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Standing Committee on Tax and Revenue
Taxpayer engagement with the tax system

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

VIAL, Mr Peter, New Zealand Country Head and Tax Leader, Chartered Accountants Australia and New Zealand

Committee met at 09:33

CHAIR ( Mr Hogan ): I declare open the sixth public hearing for the inquiry into taxpayer engagement with the tax system. The hearing today provides further opportunity to discuss the ways Australian taxpayers engage with the tax and superannuation system now and into the future. Taxation legislation has evolved over time, but the overall framework of the systems, the stakeholders and the type of information required remains largely unchanged. There is now, however, a rapidly changing landscape with the widespread use of ecommerce in globalised markets and digitised records and increasing cyber risk. A significant change for the ATO in the last few years has been the rapid move to paperless interactions between taxpayers and the regulator directly, yet transactions in paper money cash continue to contribute to the revenue gap. At the core of the tax framework for people, the human element of the system has led to the increasing use of behavioural insights in policy development and communication. The committee will discuss the insights behavioural economics can offer to influence taxpayer compliance and engagement time lines.

The hearing will be broadcast on the parliamentary network. These are public proceedings, although the committee may agree to a request to have evidence heard in camera or may determine that certain evidence should be heard in camera. In accordance with the committee's resolution, proof and official transcripts of proceedings will be published on the parliament's website. Those present here today are advised that filming and recording are permitted during the hearing. I remind members of the media present or listening on the web of the need to fairly and accurately report the proceedings of the committee.

Welcome to the hearing. We thank you for your submission to the inquiry and for attending to expand on this evidence. Although the committee does not require you to give evidence under oath, these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the House of Representatives. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by either house of parliament as a contempt. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Before we proceed to questions, would either or both of you like to make introductory comments or remarks?

Mr Croker : Our submissions stands. We don't have too much to add to it at this stage and are very keen to hear your questions and participate, as we regard this as a very valuable forum. One of the tweaks we made to this submission was, however, to highlight some of the insights we are increasingly getting from New Zealand. My friend and colleague, Peter Vial, is double-hatted at the moment, as both head of tax and country leader. We hope to bring more and more insights from our New Zealand tax team for future submissions. I think your secretariat noted this was a rather unique opportunity for our organisation at least to demonstrate some insights we're getting from New Zealand. I might hand over to Peter to make a few opening remarks which you might find of interest.

Mr Vial : I would like to make some opening comments about the New Zealand tax system. There are many similarities between our systems, but several interesting points of difference affect the way taxpayers in New Zealand engage with the system. At a practical level the most obvious difference to me is the fact that many New Zealanders do not, and are not required to, file income tax returns. Most individual taxpayers are unable to claim work related deductions. Generally taxpayers who derive only wage and salary income and interest from dividends do not file tax returns. The reason they do not file tax returns is that their tax has been deducted at source and they're not entitled to claim deductions other than in very narrow circumstances. We have only two types of work related deduction that a wage or salary earner could claim. One is in relation to income protection insurance premiums, and many or most of them don't have such insurance. The other is for the cost of preparing a return. Given that most of them don't have to file returns, they are not entitled to a deduction for something they're not incurring. Only about 1.1 million individuals, less than a third of the total of about 3½ million, file income tax returns each year.

The requirement of taxpayers to file tax returns was removed for the majority of individuals in 1999. There is another group of about just over a million who are either issued with, or have to complete, something called a personal tax summary or PTS. Most of the people in this group are taxpayers who receive social assistance, which we call Working For Families. The purpose of the PTS being issued to them is to check whether their tax obligations and transfer entitlements have left them in a net correct or near-correct position for the whole year. The entitlement for wage and salary earners to claim deductions was removed in 1988 and has simplified the way individual taxpayers engage with our tax system. In my view the change, while impure in the sense that individuals incur expenditure in deriving income and so in a pure policy sense should be entitled to claim deductions, was a pragmatic one which has made our system more efficient and simpler than it would otherwise have been. It was intended to increase certainty, simplify return filing, prevent abuse, and reduce administrative costs for the government and compliance costs for taxpayers. The fact that about 1½ million taxpayers either don't need to file a tax return or don't need to be issued with a PTS is, on balance, in my view, a positive part of our system.

There are also proposals out for consultation at the moment that will reduce the number of people who have to provide year-round information to Inland Revenue even further. These proposals, if implemented, will allow Inland Revenue to issue refunds or confirm tax to pay based on the information it holds from banks, from employers and from New Zealand companies that are paid the taxpayer dividend. So there will be even more people who won't have to either file a tax return or complete a PTS. Those proposals follow some draft legislation that is before our parliament at the moment that provides for Inland Revenue to receive income information from employers and banks more quickly and more frequently so that earlier and more regular information from the banks and employers will allow the social assistance entitlements to be adjusted up or down in something more like real time, and more people will therefore be out of the tax return process.

