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Economics Legislation Committee
30/05/2017
Estimates
TREASURY PORTFOLIO
Australian Taxation Office

Australian Taxation Office

[09:00]

CHAIR: I welcome the Minister for Finance, Senator the Hon. Mathias Cormann, representing the Treasurer, and officers of the Treasury. Minister, or officers, would you like to make an opening statement.

Senator Cormann: I do not, but the commissioner does.

Mr Jordan : Australians must be able to have confidence in their tax administration, and, with that in mind, I want to highlight a number of matters in this opening statement: first, Operation Elbrus, the joint operation with the Australian Federal Police that became very public on 17 May when a number of warrants were executed on people involved in a syndicate allegedly involved in tax evasion and organised crime. The operation was clearly a success for our work—that of the ATO, the AFP, and the Australian Criminal Intelligence Commission, the ACIC. All three agencies separately and independently identified and investigated the syndicate and then worked together to culminate in the actions earlier this month. It has been a great demonstration of the federal capabilities of the ACIC, the AFP and the ATO to separately and jointly detect and take action against those we have reason to suspect are doing the wrong thing.

Now, whilst it is a success story, what has detracted from the story is the alleged wrongdoing of some ATO officers. I cannot overstate how much those allegations have struck at the heart and values of those who work at the ATO, and how seriously we are taking those allegations. We are keenly aware that the community must have full trust in us and in our integrity, objectivity and expertise. We cannot do our job effectively without this. The events of the last couple of weeks and some of the media attention associated with them have potentially been detrimental to our reputation and the respect people have for the role we play in the community. When confidence in us is jeopardised, it can impact negatively on taxpayers and on the tax system. I will do everything in my power to eliminate the risk of that happening.

That said, I do want to acknowledge the overwhelming support we have had from the community, the tax profession, clients and key stakeholders. By far, the sentiment expressed to us, and to me, has been of confidence in our administration, ethics, sound judgement and practice. We do have a longstanding record of quality tax administration, and I assure you the ATO is continuing to work well for the community it serves. We have robust frameworks, policies and procedures in place to support a culture of professionalism and high ethical standards. Like other APS agencies, we have frequent communications, numerous checks, declarations, methods of identifying and managing conflicts of interest, security clearances, and controlled access to information—particularly taxpayer information—on a need-to-know basis only. Not only do we have these policies and processes in place, but they are regularly reinforced with messages to our people. While I say this with confidence, I understand the questions and assurances people might be asking or seeking, so we will be thoroughly reviewing what has happened and whether our policies, practices and procedures need to be strengthened. I will, however, also make the point that no system involving humans will ever be infallible.

Now, I am going to outline to you the events leading up to the actions taken by the AFP and the ATO just under two weeks ago on Operation Elbrus. I say now that I am not able to give you a whole lot of the detail, because it is inappropriate to do so and may compromise ongoing investigations and legal actions. Our work at the ATO related to Operation Elbrus began in early 2016. Both the Australian Criminal Intelligence Commission and the AFP also initiated their investigations last year—the ACIC in early August and the AFP in September. When the ACIC learned the AFP was looking into the same matters in late September, they agreed the AFP should take the running and handed over to the AFP the financial data and other intelligence they had gathered.

In February 2016, as part of our routine monitoring, we identified a small number of entities that went into liquidation owing pay as you go withholding and GST payments, and the matter was referred to our tax evasion and crimes area for review and potential audit action. Our initial review showed the presence of a syndicate that appeared to be promoting phoenix arrangements to the labour hire industry in the construction and IT sectors. Because some potential criminal links were identified, covert audits and reviews were commenced. Over the year, we progressively uncovered a complex web of suspected tax evasion involving a multitude of entities and individuals. The identities and details of those involved are not all apparent to start with. As with many of these kinds of syndicates, their identities, roles, activities and arrangements are deliberately opaque, deceptive and complicated, and they take time to piece together. So far, over 200 entities in layered structures and complex transactional and business relationships have been identified. When officers in the ATO working on the investigations were certain that one of the principals of the syndicate had a personal connection with Deputy Commissioner Michael Cranston, they took steps to further isolate and lock down the casework. This was in addition to the extra security and compartmentalisation already in place for such tax crime cases.

In December 2016 and January 2017, our audits and investigations culminated in a series of actions starting with assessments and recovery of unpaid taxes through garnishee notices. We have raised liabilities to date of more than $130 million—the original estimate of $165 million apparently was released by the AFP, but we believe it is more in the order of $130 million, and we are still working through that—and we have collected almost a third of that amount so far, including from various garnishee notices. We were able to collect these amounts because we targeted bank accounts with significant balances and current payroll activity so that they could be garnisheed as soon as any tax liability was assessed, protecting the revenue at risk. The ATO garnishee action in December and January caused significant disruption to the syndicate and alerted the AFP's Operation Elbrus team to the ATO's interest in their targets. AFP Commissioner Colvin visited me on 11 January this year to make me aware of their investigations and of the personal relationship between one of the principals they were interested in and Deputy Commissioner Michael Cranston.

Commissioner Colvin was clear to me that Michael Cranston was not suspected and is still not suspected of being involved in the syndicate and its activities of defrauding the Commonwealth. I would like to cite the AFP's quotes in one of the media articles recently:

"The AFP always needed to consider whether Michael Cranston was involved in the conspiracy, however subsequent investigation clearly demonstrated he was not involved."

"Michael Cranston is not being considered for conspiracy to defraud the commonwealth."

I was not asked by the AFP to intervene. In fact, the ATO was asked to leave things as they were, and to keep all existing arrangements in place, keeping Michael Cranston in the deputy commissioner position while further information continued to be gathered about the syndicate and its operations.

So let me assure you that evidence to date shows that at no time did Michael Cranston directly access taxpayer data systems, or access the audit cases under this investigation. And there is no evidence of actual intervention or influence on the audit cases or of money being refunded or of tax liability being changed. No deals were done. In February, the ATO and AFP joined the tax crime intelligence with the AFP criminal intelligence to put together a fuller picture, and both agencies continued working on investigations and compliance actions. In April, we undertook further steps to collect outstanding taxes, like we do in cases of this type. We froze bank accounts, due to the high risk of the removal of the funds by the account owners. Conscious of the impact this can have on innocent third parties, especially regarding wages, we established the names of those due to be legitimately paid, so that funds could be released to pay the wages owing. We did not stop people being paid. We are continuing to look into how we may be able to have any of the remaining funds released to pay outstanding superannuation guarantee amounts.

In mid-May, the warrants that were executed by the AFP yielded seizure of a large volume and high value of cash and assets. With these significant amounts of cash and assets seized, we would hope and expect, there to be recovery of significant amounts for the Commonwealth. For workers, employers and businesses affected by Operation Elbrus, we have put in place a range of help and support. Yesterday, general advice was published to our website, and we have a dedicated help line for people to call. We have committed to updating the advice as we learn about different scenarios, and we will be reaching out in a more targeted way, to those who might need our assistance in readiness for lodging their 2016-17 tax returns. We will be honouring the pay-as-you-go holding amounts that have been deducted from people's pay, so that when they lodge their tax returns they are credited with those amounts.

