. Similarly, our 2012 survey of results for the small-to-medium enterprise segment shows that a large proportion—92 per cent of these businesses—agree that the ATO provides the information and tools needed to manage their tax affairs. The vast majority—85 per cent—believe we are doing a good job. This is pleasing, as we regularly review these results and apply this feedback from the community with a view to improving and better tailoring the work we do.

In continuing to build upon the high level of community engagement and participation in the tax and superannuation systems and to assist in improving and better tailoring our activities, we regularly consult and co-design with the community, business and other stakeholders. We have in place over 60 consultative forums. For example, I chair the small business consultative forum and consider carefully the feedback provided through this forum.

With regard to our work with Treasury, I strongly believe our early involvement in policy and law design helps ensure that implementation and ongoing administration issues, as well as compliance costs for the community, are taken into account during the development process. Ultimately the community will be more engaged and willing to participate if they know what is expected of them, if they are able to do this easily at minimum cost and if they believe the tax and superannuation systems are working as they are intended.

We continue to work with Treasury to improve on the role we play in the policy design process. To this end, we have recently revised the existing protocol between Treasury and the ATO. The revised protocol will result in greater cooperation and consideration of practical implementation during the law design process, taking into account the ATO's experience of law interpretation and administration, as well as its consultative connections with professional and industry bodies. It is consistent with a number of other government initiatives designed to support greater consideration of implementation issues at the cabinet stage of decision making. The revised protocol will be launched on 25 September and will be publicly available on our website. However, given the committee's interest in law development and design issues, I have a copy of the revised protocol, which I would like to table today for the committee's reference.

I would like to conclude by noting that this will be the last appearance of Second Commissioner Jennie Granger before this committee. Today is in fact her last day with the ATO. Jennie has been appointed to the position of Director-General, Compliance and Enforcement, at Her Majesty's Revenue & Customs, HMRC, based in London, UK. Jennie has had a distinguished career with the ATO, including roles in litigation, superannuation, international tax, personal tax and compliance. As well as recognising her wealth of experience and great personal talent, Jennie's appointment to HMRC signals the high regard in which the ATO is held by tax administrations around the world. The appointment of someone from another country to a role at this level, in a much bigger tax jurisdiction, is indeed rare. It continues the international recognition of the skills, judgement and expertise that is developed while working for the ATO. I am very proud of the ATO's role in working collaboratively with other tax administrations to address common compliance risks and to learn from each other to improve tax administration internationally. I know Jennie will continue to further this course in her new role.

Finally, I would also like to acknowledge the contribution made by this committee and our scrutineers to good tax and super administration. Thank you.

CHAIR: Thank you. On behalf of the committee, I also wish you, Jennie, all the best. Hopefully the focus remains on Australia as you work for other countries, particularly in the area of customs.

I will ask about some cleaning-up issues from last year and also about some submissions and exhibits that we have got to allow you, Commissioner, to give some responses. I also might get the Inspector-General of Taxation to come forward now. I will ask some questions and then we might start to include the Inspector-General of Taxation.

Firstly, Commissioner, we made a report based on what we all thought was last year's successful attempt at having a fairly open round table with you, which was a first. Some of the recommendations we made have been responded to by government. I am interested in one in particular—that is, the question of advice provided by the ATO to Treasury and government more generally. We made a recommendation that, at some point, without being too time specific, because you are an independent authority, that advice should be public. The government's response was that they did not agree with that. They feel that it should remain private. The first question I have goes to whether you want to take the dangerous opportunity of responding to the government's response and our recommendation. If you do not want to get too deep in that area, at the very least are you comfortable reaffirming that you are an independent statutory authority and not technically a part of government?

Mr D'Ascenzo : I might start from the second part of that question, if I may. The question is very much to government and one for response by government. It is important to put in context the independence of the commissioner. The independence of the commissioner is in the application of the laws that come within my responsibility. When you start to think about the direction of resources that you put to helping the community, risk management for the community, the application of particular laws to particular taxpayers, the litigation of those matters where the taxpayers seek to have a dispute, they are all matters that are very much independence questions for the commissioner. That level of independence is a good feature of the Australian system. Not all systems have that level of independence. The Australian system gives the commissioner the opportunity to make those decisions with integrity in accordance with the law in a way that meets the statutory responsibilities that are on the commissioner.

There is no doubt about the independence of the commissioner in relation to the application of the tax laws. You hear what I call the 'media myths'—for instance, when I read in the newspaper that obviously the government has asked the commissioner or forced the commissioner to do something. But it is my experience that this government and successive governments have been very careful in not impeding the statutory independence of the commissioner in relation to the application of the law to various taxpayers nor regarding the risk management choices that we make in terms of how we allocate our resources. I can state quite categorically that the level of independence in Australia is very strong and very rigorously protected.

In terms of the advice, part of the role—and it is not a role associated with the application of the law to taxpayers—is to see how the tax provisions and the superannuation provisions are working on the ground. There is an implicit responsibility, albeit not under the independence rules, to advise Treasury and the government of the day about what we are seeing on the ground. That is a very strong and important role of the commissioner. When we play this role, we play it wearing a different hat; we play the role wearing a hat as an advisor to the government through Treasury on what we are seeing in the marketplace. For instance, how tax revenues are going are matters that I report on to government under different responsibilities to the responsibilities I have for carrying out the administration of the Income Tax Assessment Act. There is a dichotomy of responsibility. One set of responsibilities is fiercely independent regarding the administration of the tax laws. Another responsibility is as a member of the Australian government Public Service in providing advice to the government through Treasury as to how laws are operating on the ground and a whole range of other issues, including the management of resources under the FMA Act.

The commissioner has been very independent in relation to the administration of the law, but it has wider responsibilities as part of the public sector to provide advice confidentially to Treasury and government on matters where the government may want to consider legislative change. All that means is that it is up to government at the end of the day to say whether that advice should be made public.

CHAIR: As we consider what we do as a committee, a genuine case could be built that there are valid reasons why information is kept private, if making it public was some sort of challenge to the tax base or alerted people to tricks that might challenge the tax base. The question that I would like some clarification on is: out of 10 pieces of advice that you would give government, roughly how many—and this is in broad terms—are mundane and technical versus those that are a bit more highly charged and sensitive and may be used for the wrong reasons by the wrong people if put into the public domain?

Mr D'Ascenzo : The majority of them are of a technical nature, but they all build in terms of the ongoing legislative workload that a government might have. It would need to make choices in terms of whether or not it decides to accept advice that we provide through Treasury and when that can happen. Sometimes minor changes can take a long time. The more significant ones from the government's perspective are done more quickly.

CHAIR: Also, cleaning up a bit of stuff from last year, we had a long discussion around tax base challenges. Would you like to take the opportunity to put on the record anything around the latest state of play of any challenges, tax receipt reform, the tax gap or any other issues that you think are worthy of mentioning in this public hearing—things that occupy your mind with regard to challenges to the tax base?

Mr D'Ascenzo : What has happened since the last meeting is that the government has moved to make amendments to the transfer pricing rules. It has also announced amendments to the general anti-avoidance provisions. In some way that, to my mind, provides security in terms of the ongoing integrity of the tax base, so that level of concern has been mitigated since our last meeting. I note the committee's support of ensuring that we have a firm and sound tax base moving forward. There is always the question of levels of compliance across the board. To my mind, they remain very healthy compared to international comparisons. We are doing some work in terms of tax gap analysis, particularly in the GST area. I am hopeful that, over time, we will be able to make that more public. Our preliminary work suggests that the tax gap that we have is small compared to most modern countries around the world—I am talking about the GST tax—and that it is trending downwards. So, in that sense, there is some support for the strategies and initiatives that we have taken in terms of trying to support an environment that encourages voluntary compliance.

There is still a lot of complexity in the system. Trying to remove complexity is important over time. That goes to the committee's concerns that have been expressed over a number of meetings about how we make sure that the government and the people who lobby government for changes make sure that they take into account the broader interests of Australia rather than sectional or lobbyist activities that create unnecessary exceptions or unnecessary carve-outs. That works against simplicity, so if you have fewer choices and more clear-cut approaches that will help simplicity and help people understand what their rights and obligations are.

CHAIR: On the tax gap issue, one of the submissions we have received—and I appreciate that we have only just approved the submissions to be public so you would not have seen it—from someone who wants to remain anonymous, so we cannot clarify who it is, made an allegation that there is a tax gap of, I think, $41½ billion.

Would you be willing to dispute, refute, clarify?

Mr D'Ascenzo : Our most progressed work is in relation to the goods and services tax. It is a very much lower GST figure than that. If the person can make themselves available and explain their methodology, I would be happy to consider what they have done. The GST tax gap analysis we have made does not reflect anywhere near those sorts of figures.

CHAIR: I want to give you the chance to respond to another submission, because I do not want you to be blindsided if we put something up on our website at the end of the day. In this submission there is a direct comment: 'I submit that Mr D'Ascenzo insists that the ATO is not required to follow single-judge decisions.' This follows a case in the full Federal Court. It indicates that the Australian Taxation Office has been ignoring the views of the judicial branch of government in the administration of a law of the parliament. You probably know a lot more about this than I do.

Mr D'Ascenzo : No, not really. I would like to know who this invisible person is. Let me say generally, without getting to the person—

CHAIR: We will let you have a read of it and move on. During the day I will let you respond.

Mr D'Ascenzo : I am happy to respond right now, because whatever the situation I take this as personally misleading and offensive in a lot of ways.

CHAIR: That is why I am giving you the opportunity.

Mr D'Ascenzo : No other administration has the rule of law as one of its corporate values. We carefully work with counsel and the courts to make sure that we abide by the rule of law, we are not capricious and we are not arbitrary. Everything we have done has always been supported by counsel advice with a view to respecting the system of laws we have in this country. The system of laws operates from the position that parliament makes the laws and they are then explained through the courts. The courts are the final arbiters and we always abide by those. There are situations where we would appeal. There are situations where we think the answer is not right and we try to seek that to be addressed by a higher court. Or as has happened in other situations, the government has seen that the outcome in those processes has required some legislative change. To claim that we do not pay due deference and follow judicial pronouncements is just wrong.

CHAIR: I wanted to give you the opportunity to say that, because the submission seems to indicate that you are quoted as saying the ATO does not always have to follow judicial rulings.

Mr D'Ascenzo : We have had a lot of discussions since 2007 and I would have thought by now this would be dead and buried, but let me go back to this issue. This issue arises from a case we won. It was based on two grounds and we won one ground. We won the case and we had other cases in the courts on the other issue. We said we would progress the other issue to get clarification from the courts. We were saying we wanted to listen to the courts and get this reviewed by the full Federal Court because we thought this could be incorrect. We had counsel's advice to the effect that we were doing everything in a proper way—that was from the Solicitor-General. We would not have done it if we had not had a clear mandate that this was in accordance with the proper application of the law.

I do not know why some people took it in any other way than the way that it was meant, to have clarification in the full Federal Court, but they did. It ran its own little course for some reason. It is interesting that since that time there have been comments by jurists, including the Supreme Court of New South Wales, saying that was the proper course of action in any event.

CHAIR: Rest assured, we are agnostic about the submissions we receive. We are really giving the opportunity to myth-bust as much as anything else.

Mr D'Ascenzo : Name withheld.

CHAIR: Yes. But it is the content we want to dispel and give you the opportunity to dispel as well.

Mr D'Ascenzo : Think you. I appreciate it.

CHAIR: I might now get the Inspector-General involved. Welcome to representatives from the Australian Taxation Office and the Inspector-General of Taxation. We might start with you, Ali, and we will get the Auditor-General and the Commonwealth Ombudsman to come forward at the same time.

Participants are asked to remember that only members of the committee can put questions to witnesses if this hearing is to constitute formal proceedings of the parliament and attract parliamentary privilege. If other participants wish to raise issues for discussion they should direct comments to the committee. It will not be possible for participants to directly respond to each other. Given the short time available, statements and comments by witnesses should be relevant and succinct. Although the committee does not require you to give evidence under oath I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective Houses. The giving false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege.

Before we proceed, do any of the witnesses present have any opening statements?

Mr Noroozi : I thank you for the invitation to attend today's hearing. The JCPAA's review of support function in relation to the tax system and, in particular, the role of key scrutineering agencies such as the IGT is much appreciated. As you would be aware the overarching aim of my role is to improve the tax administration for the benefit of all Australians. The role offers a unique perspective that is founded upon three pillars: statutory independence; compulsory information and access powers relating to the ATO; and a stronger relationship and consultation with the taxpaying community. This foundation facilitates the sharing of frank and candid views in a manner not ordinarily exchanged between the ATO on the one hand and taxpayers, tax practitioners and their respective representative bodies on the other.

This process of exchange between stakeholders provides a strong basis for the development of my reviews and in the shaping of recommendations for improvements in the resulting report. Each IGT review achieves both direct and incremental improvements. Whilst the full benefit of a given review may not always be immediately apparent, I am confident that the incremental changes brought about by the reviews and other complimentary activities that the IGT undertakes will, over time, result in enduring improvements to tax administration in this country.

I will now update you on the reviews undertaken by my office since we last met, and thereafter discuss a specific opportunity for you to contribute to my new work program. Three of my review reports were publicly released by the minister since we last met. The first to be released was my review of ATO's administration of class rulings. While the class ruling system was found to be a useful element of the tax system, a number of areas for improvement were identified.