I have quite often been asked by Michael and other Australian tax people how it was possible for our government in the 1980s to remove the entitlement for wage and salary earners to claim work-related deductions. My view is that the removal of the entitlement was achieved with little fuss because the change was made as part of a package of reforms that included within a very short space of time reductions in tax rates, the introduction of our very comprehensive GST, and increases in social assistance. The packaging of tax reforms has been successful on a number of occasions in New Zealand, and that's just one of them.

The second aspect of the New Zealand tax system that I thought would be useful to draw to your attention is what we call our generic tax policy process, or GTPP. Since the mid-1990s, successive New Zealand governments have developed, enacted, implemented and reviewed tax policy according to the GTPP framework. It's an end-to-end process and it lies at the heart of our tax system. It guides how taxpayers and the business community in particular engage with the tax system and how they input into tax policy and law as it's developed, and it's an end-to-end process.

The government has mapped out the various stages of this process. It starts with the strategic stage and then moves through operational and tactical stages, through to the legislative stage, and then the implementation of that legislation and post-implementation reviews of the effectiveness of legislation afterwards. At its core—and this is what, to me, is the most important—are transparency, accountability and engagement with the private sector. The GTPP process encourages close collaboration with the private sector. It ensures our policy in tax is not developed in a vacuum and that the policy formed by politicians and officials is informed by and right for the wider community. There is a philosophy underlying it that we will get a better outcome for the tax system if we have this collaboration between the government, the policymakers and the broader community, including business.

Consultation occurs at various stages throughout the process. It starts off with the government setting its tax policy work program, which is usually for an 18-month period. The government consults with stakeholders like us and other key private sector stakeholders on what reforms should be on that program and what we would like included, and we often get measures or issues included on that work program. Then officials consult with the community, and particularly with the key stakeholders, as they develop the policy and turn it into law. By the time the legislative stage is reached and a bill is introduced, many, but often not all, of the issues and risks and drafting challenges have already been addressed. If not addressed, they have at least been aired and they are on the table. There are two Oxford academics who have done detailed research on the policy development process in various countries. In their view, commitment to consultation is not just on paper, but it's an integral part of the culture of tax policy development in New Zealand.

So our organisation advocates in the public good for the public interest, and not self-interest. We play an effective and valuable role, in my view, in the development of tax policy in the law, and the GTPP provides the framework for us to do so at various stages. But there is also the fact that the tax community in New Zealand is very small and closely connected. Even the business community is relatively small. So that makes the consultation and collaboration that much easier than it would otherwise be. It's easier for the system to be agile when the number of players is quite small.

The fact that New Zealand only has one house of parliament also helps ensure the legislative process is generally straightforward. With this GTPP there are few surprises and no wild changes in policy direction. Ad hoc, short-term decisions about tax settings are rare and the GTPP is one of the main reasons for that. It is, however, not a statutory process or framework. It doesn't have the force of law. The government is free to diverge from or suspend the GTPP in respect of a specific policy or for a specific period, and they do do that, particularly in the cases of a particular base erosion issue that they want to address.

Bypassing or truncating the GTPP has generally been the exception. On the rare occasion when it has been suspended or short-circuited, the outcomes have not been good, in my view. Law that has not worked as well and needs significant remedial amendment that may take years to achieve are leaving taxpayers in the meantime with uncertainty and frustration. The GTPP helps our government to divert tax law that works. I have written academic articles calling it the jewel in our tax policy crown. I'd like to think it is the global benchmark for converting tax policy thinking into law. It's not perfect, but it has been instrumental in ensuring our legislation and policy is more cohesive, more robust and fair and efficient than it might otherwise have been.

Just to conclude, I fully appreciate that New Zealand and Australia are not the same, that our economies and our communities are different and the fact that an approach or policy has worked in New Zealand doesn't mean it's right in an Australian context and vice versa. What I am keen to get across is that several aspects of our system—the removal of work related deductions, the fact that many or most of our individual taxpayers don't file returns and the adherence to this generic tax policy process—have all worked well for New Zealand. I know that officials in New Zealand and Australia have collaborated at a high level and share ideas constantly, so they will be very familiar with those aspects of our system.

CHAIR: Thank you. I note your comment about having one legislative assembly making things more simple, which I think we can all relate to. The work you have done, particularly work related deductions and the simplification of the process, has obviously had benefits for you. The committee is looking at this inquiry as if there are two cash economies, if you like: the cash economy—the mums and dads, the hairdresser who operates out the back and doesn't declare everything et cetera—and the black economy and the illegal things that are going on. You have alluded to both of those. We were told not long ago that you estimate that the black economy itself, forget the cash economy, is worth around $25 billion—is that what you said?

Mr Vial : For Australia?