As you would also be aware from the publicity around Operation Elbrus, we took action against a handful of ATO staff, standing them down while investigations related to their alleged actions were ongoing. As I have already said, I cannot overstate how seriously we take the allegations of wrongdoing by ATO staff. We do understand the ramifications of a loss of confidence in us. Three of our SES officers are being investigated for potential breaches of the APS code of conduct, and these investigations are being conducted by Barbara Deegan, a former fair work commissioner. If breaches are found, potential sanctions range from reprimand through to demotion, or termination of employment. I will not say anything further about these details of those cases, as it is not appropriate to do so at this time.

There are three messages we are giving right now. Firstly, Operation Elbrus is a clear success of our efforts and that of the ACIC and the AFP to detect and take action against people we have reason to suspect are doing the wrong thing. Secondly, our integrity is critical. The people in the ATO know it and take it very seriously. We have policies, procedures and controls in place to support a culture and practice of professionalism and highest ethical standards. However, given the recent events, we will review these policies, procedures and practices to give assurances to the community that they are watertight. Thirdly, the ATO continues business as usual. We are getting on with our job. We are proud of the work we do and every effort is being made to demonstrate our ethics, professionalism, capability and resilience. Before I move on to one more key topic, I will reiterate that this is all the information I can give right now about Operation Elbrus and related issues. As you would appreciate, there are ongoing investigations and we cannot compromise them in any way.

Let me just briefly turn—and it will be brief—to an update on the preparations for tax time and our systems restoration over the past few months. This follows up on our last appearance at Senate estimates and the issue of the outage caused by the SAN failure in December and February. I want to assure the community that our systems are restored, no taxpayer data has been lost and we are tracking well for delivery of tax time 2017. We have already rebuilt our storage system to the latest in world-class standards, replacing the faulty equipment with new technology and we are reviewing our IT framework to ensure stability and resilience more generally. Next week, we will publish a report that provides findings of reviews to date from a range of sources, an interim root cause analysis by our contractor Hewlett Packard Enterprise, expert technical advice from PwC, feedback from our stakeholders and the ATO's own internal review. In summary, the report will say the turnkey service of data storage, as per the 3PAR SAN provided by HPE, failed us. Preliminary analysis shows the following problems: the fibre optic cables feeding the SAN were not optimally fitted; disk drives on the SAN had software bugs that made the stored data on the drives inaccessible or unable to be read; some monitoring features were not activated, including a back-to-base tool to HPE to report operating errors; and the SAN design and configuration meant we had an overemphasis on performance features rather than stability or resilience. A relatively small disk drive failure had a large impact. Only 12 of some 800 disk drives failed, but they impacted most ATO systems. The recovery was slower because some of the actual recovery tools themselves required for that restoration were stored on the same SAN that failed. Our business continuity mechanisms, communication and engagement worked well, but into the future need to be more inclusive of our partners, such as software providers, tax professionals and the superannuation industry. We have reached a commercial settlement with HPE, the detailed terms of which are subject to contractual confidentiality. The settlement recoups the key costs incurred by the ATO and provides us with additional and higher-grade IT equipment, giving the ATO a world-class storage network.

In conclusion, I want to impress upon you our heightened sense of responsibility and accountability for the performance and confidence in the ATO right now. We are managing with utmost care and respect the current investigation processes, our ongoing service delivery and the relationships with stakeholders, our partners, clients and the staff of the ATO.

CHAIR: Thank you, Commissioner, for that very comprehensive opening statement. I am going to use my Chair's prerogative to kick off the questions, but we do have questions from a number of senators around the table today. Can I first congratulate you. I understand that you have been reappointed for seven years. That is terrific news. You have been with the ATO now for—

Mr Jordan : Nearly four and a half years.

CHAIR: Congratulations, that is very good news. Can I please just clarify some of the timelines of Operation Elbrus. You mentioned them in your statement, but I want to condense them for the sake of senators' understanding. Can you tell me exactly in what month and year the ATO's work began on Operation Elbrus.

Mr Jordan : In February 2016, there was a referral from the pay-as-you-go withholding unit within the ATO, to the audit team in this area, about some suspicions around some companies that had liabilities that were being put into liquidation. That audit team then determined that there were, as I mentioned, some links to people on the National Criminal Target List, and hence that audit was not overt—in terms of going to the people. It was a covert operation, whereby they saw what looked like a promoter of phoenix operations into labour hire firms into the construction industry, and in this case the IT industry. That is when we first started. It was in February, trying to piece together that layering of over 200 entities with a multitude of directors, opaque ownerships et cetera.

CHAIR: That was the point at which Operation Elbrus came into being?

Mr Jordan : Ours was actually called Operation Crocodile. Operation Elbrus was the AFP's name. I am aware that the Australian Criminal Intelligence Commission started investigations as a result of some information at the beginning of August.

CHAIR: August 2016.

Mr Jordan : Yes. The beginning of August 2016. The AFP became aware of it on 30 August 2016, and started a project named Elbrus in September 2016. The ACIC became aware that the AFP were looking at the same syndicate, so they agreed with the AFP that the AFP would take the running on this alleged fraud and the syndicate. They handed over, officially, all of the intelligence and material they had gathered, at the end of September 2016.

CHAIR: When did each of the agencies become aware that the others were also undertaking work on this issue?

Mr Jordan : The ACIC became aware that the AFP was involved in September 2016. The AFP became aware that we were involved at some time towards the end of 2016.

CHAIR: How did that awareness come to be?

Mr Jordan : We garnisheed some bank accounts on some of the syndicate companies, which alerted the AFP to our business-as-usual audit operations. They then approached us to work with us jointly on project Elbrus.

CHAIR: Can I ask you about Mr Cranston. How did the ATO lock down Mr Cranston's access to various ATO files? At what point and how.

Mr Jordan : The AFP specifically asked me not to change anything around Michael Cranston, because they did not want that to tip-off the syndicate that something might be wrong. He did not have suspicions. He had normal access to our systems right up until the time of the execution of the raids. However, as with me, even though he is in charge of the area, it is on a need-to-know basis. He could not access the files around the alleged fraudulent activity in which his son was allegedly involved. He could not access that. Once that audit team knew for certain that Adam Cranston was not only involved but apparently a principal in the syndicate and that he was Michael's son, it was further locked down. Our systems are very much on a need-to-know basis. As a general proposition, it is business as usual. This case was clearly peculiar because of the family relationship between an alleged principal and a senior officer at the ATO.

CHAIR: Can I ask you about the integrity measures that have been put into place since that time? You mentioned your policies, procedures and practices that potentially have changed as a result of Operation Elbrus. Can you enlighten senators on what they might be?