The second report released examined the ATO's compliance approaches to small and medium enterprises and high-wealth individuals. Many of the recommendations in the report are aimed at improving ATO staff capability, which was found to be the main underlying challenge.

Another key achievement of this review was the ATO's agreement to replace its Wealthy and wise booklet, which is focused on high-wealth individuals, with a booklet covering its compliance approaches to the entire SME and high-wealth individual markets, providing taxpayers and their advisers with a better understanding of the processes and means of holding ATO officers to account where those expectations are not met.

The Review into the Australian Taxation Office’s use of early and alternative dispute resolution is the latest report to be publicly released. Broadly, the recommendations in this report seek to address stakeholder concerns about the ATO's approach to alternative dispute resolution and its general commitment to resolving disputes as early as possible. Importantly, the ATO has already commenced the process of implementing the agreed recommendations.

Another two of my reviews have also been completed and are awaiting public release. These are the ATO's use of benchmarking to target the cash economy, and improving the self-assessment system. I also have another review which is in progress at the present time; this is a follow-up review focusing on ATO's implementation of IGT recommendations contained in a number of completed reviews.

My office not only examines systems established by the ATO but also identifies opportunities for government to consider policy improvements to those systems through legislative action. A recent example of government adoption of IGT recommendations is the legislative amendments implementing the IGT recommendation to better protect superannuation guarantee entitlements by expanding the director penalty regime as well as a pay-slip reporting of superannuation contributions.

I would now like to invite you to contribute towards my work program. While I may self-select matters for review, my office has the relatively short but proud history of engaging directly with the community to better understand their concerns or issues with the tax system and undertake reviews to address such concerns. This grassroots consultation often draws my attention to issues that may not otherwise be considered. It also ensures my office's limited resources are maximised in delivering improvements through a process that is open and more relevant. I also consult directly with the ATO, other scrutineer agencies and other relevant bodies to identify issues worthy of review. A recent example of intersection between external stakeholders and ATO, of raising a common topic for review, was that of alternative dispute resolution. I am eager to ensure that this kind of engagement with key bodies is also fostered through the JCPAA and its members. I would be grateful for any assistance you are able to provide in seeking to identify and address issues of concern to you or others whom you may be in contact with regarding tax administration. In closing, I would be happy to take questions or note of any concerns you would like me to consider.

CHAIR: Thank you. Mr McPhee.

Mr McPhee : Thank you, Chair. I have previously provided an opening statement, so perhaps I could just make a few brief comments. Clearly, the ATO is a significant public sector organisation with a very important role in collecting some $300 billion in taxation revenue. As you would expect, the ANAO's audit coverage is fairly constant within the organisation. We undertake the financial statement audits each year, and of course the performance audit program would cover about five separate topics.

Speaking broadly, we find the governance arrangements in the ATO to be very effective. Certainly, in the period that I have been Auditor-General and that the commissioner has been in the chair, we have seen continuous improvement in terms of the tax office's own administration. We find the tax office responsive to the matters we raise and always willing to improve areas where there is a need to do that. So it is a good relationship, and I think the tax office does a very good job, given the scale of its operations and its role. Thank you.

Ms Larkins : I do not have an opening statement but I will make a few brief comments. The Office of the Commonwealth Ombudsman received nearly 23,000 complaints last year, and that was an increase of 16 per cent on our complaint numbers for the year before. Of those, complaints about the ATO numbered 2,717, or around 12 per cent of our total complaint volume. This was an increase of five per cent on complaint numbers for 2010-11and makes the ATO our third largest complaint-receiving agency.

This year, our complaints received to the end of August are down by 10 per cent on last year's figures. We are receiving very few tax time complaints. Our relationship with the tax office has improved markedly over the last two years and we are very happy that issues we have been concerned about have been resolved. From our perspective, it is a positive story of issues being identified and then addressed. We can provide some more detail on that. I would particularly like to acknowledge, on her last day, the significant investment made by the Second Commissioner, Jennie Granger, to the relationship between our office and the ATO.

Mrs D'ATH: Can I also congratulate you, Ms Granger, on your appointment. We got the booklet on tax and superannuation litigation trends only this week, so I have not had a chance to read it in detail. I am interested in getting some figures on the resources within the ATO, the monitoring and auditing and the prosecutions in relation to superannuation guarantee obligations on employers. We all hear the anecdotal evidence of employers not contributing and employees not finding out until after they have left their employment, or worst case scenarios where the business goes into administration and then we discover that there is no money there. I want to come back to that point to see if you have any statistics on the number of companies in administration where the monies have not been recovered versus where they have been. I an interested firstly in the ATO's resources and how you monitor and audit businesses in relation to their superannuation guarantee obligations. If you need to bring someone forward to answer those questions, that would be great. Thank you.

Mr D'Ascenzo : I will give you a context of the super guarantee compliance overview that we do. We generally find that quite a lot of employers—most employers—do voluntarily pay their super contributions. In 2010-11, something like $71 billion was paid in super contributions. The complaints that we have are always important to us. In an aggregate sense, they are low; they are 0.17 per cent of employees. That is still a matter of concern but is relatively small in the scheme of things. Last year, in 2011-12, we had 19,440 complaints. That was up from about 18,000 in 2010-11. In 2010-11 we raised super guarantee liabilities of something like half a billion dollars, of which we collected just under $300 million—$291 million. We were able to transfer to employees $269 million last year. This year, in 2011-12, which is the current closed year, we raised $553 million in super guarantee. We are bringing back into the net half a billion dollars a year. We collected $314 million and were able to put into employee accounts $293 million. We did something like 11,000 cases to 30 June 2012. We also did some proactive work which bought in $143 million in 2011-12.

Mr Peterson : Perhaps I can help a little further. I am happy to start with the resourcing question if you wish. During the course of the last financial year, the ATO spent 711 full-time equivalent employees on superannuation guarantee and choice. Just under 250 of those are engaged specifically on super guarantee audits. There are a number of other auditors who do super guarantee as part of a broader employer obligations piece of work. That of course includes the money spent on processing, debt collection—all the activities that support the whole piece of work.

In terms of strategy, our first step, as Michael said, is to promote voluntary compliance. Voluntary compliance is pretty high. Notwithstanding the level of complaints, something like 0.17 per cent of employees actually finish up lodging a complaint with the ATO for the course of a year. Our experience is that about a third of complaints do not result in any liability being raised because there has been some kind of misunderstanding, the money has been paid, it may have been paid to a place where the employee has not looked or perhaps they do not have any kind of eligibility. But voluntary compliance is actually pretty good.

We have a proactive piece of audit that we undertake. A small number of audits are directed specifically to super guarantee. The vast majority are directed more broadly to employer obligations, so they deal with withholding, super guarantee—those sorts of things. We do probably just under 4,500 of those. That is about 4,500 employers, and that is, of course, some multiple of that in terms of employees. It depends on the size of the businesses we tackle, the number of employees we cover.

We of course also follow up complaints. Our commitment is to deal with 100 per cent of complaints that we receive. As Michael said, it was just over 19,000 last financial year. Our commitment is to commence that work within 28 days and we are achieving that with 99 per cent of cases. When we start a complaint case, we risk rate the employer. So we look at the employer's business—the size of the business, the nature of the business, whether it had previous complaints, whether we have raised assessments previously, what their tax compliance otherwise is like. So we look at lodgement history, outstanding debt and those sorts of things. So we risk rate the employer. If the employer is rated as anything other than low, we not only look at the complaint that is lodged; we in fact pick up all the other employees across the business. If I can go back to last year's annual report, we recovered super guarantee or covered over 220,000 people through our audit activities and super guarantee over the course of the previous financial year. I do not have the figure for the year just completed, I am sorry. Not at this stage. Michael has given you the dollar figures. I could not add anything more interesting to that.

Mr Noroozi : We did a review into the super guarantee back in 2010. It was completed and given to the minister on 24 November 2010. The committee may wish to have a look at that. The government, as I mentioned in the opening statement, has passed some legislation, so one of those is extending the director penalties. Often what happens is employers go bankrupt, so now you can look through to the directors of those companies. There is also pay slip reporting that has come in. It is up on our website, I am happy to give you a link to that report. There was a package of recommendations to the government and to the ATO, some of which the government has already moved on.

Mrs D'ATH: Auditor-General, have you got any comments on that, whether any of this area has been identified through your audits?

Mr McPhee : I recall several years ago we did look at super guarantee, and after your question I had a quiet word to Mr Harradine to suggest we might put it on our forward planning program as well. So we will consider it in the future as well. I will confirm and advise the secretariat whether we did the report, and the name of it and the coverage of it, after the meeting.

Mrs D'ATH: Thank you. Mr Peterson, you said you do about 4,500 audits on businesses in relation to superannuation but also more broadly, which would pick up the superannuation as well, and over the last year you have identified—is it 220,000 who were not being paid their superannuation?

Mr Peterson : Yes. I am quoting to you figures from the 2010-11 financial year annual report. I do not have a figure for the last financial year at this stage.

Mrs D'ATH: I appreciate that the complaints numbers may be very low and the dollar figures, when you are talking about tax, may be low. But for an individual they are quite significant. I certainly am aware, Inspector-General, of recent changes in relation to being able to sort of follow the directors and so forth. I guess my concern is that it is very late in the process. We do need to have all those mechanisms, but quite often we cannot recover the moneys for those individuals, which is very important.

There have been 4,500 audits and 220,000 people have been identified as not having their super. I wonder how many more there might be out there if that audit process was widened. I appreciate that you say there is high compliance, but my question is: how do we know that there is high compliance across businesses, that the majority are voluntarily doing the right thing, if through 4,500 audits we have been able to find 220,000 workers not getting their super?

Mr Peterson : Perhaps I should additionally clarify that the 220,000 includes superannuation guarantee charge statements lodged by employers. In his opening statement the commissioner talked about our targeting particular industries. What we do is engage in a process of education and then a few months later we come back and do some audits. What we find is that through the education process a number of employers are inspired to lodge superannuation guarantee charge statements to correct problems. When we begin audits, word also gets around and the people we contact directly to audit are sometimes also inspired to lodge superannuation guarantee charge statements. So it is not all from a direct audit assessment process. You get some indirect benefit—that is probably the point I am trying to make.

In terms of what assurance we have around the level of compliance generally, I would say there are a couple of indicators. One is the level of complaint, and it has been fairly steady for the last few years. The last time we saw a jump in complaints was 2007-08, when we had a Simpler Super media campaign. So putting things into the public domain is a good way of getting people to look at the issue. We are planning to do some pilot activities over the next year or so—limited publication and educational processes to see what sort of reaction that brings in given geographic areas.

In terms of overall compliance I would say that, if you look at the total salary and wages bill across the community and compare that to the over $70 billion in employer contributions made to superannuation funds each year, the average exceeds nine per cent of salary and wages as a calculation. We have also taken the ABS industry groupings and some of the subindustry groupings and broken those down as well. Generally you find in excess of nine per cent on average across salary and wages.

Mr D'Ascenzo : That was the reason that I mentioned the $71 billion at the beginning. It is a very good question: how do you know how big the problem is? That is an indicator that the system is working reasonably well, but I did not want to understate the fact that for individuals where it is not working well there is a real concern. Indeed, this committee has over a number of years highlighted the super guarantee and the concerns it could raise for employees who are not benefiting from their activities in terms of superannuation. I know the feedback that we have had from this committee has been built into the last four compliance plans that we have had, so we have taken on board the concerns.

When we talk about superannuation, as my colleague said, we do some specific projects on the super guarantee, but the whole work on employer obligations, which is a wider sphere of work, includes that. It also covers the work we do on phoenixing, which is where people do not have any money, which is what the inspector-general was talking about in some ways. The other area we talk about is people who are contractors or not contractors, because under superannuation the definition is different and therefore more people are likely to be employees for superannuation purposes. So all the work we do in terms of whether or not you are a contractor also plays out in this space. But we are very active. We think it is a very important area because, while we think the system works well overall, there are individuals who at the end of the day have their retirement incomes at risk.

Mr Noroozi : What I was saying about that review we did, the committee might want to have a look at those recommendations and possibly encourage more of those recommendations. For example, the pay slip reporting one is really important. What used to happen is that, because we are talking about probably the most vulnerable people in our society, sometimes they may not be aware that they are not getting their super for a couple of years. The pay slip reporting is really important because it brings it to their attention much earlier. So things may well improve. In addition to that, I am not sure whether the ATO agreed or not to that. We did suggest more field audits. But these are all resource based, depending if they have resources. There are a number of things and I am happy to talk about that report further, because there were quite a few findings. A lot of the audits are complaint based or the tax office is already doing an audit in another area, so we have encouraged more field audits specifically on this issue.

Mr McLoughlin : Just in addition to that, one of the biggest concerns when we were looking at the issue was not just the personal dimension; it was also the Commonwealth dimension. Obviously to the extent that there is insufficient superannuation set aside for individuals, that potentially is a cost to the revenue down the track. That was one of the biggest issues that we were looking at to try to address and understand. With respect to some of the policy recommendations that we made as a package, the penalty regime is incredibly punitive and that is something I know government is still considering. But that was something that linked into some of the Phoenix results, where otherwise people who were trying to do the right thing may just be faced with a potential debt that was so large that they felt they could not deal with it. The nature of the issue is in the complexity and trying to get the right framework in front of problems, so that we are dealing with them as early as possible and we do not get these issues, like pay slip reporting, on a paid basis and not on some other basis, so that people can check their super with the provider by way of reconciliation to their pay slip, and they can know whether or not super has been contributed.