CHAIR: Yes, I'm sure I read that, and that you think the cash economy is smaller than that. Mr Vial, we are getting a wonderful insight into your country. Is there anything you would like elaborate on where New Zealand is going with respect to the black economy? You mentioned AUSTRAC in your submission. Is there anything that might be of interest to us?

Mr Vial : I think so. We do have quite a comprehensive withholding tax regime. It's been reasonably successful in bringing contractors back into the system, or keeping them in the system, who otherwise might not be. We take what we call a scheduler approach. We have a schedule in our act which has a whole range of occupations, vocations or activities which are subject to withholding tax at various rates. We have had that regime for a number of decades and it's worked reasonably effectively. We've recently had quite significant reforms to that regime to widen it—so to bring more people into the withholding tax regime. For example, if you're a journalist working as a stringer writing articles, or you are in a particular industry where your work is on contract and ad hoc, you are likely to be included as a vocation or activity in the schedule, subject to a withholding tax rate. The new changes allow people who are even outside that particular scheduler approach to elect into the withholding payment regime and to have tax deducted at source. It also allows them to elect their own rate of withholding tax, subject to minimums. So the regime has been broadened and made more flexible, and it has also be given some more teeth. We have followed the Australian example of introducing rules in respect of labour hire arrangements. The government has said they are targeted particularly at the IT industry, where there are a lot of contractors. We have followed suit with Australia and introduced those rules very recently. They only came into effect on 1 April. Generally, I think I would be right in saying, Michael, that our withholding tax regime is much broader and encompasses a lot more activities than the equivalent in Australia.

Mr Croker : The committee is going to hear from Karen Payne shortly. I can't speak for Karen, but withholding, for us, and I think for administrators, is the ideal. Australia tends to have gone down the reporting route, which is, in our view, second best. Withholding is not popular, but if this is business to business withholding that Peter is talking about, it does create that skin in the game for the provider of the service or goods to actually come back into the tax system to try and get those credits back—those withholding amounts back. But Karen might talk about that a bit later.

CHAIR: I know a lot of assumptions always go into to these types of things, but, going to the withholding tax philosophy, do you have estimates of the total size of the cash economy and how much more you collect because of that type of philosophy rather than the other?

Mr Croker : In an Australian context—

CHAIR: I think both.

Mr Croker : The ATO has indicated to us they will soon publish a gap analysis—quite an extensive series of gap analysis reports, one of which will be on the estimated size of the cash economy. I defer. I hope you are hearing from the ATO team that is preparing the gap analysis, because they have been working on it for a while now and are taking into account a lot of expert input from other jurisdictions. I think they are getting to the stage where they think their methodology is very sound, so I think you are about to receive one of the best prepared gap analyses of the cash economy and other tax segments that Australia has ever produced. That will inform your work.

Mr LEESER: I have a couple of questions about what happened to the profession in New Zealand after you made those changes. How did the profession welcome or resist the changes?

Mr Vial : The accounting profession?


Mr Vial : It was a long time ago; in terms of work related deductions, it was 1988. So I am speculating here, but I suspect the profession was not enthusiastic at the time, but has moved quickly. It is part of the rules. It is the way the system works, and it works efficiently. Individual taxpayers in New Zealand do not, generally, use an agent unless they are in a self-employed situation. As I said, most wage and salary earners would not prepare a return, so they would not require the services of an agent. If they had some complexity in their activities—if they owned rental properties or they derived royalty income or whatever—they would use an agent. But our agents are busy dealing with small and medium businesses and large businesses as well. Obviously in that period since 1988 technology has moved hugely and the role and business model for an agent is changing enormously anyway. In the last 10 or 15 years, that I can recall I have only seen one article and one commentator calling for the return of work related deductions for individual wage and salary earners. It is just part of our framework now.

Mr LEESER: Did it see a massive decrease in the number of accounting professionals in New Zealand? You might even want to take that on notice. I think it would be interesting for our committee to have a look at getting a bit more information. Even some of your articles would be of interest. Could you remind me also what the top marginal tax rate, the company tax rate and the GST rate are in New Zealand.

Mr Vial : The GST rate is 15 per cent, the top marginal tax rate is 33 per cent and the company tax rate is 28 per cent. We have reasonably closely aligned rates. The company rate is 28; there was a five per cent differential to the top marginal tax rate and a five per cent differential to the trustee rate. We have had issues in the past with planning and avoidance where there is a bigger divergence between the company rate and the trust rate and the top personal rate. We had a period in the 2000s when the top rate was moved to 39 per cent, but it's now back at 33. So, by global standards our highest rate is low, but it kicks in at a reasonably low threshold; it kicks in at $70,000, which is quite low internationally.

Mr LEESER: If I can take you to page 4 of the submission, at the very top of the page, you look at tax and the social contract, and you have a few examples of things related to government benefits, government support, entitlements or rights that you might have as a citizen that might be withdrawn if you don't comply. Why did you choose this set of rights in particular?