Mr Jordan : I will pass over to our chief operating officer, Jacqui Curtis, but nothing has yet changed, as I understand. We will be looking at Barbara Deegan's investigation and reviewing. They are pretty strong and they actually did work here, because nobody actually got access to anything to do with the file. People tried to get access and that, in itself, is the offence. You are not allowed to try to get access to information that you are not supposed to look at. So that was the offence of the other officers being asked by Michael Cranston to have a look at this, but they could not find anything.

Ms Curtis : As the commissioner just said, we do have very rigorous and robust systems in place and lots of controls, not only for unauthorised access but for any type of fraud, conflict of interest, et cetera. There is lots of governance in place. We have not done anything since this came to light that is different, or changed any of our processes or controls. As the commissioner said in his opening statement, we are going to be looking very carefully at everything that has happened here to see if there is anything that needs to be changed or tightened. As in any system, I am sure there will be things that we might be able to improve upon, but, to date, we have not changed anything. What I can also say is that, obviously, as soon as we became aware of the relationship, we also were doing what we would normally do, which is monitoring, very broadly, any files, any accesses et cetera. From the time that we were aware, we put in very rigorous controls over and above the norm—specific ones—but we have not done anything with those policies since then because we are waiting for the investigations and to see what happens when we do the review.

CHAIR: When do you think that you might be able to update senators on those changes, if any, that are implemented as a result of this?

Ms Curtis : As soon as we do actually make those changes, which does depend a little bit on the investigations. We are trying to be very expedient in the investigations, but we may not be able to do too much until we have actually got those findings and we can see if there were any areas that needed improvement.

CHAIR: I am sure that there will be continued interest in this issue at next estimates, so we look forward to an update from you then.

Senator GALLAGHER: Thank you for your opening statement and the comprehensive nature of it. It certainly answered a number of questions that I had. I want to focus a bit on where the chair left off, which is that you are right to place emphasis in your statement on integrity and the confidence of the community in your processes. Where you have made reference to the review, which you mention a couple of times—you will be thoroughly reviewing what has happened and there was another reference to it—can you expand on any thinking that you have done around what that might look like? Have you considered, for example, an independent review to ensure that those objectives of trust, confidence and faith in the work that you are doing are upheld?

Mr Jordan : The code of conduct review is being done independently by Barbara Deegan, a former Fair Work Commissioner.

Senator GALLAGHER: That is into the three SES officers.

Mr Jordan : That is into the three officers. That is an independent review. We will wait until she reports to us and will see if that exposes any shortcomings. But, as I said before, I do not want to be defensive on this because I am acutely aware of the need for people to have confidence in the integrity of our processes and our systems. I am absolutely acutely aware of that. However, the existing processes did work. No access was gained. People tried, but could not. They were locked out of the audit files. It was a tax crime covert operation on our behalf. They are locked down. Michael Cranston himself could not get access to that, even if he had tried, as the leader of the area. We are open-minded. That is what I am saying. We are not going to be defensive. We will have a look at this, but it is not as though there was a big breach that exposed some gap or weakness or flaw in our system. As I say, I definitely do not want to sound defensive, but we will wait and see what comes out of the code of conduct. We are well known for an incredibly strong internal fraud prevention and internal investigation unit. It is often referred to as 'the feared group' and has a hugely respected reputation of weeding out any inappropriate behaviour or access.

Senator Cormann: I might just add here that the alleged very serious tax fraud was, of course, perpetrated by people outside the ATO. The connection with the ATO is courtesy, of course, of the fact that the father worked in a very senior position in the ATO. But, as the commissioner has already indicated, there is no suggestion by the AFP that there was any involvement by him in the conspiracy to defraud the Commonwealth. The advice that we have received, independently from the Australian Federal Police, is that this is very much an isolated incident as far as they are concerned. There is no concern about any systemic issue in any way, shape or form. Given that the systems have actually worked as they were designed to work, given that there is an ongoing investigation, given that, really, we should allow that investigation to take its course, and given that there is no indication at present at all of any systemic issues inside the ATO, we believe that the processes currently underway should be allowed to take their course before any further judgements may be made down the track.

Senator GALLAGHER: I take from that, Minister, that the government is not considering any external review of the ATO at this point in time.

Senator Cormann: The government has full confidence in the ATO. Based on advice provided to us independently by the AFP—that this was a very isolated involvement in circumstances, which I think everybody well understands, in relation to an alleged very serious tax fraud, though perpetrated by people outside of the ATO—the government does not believe that there is any case right now to take any further steps, other than supporting, of course, the ongoing investigations pursued independently by the AFP and the work that is being done by the ATO internally.

Senator GALLAGHER: That is fair enough. Do you have a time when the Deegan review is due to be completed? I think you mentioned that you were wanting her to be quite speedy.

Ms Curtis : We have asked Ms Deegan to try to complete the investigation as expediently as possible. We understand that is very important to get that code of conduct report in so we can see what the findings are. Of course, like all investigations, and particularly in this case because it is also linked to a criminal investigation, that does depend a little bit on being able to get access to information. But we are hoping that it will be completed within four weeks.

Senator GALLAGHER: The outcomes of that will determine, presumably, the fate of the three SES officers, but also whether or not there will be a further response from you, Mr Jordan. Is that right, in terms of being the Commissioner?

Mr Jordan : We will wait until we get that review and see if there are any particular areas that Ms Deegan has identified that need further work. As I say, we are acutely aware of the sensitivities and the need to give confidence to the community in our integrity and the tightness of our processes. I am not, in any way, trying to be defensive or avoid the absolute need of confidence in the ATO, and we will do whatever we need to ensure the community maintains that confidence.

Senator GALLAGHER: I can tell that from the approach that you have taken with your opening address. I guess that you also have to be dealing with perceptions of community sentiment, whether rightly or wrongly. That is why my questions go to whether or not you have considered a broader, independent review. We hear you; we understand what you have said this morning and that you are telling us that your processes work. There is further validation that comes from an independent analysis of what you are telling us here today to instil that confidence and ensure that community trust is maintained.

Mr Jordan : I can assure you that we have an open mind and we will consider all options to ensure that that confidence is rebuilt or maintained in our integrity and systems. I should also mention that we have multiple reviews on parts of ours from the Inspector-General of Taxation, from the Australian National Audit Office and the House of Representatives Standing Committee on Tax and Revenue. Many parts of our organisation are reviewed in a continuous fashion—multiple reviews every year. As I said, I am absolutely open at any constructive suggestions as to how we can assure you, as the committee, and the House committee—I am sure that next time that meets, we will need to go through this again with them—as to what we need to do so that you can go to your constituents and say, hand on heart, 'They have done the right thing.' I need to make sure that you have that confidence and we will do whatever we need to give that confidence to you, because you have to, just like I do, front the community and speak to your constituents. I have to front the community; I have to front you and assure you of that. So I will do whatever is needed. I am happy to take on and I am happy to provide information publicly rather than waiting for the next estimates. Chair, you said that people will be very interested. I am happy to commit to you now that we will try, through whatever appropriate means are possible, to keep this committee informed of the progress and our options—I do not know how it works offline—between meetings. This is such an important thing that I will do whatever is necessary to help you to be able to front your constituents and explain this in the best way that you can.