Mr Noroozi : All of this needs to be balanced because with the tax system there are so many issues. When you start wanting all this extra reporting, you have the small business community then complaining that there is too much red tape. There is a very fine balance to be reached. For example, if I said that there should be more audits there, I am sure that the small business community might also have something to say about that. All of this is a delicate balance and there are not necessarily quick fixes.

CHAIR: Off the top of your head, of the recommendation you made in that report, do you have a figure on how many were adopted and how many are still pending?

Mr Noroozi : As I said, this was one of the more positive ones, particularly from the government. They have already moved on a couple of them. In fact, when the Labor Party were going into the elections with their super policy, there was synergy between the two. Most of our recommendations are generally accepted by the tax office. I am happy to send you a copy of the report and in the report every recommendation has the tax office response below it.

Mrs D'ATH: With regard to 'one last chance' referrals, I note that it is used when a person complains about a matter which has been considered finalised within the ATO, but the Ombudsman's office assesses it as being one that could be easily resolved by the ATO. The complaints are then referred back to the ATO for action within 14 days, with the Ombudsman identifying possible remedies. I understand a large majority of cases referred back to the ATO under 'one last chance' referrals provision are satisfactorily resolved. I am interested to hear what is being done to rectify that when you get to that point where the Ombudsman can identify that these are easily resolved and they are being resolved quickly. What can we do to make sure they are not getting to that point in the first place?

Mr D'Ascenzo : You have to put it in context. I think there were 41 of those cases, so it is a small group. What happens is that it is seen by different people within the organisation and probably escalated higher, and if there is an issue that is systemic in terms of application to more than one person then we would take that feedback and try to correct our processes.

Sometimes it is just a judgement made at a level in the organisation where different eyes can see a different conclusion that can remedy the situation. The fact is that there is a process for doing that. Sometimes some of those have been sent directly to the Ombudsman's office rather than going through our processes as well, so had it been escalated through the ATO it may have been rectified then. But Alison may know more.

Ms Larkins : The one-last-time referrals have all been through the ATO. They are cases that come to us and we look at them say, 'This is a simple matter that should be easily resolved by the office,' and we refer them back. The commissioner is right: 41 out of the complaint volume last year is a small proportion. But we did see last year an increasing number of people coming to us directly without having gone to the ATO first, and that concerns us. We will be doing some more analysis about what might be driving that. We are very happy with the ATO doing that, but 41 is a small number.

Mr D'Ascenzo : I asked the same question: why is there an increasing number of people going straight to the Ombudsman? While this is not proven, one of our suspicions is that we are providing a lot more information to people, saying, 'If you are unhappy, here is the Ombudsman's office's number,' to give them the opportunity to have their say. We might be marketing the Ombudsman in a way that is intended to help the system, but maybe there are other ways of doing it.

Ms Granger : We have the answer to the question on the implementation of the guarantee recommendations. I will just read that in for you. There were 12 recommendations in total. There were two that were matters for government and one of which the tax office disagreed with. The rest the tax office agreed to the principal partly or totally. This is not audited or reviewed by the Inspector-General but, from our perspective, there are only two recommendations that are still open in relation to that report which was tabled in November 2010.

Mr Noroozi : I should also thank particularly the second commissioner. I think I referred last time we were here to the fact that the new system that has come in place for the tax office through their audit committee actually follows the implementation of our recommendations. It is an appropriate time to think Jennie, given it is her last time, for all her good work that she has done while she has been working with us.

Ms SMYTH: I have two areas that I hoped to ask about. First, is the issue of business certainty and private rulings and the second relates to some of the observations made in the ATO's submission in relation to debt recovery post GFC, particularly in relation to microbusinesses. But the first issue that I hoped to ask about was in relation to some work that had been done by the Inspector-General in around 2010 relating to private rulings. What work has been done since then around that and is there more to be done by the ATO? What is your sense of business reliance on those private rulings and their assumption that they act as law and the level of compliance of business with those rulings?

Mr D'Ascenzo : What we are seeing is a slight reduction in requests for private rulings. Most businesses are happy with the practical guidance we provide which allows them to get on with business without necessarily getting into the intricacies and complexities that often happen in the application of the tax and superannuation laws. Basically they are using the private ruling system primarily for those cases that are genuinely contentious in terms of the difficult application of the law to their circumstances and really relying, as a rule of thumb, on our guidance materials. We have a lot of guidance materials and we have stepped up practical plans and common-sense rules of thumb that most taxpayers follow and which usually get them the right sort of answer. Through a program of trying to spread our tax technical expertise across our organisation we have moved a lot of our technical specialists to more front-line activities, to have them available there to help mentor and assist our front-line people in the provision of private rulings. That is one angle of what we have done to improve the system.

Ms Granger : I need to pay homage here to my colleague Second Commissioner Bruce Quigley. Most of the private rulings are done within his area, and there has been a major review and re-engineering of that process. We were struggling with timeliness of rulings rather than with quality of rulings for a while, and it is now exceeding standards and is still of good quality.

The commissioner made another point that is of concern to us; that is, we would prefer more people, if they need the answers, to use the private ruling system to get certainty. We are seeing lower numbers, but that could be cyclical; we tend to have a lot more ruling requests when there are new provisions, whereas in periods of relatively settled law we find we do not get quite as many rulings in relation to that. We get some big, complex ones that tend to come in from large business, and as part of the general direction the Inspector-General has been encouraging us down this path not just for ruling requests but also for audits.

We have taken the decision to invest some of our high-end law experts right up front in the decision-making process. The big trick there is that it is a large organisation and we cannot afford to have a law expert next to every case, so it is only in the most difficult cases to try to break through on issues early. We think that is working. It is going to be tricky as to how we prove that. One of the ways will be the feedback we get from various parts of the community as to whether that specific initiative is making a difference—obviously, there are a number of things. The bottom line for private rulings more generally is that we have really been able to lift our game in terms of timeliness.

Ms SMYTH: Is there a codification of those private rulings that is being undertaken as well? I know there were some recommendations made in the work done in 2010 in relation to reviewing the nature of the rulings being sought, and I know you have mentioned that they have declined in number, but presumably there is work to be done there. I imagine it is being done, but I would be interested to hear about it.

Ms Granger : Part of our processes is to look at ruling requests from two angles. One is: is it telling us there is a need for education, or is there a risk that we will need to do further reviews? The preference is to opt for education if we can. Second is the point you made: is there something here that could be codified in a public ruling, a class ruling, or some other product. Rulings are not always the answer to what is being asked; sometimes it is something like a simple checklist, but it can be a whole range of things. So we do that. We have a public rulings steering committee, which I chaired until today and which has independent members from the profession as well, that assesses suggestions that come either from our consultative forums or from our own practices about what might be useful to put in a public ruling.

Ms SMYTH: The feedback from business in that area would be significant. I know, based on my own experience that the cost of seeking private rulings and consultancy fees, and all the things that go into requesting those, it is quite a significant cost for business. It is something that I will continue to have an interest in. I wonder if the Inspector-General had any other observations about that?

Mr Noroozi : That review was concluded in 2010. There has been some follow-up work. The Taxation Office has worked through those recommendations. There were a couple of things we parked; one of those was the broader issue of technical decision making, in response to which, as Jennie said, they have re-engineered that whole process. We held off doing a review on that until this new process was in place, giving it time to be bedded down before seeing whether there is a need for a review.

There are a couple of other issues which are more legislative in nature regarding private rulings. Those are addressed in the review I referred to on self-assessment, which is completed and sitting with government for public release. That review had four different areas that it looked at. One of those was that the role of administrator as an adviser. Under that, there is at least one, or possibly two recommendations—this is just off the top of my head—that go to private rulings. So there is some additional stuff to come out from that. Without infringing—because I am not allowed to talk about the ones that are not publicly released—one of them does go to timeliness.

Ms SMYTH: My second question—and I will keep it brief—really relates to my recollection that the ATO had altered, slightly, its debt collection arrangements and put in place more flexible arrangements during the period of the GFC. I note that your submission refers to an increase, particularly, in microbusiness debt. Could you talk to the committee about the change, if any, since the GFC in the way that you approach debt recovery around microbusinesses.

Mr D'Ascenzo : We took a decision at the start of the global financial crisis that we needed to see whether or not we could help people across the line. In a lot of ways, it was actually a reflection of our corporate value—of trying to help people over the line where they are genuinely trying to do the right thing. It just shows how values can play out in administration in a very tangible and positive way. In fact, because it is a value, there is no change from that general proposition of trying to help people over the line when we can. To put that into a debt context, what we have done and continue to do is to make sure that, where businesses are in short-term financial difficulties, we continue to provide payment arrangements, including a range of interest-free payment arrangements but typically payment arrangements that suit the cash-flows of the particular business. That still continues.

What we have done that is probably different is that we have been a little bit more rigorous in our evaluation of whether or not a business is viable and whether the issues are short term or longer term. We have actually developed some software tools for our people that allow them to discuss with taxpayers what their business position is and to get a much more objective assessment of their viability. That has meant that, in some situations, we have said, 'No, we really cannot give you a payment arrangement or defer firmer action because in some way we actually think that you might be trading in a position, perhaps, of insolvency.'

Where in doubt we have generally tried to support the taxpayer and the business; so, where in doubt, we have not been trying to be too hard in that process. We have taken what I have described as the empathetic approach to it. But, when you enter into payment arrangements and then the taxpayer defaults, and then the taxpayer defaults again, and then the taxpayer defaults again—in situations where keeping the business going may not be in the best interests of the people themselves, and certainly disadvantageous for other businesses that are paying their tax position—we have taken what we call firmer action which might include garnisheeing. You have seen an increase in liquidation, which we put into our report. But it is not so much that all of a sudden we are taking a different approach; we are just applying a tailored approach to the facts and circumstances of the taxpayer in the context of those broad principles that I explained to you.

One other thing that I think is very important, because I am very careful in this area and it has been an area of interest to me for many years, is that we have had, for many years, independent reviews of the cases we take to liquidation, for instance—and it is a sample; it is not every case—to see whether or not we are too quick to do that. And the feedback has always been that we are not too quick. If anything, we might be a little slow, but we are not too quick. Robert has some more details.

Mr Ravanello : One other point to note is that, as a percentage of total payment arrangements, the GIC-free payment arrangements, which were part of that package of assistance to small business, actually increased in the last 12 months. In June last year it represented 11 per cent of total payment arrangements; in June this year it represented 13 per cent. So, in some aspects, it is not actually a weakening of that; we are continuing to support. And, as the commissioner said, we are just looking at eligibility criteria.

Senator PRATT: I want to ask about progress on bringing Norfolk Island into the tax and transfer payment system.

Ms Granger : The administration of Norfolk Island is a matter for another department not the tax office.

Senator PRATT: So the tax office has not started consulting yet on the education. I appreciate the decisions have not yet been formally made to bring Norfolk Island in, but it is difficult for them to make those decisions unless they understand how the system works at an operational level. I assume you are saying that there has been no interaction between the ATO and Norfolk?

Ms Granger : It is a completely different policy department—I will get the name for you. It is not the tax office.

Mr D'Ascenzo : The question that has been asked is, if it comes through, people will need some assistance in relation to tax matters. As far as I know, there has been no advice to us formally to do anything in that space.

Senator PRATT: Yet. Okay. It is just that in order for it to progress at a policy level, it strikes me that there is a need for the community there to have an operational understanding of what it is like to be within the Australian taxation system.

Mr D'Ascenzo : We would be more than happy to assist. We will wait for the relevant department to get us involved.

Senator PRATT: By relevant department do you mean the department of regional development?

Ms Granger : Yes, that is it; they have administration of Norfolk Island. The way that would work is that firstly there would need to be discussions between Norfolk Island and Treasury. Of course, we could become involved in advising on practical detail in relation to that. But that would be a policy issue for them.

Senator PRATT: There has been no discussion of practical detail at this stage?

Ms Granger : That is a policy issue for the Treasury and the department of regional Australia—sorry, I do not have their proper title.

Mr Quigley : I am extremely confident that we have not had any direct contact with the Norfolk Island community about what is proposed because, as Ms Granger said, it is a policy matter.

Mr D'Ascenzo : Often they would bring us in where there is a tax implication. I think the senator is raising an issue that, if there is this policy decision, maybe it is worthwhile having the ATO in regarding the practical implications and marketing and communication. I think it is a good idea.

Senator SMITH: Can you provide us with an update of the development of your work plan? I am particularly interested to understand what community issues have been identified and how they will be incorporated, if at all. What is the mechanism you go through with other agencies to confirm the work plan?

Mr Noroozi : First of all, I called for submissions. I sent through the press release and hopefully you have that. The closing date for submissions is 27 September, so it is still open. I checked this morning and so far there are about 70 submissions. We also have consultation meetings. We had one on Thursday. We have one in Melbourne on Monday and another one in Sydney on Tuesday. There have also been ads in newspapers calling for submissions. We have tried to make the ads a little more friendly to the average taxpayer this year. In addition to that, even though I have called for submissions, if you look up my legislation even though I can self-select the entirety of the process is based on public consultation. That is how we make the selection. In addition, there are already meetings organised with the Ombudsman and the Australian National Audit Office the week after next. As you know, the three bodies agreed, although in my legislation I am required to consult with the other two scrutiny agencies anyway. In addition to that, at the request of JCPAA, and we have responded to you, we have all agreed to collaborate even further, and there is a three-way consultation taking place. Meetings are already organised with the tax office as well as with the Department of the Treasury to have input. As said at the outset, I am also keen to hear if you have any input into it.