Mr Croker : Just by way of example—and I should make a disclosure—I am a member of the Black Economy Taskforce reference group and work closely with Michael Andrew and the Treasury team that supports him. We think this has great merit in terms of trying to change attitudes in Australia towards paying tax. I think as parliamentarians—and I think Michael will vouch for this—you will often hear, 'Why are you going after the little guy?'—or the battler, or whatever, when there are these multinationals or these very rich people in our community who are perceived not to be paying their tax. Michael gets that a lot at his public town hall sessions.

But this idea that the community bestows on us lots of advantages comes from some of the systems in place in South Africa and Ireland—this idea that you do not get this entitlement that the community bestows on you unless you have so-called green ticks or tax clearance certificates, which are easily accessed by the supplier giving details to the payer. They say, 'Here you are; you can go onto this trusted website and you can see our green ticks, and then you can proceed to the next stage.' And you can then go to the next stage of getting this tender application processed or this dispute resolved.

We think it's also important because of our federal structure in the sense that the states, who are primarily the beneficiaries of GST revenue, as you know, could come to the party a lot more and help the federal government in terms of reinforcing this view that there are a lot of things that are doled out by the states and—

Mr LEESER: A number of these rights as it were relate to state matters—

Mr Croker : They do.

Mr LEESER: particularly some of the consumer protection stuff and certainly the landlord and tenant matters that you raised there.

Mr Croker : And we would hope that these sorts of initiatives could trigger increased GST payments, GST compliance, and the benefits to the states would be obvious. So, it's unclear to us exactly how that federalism discussion is going at the moment. The previous Prime Minister did start a federalism project, but—

Mr LEESER: I think the white paper process has been abandoned.

Mr Croker : Yes. That's disappointing in the sense that we see a lot of opportunity here to reinforce the measures that the federal parliamentarians might be trying to push, because the states really have a key interest in making sure this works.

Mr LEESER: But you didn't feel that there were some examples of things at the federal level that could be withdrawn, whether a right to access family tax benefits or childcare support or the pension arrangements? I'm not suggesting that we do any of those things; I just wondered whether there was anything that you thought at the federal level that we should be doing.

Mr Croker : Some of Ms Payne's comments might go to that point. There are of course a lot of tenders, contracts and what have you awarded by the federal government. One of the other reasons we thought you might be interested in meeting Peter Vial is that, in New Zealand, New Zealand Inland Revenue has in one way or another become front and centre in terms of the process of providing transfer payments. In Australia we've had this recent experience with the Department of Human Services and alleged overpayment of benefits, and whether the data provided by agencies such as the ATO has been properly interpreted by another government department. I'm not sure whether you wanted to comment on that, Peter, but it does seem that it's more in league with this PTS statement that you've referred to.

Mr Vial : Yes. New Zealand Inland Revenue is primarily responsible, in addition to the tax base, and also administering social assistance entitlements and child support and student loans and KiwiSaver. So it is, in a way, a one-stop shop for social assistance and tax. That has of course had its challenges, and that's why at the moment the government's investing a large amount in a new system, because over the last 30 years each of those broad responsibilities have been added to Inland Revenue's traditional role of income tax, and that has placed pressure on the system and the software and so on. But there's a huge transformation project at the moment which will improve all those processes.

Mr LEESER: On the other side of this, you've also recommended a good behaviour bond. How would the good behaviour bond work?

Mr Croker : We've been talking to the ATO for some time now about penalties. Penalties are imposed, often automatically by the ATO computer, for late lodgement or late payment. And it seems that in many cases taxpayers or their representatives can contact the ATO and get some of those penalties remitted. But where they stand, those penalties can be quite substantial, and they add to the existing liability. What we've been observing in Australia for some time now is a growing level of aged tax debt, particularly from the small business community. When certain small businesses just go under, then I think you are finding that the ATO is left in the position of being owed quite a bit of money.

But we were trying to figure out how you could perhaps have this sanction without necessarily adding to the angst that particularly small businesses suffer. This idea struck us as something that could be worthy of consideration such that the taxpayer says, 'Well, I have done the wrong thing.' Or it could be a new business registration. You'll hear a lot about phoenixing behaviour. Certain businesses allegedly carry on a business but they get the registration and never seem to lodge a GST return or an income tax return which has business income in it. So, this idea that you put some skin in the game again, that you register and you put some money up-front to the ATO or you volunteer to come into the system immediately—in Australia we're very generous to new businesses. We allow them up to 18 months to inform the ATO of their first income tax return, by which time certain purchases might have been made, input tax credits may have been claimed, and the business is really not functioning and never did function. So, there is this idea of demonstrating your intention from the outset to be a business taxpayer and to put some money into the system—not a lot of money; it would be an advanced payment of tax—to demonstrate to the ATO that you are in fact carrying on a business, or, if you have been penalised as a business, the idea that you are not lumbered with a non-deductible penalty. Rather, you say, 'Okay, I have done the wrong thing; here is a bond and I commit to being more compliant in the future.' And that bond is dissipated by reference to the taxpayer's good behaviour subsequently so that over time that bond is repaid to the taxpayer and is not a standing debt. You get it back in the sense described in our submission. It's just a way of trying to address this debt mountain that seems to be exacerbated by the imposition of penalties. It just seems to increase and increase for some taxpayers and they never seem to get through it.