Senator GALLAGHER: I just have two further questions. One is about whether or not you have considered a referral to the Inspector-General of Taxation.

Mr Jordan : Not at this stage. We have briefed the Inspector-General. He has said that that it would be too early for him to commence any investigation, until such time as our processes have gone through—

Senator Cormann: He can certainly initiate, couldn't he?

Mr Jordan : He can initiate on his own, if he wants to. He puts out a forward work program—

Senator GALLAGHER: We will ask him later.

Mr Jordan : and if he decides that that that is what he would like to do, he can. He can do a review of that. The Auditor-General can do a performance audit on it. He seems to do it on everything else, so he might as well have a go here.

Senator DASTYARI: Hello, Mr Jordan.

Mr Jordan : It is good to see you back, Senator!

Senator DASTYARI: I missed you, too!

Senator GALLAGHER: Commissioner, there is a story in The Canberra Times today about Michael Cranston—another matter relating to him. Do you have any response to that?

Mr Jordan : I have absolutely no knowledge of that matter at all. Maybe our chief operating officer can comment. What I will say, though—and this has got nothing to do with that issue, so no knowledge at all—is what I have learned, particularly when I first started, is that a lot of people have a lot of emotional investment in the issues that they have dealt with. This is on both sides. The private sector passionately believe their position is right. People in the tax office passionately believe their position is right, and they might have invested a few years in something—nothing to do with this one; I am just saying generally. With independent reviews within our organisation, I have needed to take it out of the compliance group, put it into the law design and practice group; have the tech lawyers look at it under independent reviews, and often it is determined that the tax office view is actually the better view. People dig themselves into trenches. That is what we found. In the first year, we had to sort of get people out of their trenches and maybe change some of the people, on both sides, because of the emotional attachment.

So sometimes things do need to be looked at, and sometimes representations are made: 'Look, this just doesn't seem right. Can you have a look at this before we waste all this time and effort?' I do not know anything about that one, but I have seen emotional attachment, and some pretty deep trenches that people have gotten themselves into and do not want to get out of, on both sides: our people and the private sector. That is what happens. So you will find, I have got no doubt, we get more people coming out of the woodwork—some ex-employee making some allegations about something I do not know anything about.

Ms Curtis : With that article, my understanding is it relates to a PID, so that is the Public Interest Disclosure Act. Given the nature of those disclosures and the protections afforded to the discloser or the whistle blower as they are now commonly known, because I do not have any detail on it with me it would be inappropriate for me to comment at this stage.

Senator GALLAGHER: You do not have any detail on the matter that has been raised?

Ms Curtis : I do not have any detail of the matter that has been raised.

Senator GALLAGHER: Okay. So it has been handled as a public interest disclosure?

Ms Curtis : It has been handled as a public interest disclosure, and we do always investigate, as we have to under the legislation, public interest disclosures.

Senator GALLAGHER: I just note that it says in the article that the tax office 'declined to answer questions about the case', saying that the PID Act prevented it from making any comment. Is that your understanding of—

Ms Curtis : I would understand that, if the media unit had been asked to comment on that by a journalist, they would have used that as the holding line, because (1) they would not have had any detail but (2) they have to be extremely cautious about in any way disclosing the discloser.

Senator GALLAGHER: Yes, I understand that. The PID Act is there to ensure the privacy of the discloser but does not necessarily not allow you to speak about other matters, if you are in a position to do so.

Ms Curtis : Yes. I just do not have the information on that to be able to comment.

Senator GALLAGHER: Okay.

CHAIR: Thank you, Senator Gallagher. Senator Williams has some questions.

Senator WILLIAMS: Thank you, Mr Jordan. Deputy Commissioner Michael Cranston—did he voluntarily stand down or was he stood down? He is stood down at the moment, is he, or is he still at work?

Ms Curtis : He was suspended without pay, and he is still suspended without pay while the code of conduct investigation is taking place.

Senator WILLIAMS: Okay. Mr Jordan, just a question about your investigation: were you limited in any way because of the laws? Were there any laws that restricted you? In other words, does this place here in Canberra have to change any laws to see that you are free to do your proper investigations without being inhibited in any way?

Mr Jordan : Not specifically in terms of the tax laws because, when you cut through this, this is all pretty straightforward. People just skim money off and do not remit pay-as-you-go tax. One of the areas—and this has been looked at and there have been reviews done and recommendations made over the years—is how easy it is to be a director of a company in Australia. As part of the focus on phoenixing, we build a very large database of phoenix operators and we aggregate all the analytics and all the associates and all the family members to known phoenix operators from the past. However, as you would have seen in the paper—because most of anything of import has been reported, mostly in the Telegraph, so you would have seen all this—some of these were vagrants or homeless, people of just simple means, who were paid, as I saw in one case, $1,000 a week, which would have seemed like a lot of money to those people, to have their name as a director and to hand over any correspondence.

Years ago, when I was in practice, I remember an Australian company having a holding company in the Netherlands. It was very typical—it was Europe; the Netherlands has a good treaty network; there was nothing particularly tricky about it. But to be a director in the Netherlands, and this was a few years ago, it took about three months. You had to have a police interview and you had to have the equivalent of a 100-point check. You actually had to go to a police station to be interviewed and checked out as a fit and proper person. So I think there is a piece of work there. There is a task force on this—

Senator WILLIAMS : So you are saying it is very easy to become a director of a company in Australia and perhaps it should be tightened up.

Mr Jordan : I could appoint you as a company director without you even knowing, with me then controlling the company.

Senator WILLIAMS : How much do I get! Okay, in other words, there are questions for ASIC.

Mr Jordan : So there is something that I think we need to look at there.

Senator WILLIAMS: Surely these companies would have to report to ASIC, wouldn't they?

Mr Jordan : That is an ASIC issue.

Senator WILLIAMS : We will raise it with ASIC tomorrow.

Mr Jordan : It is on the cards. This is not a new issue. Phoenixing is a big problem, especially when you have these people that are unassociated with the principals. You cannot keep track. We build the models of all the associates, so we have the web that sits around the problem person, but they are all the relatives, all the friends and all the known associates. But, if they go out on the street, basically hang outside Centrelink and say, 'Do you want 1,000 bucks a week for something?' it is really hard to know that company with those directors, with another company owning it, with a couple of other vagrant, dummy directors, owned by another company. This is why it took from February 2016 through to August or September for us to piece together over 200 layered, opaque companies to get the proper picture of what is going on.

Senator WILLIAMS : You said in your opening statement that the liability—in other words, the money owing to the ATO—is not $165 million but $130 million.

Mr Jordan : One hundred and sixty-five million dollars was an original estimate. The AFP released that publicly. We have issued assessments of about $130 million. So we are solid on $130 million now.