In the press release that I put out on 13 August, I said what are some of the major ones that are already on our list, because people do not stop raising issues. So we keep those, but also in the course of doing reviews sometimes we say, 'We really need to look at that too but it is out of scope.' So we park it. There are 11 issues listed there and I have asked people to not only raise whatever they want but also tell me what are their priorities.

Senator SMITH: At this stage, recognising that the closing date is yet to occur, in your assessment what are the standout themes that are coming through?

Mr Noroozi : At one of these consultation meetings I did just that, and then I had phone calls from people saying, 'Oh, you've already decided before.' I will tell you, but please note these can change. The major written submissions are usually a week or so later after the closing date, and we still take those into account. At the moment, the ones that are high on our list out of the submissions we have received to date are largely the ones that we had here. But if I were to give you the top five, probably the ATO's risk engine—maybe it is a funny title, but basically that is the risk assessment process that the tax office uses to focus their compliance activity. We have not defined the scope of that yet, whether we are going to do it across all market segments or whether we are going to look at specific market segments. We have left it wide. That is one. Another one is the delayed income tax refunds issue, which the ombudsman has also had dealings with and dealt with the tax office on. Another one is ATO's administration of penalties. Another one is the ATO's administration of the general anti-avoidance provisions. Another one is ATO's compliance approach to transfer pricing. The other one is issues around the excess superannuation contribution. We do not know to what extent that is more a policy issue. Most of the issue seems to be around a very tightly legislated discretion of the commissioner and most of it is around people really wanting the commissioner to exercise that discretion in a wider set of circumstances. Those are probably our top five or six. Often people raise issues in a way that may not necessarily lend itself to a review. They raise very discrete issues. I then have to see whether in a range of these discrete issues is a broader topic or a broader underlying issue. So whilst I have rattled off a few things, the final topics may be quite different.

As members of parliament and senators, I am sure you have your constituents approaching you about issues, so to that extent I would welcome you passing on any concerns that people have—bearing in mind that I only look at systemic issues. Unless they are sufficiently broad to be systemic, it is the domain of the ombudsman to deal with single complainants.

CHAIR: I mentioned compliance with transfer pricing, and one of the issues I did want to raise today is an issue that has been raised several times, particularly in the Senate. I can directly mention Senators Xenophon and Heffernan, who have raised this on several occasions through various formats. At my end it is an allegation—I do not know whether it is true or not; hopefully we will find out now—and that is if there is revenue leakage out of Australia in the relationship with the rules within Australia and how foreign capital comes in and out of the country. It is less about foreign investment in Australia but it is under this theme of how our tax system talks to other tax systems. I just want to clarify whether the commissioner, or anyone else, is aware of any corporate structures or sovereign structures that—without being diplomatic about it—are gaming our tax system for benefit, other than the ATO and tax receipts in this country?

Mr D'Ascenzo : In terms of the narrow definition of sovereign structures, we are not aware of any actual situation where that occurs. The laws of Australia dealing with inflows of capital are quite complex and cover a whole range of different contexts. In a sense, the transfer pricing rules apply where you transact with a related overseas party and therefore are not charged the right amount in relation to the value that you provide.

In relation to capital gains tax, there is a foreign investment concession in terms of not having to pay capital gains tax except in relation to asset-rich companies—sorry, land-rich companies. So there are a range of different provisions. The whole context of how the international tax system operates in relation to Australia was reviewed recently under the review of international tax arrangements that was enacted a few years back. It is very complex and it works within the complexity of the laws around the countries. It is often based on principles of source and residency, and they are difficult criteria to apply domestically and also globally.

CHAIR: Is revenue leakage an issue that is real and keeps you up at night, or is it something that is more part of the mythology of foreign investment?

Mr D'Ascenzo : If you look at our compliance program, we have a lot of risks that are associated with dealings that are offshore or deal with offshore arrangements. What is important for the tax administration is to work out what is intended in terms of the correct application of the law, and then you have a question of policy, whether or not those policy parameters are appropriate for this country. Our role is to work out whether or not there has been abuse of the existing law in some way, and we have seen arrangements that involve international legs that tried to apply situations that do not reflect the underlying economic substance of the transaction. In fact, some of the cases that we talked about in terms of litigation and the application of the anti-avoidance rules had to do with offshore arrangements that transferred assets and value without triggering a capital gains tax consideration. Given that the courts have said that certain arrangements have been effective, the government has then said, 'We do not think they really meet what was originally intended.'

CHAIR: I am trying to establish whether there is a policy consideration for us under current law. Is there such a concept as revenue leakage that is real and material?

Mr D'Ascenzo : It is always a risk area in our compliance program in terms of trying to deal with offshore arrangements. Some arrangements which people call revenue leakage are the consequences of legislation that has that intended effect. It is then a question for parliament whether or not the cost of those measures is offset by the economic benefit provided to this country through the investment that is generated.

CHAIR: I am just trying to separate truth from fiction as much as anything else with this exercise, and it is not only about foreign investment coming in; it is about offshore transactions, it is about money coming in and out, and all the various structures. I read a speech last night from one of the senators, and he made a comment that $700 million was lost in the Myer transaction because it went through Luxembourg. As a practical example—a statement that has been made in the Senate this month—what are the rights and wrongs of that?

Mr D'Ascenzo : Without going into the specific details, we have issued two public rulings, or two public determinations, that cover arrangements that involve leveraged buyouts by overseas investors. A leverage buyout is when someone gets a big loan, buys out a shareholding in Australia and then divests some of the Australian assets and uses the proceeds to pay back that loan. Where they do it as a matter of business—this operates in terms of offshore private equity firms, for instance—that is, they do it on a regular basis and their modus operandi is to buy companies and divest of those companies in a short time, we have maintained our position that we think that it is on revenue account. So they are liable to Australian tax if that occurs. What often occurs in some of these arrangements is that they try to take advantage of what benefits exist in terms of the treaty network around the world. For instance, they might have gone to Luxembourg and to the Netherlands to secure what one might argue is some protection not only from Australian tax but also from, say, US tax.

CHAIR: Is there an argument that this occurs?

Mr D'Ascenzo : That treaty-shopping is subject to our general anti-avoidance rules and undoubtedly that is one of the reasons the Inspector-General has a concern about our application to part IVA.

CHAIR: Right. Is that why the trigger for the compliance on transfer crossing borders—

Mr D'Ascenzo : No.

CHAIR: Is that separate?

Mr D'Ascenzo : Not necessarily. It might have been one. What happens is that we put on the table that we think these arrangements are taxable in Australia. Then you get the next question about how you collect the tax from people who are overseas, and that is another issue.

CHAIR: So I am right to say, yes, there is a concern to our tax base from—

Mr Noroozi : It is always there.

CHAIR: Yes, I know. I just want to hear from—

Mr D'Ascenzo : My proposition is that we consistently put international issues as a focus area for our compliance program.

Mr Quigley : In relation to the particular sorts of circumstances you are talking about, Chair, we have actually put out four determinations on different things relating to the same aspects, but they have not been tested. So we have put out our position and, until it is tested in the courts, that is what we believe is the correct application of the law.

Mr D'Ascenzo : Taxpayers have not objected either.

Mr McLoughlin : It is important to appreciate in relation to the international tax system that idea of capital import and export neutrality is a difficulty. There is a tension between what we as Australia want to do and what other jurisdictions do. We want to try and reduce the overall tax that is unnecessary in transactions cross-border. So, as an issue, we do have to relate in an international system. While we have domestic law, we do need to make sure that we are appreciative of other jurisdictions in trying to import capital both ways, back and forward. It is not without some tension in trying to relate to other jurisdictions to make sure that everyone perceives that there is a fair game being played as between ourselves and others.

CHAIR: Sure. It is a question of whether the policy anomalies are working against us. The other example that was raised in the same speech was food export in Australia. If it is packaged for business purposes, the allegation is that tax applies. If it is packaged for charity or humanitarian purposes, it is not.

Mr Noroozi : Just to clarify the issue that you raised about Myer and so on, that is not really to do with transfer pricing. That is more to do with private equity. Our existing legislation should be able to deal with it and the tax office has put out its view on that. One thing we need to also bear in mind when these numbers are being bandied around is that at the end of the day you want to make sure that there is not leakage that is really hurting the country. But, on the other hand, as a Prime Minister of another country has said, we want the world to know we are open for business. So there is a delicate balance to be reached here. All I would say is that sometimes these numbers get bandied around but it does not need to be that we all of a sudden go in with steel-capped boots. We need to be very careful with what we do.

CHAIR: That is right, and I would agree wholeheartedly. That is why I am trying to clarify truth from fiction: so that we are very clear on what the story is and that we are open for business to our own benefit.

Mr D'Ascenzo : As I said, there is complexity in international arrangements. I do not disagree with anything that has been said at this table—that there is a balance to be had. These are political and government issues about what our international framework should be, and we have to bear in mind that we are an open, small economy in a global world and we have to work within that context. We are also usually quite thirsty and hungry for capital to come and use the resources we have in this country. So that is the broader context.

CHAIR: It is not a foreign investment argument. It is trying to get a handle on the structures.

Mr D'Ascenzo : In terms of structures, again this is where the effectiveness of the anti-avoidance provisions can play a role. Our bailiwick is to work out whether or not the intent of the laws that we have is being abused by arrangements that are artificial or structured in a way that is beyond the pale.

CHAIR: Can you at some point, if not now, just get some advice back to the committee about that food production one—whether that is accurate or not, as to whether the difference between charitable or humanitarian purposes and business or corporate purposes is different tax arrangements?

Mr D'Ascenzo : Let us say you have a big company in Australia which produces food: if it makes a distribution to a related overseas company then the transfer pricing rules would work; if it makes just a gift then it may well trigger a capital gains tax provision, but I am not sure about that. But it is no different from Australian companies doing the same thing.

Mr Quigley : I think that is the important point, Chair, that you are trying to get to grips with, and that is the answer. In fact, we have provided an answer previously to a question from one of the other committees on exactly that same question.

CHAIR: Still talking about the tax base, some of the issues we talked about 12 months ago were the cash economy, and illegal flow of money. I know, Inspector-General, you are very interested in tax gap; did you want to give your thoughts on any tax gap issues?

Mr Noroozi : I was having a conversation with the commissioner about this last night.

CHAIR: You were caucusing!

Mr Noroozi : No; we were having one of our regular catch-ups. To do gap analysis you would have to do some random audits, because at the moment the tax office and, indeed, most revenue agencies seem to focus their compliance activities based on some risk. This is for income tax, because GST, obviously, the commissioner has spoken on. So I am just referring to income taxes. What it would involve is doing a certain number of random audits so you have untainted data on which you can then work. So people need to know what is involved in doing it. The conversation I was having was this. Obviously the commissioner would probably say—and I will let him speak to this—'Do you want me to direct my resources to the riskiest parts, or should I do a half-a-dozen audits that are not going to raise any money at all?' And that is fair enough. As to random audits: I have not investigated this; I may do, as part of the risk engine type of thing, but I have not yet. What I would also say is that perhaps some of these random audits could also be used to refine your risk engine so that the data obtained from that could go into refining your risk assessment tools.

I think there is some usefulness to doing some gap analysis. I know the UK does some. It is limited. They do report it. Jennie will no doubt find out about all this very soon. In their annual report they do talk about their gap analysis and so on. Others will also say, 'Most of these gap analyses are so far wide of the mark why would you bother?' My answer to that is: we also do Treasury forecasting; we do all kinds of statistics, for all sorts of reasons, that are also wide of the mark. Nevertheless, it at least gives you something—some measure to start off with. I think it is a good way of showing the public that we are collecting as much as we should do. I do not know whether that is all very scrambled—

CHAIR: No. It is very consistent with what you have said before.

Ms Granger : For obvious reasons, I am not going to comment on the UK at this point but—

CHAIR: We will get you back over here!

Ms Granger : In fact, one of the measures that my area will be doing is: how do we close the tax gap further? There is in fact a £7 billion compliance objective to 2015 for Her Majesty's Revenue and Customs. I think it is worth making a couple of points around tax gap measurement and how other administrations do it. Here in Australia we tend to use 'tax gap' to mean people who do not return income and so we think cash economy. Most of the international measures include in them: how many people are actually lodging; how many are lodging on time; is debt paid on time, as well as the correctness of returns? Of course, we do measure most of those things. The only component that is being debated in relation to income tax is the question that was asked earlier by the deputy chair: how do you know what the gap is between what is reported and what could be?

One thing that has changed, particularly for the personal tax market here in Australia, is how much is now reported from other sources. We have a system of full lodgement of return requirements for everybody earning income. That is not the case internationally. In other systems, including the one I am going to, you do not lodge a tax return. It is finally withheld by employers and others. But in Australia we have a system where you do lodge and a lot of your data is now prefilled from other sources.

I think the gap is actually closing in terms of what we know about that particular market. The challenge—and it will be very interesting to get to a prefilling process for small business—is what we could do in regard to that aspect. In a previous life, when I was Second Commissioner Compliance, I did look at what it would take to do a robust random sample of audits—so leaving aside the question of how the community would respond to us auditing them, and there is no adjustment required because there is push-back when you do that, particularly if you are doing large numbers—but it was not a few. From memory, about 40,000 audits would be required to be a robust sample. It would in fact at that stage take the resources of the compliance program to do that. So there are some pretty big decisions. Something smaller and more sophisticated may be possible, but that is the kind of thing that needs to be weighed up and whether there are other ways we can get at that particular measure because we actually do have the other components. We just do not tend to package that here in Australia as tax gap because that is not the way our community understands that issue.