Mr LEESER: I want to ask a question about the New Zealand situation, which is referred to on page 10 of your submission, in particular the importance in New Zealand of outsourcing the tax administration software. We have perhaps an ideological submission from the Community and Public Sector Union, which is appearing before us this afternoon, concluding that the outsourcing of IT has been a bad thing. I wondered whether you could perhaps speak to that with reference to New Zealand and perhaps tell us some of the benefits of the outsourcing of tax administration software.

CHAIR: A very good question.

Ms FLINT: An excellent question!

Mr Vial : As far as I understand it, the outsourcing decision is proving successful. The business transformation project is, for a country of our size, a huge endeavour, and it is rolling out over a number of years. My understanding is that government and inland revenue considered very carefully whether it would outsource or have it developed in-house, and they've decided to outsource and they have acquired the platform from a US company which I understand specialises in tax administration software. I think there are some states in the US and some other countries that use software from the same entity. Therefore the decision was made that, in the New Zealand context, this was an appropriate decision. That was obviously a decision by government and Inland Revenue. As I said, we are in the middle of the process. The first major stage has been rolled out with what is called My GST, which allows a lot more online interaction in respect of GST. The next stage will be in relation to income tax and then social assistance. To be fair, there have been some teething problems with My GST, but I suspect, in the greater picture, they are normal when you are doing a big change in platform. We have worked with Inland Revenue on some ways they can roll out the next stages better—so more education, more testing, more engagement with agents, more in advance and so on. I would see them as normal teething problems with a new system.

Mr Croker : The committee might be interested in the way New Zealand has just combined the accounting cash flow of small businesses with their tax payments. That is another feature which is quite unique.

Mr LEESER: Has that been delivered by outsourcing too?

Mr Vial : No. What we are talking about here is a method of paying provisional tax, which, I understand in Australia, is pay-as-you-go tax. We have a couple of methods. Most taxpayers would currently either estimate their provisional tax payments, their instalments, or would use an uplift from the previous year. So what the government has done is introduce a new system for paying provisional tax, which possibly many taxpayers will adopt, which means businesses will pay tax but provisional tax, so PAYG instalments, in advance on the basis of their accounting income. The accounting software products will land on an accounting income. There were certain adjustments made to that but the accounting software that the client or the taxpayer uses will talk directly to Inland Revenue software, and the provisional tax will be paid based on the accounting income. It was enacted by parliament the end of March. The details of the adjustments will come through. It is particularly suitable for taxpayers with lumpy income or seasonal income. It does raise some interesting issues because the extent to which an agent is required to be involved is one of the issues for debate. But it is outsourced in the sense that the taxpayer will use software provided not by Inland Revenue but by their own accounting software provider.

Mr Croker : And there is a true-up at the end of the year when you lodge your tax return if you are under or over.

Mr LEESER: Just to be clear, did you find in New Zealand the experience of outsourcing the IT to be a positive experience?

Mr Vial : So far it has been positive, yes. As I say, it is a huge project and it is part way through so we're not through the tunnel yet but it is looking good so far.

Mr LEESER: Are there benefits from you getting outside expertise from people?

Mr Vial : Yes, and I presume another benefit the government would have weighed up is the cost benefit of sourcing an off-the-shelf technology platform that has been proven elsewhere and is being adjusted to fit the New Zealand tax system.

CHAIR: We might take that up later.

Ms FLINT: I am very interested to pursue further the behavioural insights and comments that you have made in your submission very much in light of the New Zealand experience that has been shared with us. Was there a shift in community attitude, do you think, to paying tax because of the changes that occurred in 1998, where all of a sudden you moved from trying to claim every single thing to minimise your tax to being told: 'This is what you pay'? Is there a difference then between individual taxpayers and business taxpayers or those who may have investment properties and things, as you explained, in relation to compliance and/or what they see as a fair contribution?

Mr Vial : There are some interesting issues there. One possible negative with having taxpayers not entitled to claim deductions and many of them not required to file returns is a question of what I call fiscal literacy and engagement with the tax system. The engagement is minimal.