Senator WILLIAMS : You have recouped about $40 million? I think you said around a third.

Mr Jordan : We have recovered, and also there are all the seizures on property. Some people think all of it is gone. There are a lot of properties, real estate—

Senator WILLIAMS : Porsche cars.

Mr Jordan : Cars.

Senator WILLIAMS : Lots of second-hand market there.

Mr Jordan : Watches, Grange.

Senator WILLIAMS: Well done. Thank you.

CHAIR: For the sake of the panel, I would like to cover off on this particular issue before we move onto other issues. So I will call on senators on this particular issue only, and if you have any questions please let me know.

Senator KETTER : I understand that former commissioner Michael D'Ascenzo had issued instructions that tax agents, accountants and lawyers should not be allowed to directly contact SES officers, except in accordance with the ATO's practices and procedures. What were the ATO's procedures for allowing tax agents, accountants and lawyers to directly contact SES officers at the ATO?

Mr Jordan : I am not aware of those specific guidelines.

Senator KETTER : So those guidelines do not exist?

Mr Jordan : I do not know. I would have to take that on notice. It was a specific thing from my predecessor to staff or to SES officers?

Senator KETTER : To SES officers.

Mr Jordan : I will take that on notice. The system has to work by people talking to each other. You cannot just sit in your office—and this is part of the problem that we had. People would sit in their offices and write these long letters to people that no-one understood. I have been agitating for people to get out of their offices and talk to people so they understand what you are saying. And the best example of this—I will be quick on this—was in the GST small disputes area. We decided to get some facilitators—they are not GST experts but they are trained facilitators—to see what we could do. There are thousands of these GST cases for small business. A full one-third of those disputes were solved in the first phone call, because we either did not understand what they were trying to tell us, or they did not understand that this was black-and-white law and what they thought was just wrong was never going to change. We would write these complex letters to them and they could hardly understand it. That was really was something that highlighted to me the need for what we now call 'early engagement'. One-third of all of those were solved on one phone call. They either went: 'Oh, okay. I didn't realise that. Okay, fine, yep.' Or our guys went: 'Ah, now I understand what you are trying to tell me. Yeah, that's fine.' Our system is depended on, so when you say 'an instruction about how an accountant or someone can talk to an SES officer', well, that would happen every day, all over the place. I do not know what the instruction would mean, but we will have a look. I will take that on notice.

Senator KETTER: I fully appreciate that people have to talk to each other, but there should be some protections—

Mr Jordan : I might have some information.

Ms Lendon : In terms of the question that you have raised, we are not aware of any instruction of that kind. The closest to it was that there was an independence around our tax counsel network advice. So we tried to guide people—tax agents and so on—through our compliance areas and so on, rather than going directly to our tax counsel network. That might be where some of the confusion is, but certainly the commissioner of that time was keen to be open with the community and have ongoing dialogue.

Senator KETTER: Okay. So, in terms of the people involved in prosecutions, for example, are there any guidelines around contact with tax agents, accountants and lawyers?

Ms Lendon : In respect to prosecutions, I would have to take that one on notice.

Senator KETTER: Are you aware, Commissioner, or others present, of any cases where large accounting firms have directly contacted SES officers?

Mr Jordan : I am not aware of any by name, but I am absolutely certain that there would be dozens, lots.

Senator KETTER: And so you would not have issued any instructions that this should not happen?

Mr Jordan : As I say, that is just the system working. People have to talk to each other. So, when you say, 'Did an SES officer receive a phone call from a large accounting firm about a major matter?' It would be happening on multiple times every day. That is the system. People have to talk to each other—'What's going on?' 'Where's that information?' 'You said you were going to give it to us this week. When are we going to get it?' Important things, obviously, are put in writing. So all the requests for information would have been put in a letter or something, but people will be phoning each other up all the time. That has to be the system. Otherwise, you revert to long letters that no one understands, and that is not the way modern business works.

Senator KETTER: Okay. Thank you.

CHAIR: Thank you, Senator Ketter. Senator Macdonald.

Senator IAN MACDONALD: Thank you, Mr Jordan, for your statement. It has answered most of the questions I had, and I think most of us had. So thank you very much for that. Thank you for being so open about it. I am not sure that we can take this much further. I have a lot of other questions later. Can I just ask you, how many of these sorts of incidents have occurred in the tax office in, say, the last decade? What I am really trying to establish is this a regular occurrence, which I do not think it is—

Mr Jordan : No.

Senator IAN MACDONALD: but I am simply asking you the question so that you can demonstrate that this is—

Mr Jordan : I am not aware of anything similar. This was a father misguidedly, with a huge error of judgement, trying to find out some information for his son. I am not aware of any of that.

Senator IAN MACDONALD: Any other similar incidents which have caused concern—

Mr Jordan : The only other thing—it is not similar, because it was really bad—was the Petroulias affair. I do not know: was that 10 years ago or more—12 or 14 years ago? He was an officer that was brought in, laterally, as an SES and—he went to jail—I think he took payment for issuing favourable rulings. Now that is not the case here, but that was the worst thing that had ever happened.

Senator IAN MACDONALD: In fact you have answered my question, which demonstrates that, by and large, the tax office has very good systems in place.

Mr Jordan : Absolutely and, if you want to know, it is an offence, as I said, to try to access information you are not—we will tell you, in transparency, how many there are each year of this kind of incident. Stupid people try to look at their friends, or you know. Some people—they are stupid. They know they should not do it. They get picked up. Our fraud and detention people are good. We will tell you how many each year.

Ms Curtis : So year to date, we have had 30 investigations into unauthorised access. They have had a range of sanctions applied. Twelve of them have been terminated, which shows how seriously we take it, and then it goes right the way down the sanctions hierarchy to reprimand. There are people who have been fined, reassigned duties et cetera. As Commissioner Jordan said, it does depend on the extent of the unauthorised access: whether it was multiple times that they have attempted to do it, whether it was just looking at their own record or trying to look at a celebrity's record. It depends on what they have actually done. There are lots of factors involved, but that is 30 in the year to date; and, previously, in 2015-16, it was 23.

Senator IAN MACDONALD: It is treated very seriously, obviously.

Mr Jordan : Given the number of terminations, to lose your job for having a look at someone's records that they were not supposed to is a pretty severe thing.

Senator BUSHBY: Calendar or financial year?

Ms Curtis : That is financial year to date 2016-17.

Mr Jordan : So nearly 12 months.

Senator DASTYARI: Can I ask a follow-on from than that?

CHAIR: Before we move on, Senator Macdonald has the call.

Senator IAN MACDONALD: I am happy for Senator Bernardi—

Senator BERNARDI: I just have a subsequent question.

CHAIR: A subsequent question then I am going to move to Senator Bushby.

Mr Jordan : I just want to be transparent with you, Senator Macdonald, on that issue with the numbers: we do get people trying to look at it, and we get onto it.