Mr Noroozi : That is an important point that I should have made, which Jennie made. I do not think the taxpayers are going to be thanking me for recommending random audits. That is the issue. The commissioner would say, 'That's not the best use of my resources,' and I think that taxpayers would probably agree with him because nobody will put their hand up and say, 'Audit me, audit me.'

CHAIR: Because this submission will, more than likely, be made public I guess you do not want to comment on the comment that the gap is roughly around $41 billion. That feels very high but, from the evidence, it sounds as though—

Mr Noroozi : We have done no investigation.

CHAIR: No-one really knows; it is still an unknown. Unless someone wants to confirm some other figure.

Mr McLoughlin : With respect to the important point that Jennie was making earlier about methodology and some of the issues around tax gap, there are all sorts of issues to draw in about the actual cost of collection. It tends to get a bit muddied in this analysis, but it needs to be considered more fulsomely.

Mr D'Ascenzo : I would like to make some comments. I do think that $41 billion does seem out of kilter. We collect $300 billion, so you are talking about a very large proportion of what would be outside the net. You start to think about the structure of the Australian system where we have wage and salary earners under a pay-as-you-go system. As Jennie pointed out, we do look at: what is the lodgement profile; what is the payment profile; what are the registration profiles? So you are really getting to where is this supposed gap? By the way, a lot of other countries, when they do their tax gap analysis they do not take into account the large end of town because it is too hard to calculate. So when they talk about tax gap they do not talk about the top end of town. We have discussed that, in that area, there is a question: what is the policy parameter and what is the level of abuse? That is not easy to define. So if people are adding what is a policy result into that tax gap, then you are going to get to high figures. If you do not, then you would think the figures would be much lower in terms of the aggregate size of Australia.

The Inspector-General mentioned that we do work with Treasury in terms of forecasting expected revenue. They do have models of the economy which they themselves work out to indicate that the level of tax should be of a certain order. We always work very closely with that parameter. It does not cover the total gap but it is another indicator that, on historical measures, that is what is expected. We then do a lot of work ourselves across a number of sectors at a more microlevel using macro information, using information that is sometimes skewed because it is targeted at risk. Again, we are not seeing that adding up to levels of $40 billion-plus.

Another interesting area is the debate about how big the cash economy is. There is often a whole range of claims. The only authoritative government estimate that was researched here was done by the Bureau of Statistics some years ago. They wrote about it—it is about two to three per cent. So if you look at three per cent of $300 billion, you are getting a much lower figure there.

Mr Quigley : In our compliance program 2012-13, which we published in July, we actually did take those so-called pillars of compliance that Ms Granger was talking about—that is, people who register, who lodge on time, who report correctly and who pay on time. We have come to some conclusions based on those, which is basically around the effectiveness of the system and how it is. That did identify that there are some trends which we would prefer not to be there around some of the lodgements of certain categories of returns—for example, for trusts. So we are increasing our compliance activity in those that have been identified in that way. Also, in the commissioner's annual report, which is due to be tabled late in October, we will be building on that and providing some information around it. It is not directly on the tax gap but if you talk about the tax gap you are really talking about the effectiveness of the system, which is the way we prefer to approach it.

CHAIR: The only one we have not talked about, which we did spend a bit of time on last year was the illegal flow of money and AUSTRAC. Have there been any changes or updates or anything to report?

Mr D'Ascenzo : At a broad level we have always promoted at a policy level the transparency of information from secrecy jurisdictions. We have increased the number of tax information exchange agreements that are available. Some of those are now being used quite effectively and have provided us with information that has enabled us to progress matters in a positive way. We are still seeing a reduction of outflows from Australia to some high-profile tax havens, through the AUSTRAC data, and we are seeing an increase in inflow into Australia from those jurisdictions, which indicates that not only is there some countering of the practices that might have existed in the past but there is perhaps some repatriation back into Australia of hidden wealth.

The government has provided further funding for Project Wickenby. The anecdotal information is that it has been effective in providing a chilling factor to the people who want to enter into these arrangements. So the deterrent effect of Project Wickenby has been significant.

CHAIR: I have one question from last year and it is to the Acting Ombudsman based on the previous campaign from the previous Ombudsman around plain English. Do you have any update on progress in that area at all or did that move on when he moved on?

Ms Larkins : I am not sure that I can say that all communication issues have been resolved. We are certainly working quite effectively with the tax office. We have given some examples of letters. Where we have correspondence we are concerned about we refer it back and the tax office has been quite responsive. It is still a major cause of complaint to us and it is still the most common remedy, which is providing a better explanation. So there is still room for improvement.

CHAIR: From memory, they promised last year that there was a lot of work in this area.

Mr D'Ascenzo : There is always a lot of work happening in this area. It is one of those ongoing areas where you are always trying to improve how you communicate with taxpayers and make it as easy as you can for them. I stressed right at the beginning that we need to keep things in a simple way so that people can understand. That is the reason why I have highlighted the fact that people have actually appreciated the shift from trying to be legalistic—and that is why we moved away from binding rulings to more guidance material. It is important in this context to have practical rules of thumb so that people can apply and understand. This is the sort of direction we have been taking. It is an ongoing opportunity to make it a bit easier for people to work in the system and understand it. We welcome the feedback that we get from the Ombudsman.

Ms Larkins : Getting a better explanation is across all of our jurisdictions and that may be, partly, having a third party explain a decision, which gives it some additional validity. But it is a continuing issue.

Mrs D'ATH: Just a couple of brief questions. Inspector-General, you talked about issues raised to members of parliament by their community and identifying whether or not they are systemic. My question is the response time to calls. Do you have any statistics—I think we are able to get that from Centrelink—how long people are, on average, expected to wait on calls before they can get to an actual person and have a conversation? Do you have that data?

Mr Ravanello : We do monitor response times and average handling times as well and we publish as external standards our average wait times for tax practitioner and general calls. Our standards for tax practitioner calls are that 90 per cent of calls are answered within two minutes and, for general community, it is 80 per cent of calls answered in five minutes. Our standards achieved last year were: we answered 92 or 93 per cent of tax practitioner calls in two minutes and we achieved 84 per cent for the general community within five minutes. For the tax season, our busiest period of the year, our average wait time for general calls is under three minutes and the average wait time for tax practitioners is around 30 seconds.

Mr D'Ascenzo : That is in the context of over 10 million calls.

CHAIR: Can I just jump in. From the Ombudsman's point of view, are you getting any feedback across jurisdictions on this, because I have had some feedback that some of the Human Services call centres have significantly longer wait times than that.

Ms Larkins : That would be an issue that we are preparing to talk to you about next Wednesday. It has been quite a concern in DHS in the last year.

Mrs D'ATH: Can I clarify: in relation to the tax office—

Ms Larkins : I was particularly talking about DHS. This year, tax time has gone extremely smoothly from our perspective, and our complaint volume is very low in relation to tax time complaints.

CHAIR: Those times by comparison sound pretty impressive.

Ms Larkins : They do, but we are not seeing any flow-on to us in relation to broader tax time issues. That has been a major source of complaints to us in the last two years, so there has been quite a drop off.

Mrs D'ATH: So if there were extended delays in calls, what would be experienced—and I can only go off the people who walk into my office and talk about their personal experiences. What would lead to unusual delays?

Mr Ravanello : It is always difficult to predict the flow of calls. But we do experience delays in particular call queues. So, for example, if you are ringing on a matter that is very narrow and very specific and we have a small number of staff on that queue—say, you have a specialist matter around excise, we might only have a limited number of staff in that queue. If there is a flood of calls that come in all at once you will actually get a blow-out of wait time in that specific queue. So we do tend to watch queues and we do tend to watch the general level. You will always get instances where there will be a blow-out in times, just because of the way we try to route calls to staff who are skilled to answer them. But, at a general level, the figures I mentioned earlier are what we have seen this year.

Mr D'Ascenzo : Having said that, there are situations where people are on wait times much longer than this. Some of it is a resource issue. We actually try to staff up as much as we can during the peak times and when we expect the peaks. But, as Robert said, sometimes, particularly tax time, when something happens—for example, there is an issue of letters from the ATO and we might have more calls than we expected or there is an announcement by government and there is a newspaper report—all of a sudden we have got more calls than we would have expected. It is a resourcing issue; people just cannot get through.

We have done some very intelligent stuff in terms of using technology so that we can have auto call back: 'Please leave your name and number and we will ring you back when we can.' But there have been occasions in which we just cannot handle all the calls. There are situations where people do, unfortunately, get frustrated because they cannot get through to us quickly. Overall, we do a good job. It is a difficult management role to make sure that we provide a good service, and we have improved that service significantly over the last couple of years.

Mrs D'ATH: In relation to some of the more recent changes that the government has brought in in relation to businesses, such as the superannuation guarantee increase, which I know has not been commenced yet but certainly has been legislated for, and the instant asset write-off, I am interested to know what sort of education and communication there is. I know it is a difficult area to constantly try to keep businesses informed of changes that are happening. I have noticed in my area a lack of understanding about some of these changes, such as the superannuation guarantee changing from nine to 12 per cent. There are still small businesses and medium-sized businesses who think that it is going to 12 per cent next year. What is being done? Are there any suggestions to further inform businesses out there of changes as they are happening?

Mr D'Ascenzo : I might go back to the earlier question on calls, which Second Commissioner Quigley pointed out to me. One of the things we are trying to do is automate some of the processes. Sometimes there are a lot of calls asking, 'What is the progress of my assessment?' We are trying to get people to use our online services. A lot of the information you mentioned in relation to businesses is through our online processes. We have our website, we have bulletins that we send out to industry bodies and we do a whole range of marketing exercises. The trouble with a small business is that you can get information overload. A small business may not want to say, 'Gee, I am going to go and look at the ATO website now about what my situation is.' So we have to be proactive. We try to time our communication to a time that is fresh for them. We would probably not have the most extensive amount of communication until it was closer to the mark for people to make the changes to their systems.

Another thing is that we work very closely with software developers. A lot of businesses use your software packages to work out their payment arrangements. We work with software developers—in other words, use other natural systems to make sure that when the change has to occur it is going to happen naturally through the normal business processes that people would take. Brett might be able to be more specific.

Mr Peterson : There is not a lot I can add to what the commissioner has in fact already said. The super guarantee changes are part of the broader reform, as you will undoubtedly be aware. We have been doing some fairly extensive research in relation to the range of superannuation reforms. We have particularly picked up employers through a number of individual responses and focus groups et cetera. What you are telling us about employers is absolutely what we have been told—that their level of awareness is fairly low. They tend to think it is the individual's responsibility rather than theirs. They see it as an extra cost, which is pretty obvious. They are perhaps a little concerned about some of the changes in moving to electronic data standards—those sorts of things.

For the super reforms the ATO was funded to run a media campaign. The creative content, the detail and the timing of that campaign are yet to be worked out. No doubt tucked into there will be a bundle of work dedicated specifically to employers. We have used in the past direct-mail for employers, but we know we are competing with a number of other sources in relation to that. We also aim to work through intermediaries. We know that a lot of small businesses see their accountants, some regularly and some far less regularly. The accountants are a small and more targeted group that we can get to, and they are far more switched on in terms of what they need to tell their clients, what their clients need to do and those sorts of things. We will be working with some direct-mail, perhaps, but that is still to be settled on because it is not quite here yet. We certainly will be working through intermediaries. And we are working with software providers, as the Commissioner has already said, because the aim is to make it as easy as we can for employers and indeed for everyone in the system. The more we can automate or get automated systems into place, and encourage people particularly small businesses into using the superannuation clearing house run by the Department of Human Services, the easier it becomes for them because the system does the work for them.

Mr Quigley : I would like to address things like the changes to the instant asset write-off. One way we try to communicate that is through sending out a small business newsletter. We send out these newsletters each month and we estimate that they go to about 1.4 million small businesses. That is the sort of message that the newsletter contains. It is a fairly simple message to say, 'This is in', or there is an initial deduction when you acquire a motor vehicle and the circumstances in which it might be available to small businesses. That is one way we try to get those sorts of messages out, as well as through the various forums. We also have the ATO Online Small Business Forum. That gives business operators the opportunity to interact with us as well. We also have dedicated business info lines and those sorts of things.

Mr D'Ascenzo : There is another area. One of the intermediaries is tax agents and another is small business representative bodies. In my opening statement I mentioned that I chair the Small Business Consultative Group. That is a process where we share not only ideas about how we can make it a bit simpler for small businesses but how we can pass information to them that would be useful for them in conducting their businesses.

CHAIR: Thank you very much.

Proceedings suspended from 11:23 to 11 : 38

CHAIR: Thank you, everyone, for coming in. I welcome representatives from the Taxation Office, CPA Australia, the Tax Institute, the Council of Small Business of Australia and Mr Malkovich. Participants are asked to remember that only members of the committee can put questions to witnesses if this hearing is to constitute formal proceedings of the parliament and attract parliamentary privilege. If other participants wish to raise issues for discussion they should direct comments to the committee. It will not be possible for participants to directly respond to each other. Given the short time available, statements and comments by witnesses should be relevant and succinct. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Is there anything any of you would like to add about the capacity in which you appear today?

Mr Malkovich : I am a former member of the ATO Small Business Advisory Group and the Commissioner's Small Business Consultative Group.