Philosophically, from my point of view, the tax base relies on compliance and it relies on an understanding of what tax is for. Tax is there to pay for hospitals and schools and roads and the rest of it. When you have minimal engagement with the system, the question does arise, and it's something that should be considered, as to whether that disengages people from the tax system. So that is on the one hand—it's a balancing exercise—and on the other hand simplification means reduced costs for the taxpayer, reduced collection costs or processing costs for the government. There are all of those factors, so you just have to work out where the balance is right. Given that we have stuck with that reform for the last nearly 30 years, I would say that most informed New Zealanders would be convinced that it's the right balance. I don't dismiss the issue of fiscal literacy and understanding of what tax is. When you don't have to engage, it's possibly easier not to be aware of what underlies the tax system and why we have it and what it's for.

Mr Croker : Peter, the idea of a contractor or someone with rental properties, they're still in the system generally, they're still lodging tax returns?

Mr Vial : Yes, they would lodge tax returns because there's no tax deducted at source on a rental property, for example. But a taxpayer who has one or two rental properties will still have a fairly simple tax return, and many of them would file those tax returns on their own. They would still be required to file one.

Mr Croker : In Australia, this trend towards greater use of contractor status is an interesting one. In your policy decisions, there's this idea that a PAYG worker may be denied deductions whereas a person doing almost exactly the same thing but calling themselves a contractor might be still entitled to the deduction for their car and their phone and their work boots or whatever.

Mr Vial : Yes, self-employed contractors are entitled to claim deductions subject to the rules of tax law. Yes, that is a difference.

Ms FLINT: You have referred to the work the ATO is doing and the New South Wales government is doing on the behavioural science side of things. Are there any observations you, Mr Croker, might share as to how you think we can encourage better awareness of what people's taxes are going towards and why it's important that they do make a contribution?

Mr Croker : It goes to Peter's comment about financial literacy. The ATO people, if you're hearing from them, will talk about engagement a lot. I think some in the ATO think it's a good thing that you lodge an annual tax return, and it might sound strange coming from Chartered Accountants that perhaps we would support a different model. The worry for us is that the online world may be contributing to a problem. There is the sense, the idea, that you do it yourself online, with MyTax for example—you type in work boots at $1,000 and a nudge message comes up and says, 'No, that's just beyond the pale', so then you type in $800 and then $600—and that you experiment with online claiming and try to check out when do you come into the benchmark that's acceptable. The idea that you are required to wear a polo shirt that has, perhaps, Bunnings written on it and it's coloured red—we've all seen the Bunnings workers and to most people that is a uniform—and so, yes, you will claim laundry deductions. The commissioner commented on this at the Press Club the other day, where he said, 'Geez, everyone seems to be wearing a uniform in Australia because we're seeing so many laundry deductions.' So there is this idea that people start to self-interpret the law regarding uniforms or self-interpret the law about travel expenses.

We've had quite a detailed discussion with the ATO about taxpayer attitudes in recent times. Our sense is that the tax system can be seen as a way of compensating you, the individual taxpayer, for this feeling that you might have of not getting ahead: 'I haven't had a pay rise for a while', or, 'I can see my electricity and gas bills going up', or, 'Things are a bit tough at home'. This idea that you have an entitlement to get something back that was taken away from you is, I think, quite a legitimate thing. People are seeing tolls imposed quite often now to travel around Sydney, and there's the sense that, 'Really, I'm on call quite a bit', or, 'I do a lot of my work home these days'—because we're all such family friendly employers these days—'so I should be able to claim the toll.' So there is this sense that in an online, do-it-yourself world that you will, in your own mind at least, start to justify this thinking: 'I am entitled to certain deductions. I have heard about claiming car expenses. I have heard about claiming laundry and uniforms.' And on it goes. However, if they went to a tax agent—a good one—and the law was applied correctly, they would be told, 'I'm sorry, that's not deductible.'

But Peter's country has just negated all of these sorts of discussions and is proceeding in an online world directly into the business sphere, leaving largely the individual New Zealander out of the process and using data analysis to make sure their tax affairs are dealt with correctly. The focus of modernisation in Peter's country is, I gather, mainly on the business community, whereas our commissioner is trying to do a little bit of both. With individuals, and this is a concern, he's indicated that the cost of work-related deductions are going up. He's also dealing with the business community online. We have a lot of work to do on the individual front if we are to continue to require Australians to lodge annual income tax returns.

Ms FLINT: And just to be clear: does CA Australia have a position on where we should go in future? Should we go down the New Zealand path?

Mr Croker : Our long-held position, and we come here to speak in the public interest not in self-interest, has been that Australia should explore mechanisms and policies, as has been done in most other countries, with the notable exception of the USA, that eventually remove individuals with straightforward affairs out of the tax system, and to use enhanced data collection, working even more collaboratively with other government departments or centralising both revenue and transfer payment functions in the one entity. You can interpret data and produce a just outcome. That would be a good model. To be frank, we're quite envious of what New Zealand has achieved in this particular sense.