Senator BERNARDI: Ms Curtis, out of those 30, how many of them were public figures versus someone just inquiring into one of their mates or their own tax records?

Ms Curtis : I do not have that detail with me. I would not be able to tell you how many attempted to look at public figures as opposed to who just access their records. I have just got the table of how many were actually investigated for unauthorised access and what the sanctions were.

Mr Jordan : All of you should, or do, have an extra layer of protection of your affairs.

Senator IAN MACDONALD: Can I just finish by saying thank you: thank you for what you have done and thank you for your statement today.

CHAIR: You have a follow-on question?

Senator DASTYARI: A follow-on from that—and I think a really good line of questioning from Senator Macdonald. When you said the 30, that is 30 investigations; not 30 breaches—correct?

Ms Curtis : That is 30 that have actually breached the code of conduct, have been investigated and found to have breached the code of conduct.

Mr Jordan : And 23 last year.

Ms Curtis : When we actually go about our routine scans, we have all sorts of ways in which we identify potential unauthorised access. When we go through those scans, we might highlight people whom we think may have tried to access but then we get down to a much smaller number when we discount those who, for whatever reason, actually had a reasonable need to look into that file.

Senator DASTYARI: And the number of people that—

Mr Jordan : There are 20,000 staff. Our systems view all of this.

Senator DASTYARI: I am surprised there are not more people trying to look into their bosses.

Mr Jordan : See, this is the stupidity of these people. They know, or should know, that they are monitored, so they are picked up. Out of 20,000 people, albeit 23 who had a look at something—they are human, right?

Senator DASTYARI: So you are pretty much saying, Mr Jordan, that it should be automatic termination, just based on knowledge.

Mr Jordan : No.

Senator DASTYARI: They should know better.

Mr Jordan : No. Twelve out of the 30 were terminated. Demotion or fines are the other two things.

Senator WILLIAMS: Mr Jordan, just one issue: you said 30 this year.

Ms Curtis : Year to date.

Mr Jordan : June—

Senator WILLIAMS: You had 23 last year and, up until now, you have had 30 in less than six months.

Mr Jordan : No, financial year—

Senator WILLIAMS: Financial year—right, I am with you. No problems.

Mr Jordan : so it is one more calendar month.

Senator WILLIAMS: I just thought calendar year would be a problem that is growing.

Ms Curtis : What I would say is that we are getting much better all the time because of technology and different methodologies that we can use. We will be identifying, I would imagine, higher numbers of attempts because we are getting better at identifying it.

Senator WHISH-WILSON: Mr Jordan, how is Mr Cranston holding up at the moment?

Mr Jordan : I will pass that over to Alison Lendon.

Ms Lendon : I have had a couple of phone calls with Mr Cranston since his suspension. As he is still an employee of the ATO, obviously we have a duty of care to him. We have offered him some support through our employee assistance program. He is holding up—obviously, under lots of pressure. The first phone call was to offer the employee assistance support and to make him aware that I would be his contact point within the ATO. The second call was because he wanted to share some information about some of the work activities that needed to be handed on. On that call, I again asked him how he was. He is holding up, but under lots of pressure.

Senator WHISH-WILSON: I can imagine how difficult it must be for him, given the circumstances. Mr Jordan, based on what you said today about him not being under suspicion in terms of the Federal Police—and you made it very clear—

Mr Jordan : That is for defraud. There is a summons for him to appear in court for the offence of abuse of public office.

Senator WHISH-WILSON: Okay, but in terms of the actual syndicate—

Mr Jordan : Actual fraud—it has always been, and continues to be, no allegation of any part involvement in the syndicate; in the fraudulent activities.

Senator WHISH-WILSON: My questions were very similar to what you have been asked by some of the Labor senators about an external investigation. I think that, given the good work that your department has been doing and for Mr Cranston, as well, around the syndicate, you do not control the information flow and the way this is reported in the media. I do, personally, think it is very important that you have an independent external review conducted on this issue. In relation to that, especially, you have been on record, Mr Jordan, through speeches and information that you have provided to the House committee that has looked at ATO external scrutiny as saying that you believe there has been too much external scrutiny and that some of the legacy processes that you inherited were not effective and needed to be streamlined. The particular question I had was around the internal independent integrity adviser. I understand that that role was created by the Commissioner to provide you with advice on ATO's ethical and legal obligations in respect of fraud prevention and control, your integrity framework and certificate of assurance processes. Do you actually have a role in the ATO for that at the moment?

Mr Jordan : We do not have the same as what it was. It was a part-time role providing oversight on the certificates of assurance—3,200 pages of material each year from each one of the business line managers, basically assuring me that they were doing a good job. There was a sea of green traffic light indicators in there, and it would take half my working year to read through those 3,200 pages. I asked our Chief Internal Auditor and the ANAO auditor if they rely on these certificates of assurance. They said, 'No, they are a self-serving document created by the business line manager to tell you that they have done a good job.'

And I said, 'If I'm not going to read them, the internal auditor can't use them, and the external auditor won't rely on them, why are we creating 3,200 pages of this material every year?' And we eliminated 50 full-time equivalent jobs to be deployed elsewhere on more productive material. That was a decision of mine not to have these certificates for assurance. We have a much more comprehensive and modern mismanagement framework that reports up through to our audit and risk committee, with independent members that reports through on a more regular basis—quarterly—to the executive. This was once a year. Honestly, it was a foot high, or half a metre high, of stuff. So we have got, not one person who comes in part-time to look at some of these things, but we have a much more rigorous and comprehensive risk management framework in place.

Senator WHISH-WILSON: Okay. You have already been asked questions about the Inspector-General of Taxation and whether you believe that position should be taking out an investigation. So I will not go down that road. But, in relation to the workload in the private groups and high-wealth individuals, what is your case load at the moment for those groups? How many investigations are underway?

Mr Jordan : I will hand over to Will Day, who is acting in that role, that Michael Cranston previously had.

Mr William Day : In terms of taxpayers, we are responsible for helping taxpayers. Any private group, with taxable income of more than $2 million a year, we look at. We also have particular focus on wealthy Australians who have income somewhere between $5 million and $30 million, and a particular focus on high-wealth individuals who have a net worth of over $30 million. We also have corporate responsibility looking at not-for-profits, trusts, and then a tax evasion and crime area that deals with phoenix—

Senator WHISH-WILSON: You have a big workload at the moment, Mr Day?

Mr William Day : Yes, we do. We have over 1,800 staff.

Senator WHISH-WILSON: 1,800 staff. And how many investigations are underway?

Mr William Day : I would have to take that on notice.

Senator WHISH-WILSON: You can take that on notice. And how many were Mr Cranston involved with?

Mr William Day : Well, like any deputy commissioner, you would have—

Senator WHISH-WILSON: Pretty much all of them?

Mr William Day : You would have a high level of oversight over cases within your patch, but not day-to-day control or decision making.