Mr Halton : My usual affiliation is with the Livestock and Rural Transporters Association, but we are a member of COSBOA and Peter Strong has asked me to present his apologies and asked me to attend for COSBOA today.

CHAIR: Are there any opening statements? We might start at the Tax Institute end of the table.

Mr Jeremenko : Thank you for the opportunity to participate in this JCPAA hearing. The Tax Institute always welcomes public discussion and additional scrutiny of our tax system and, of course, that includes the vitally important area of tax administration that we are focusing on today. Just for the benefit of the committee, the Tax Institute is Australia's leading professional association in tax, with some 13,000 members who carry the mark of expertise in tax. We set the benchmark for the most up-to-date tax professional development events in the country. What this means is that Tax Institute members are best placed to have the highest level of expertise in the tax field and they also have daily interactions with the tax system and very regular interactions with the tax office. The members' experiences will inform our comments today, which I think is very useful. As Senior Tax Counsel, I am responsible for leading our technical, media and government activities at the institute, and I am more than ably assisted by my tax counsel team, including Ms Caredes, who is next to me.

I will just say a few words about a couple of the issues that we have been dealing with in recent times. To start off with, it is important to acknowledge that the tax office plays a fundamental role in administering our tax system and a fundamentally important role. How do they do? They make a pretty good fist of it, from the Tax Institute's point of view. They are administering an extremely complex system—a system that the Federal Court Chief Justice recently described in this way: 'Opening the tax act is like opening the door to a parallel universe.' That is probably all the more reason for significant tax reform, but that is another area we may or may not get to.

Of course, there are always many challenges in navigating that universe—that tax act—but, from a tax professional's point of view, and from the Tax Institute's point of view, when we do encounter problems when our members encounter problems, the important thing is that there is an open dialogue between the profession and the tax office, and I am pleased to say that that open dialogue does exist. The Tax Institute does have a strong relationship with the tax office and we continue to work with the tax office through the issues as they come up through the tax system and to satisfactorily resolve those issues.

In terms of some of the issues, I will just highlight three issues that we have recently dealt with or are currently liaising with the tax office on: the development of the lodgement differentiation program, which involves a significant overhaul of the lodgement program for tax agents; how the tax office corresponds with taxpayers who have agents and whether they correspond with the agent or the taxpayer themselves; and also how the ATO responded to the number of income tax refunds that were delayed as a result of the new risk models. This is mainly out of 2011. I will just say a couple of brief sentences on each of those matters.

Firstly, in relation to the differentiation program, we have worked very closely with the ATO over the last 18 months, and this is really about a codesign of a program that will change the lodgement program for tax agents. The lodgement program effectively enables agents to lodge tax returns later than the October deadline for individuals; so, into the next year. We can go into some of the detail perhaps in questioning, but it is really about getting the information out there at an early enough stage in a form that tax professionals can deal with and embrace this new program. This program will start on 1 July next year.

In relation to pre-issue reviews of income tax return refunds and the delays that did occur, we are really pleased to see that, as was mentioned earlier this morning, with tax time 2012 we are not seeing the sorts of problems that were evident with tax time 2011 with some delays, which is great. We have also been satisfied with the ATO's approach to the communication issue with tax agents vis-a-vis taxpayers.

I should also mention the small- to medium-enterprise tax compliance booklet that the ATO recently issued as a result of some investigations by the Inspector-General of Taxation. We welcome that as almost a bill of rights for small businesses when dealing with the tax office and what, on both sides of the equation, each party expects and can expect of the other. I might leave it at that and allow others to speak.

Mr Drum : CPA Australia has 140,000 members in 110 countries. Most of our members are in industry and commerce, but a significant number are in public practice and on their behalf we welcome the opportunity to present to this committee today. Thanks for the invitation, and we welcome the opportunity.

By way of background, and to show a little more about our members, the members are in the public sector, public practice, academia, industry, commerce and the not-for-profit sector. We cover the whole spectrum of business, not for profit and academia one way or another. Some of our members in public practice are at the coalface, with regular direct interaction with the tax office on behalf of clients, while others have their own interactions as well. I think we are well positioned to make comment on some of the things the committee might like to discuss today in that regard.

CPA Australia has taken the opportunity to review the submission made by the tax office for this hearing. We acknowledge the tax office's achievement in satisfying a wide range of performance metrics as set out in its own submission including, amongst other things, those relating to financial management, debt management, tax return processing timeframes, customer service protocols and the detection of large, fraudulent claims, especially those involving identity that. In particular, we acknowledge that the processing of personal income tax returns as part of the Tax Time 2012 project has been an outstanding success. This is built on the tax office's improved systems, investment of resources and commitment to affected stakeholders, including CPA Australia members.

We see these as significant outcomes during a period in which the tax office has had to maintain and improve its performance while, like many departments, absorbing the adverse fiscal and resourcing impact of complying with the federal government's efficiency dividend, continued substantial economic uncertainty and a raft of significant, complex legislative reforms. In that regard the ATO's performance has been very favourable against these particular items.

One other thing I wanted to raise on behalf of members is a discussion about reportable tax positions and what the tax office is doing in that regard. It is an issue that really affects the top end of the market—large taxpayers—but there is a plan or strategy that it will be rolled down to smaller taxpayers in the coming years, and we have some concerns about how that might be managed or how taxpayers might deal with that. We would welcome the opportunity to talk a bit more about that in discussion time.

Mr Halton : I am standing in behalf of my colleague Peter Strong. Peter's instructions to me are that COSBOA has a number of ambitions around the tax system, some of which are policy matters that I do not want to touch on. In terms of operational management of compliance of the tax system, we have a strong focus on trying to make the system easy for small businesses to work with to reduce compliance costs and on seeing the tax office innovate in how it interacts with small businesses. COSBOA's general view is that the tax office is working very strongly in all those areas. Witnesses earlier today talked about a number of things which struck a real chord in terms of what COSBOA has been seeing and feeling. COSBOA has particularly appreciated the focus on improving advice given to small businesses in one-to-one case management and in other dealings. The general communication and focus on waiting times have been very visible to us; we can see the management attention and effort being put in and we have been very appreciative of that. Peter, as you know, is an extremely energetic advocate for COSBOA. One thing he has relayed to me, from his personal observations of a number of meetings he has attended where tax office and Treasury officials have been present, is that he was struck by the degree of coordination and cooperation between the agencies, with Treasury quite openly working through a few policy propositions that they might take forward and the ATO working in a group environment to understand the process implications of that. He has asked me to remark that he thought that that visible liaison has shown a marked improvement in recent times.

In the small business sector, the ATO from time to time has issues around cash compliance. COSBOA supports the work that they are doing and has been quite pleased about the approach taken.

The fifth thing I wanted to raise, perhaps the only mildly negative issue, is that there is some concern in the small business community about the management of penalties—so it is the enforcement end of the compliance regime. Earlier today, I think you heard that the Inspector-General of Taxation has the possible intention of making that an area of review, and our intention is probably to lodge a submission saying we would in fact like to see that happen. I think I will pause there, Chair.

CHAIR: Thank you. Commissioner, would you like to respond to any issues raised in those opening statements—reportable tax positions, for example?

Mr D'Ascenzo : Mr Quigley might talk about reportable tax positions. That is really in the pilot stage, dealing with very few large companies, so I am not sure there is any great rush to bring it down to very small companies in the short term. But Mr Quigley will explain more.

Basically, it is nice to hear people from a whole range of different areas, including the tax profession, CPAs and COSBOA, indicating something that is really important to me, which is that they can see a tangible change and effort. It is all very well for me to be here and say we are trying to do this and we are trying to do that, but to hear other people say, 'We're seeing that being done,' is very pleasing from my perspective.

Mr Quigley : Just on reportable tax positions, certainly, for the 2011-12 year, they were applied to around 56 taxpayers at the top end, and for 2012-13 we have rolled that out to another 170 taxpayers. Over time, we will be rolling it out only in that largest businesses area—that is, corporate groups with turnovers in excess of $250 million. There is no intention whatsoever of going beyond that at this stage, and I would be happy to talk to Mr Drum separately about that.

CHAIR: Okay. And that is all rolling along smoothly?

Mr Quigley : Yes. We hastened slowly on purpose. We realised that it was a shift for some of these large businesses. And, yes, it is a pilot that is running to plan at this stage.

CHAIR: And what is the feedback from those involved?

Mr Quigley : They have not had to actually do it yet, because it is for the returns for the 2011-12 year. But there has been quite a high degree of consultation through our Large Business Advisory Group and also a subcommittee of our National Tax Liaison Group, who helped us co-design the form and will, I think, ensure a smooth process. So it is all go as far as we are concerned.

Mr D'Ascenzo : One of the interesting benefits we have today is that Mr Malkovich was not only on our Small Business Advisory Group but also on our Commissioner's Small Business Consultative Group. The fact is that John actually runs a small business, so he can see it from the personal perspective of how he has to operate on a day-to-day basis. I think it is very valuable to get right down to the people who have to run a small business and face those issues, whether it be compliance with the tax system, compliance with the superannuation system or a whole range of other obligations, as well as the life issues that affect small businesses.

CHAIR: Did you want to comment on that compliment, Mr Malkovich!

Mr Malkovich : Yes! I started with the ATO, in the Small Business Advisory Group, back in 1999. The group was initially just going to go through until July 2000 to help with the transition to the GST and to see how it would potentially impact on small business. So there was a lot of discussion happening around the GST leading up to then. But, post 2000, obviously the ATO saw the benefit of keeping the group going beyond that, to really use us as a sounding board in terms of what is happening with the tax office, how it is happening and what can be done to make it easier for small business to interact with them. Over the 13 years—because I finished up with the Small Business Advisory Group just this year—a lot of changes have happened, and a lot of them have come about because the people that the tax office were speaking to were the people who were at the coalface every day dealing with business issues. The compliance cost was obviously something that came up a lot, and the ATO has done a lot to try and minimise the impact of that on business. A lot of the changes that have come about over the 13 years since I have been involved include paying tax with your credit card which was not done but was raised a while ago and now you are allowed to pay tax up to $50,000. We were also heavily involved with the web design and the content and functionality. You mentioned before the use of plain English, so we were involved with that with the ATO in web design and that continually happened for 13 years.

We were also involved with the testing of electronic tools. One we worked with particularly in Brisbane at one of the meetings was the CGT concessions tool and the employee/contractor decision tool. Those came on board for people that could get on to the website and punch some figures into those tools to see how they work for their business. Another great thing was the form design that we were involved with from the outset. From day 1 there was a fair amount of discussion about the BAS, the layout and some of the questions being asked. We also had input into newsletters, brochures and booklets to make sure that the information was relevant and in plain English. That came up quite a bit.

With debt management initially there were issues with some people saying the ATO was a little too hard in approaching debt management. But that softened up a lot over the years and it is no longer one strike and you are out. We really pushed the issue that if you are a good taxpayer meeting your BAS on time and doing everything you should, if you do not get it in on time once then they do not come down on you hard. Instead you get a letter saying, 'You're a great taxpayer but you haven't got your BAS in on time this time, so make sure you do it next time.' I think that is a wonderful touch.

There is also the Small Business Advisory Service which I think is fantastic. The ATO is going out to talk to small business people. Critical to that is that the ATO goes out and says they are not there to use this as a trigger to do an audit, but they are genuinely there to help with business processes, including ABN registration, super, record keeping and things like that. Another great thing that has evolved over time and that came through discussions is the education element. A lot of people who get into business do not know what they are getting into. They might be great in their trade but they are not very good at running a business. Unfortunately that can let people down quite a bit. The education program the ATO has is linked in with the schools to get younger Australians familiar with the tax system and super. I think this is great too.

My suggestion is to extend that further to get people looking to get into business to make sure they have some business fundamentals under their belt. This would mean people would not be allowed to start a business if they do not know what they need to do for their industry. If you are getting into recruitment, as I am, you need to know that you need to register as a licensed operator. You need to know that you need to take our certain insurances. It is also a good idea to know profit and loss, balance sheet and cash flows and understand your obligations with tax and super too. My suggestion is to try and push that a little bit further to get people to do that. If you have some education, relevant work experience or reading, sure you can start another business. If you do not then you have to complete some sort of initial course to prove that you have those fundamentals under your belt.

CHAIR: For someone without an opening statement, that is a great summary of the last decade.

Mr Quigley : I am sure the Commissioner could not have expressed it better himself.

CHAIR: If there were two or three things that the ATO could do that have not yet been achieved, what is the next chapter from a small business perspective?

Mr Malkovich : In terms of compliance costs and time, for me tax does not take up a huge amount of time. We have good systems in place and we have good software in place. The business has been going for a while and that is working beautifully. I have noticed that from a lot of the meetings we had the suggestions coming through from small business people that issues were more to do with the policy side and the legal side of what is going on rather than the tax administration side of it. One of the things raised from day 1 was that it would be fantastic to have Treasury involved at every meeting to hear small business people talk about their specific issues. I think they really need to see what is happening and how their policy or legal changes may impact down at the grassroots level. It is always great that there is an idea happening here, but when you are dealing with people who are struggling to make ends meet to get a business off the ground the last thing they need is for another compliance cost to be thrown on.

The software developers are doing a great job to try to make all that part of their natural business process, but I talk to a lot of people who say: 'The last thing I feel like doing is sitting down and doing any books, reading brochures or doing this. I just wish I didn't need to do it. What can we do to simplify it?' If Treasury heard that sort of feedback on what some of the hurdles are for small business before anything becomes law, before it becomes policy and before the ATO needs to administer it, that would help immensely. A lot of the time the ATO says, 'We only administer it. There is only so much we can do,' and they go back to Treasury and say, 'What can be done?' But I think if it were done earlier on it would make things a lot easier. That is probably the biggest thing that needs to be considered. The rest of it is pretty okay for me.