Ms FLINT: They're doing some wonderful reform work in many areas, and I think we're envious of a lot of those areas.

CHAIR: As I commented earlier, one legislative assembly works. I have a couple of questions to follow-up on a different issue. The ATO has had some outages recently on its website. Would you care, in your field, just to make any comments about that?

Mr Croker : We find it difficult—you would meet with many CEOs. Invariably they will express frustration or fear that one morning they'll wake up and things have gone wrong in the IT area. We feel very much for the commissioner in the sense that senior level management place a lot of trust in the technology, the equipment, the skills of the labour force that help with IT. We're not about to sit here today and lecture the ATO about IT and how they could do it better. We simply don't know.

With the PwC report, we would hope that within government circles at least that the full report would be shared with parliamentarians. We would hope that the commissioner would one day see fit to become more like the banks or other financial institutions and operate with a service standard such that if there is an outage and it causes delays or causes downtime or loss where, in a professional practice, your workers can't work, then there would be automatic service standards kicking in to say: 'This will happen now. There will be an extension of lodgement times. There will maybe be some payment of interest if the outage is sufficiently long to cause financial loss.' That has not yet been adopted by the commissioner in his initial response, but we think that eventually, once the systems are more trusted and up and running, that idea could be revisited by the commissioner and other regulators who are similarly requiring all Australians to deal with them online and that that would be something that they would think about doing. This is so that we don't have to rely on an occasion by occasion act of grace from the commissioner to say: 'Okay, this time, yes, we will give you this extension. This time we will give you further time to pay.' It's just so that it just kicks in as an automatic entitlement for the user if certain outages cause specified levels of damage or delay.

CHAIR: Very good point. I remember reading an article 20 years ago talking about the dangers to government of the advancements being made in the digital word with encryption technology et cetera, where there would be platforms where it was invisible to government—we could have a method of transfer that would be acceptable to a lot of parties, where they could encrypt the transaction and no-one would know except for those two parties, and it would be impossible for a government to ever see it, tax it or do anything about it. Their prediction was that governments would then be very much leaning towards taxing what could be seen, felt and heard in their sovereign area, like land taxes et cetera. Given the advancements in platforms et cetera, do you have any comment to make on that from where you sit?

Mr Croker : Another disclosure: I am a member of a cybersecurity working group with the ATO. One of the concerns we have is that a key regulator like the tax office could be brought down by some act of deliberate—

CHAIR: Vandalism?

Mr Croker : vandalism or whatever. The idea for us is to say, as a profession: how can we present to the ATO our credentials as cyber aware practitioners? It would not come as a surprise if one day the profession in Australia is asked to step up, as part of our social licence to operate, the tax agent licence, and is required to dedicate more resources to cybersecurity.

On the collection side of things, it has been a longstanding worry for policymakers as to how they tax online. Parliament has tried with online services, online goods. Bitcoin has been brought into the system and recognised as money, rather than being seen as an outlier and possibly badged by some as the currency of the underworld. So I think this idea of trying to bring these new technologies into the net in a modern way is a key policy area for further development.

On encryption, I see the Prime Minister and the Attorney-General have recently made some comments about trying to get government access to unlocking, which we think is probably worth considering on a lot of fronts, not just tax, of course. But, by and large, what we hear from the ATO is that the encryption process is relatively sound, where tax practitioners use trusted software which meets minimum Australian standards and are messaging from the practitioner's office to the ATO. The encryption in that particular funnel, if you like, is generally regarded as quite secure.

What we have been focusing on as an organisation is to say to our members: how secure are you in terms of your practice? As I said earlier, a lot of employers allow their staff to work from home. How secure are the home systems that you allow your staff to use? And we are generally educating. The big one that a lot of our members complain about is the ease with which some of their clients have been duped by phishing, by malware attachments that seem to come from ASIC or ATO. Getting onto that quickly and effectively, I think, is still a challenge for the Australian community. The more people who, unfortunately, part with their money, it is just going to lead to more and more letters coming to you and your offices saying: 'How did this happen? Why isn't this stopped?'

The ATO and other regulators—we have been to talk to the Australian Federal Police—effectively say: 'The scale of the problem is just so big, and, with the resources that we can throw at trying to protect the community from it, it's just diabolical.' We try and turn that into a positive, as professional men and women working for organisations like Chartered Accountants. We try and say: is there a role for having trusted intermediaries in our community, where you can be more confident that the communications that your licensed adviser makes to the ATO are dealt with very confidentially and securely?

And, if you get something from the ATO that hasn't come via your adviser, you're well entitled just to hang up or delete that email because it hasn't come via your authorised intermediary. So we tend to flip these things and turn them into a positive and say, 'Well, there is an important role for educated professionals to form part of a defence mechanism for the Australian community against cyber incidents.'