Senator WHISH-WILSON: Okay. Have lawyers who have been representing clients in any of these investigations got in contact with you to ask if Mr Cranston was directly involved in those cases?

Mr William Day : I believe there have been a small number of inquiries. And, of course, notices that we have issued, even those that went out under Michael's name, are valid. He was not personally involved in decision making on those sorts of cases.

Senator WHISH-WILSON: So, because Mr Cranston has been charged with abuse of public office, will that have any repercussions for any of these cases at the moment? Is there any legal precedent or any advice you have received as to whether this will jeopardise or be prejudicial on any of these cases?

Mr William Day : We do not think so, in any way.

Senator WHISH-WILSON: Okay. You have mentioned that two ATO individuals were stood aside in association with this case. They are now working again? They are back?

Ms Curtis : One of the individuals, we have looked into their access and we have found that it was on a needs-to-know basis. They have been cleared of all wrongdoing. They cooperated fully with us. That has been why we have been able to close that one out very quickly. The other one we are still having a look at. The investigation is continuing. They are not formal code-of-conduct investigations—those two more junior officers—they were just what we call a prima facie look at what had happened. So it is just the three SES officers that are under the formal code-of-conduct investigations.

Senator WHISH-WILSON: In relation to the code-of-conduct investigations, will they be made public?

Ms Curtis : We do not as a matter of course usually put on public record the actual code-of-conduct investigation report, because they do contain very personal information about individuals. So that is not normally what happens. In this instance, if it were required by the committee, given the public interest and the reputational issues, then we would make it available to this committee.

Senator WHISH-WILSON: That is where I am coming back to with this. I am not saying that anything wrong has been done but the information is already out there and your reputation today, I would venture, has been tarnished by this.

Ms Curtis : I should just say that anything in the report that might prejudice future cases et cetera would be subject to public indemnity. We would have to be very careful, but we do not normally put those things out.

Mr Jordan : As I mentioned in response to a question from Senator Gallagher, I will do the utmost that I can legally do within the rules to provide transparency to this committee.

Senator WHISH-WILSON: What is the process that an ATO staff member would follow if they were asked to carry out a task that they may have suspicious about? Is there an independent person they can go to within the organisation?

Ms Curtis : There are lots of avenues for staff members to report wrongdoing, whether that be fraud or potential conflict of interest—there are all sorts of things that could constitute wrongdoing or misconduct. We have an email for our internal investigations unit, which people can email too. They can report anonymously using the ATO's anonymous fraud alert form. We have a 'leave a message' on a 24-hour hotline. These are all internal avenues. We were talking about the PID Act. You can report to an authorised officer under the PID Act and you can report to your manager. So there are lots and lots of avenues for progressing things, whether it be anonymously or directly.

Mr Jordan : One of the best ways, and what we would hope would often happen, is to tell the person asking, 'It is inappropriate for you to ask me to do that and I am not doing it.'—stop it there.

Senator WHISH-WILSON: I am sure that is the common sense approach but, as you know Mr Jordan, in an environment where you are working with other people—

Mr Jordan : My boss asked me to do something so I thought I should.

Senator WHISH-WILSON: You are worried about potential repercussions and those kinds of things. The committee has been dealing with it, across the board, for whistleblowers. If you did have an internal independent integrity adviser, would that be a role that someone could go to in terms of a first point of contact?

Ms Curtis : Yes, if we did have that role someone could go there but, as I said, there are so many avenues. I think you hit the nail on the head; it is whether people feel comfortable, which is why we do have lots of different ways in which you can raise these issues and why many of them are anonymous.

Senator WHISH-WILSON: Do you have a record you could provide to the committee as to how often those kinds of processes have been used internally, in terms of whistleblowing and issues been raised?

Ms Curtis : I do not have that with me but I can take that on notice.

Senator WHISH-WILSON: It would be useful to know if it is actually being used.

Mr Jordan : Absolutely.

Senator DASTYARI: Firstly, I just want to say to Mr Jordan and the team that I can only imagine how difficult this must be for the 20,000 employees you have working for you. The ATO and this committee have had numerous interactions on very big policy issues and I think by working together we have been able to craft some really good legislation. We can have disputes about how much further it should or should not go, but I can only imagine how hard it must be. As much as there has been argy-bargy between you, Commissioner, the tax office and politicians over the years, at no point has anyone ever questioned your integrity, the integrity of your leadership or the integrity of your team. Despite the fact that we can argue about the fact that, frankly, you should use parliamentary privilege to name and shame everybody. Mr Jordan, on this specific matter, and this is perhaps a tiny bit of a segue from where we are to where we go, the past is the past and what has happened has happened.

Senator WHISH-WILSON: That is a fact.

Senator DASTYARI: That is a fact. There will obviously be a full investigation. There are questions about how independent that should be and these are really important questions to ask. Part of a legitimate question that the public will want to know an answer to is: how do we stop this happening in the future and how do we put in better controls for it not to happen in the future? I want to ask about the Single Touch Payroll by the ATO and where you are at in the process of rolling that out.

Mr Jordan : The Single Touch Payroll, for those who do not know, is new software package using standard business reporting that provides us with information every payday rather than once at the end of the year. So, employers—there is a soft start for that, I think on, 1 July this year. There is a hard start for large employers on 1 July 2018, and then I think there is a hard start the year after for small businesses. What it does is give us a tremendously richer and fuller detail of payments that are made to people because, right now, for superannuation guarantee some time after year end, we get a list of files from super funds, telling us a person and the contribution they made way later.

The same as pay-as-you-go: we get a BAS statement, and there is a figure in a box, pay-as-you-go withholding, but there is no name, there is no tax file number. We only get that after the 30 June year end, so this Single Touch Payroll will provide us every payday. So, if it is fortnightly, it will have the name of the person, the tax file number, their salary and the withholding. That will enable us much better to check also the super guarantee, because that has to be paid, I think, quarterly So maybe a policy thing would be to bring that forward a bit, and say 'Pay it when you make your pay,' and then we can check that off a lot better.

Senator DASTYARI : Without going too much into the specifics of the case that is currently under investigation, it would appear, to a layman, that having that type of information is another kind of layer of armour or protection in being able to detect—was the whole point of this to be able to detect fraud earlier? And, when I say fraud, I do not mean someone within the ATO—that is a very complicated, unique circumstance—but people trying to rort paying tax. The whole point of this single-pay assistant—was it try to and catch people quicker?

Mr Jordan : Simply, yes; but, more than that, so we can do much better data-matching. I want to bring up this story with Centrelink. They would have newer, fresher and more current information as well. As I understand it, sometimes people, who get benefits, get a job and keep getting the benefits. They assume the information has already been exchanged between the tax office and Centrelink, because someone has taken tax out of their pay. They do not know it is at the end of the year. Centrelink do the check and say, ' You owe us $5,000,' and they go, 'I've spent it'. Single Touch Payroll will enable Centrelink and us to exchange information fortnightly or monthly-

Senator DASTYARI : And your view would be, of course, there is always going to be a handful of people trying to do the wrong thing. Fraud is fraud in an organisation, when you are dealing directly with money, as you are with tax. Would this help, in your opinion, to stop or give you more visibility to help prevent the types of fraud that have happened?