Mr D'Ascenzo : If I could add my administration perspective, we have been very much pushing the use of online processes. John talked about his systems, software packages, and how they do a lot of the hackwork in how his business operates. A lot of reporting can be done from those systems. He knows his cash flows and he has good records because of that, and therefore business becomes a little bit easier and he can concentrate on the business aspects of it.

We are promoting online and trying to move Australia into a more digital world. We are of the belief that moving on to make use of technology and online processes can really reduce the compliance burden not just for tax but also for a whole range of other matters. This makes Australian businesses a little bit more efficient and takes away that administrative burden to, hopefully, make them more productive.

CHAIR: Thinking through the suggestion of a Treasury involvement, you have quite a large number of consultant groups. What is it, about 40 or 50?

Mr D'Ascenzo : Over 60 formal ones, at least. We probably have another hundred or so smaller, informal ones.

CHAIR: Are Treasury representatives involved in any of those and would it be appropriate if they were or if they were not?

Mr D'Ascenzo : It is always beneficial for Treasury to be involved; I do not disagree with anything that John mentioned there.

CHAIR: But do they actually show up?

Mr D'Ascenzo : Let me put it into context, because while I said it is always beneficial sometimes good ideas require actual people to be available. When you have competing priorities and a smallish group of people in Treasury they probably cannot meet all the demands of the forums that we have. In some measure it is our responsibility to make sure that these comments are put into the policy-making frame in our relationship with Treasury. I think we take a responsibility to be the conduit given that we cannot expect Treasury to come to all our forums—they probably do not have the resources available to do that.

But it is important to keep in touch with the strategic forums, and in recent times we have had very high-level Treasury participation in the Commissioner's Small Business Consultative Forum. I think Treasury has found that very useful, and I think COSBOA's comments came out of that recent development. We certainly have the Treasury involved as an observer at the National Tax Liaison Group meeting as well. So they do attend some of the forums. It is advisable that they are there but if they cannot be there we have to take some responsibility to make sure we act as a conduit for them.

Ms Granger : If I might add a little to that answer, I have responsibility for the liaison with the Treasury. First of all, on the first point you made, the entire Treasury is less than 1,000 people. For the revenue group I will not get the figures right, but it is less than 200. Of course, they are doing all the policy and legislative design, so there is that side. They have very consciously been engaging where they can at more senior levels. There have also started their own consultative forum to meet a couple of times a year with key members of the industry for frank and confidential discussions so they can really get out on the table some of the key issues. I am certainly seeing—and I do not know if Mr Jeremenko might want to comment—a very conscious effort to be more engaged in that end of the process as well to try and understand the play-out effects.

Mr Jeremenko : I certainly support that. The Treasury, over the last 18 months particularly, have been very active in increasing their consultation. They had a strategic review and they have been drilling down to having regular consultation meetings not only with tax professionals but with people who interact with the system who may not necessarily want to be any closer to tax than they are currently. It really is improving.

CHAIR: Did you want to add to that, Mr Malkovich?

Mr Malkovich : Just one thing. If Treasury is doing that, I think it would be fantastic for them to have a selection of small businesspeople as permanent members on that group as well. I think the views that some industry associations put forward are going to be fairly different to what I will when I go back to my work and I pick up an issue. I think, 'Gee, why am I doing this?' and then think, 'I can raise that at the Treasury meeting.' So I think some small business inclusion on that would be great.

Ms Granger : There are some in the group, and I absolutely support that.

CHAIR: Good.

Mrs D'ATH: Firstly, it is great to hear so many supportive comments and complementary comments. The comments, Mr Malkovich, that you referred to as far as the approach that the tax office has with the BAS statements are probably very similar to Mr Quigley's comments about inspiring businesses to comply—identifying issues and allowing them to follow that path. Of course, we would rather inspire than prosecute, so that is good to hear from your perspective as well. I think that is very important.

I am very interested in following up on your comment that, if there is something else to be done, it is the education of developing businesses and your idea that there needs to be a course and, from what I gather you were saying, a mandatory course before being able to register that business so that you have undertaken a course that gives you the basics. I could advise some small businesses in my area at forums. They actually say, 'We need more education. We want courses we can go to.' They may be fantastic in their trade or their profession but that does not mean they know how to run a business.

I just want to follow that up a little bit more and follow on from my earlier questions. I do not know if you were in the room when I was asking questions about how we deal with this constant issue of keeping small businesses informed and educated about those changes. I am guessing, in part, it could be a mandatory course that says, 'This is where to find things and this is stuff you need to be aware of as changes occur.' I would just like to go a little bit further about what sort of information that course might include and also how we make something like that mandatory. How do you establish the course? Who is going to pay for it and run it? What else can we do, because, of course, that is just the first step? Once these businesses are established and they are opening the doors and just trying to keep the business running, how do we best keep them informed?

Although you are a small businessperson, I appreciate that you are probably more informed than most small businesses because of the involvement that you have had. You are not that dissimilar to community organisations or P&Cs, where it is the same faces, and the faces you are seeing are not the ones you have to convince. They are not the ones you have to educate. It is the ones who never turn up that we need to try to get to. That is a very long opening comment, but I am really interested in teasing out your ideas about the course and further education informing small business.

Mr Malkovich : What I have noticed a lot of the time is that people do not know what they do not know. Often I will see a person who will say things like, 'Look, I am a fantastic electrician. I have been working for Bob and I have finished my apprenticeship and I am going to go off and start my own business now.' If they are in a position where they can afford an accountant, a financial adviser or someone who can guide them, that is good, but there are a lot of people who do not really know the next step to take the business further.

There is access to and there is good information on the ATO website as well, but I think for people starting off initially their biggest driver to get out there is to make money. So, with anything else that is above and beyond that, they think, 'I'll just put that on the backburner for now. I've got 10 jobs that I need to finish by next week and I can make some good money out of that.'

As to getting them to do a course, I have thought about this quite a bit and discussed it with some of my colleagues. Before you can get an ABN, an ACN, a business name or anything like that, there could be a form that you complete that asks for ID, what industry you are going into and says, 'Fantastic. Have you finished the compulsory course in business fundamentals are your local TAFE or CIT? If you haven't, why not?' You could also get some recognition for prior learning.

So, if you have been in business already or have done some relevant studies that tie across—this is where I do not know how it would be scored in state and territory jurisdictions—you get some recognition for prior learning. If you have it, great; you do not need to go do this course. If you have done nothing but simply have the ticket to be an electrician, the next step is maybe 20 or so hours of flexible learning. They could do it online. They would go in and learn simple things. 'If you're going to be an electrician, you need to consider OH&S implications. Here are some brokers that provide insurance for people in the electrical industry in the ACT. You need to look at superannuation. What do you know about super?' Give them a quick run-down on that. Show them how profit and loss work. Explain to them that it does not matter what the profit and loss are; it is what the cash flow is doing and whether or not the money is coming in. A simple thing is having an offset account where you put one-tenth of your takings in as your GST so you can meet your obligations. It is simple things like that—just giving them an idea—but you have industry experts who have worked in the electrical industry or teachers who are qualified to teach it to say, 'This is what you guys need to focus on.' If they get the ticket, great. At least they are going in and have an idea about what they need to do.

I think that, with that extra knowledge, they are in a better position to run a more successful business. They are in a better position to realise that they have obligations to the Australian government to pay their tax. They have an obligation to their employees—or to themselves if they are the director of the company—to pay superannuation. All of that works in their favour. The benefit is that, when they know all of that, they are less likely to default on tax payment. Later, if they do get a letter from the ATO saying they have not done something, ignorance is no excuse, because they have done the course and know that they needed to pay tax and pay their GST. So those are the real benefits of it.

As to who enforces it and how it is done, I do not want to get into that. But I think it is something that would really help a lot of people out there. I have spoken to many people, and their biggest driver is to make money. The compliance and the other work that goes on the side they put on the backburner and do not really focus on it. Sometimes they do not know they need to do it.

Mr Quigley : It may help if I give a bit of outline of what we do for those new to business. We have a program which we are calling Right from the Start. It is very much web based and has a whole lot of tailored information about the small business support page. People can go there. It has information on the small business assistance visits that we undertake. In last financial year—that is 2011-12—there were over 85,000 small business visits, which are one-on-one, as Mr Malkovich mentioned earlier. It is an assist thing and it is not something that leads to audits or whatever. It also gives information, tips and fact sheets on where you can go for specific information depending on what your particular industry is. We have over 40 YouTube videos on a variety of topics. So we are trying to expand the way we communicate with small business and also our very wide range of online tools and calculators, some of which have been mentioned around the super guarantee and other things.

We also have the business portal now. Businesses can go use it to lodge certain activity statements, view accounts, send messages and those sorts of things. So we are certainly not going as far as Mr Malkovich is suggesting. I think it is a good direction. The detail probably might have be worked out as far as who would enforce such a thing. But that is just a quick thing to say this is how we are trying to help businesses once they are in business. I think that is the point that Mr Malkovich is making.

Mr D'Ascenzo : I think the deputy chair's point is the key one here: it is not the ones that attend the P&C. There is a lot of material there for people who do have the time and inclination to work it through, and it can be daunting for a small business to start in that sense. We do provide some free seminars, for instance. So there is a question about whether or not the voluntary nature of the current system helps those people who either find it very difficult or just do not engage in it.

Mr Drum : I want to mention that CPI Australia works very closely with the tax office on provision of information of this type. For example, in the last 12 months we have done a lot of webinars and podcasts using our own facilities to enable the tax office through another conduit, rather than everything coming from, to enable them to get their messages out to the taxpaying community. We have quite a good relationship with the tax office and would like to see that grow and see what else we can do to help facilitate the compliance of taxpayers in Australia and the effective administration of the tax system. So we are doing some work on that as well.

But I must say that when Mr Malkovich mentioned a mandatory course I thought I had misheard him there for a minute. Seeing that we have gone down that tangent, from our perspective it sounds a bit heavy handed and bureaucratic to suggest that someone has a mandatory course they must complete before they get a Nike swoosh to get an ABN. I think the priority of business should be about making money, being profitable, being successful and growing your business, and I think too much heavy handedness upfront will stifle innovation and entrepreneurship. There is a wealth of information out there that has already been identified on the small business website and the tax office. It is about how we ensure taxpayers engage with that. I think that, if it were identified through risk management or other things that the tax office or others did that there was a massive problem with start-ups, maybe we would need to look at it a bit more closely and see what we can do about that, but I do not know whether that has been identified. We know a lot of small businesses fail very early in the piece. That is about profits, not necessarily paying tax. If you do not make any profits, you do not have a tax problem in the first place. To me some of it is a bit heavy handed, and we would need to think very carefully about going down a path of some kind of mandatory course in that regard.

Mr Halton : I wonder if I might have a stab at this. From my perspective, compliance with the tax system is quite easy. If you have the cash, even if the bill is unexpected you can pay it. What I tend to see in most small businesses is they are all cash businesses. They are exactly focused, as John said at the start, on where the next job is and where the next packet of money is coming from. The most frequent challenge that I encounter in either the transport industry or broader small business is figuring out your pricing—in trucking it is called your rates. The number of times I have seen a business which has not forecast its cash needs over a period of time I have lost count. In the trucking industry it actually becomes a safety issue. Exactly as Mr Malkovich described, you get a trucking licence, you work for a bloke for a period of time, you set up as an owner-driver and away you go. Seven years in, your first engine rebuild is necessary, you have not provisioned for that, you start working seven days a week, 14 hours a day. You either get through that or you do not. In other businesses, clearly, small businesses fail, there is a lot of stress and so forth.

In our association we put a lot of work into putting out to members various pricing calculators. We do not try to say to them what their price should be but we explicitly put in front of them a set of factors that they should be making provision for. We automate that so that, depending on their aspirations about what their take-home wage ought to be and what model of vehicle they want to operate, they can come out with a rate that should keep them in business. For our membership, which is spread across rural and regional Australia, we deliberately do that online for exactly the reasons that the commissioner talked about: access to information is really critical and you reach people nowadays electronically.

Something very much in that vein that COSBOA did not too long ago was publish a carbon tax calculator. That was quite a simple device. It took the Treasury modelling on the forecast median impacts of the carbon tax—this is your 0.7 per cent CPI—and the elements of that, broke it down by sector and simply said to small businesses: 'Put in your current spend. If you currently spend X on electricity, Y on career services, Z on other matters, put in your current bills, and here is a realistic cash estimate'—assuming you are the typical business, because it is not a very sophisticated calculator—'you might need to provide for.' That is something which we have occasionally had the odd tentative inquiry about from an ACCC-style body. So we handle it carefully, but our experience in my own association and COSBOA generally is that small businesses are always chasing cash. If they get their pricing wrong, you feel good today but are in terrible trouble tomorrow. Our focus is consistently saying to people, 'Get your pricing right, and you'll pay bills as they fall due.'

Senator SMITH: To follow on from that point: small business is a very generic term. I am wondering if you are experiencing any particular or unique issues with regard to small businesses in regional Australia around tax or their engagement with the tax office?