CHAIR: You make some valid points on cyber security and being on that committee on the task force, so I'm sure you're more aware of many things that we aren't. But to go back to the emerging platforms, do you think, at the moment at least, some of those concerns are overstated? We're not talking about bringing in a tax or a GST, as you would well understand, on eBay. This obviously is a platform that is not seen by government. Do you think those fears may be overstated?

Mr Croker : The ATO discussions we've had seem to indicate that if they get the majors that's good enough; that's the best that can be hoped for. The majors being the typically well-known platforms. But they fully admit that other platforms can be developed overnight and it's going to be hard to try to bring them in. You should be aware, Chair, that the ATO has another interesting weapon here, and that is to challenge long-established views about source of income. It used to be that people would accept an argument that said, 'Well, the servers are over there in Ireland or Singapore; you don't have a taxable presence in Australia.' I think regulators around the world are trying to develop more modern interpretations of where you have a taxable presence. This idea that you try to jawbone these platforms offshore to come into the Australian tax net not just from a GST perspective but from an income tax perspective I think is a very interesting and unfolding area for tax regulators around the world at the moment.

CHAIR: What are the ATO referring to that as? What was the term you used?

Mr Croker : It is this idea that you could challenge platform providers, saying, 'Look, we now think you have a permanent establishment or a taxable presence here in Australia.' It is this idea of discarding old notions of residence and source in favour of a more modern interpretation. I should add that the OECD is on board here, and, ultimately, if the world would collaborate, then in a few years you might have vastly different models about taxing these other types of delivery mechanisms on a destination principle, which you've probably heard about in the context of the low-value goods debate—the $1,000 debate.

Mr LEESER: I want to come back to a question about the general role of the tax practitioner in the system and, as the son of an accountant, ask a devil's advocate-type question, if I may. Given that 75 per cent or thereabouts of Australians use tax practitioners to lodge their returns and given that there is this culture of overclaiming, as alluded to in your system, to what extent are tax practitioners liable for that? I don't mean liable in a legal sense, but you can't tell me that all the people that are overclaiming are in the 25 per cent that don't use practitioners. What can we do to make practitioners play a tougher role with our clients in that space?

Mr Croker : This has been a subject of discussion with the ATO in recent times. Our difficulty is that, under a self-assessment system, and given the cost structure of running an accounting practice, if a client tells me that they have travelled in an income-producing way, then we do not necessarily have a process anymore of seeing the travel diary or seeing the invoice or whatever. Some agents will spot check and they will actually ask for some records but not comprehensively review the shoebox or whatever the client has brought in. So there is that practical matter in terms of what happens inside the practitioner's office. Again, going back to what Peter was talking about with work related deductions, a change in policy could make that particular problem go away in terms of employee expenses, and the focus then would be on the accounts that are prepared in respect of businesses where there is usually, hopefully, a much more thorough interrogation of these systems and the key documents, and the regulator would have a greater level of assurance that the business accounts have been prepared in accordance with established principles and standards.

On the other side of things, there is this—and Ms Payne might comment on this, because Michael Andrew has been recently talking in the press about it—perception that there are some agents who may be gilding the lily by helping their clients make excessive claims. In a competitive sense: come to me, because I'll give you a bigger reduction—that sort of behaviour has to be identified.

The ATO tell us that their radar is increasingly good and that you can spot the agent who is outside parameters, but those agents are being contacted and using behavioural techniques—perhaps a nudge or, more appropriately, a kick up the backside. They can be reported to the Tax Practitioners Board. They can be reported to us as well, because we have our own disciplinary processes. So there are mechanisms there. Whether those mechanisms are working as effectively as they could to identify rogue agents and weed them out of the system—they should be out of the system—because they have a social licence to operate. Remember the parliament has given tax agents—

Mr LEESER: You're responsible for regulating those agencies too, aren't you? To what extent, are you doing that?

Mr Croker : In Australia, the regulation of tax agents is done via the Tax Agents Practitioners Board. We would be contacted by the board after a determination has been made and the particular agent has had their natural justice or their day before the board. If someone is terminated on the grounds of poor behaviour or discipline, that's when we are notified by the board, and then our own disciplinary processes kick in. They're quite thorough. We are perhaps the last to know, but we act when we have the information from the board, a court or a consumer has complained directly to Chartered Accountants about the behaviour of a member. They have to be a member, not just a tax agent.

CHAIR: Thank you. Thank you for your attendance at the hearing today. You will be sent a copy of the transcript of your evidence and you'll have an opportunity to request corrections to any transcription errors. If you have been asked to provide any additional material or there's any further information that you would like to provide, please forward this to the secretariat by Monday, 31 July. Additionally, the committee may provide you with further written questions on notice during the course of its inquiry, with your responses to be taken as additional evidence. Your assistance with this will be appreciated. Thank you again for taking part today.

Proceedings suspended from 10:32 to 10:47