Mr Halton : I may have to rely on my usual affiliation here. In rural and regional Australia simple access to information is shockingly hard. I heard a couple of witnesses earlier talk about the third-party channels, and that is absolutely critical. There is an extraordinary reluctance in the small business community to go to anything that ends with It is just not something you are trained to type. You will type .com but you will not type .gov. The fingers do not learn it. Particularly as you exit the city, rural Australia—even more strongly than the city, I would suggest—runs on traditional social networks. I do not want to overcook the city-country divide, but when you are in an urban area there is just a greater exposure to media and the idea that perhaps you should see a specialist. The further inland I go, the more my members rely on Cousin Ted. So we put a huge amount of effort into flowing information through social networks. What that implies for the ATO I have not worked through in any detail, but official sources are alien, foreign and distant and trusted sources are friends, family and people in my area.

CHAIR: Is the ATO on Facebook and Twitter?

Mr D'Ascenzo : Yes. We are trying to use all sorts of channels to reach all sorts of people. Whatever suits the audience we will try to do. We are reasonably innovative in that area, but it is still very small and growing. I think that, as younger Australians become a much bigger feature of the system, those social media processes will work. I agree with the issues with rural Australia that were mentioned in that context. That is one of the reasons we try to put a lot of the information that we have through the representative bodies, journals and contacts and actually invite people who have issues to talk to their representative groups, whether they be the chamber of commerce or the like, to get assistance that way. If the chamber of commerce, COSBOA or the representative bodies have issues, we can provide one-on-one support. In fact, we had outsourced a person from the ATO to COSBOA, for instance, so that person would be available to handle the sorts of queries that might come through the association rather than through the ATO processes. So I think that is a fair point about how we widen the opportunities for access to the sort of information and assistance available to them. But I think that, over time, that concept of getting Australia more online is important to reduce compliance costs.

CHAIR: I could ask how many likes you have or how many trolls you have on Twitter, but I won't—unless you want to answer!

Mr Halton : I think it needs a new button: 'tolerate'!

Mr D'Ascenzo : There is one other area. You mentioned rural difficulties. Take the issue of collectible debt, for instance. The biggest increase in collectible debt has been at the micro level. That is businesses with turnover under $2 million. That is variable around the country. We have seen some areas that are particularly depressed—for instance, there has been a closure of major businesses and that has an impact on satellite businesses in the area—and have sent some people there with a shingle, saying, 'Come and talk to us.' Notwithstanding the hesitancy, we do get quite a good roll-up on those occasions and are able to help out quite a number of people.

CHAIR: Can I get some clarity on this. If there is an agreed payment plan put in place, for any number of reasons, does the ATO ever change its position if that agreed payment plan is being met?

Mr D'Ascenzo : I do not know if that is the case.

CHAIR: If you lock in an appointed time to an agreed plan and it is being met?

Mr D'Ascenzo : Not to my knowledge. That is not usually the case. I know I had a number of letters coming back to me from taxpayers of different sizes, some small, some large, who have been appreciative of the fact that we assisted them at a time of need, the business has gone forward and they have actually closed off the payments much earlier.

CHAIR: Right. I am asking this as a local member with a constituent who is making—

Mr D'Ascenzo : As a general rule that is not a general occurrence.

CHAIR: It did not sound right.

Mr D'Ascenzo : There is a question as to whether or not people have been meeting that arrangement or whether there are increasing debts that have occurred in relation to other aspects of their business. There is a whole range of different things.

CHAIR: They are trading themselves out, but I think one of the conditions was a sale of a house to repay debt and the housing market was not moving. There was a question of how long do you give someone to meet that condition. I think it reached a point where you pulled it in.

Mr D'Ascenzo : That can happen.

Ms Granger : Chair, going back to the previous question, I can tell you how many 'followers' and 'likes', if you want to know the answer to that.

CHAIR: And trolls.

Ms Granger : In relation to followers it is 10,031 since March 2010; in relation to page likes, 2,350 since July 2011.

CHAIR: I hear there is an update to 2,453.

Ms Granger : There you go. We do have some members of parliaments, among others, following us. If you will permit me to say just one more thing about the awesomeness of country networks, I come from a very small country town and my father was forbidden to tell anybody about my announcement until it was announced by the tax office. Washington had heard within the hour, but none of them beat my father it getting around his town and to our cousin who works for the Brisbane tax office. It is awesome; if we could tap it more we could do a lot more.

CHAIR: Yes, it is better than the NBN. I know you were joking about cousin Ted but third-party channels, chambers of commerce and all the various bodies that are here are really valuable in the regional networks.

Ms Granger : The more we can connect through them, yes, that works very well.

CHAIR: I am glad you are onto it.

Mr Jeremenko : The government has announced a small business commissioner position, which is welcome, although it has not yet filled it. I think a lot of what we have been discussing in the last 20 minutes has been around getting the information into a single point, whether it is an education course or having a single point to go to for a small business. COSBOA and the Tax Institute earlier this year held what was effectively a small business roundtable and we discussed not only tax but all of the different regulatory issues that small business face. Not only is it a challenge for small business to meet those, but in raising concerns there are about 16 different departments for them to go to. That is unsustainable. So the small business commissioner position, when it is filled, I think will be an important liaison point and intermediary for small business.

CHAIR: Good. We are close to wrapping up but I cannot let a tax conversation go without picking up on the point about tax reform. I know some probably will not be able to answer but I know there are some who would love to answer.

Mr Jeremenko : I might speak first, if that is all right.

CHAIR: Why doesn't that surprise me!

Mr Jeremenko : On tax reform generally, the important thing that is happening at the moment from the government is the Business Tax Working Group that Chris Jordan, the Chairman of the Board of Taxation, is running. It is liaising with the business community, and the tax community more broadly, to work out a revenue neutral way within the business tax system to fund a company tax cut of some sort. The Tax Institute is very strongly supportive of cutting the company tax and doing it in a way that does perhaps adjust some of the concessions in the business tax system that provide assistance to a particular area, or a particular industry in some cases. That has to be done, and any changes that are made need to be made over an appropriate transition period. As I said, consultations are still underway, but that is an area of tax reform that is important, and it is great that the government has encouraged the working group to pursue it as a priority.

Another major area of reform is the trust taxation reform that is underway in Treasury. However, as members of the committee are aware, there are a number of significant areas of reform harking back to the Henry tax review and earlier which, unfortunately, we have not seen much debate on in this country, and the Tax Institute is hoping to encourage that. One that I will mention is the reform of inefficient state taxes, whether they be stamp duties on homes or insurance duties. The states themselves now are acknowledging more and more that these are unsustainable, but they also cannot just get rid of them and not have a replacement revenue source. That comes back to the elephant in the political room, which is the GST, and how a discussion about proper tax reform cannot be held without including the GST. That means either the rate or the base, or both, in terms of the coverage of the GST. So we will keep pushing on tax reform.

CHAIR: Without flagging anything, do you think it would be of assistance if a parliamentary committee tried to find an angle to pursue the pressure, particularly in that area of inefficient state taxes but also more generally? Perhaps there could be a bit of a stocktake of where Henry is at and how we can progress it even further and faster.

Mr Jeremenko : Certainly we would gladly participate in any extra public debate on the area. I will just flag, too—and a lot of other jurisdictions may have missed this—that the ACT government announced a tax reform plan that involved, over a period of time, getting rid of stamp duty on houses, and insurance duty. That was done in a completely revenue-neutral way. There is an election coming up in the next month in the ACT, but that is an example of a jurisdiction that is small but that has tried to embrace tax reform. I think an inquiry such as that would enable us to draw out some of the learnings for some of the bigger states.

Mr Drum : As you would know, as an attendee and an active participant at the tax forum last year, CPA Australia put the case and did some modelling on extending—either increasing the rate of GST or broadening the base of GST—to use that revenue to retire inefficient taxes. The Henry report had concluded, amongst other things, that there are 125 taxes, of which 10 taxes collected 90 per cent of the revenue or thereabouts. So our modelling was really based on the questions, how can we actually remove the inefficiencies in the system, how can we remove the duplication, and how can we remove the multiple effect of the compliance costs associated with that? In every case that was modelled, it came out GDP-positive; it improved standards of living. This is tip-of-the-iceberg stuff, but it was modelled taking into account changes in consumption behaviour. It is not just back-of-the-envelope calculations.

We think that still needs to be explored. That is very disappointing, the outcome of the Henry review—the government made a number of announcements at the conclusion of that review, including looking at state taxes. We know Queensland has changed government since then. I think the Queensland Treasurer was charged with the responsibility of looking at some harmonisation of tax legislation between states. Well, that person is no longer in the job, and I think that has just fallen by the wayside.

The Business Tax Working Group, because it is being done in a vacuum, is a bit of a vortex—corporates can have a corporate tax cut provided that they find the savings for it amongst themselves. We appreciate that it is consistent with a Labor government's view; as the Treasurer said at the time; he does not see the business case for mums and dads paying for tax cuts for big business. We understand that, but at the heart of all this is Australia's productivity. We are looking at Australia in the Asian century, we are looking at our international competitiveness. And the Henry review was an opportunity to look at what we are doing 30, 40 or 50 years out and not some quick, cursory examination of tax with not a lot of follow-up before moving on quickly to the next thing.

I know this committee is really looking at tax administration, but you asked the question, and the tax policy and law elements of the whole policy/law administration of tax is still very fertile ground, and I think we are going to find ourselves in diabolical trouble. Even without considering the drop in thermal coking coal and iron ore prices and the impact on the budget, we are going to find ourselves in some difficulty if we just keep pursuing what we are doing at federal and state levels into the future.

I should also mention that we said at the tax forum that, with respect to requesting COAG to pick up this and do some heavy lifting—because it involves the states, and we said it needed to be driven by the federal government or it would not happen—we did not see that as a solution, so we would welcome the opportunity that something separate was set up to revisit this to see how we could drive some reform in this regard. Thank you.

CHAIR: Thanks for that. As someone with a bit of skin in the game, in the tax forum and the whole process at the back of it, I can assure you that, with the change in government in Queensland, the state tax working group did not fall over; it is still continuing. It should be reporting some time in the next two to three months. So it is the New South Wales Treasurer, and I think now—I might be corrected on this—the South Australian Treasurer.

Mr Drum : Thank you. I will stand corrected in my statement. But I look forward to seeing—

CHAIR: But I still do not know whether they are going to be aspirational in what their recommendations are; that is the unknown.

Mr Halton : From COSBOA's perspective, there are a couple of issues—and I wouldn't mind adding just a couple of remarks on a trucking perspective. COSBOA has a couple of pretty clear policy ambitions around the tax system, and I should acknowledge that the Commonwealth government is moving in a favourable direction in a couple. One I am sure you have heard about from Peter many times in the past. He has a very passionate view that it would be attractive to have superannuation payments from small businesses handled through the ATO, to have the ATO operate as a complete clearing house for those liabilities; and quite a strong interest—which would have budgetary impacts—in small businesses being entitled to some form of rebate for time spent on compliance activities. COSBOA's policy calls for a limit of $1,000 or 10 per cent of tax receipts—the lower of those two figures—to be allowed to be returned to small business as compliance costs.

You talked a little bit about the economics of 'good' and 'bad' taxes, something my organisation has been very heavily involved in at the state level. The New South Wales government recently chose to eliminate stamp duty on trailers for trucks—we are talking the back-ends of semi-trailers, road trains et cetera. Treasurer Baird and the Premier were so kind as to do that for us quite recently. It requires legislation to go through the New South Wales parliament, which I think is due to come forward in October. But, since the time of the GST arrangement some years ago, it is the first occasion where there has been any movement on stamp duty for the trucking industry.

We are awaiting with interest to see what the government's proposals might be around the Business Tax Working Group. Something I am happy to flag is that there is some nervousness in the transport industry about the possibility that the effective life for transport equipment might be changed, as one of the contributions to producing the relevant revenue. The average age of a truck in Australia is 14 years, from memory. That means the typical truck does not have the most advanced safety equipment—braking, roll stability, headway radar and these sorts of things. We are very cautious about anything that would slow the turnover of the fleet. We will await to see what actual proposals might come forward, but it is one that is going to be a matter of great interest to us.

CHAIR: Okay. Mr D'Ascenzo, do you want to comment on anything that has been said—for instance in relation to a superannuation clearing house?

Mr D'Ascenzo : I am just a humble administrator!

CHAIR: Yes! But, about the suggestion relating to the superannuation clearing house—I gather that is a service that is there but costs a lot?

Mr D'Ascenzo : It is a small service run through the Department of Human Services. I think it is working reasonably well, but it still has a small coverage. It was a matter that was raised at the commissioner's consultative forum, and Treasury were there and they were certainly going to speak further with COSBOA about mapping it out further. The idea that it be managed by the ATO is another vote of confidence in our administration.

CHAIR: Okay, a good way to finish! From memory, the ANAO have done some work in that area. I am not sure whether you are aware of that. If you are not—

Mr Halton : It is an issue, as I say, that COSBOA is pursuing with some passion. COSBOA's ultimate vision has been to remit various payments to the ATO they desire, that the ATO would then disperse that to employee funds.

CHAIR: But make sure Peter is aware of everything that is happening at the ANAO level, because I think there has been some work done.

Mr Halton : Yes, I know that Peter is tracking this issue very closely.

CHAIR: All right. Thank you all for attending today and assisting the committee with the inquiry. I do not think there have been any questions put on notice, so everyone gets off free! On behalf of the committee, thank you all again for attending and giving evidence, and thank you to Broadcasting and Hansard for their assistance.

Resolved (on motion by Ms D'Ath ):

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 12:40