Mr Jordan : Yes. Single Touch Payroll will be a very useful thing, subject to the proviso: if you are a crook, you will find some way of trying to cheat the system—but I might let my colleague speak more sense

Ms Lendon : So more regular reporting will position the ATO to be able to respond when things are going off track, so that we can get onto it much sooner. But it also positions the employee to see what is going on, because it would be reported online for them to have a look at through myGov. It would give them the visibility, so that they can ask the relevant questions about their super and so on.

Senator DASTYARI : Speaking in simple layman's language, Mr Jordan: you are using technology to give people as close to real-time data and what is happening as possible—is that fair?

Mr Jordan : Once that is in place, yes, because it is embedded in the software accounting package.

Senator DASTYARI: If I can ask revenue group: was the idea for this—Single Touch Payroll—an idea that was from the ATO to the department?

Mrs Purvis-Smith : My understanding is that it was something that the ATO had worked on and explored. It is something that we are working with the ATO on to shepherd through, and through government processes so they can phase the implementation in.

Senator DASTYARI: Mr Jordan, your internal team came up with this as a good way of doing it and using technology. You presented that idea to government, who later chose to adopt it. Is that a very simple summary of events?

Mr Jordan : Yes—just take the superannuation guarantee. When was that brought in—1993, or something like that? Keating—when was that?

Ms Lendon : It was 1993.

Senator DASTYARI: Yes, he was around for a bit.

Mr Jordan : It was 1993—right, so you have a system of reporting based on what was in 1993; all paper, once a year.

Senator DASTYARI: I am interested in how we—

Mr Jordan : No, what I am saying is: this is why we are a big proponent of this Single Touch Payroll, because it is modernising the reporting of payments and enabling better matching for welfare recipients so that they do not get into that horrible position of—

Senator DASTYARI: Of robo-debt—

Mr Jordan : getting into debt, thinking that it was theirs because government kept paying it to them.

Senator DASTYARI: It strikes me as fantastic. The ATO is showing initiative to come up with ideas and using technology to resolve problems. That all makes complete sense. When did you present the idea to government?

Mr Jordan : Single Touch Payroll has been around a little while, because it has been based on this notion of standard business reporting. Without going into a lecture on accounting 101, standard business reporting designs a standard chart of accounts. When you call something salary, there is a taxonomy that means that. There are dozens of definitions around salary for different payroll tax states, and blah, blah, blah. It is a simple chart of accounts that has a definition that everyone agrees. It has taken a long time to get everyone to agree on these things. The software providers then stick that into their standard accounting package—for small business, say. When you enter an expense or an income, it goes into a box and that enables the software package to drag out the BAS stuff.

Senator DASTYARI: It is no secret that, as is always the case—people have their own agendas, and they are entitled to them—bookkeepers have opposed these changes in the past, because it is more work and they claimed that it is work that they do not get compensated for. That is a whole different debate, and people are entitled to look after their own industries. But that was not my question.

CHAIR: Before you get to your question, I do want to cover off on the issue of Operation Elbrus.

Senator DASTYARI: We are; this is completely linked to that.

CHAIR: I see your segue, but it is getting a little—

Senator DASTYARI: This is how you stop that happening again. Mr Jordan, the question that I had was: when did you put this proposal to government that they should move to Single Touch Payroll?

Mr Jordan : I do not have a single date on that.

Senator Cormann: We will take that on notice.

Senator DASTYARI: Can you take that on notice?

Senator Cormann: We will take on notice whether we can provide you with any assistance.

Mr Jordan : It sort of was an iterative thing that has been going on for a while.

Senator Cormann: We will see whether we can assist.

Senator DASTYARI: If I can actually put two questions on notice, then—one question to the ATO: what have been your interactions with the government insofar as the development of this? It was your idea. At some point, obviously, it was pitched up. And if the department can separately answer those same questions about what the department's interaction have been with the ATO in the development of this. Two quick questions related to this, and they are related to this issue: in the one year and five months since this was announced, have any firms commenced the improved reporting? You went through the period—you just told me a few minutes ago—hard, soft—

Mr O'Halloran : Not at this stage—

Senator DASTYARI: None?

Mr O'Halloran : For Single Touch Payroll?

Senator DASTYARI: Yes.

Mr O'Halloran : No, not at this stage, because we are not due to start until July 2017, although we have some commitment from some small software providers who will come on board, and then July 2018. There has certainly been—I will not go through it now—a range of consultation and design, preparing for, particularly, the July 2018—

Mr Jordan : And that is the soft start-up on July 2017, to make sure that it works, everyone picks up that software—

Senator DASTYARI: This is the final question: had these been implemented earlier, would it have been likely that the behaviour that we are here to discuss this morning would have been detected earlier?

Mr Jordan : That is a difficult question, because what they could have done under Single Touch Payroll is just reduce the payment amount and, therefore, reduce the pay as you go amounts. Had they kept the payment amount at the right amount that they were actually paying, with a reduced pay as you go amount, that would have shown up earlier, but I presume that they would have been smart enough to reduce the payments. What they were doing was that they were paying out the salaries to the people, and the people thought their tax was being paid. I think it was something like 50-50 or 60-40—they were paying us 60 and keeping 40—so it looked like something was happening. So, as I say, if you want to be a crook and you want to commit fraud, it is very hard for any system anywhere in the world to stop that totally—

Senator DASTYARI: Sure, but Mr Jordan—

Senator Cormann: Sorry, but this is a very important point. If you are seeking some sort of commitment or guarantee that at no time in the future will anybody seek to dishonestly defraud the Commonwealth or commit crimes in a covert, deceitful fashion, obviously nobody can give you that guarantee. Obviously—and this is not a partisan statement in any way—governments of both persuasions at all times will seek to ensure that the administrative arrangements when it comes to enforcing our tax rules are as effective and as focused on managing risk as they possibly can be. Whenever you put a new system in place that improves on what was there before, there are inevitably lead times involved in making sure that that is done professionally and that, as the commissioner indicated, that is done in a way where everything works as it is intended.

I do not think that you can run a suggestion here that, if we had rushed the introduction of a new system which down the track will be superior to what was there before, somehow we would have been able to prevent somebody covertly and dishonestly seeking to defraud the Commonwealth. Having said that, obviously there are ongoing investigations underway both by the AFP and in the processes that are going on within the ATO, and whatever learnings can be drawn from that in a systemic way will obviously be applied to all relevant processes as appropriate.

Senator DASTYARI: I want to be clear. Yes, of course there is never going to be a foolproof, perfect system. What you are not saying is that we do not try to improve the systems that we currently have, even though you are going to create loopholes—

Senator Cormann: We always try to improve the system we currently have, but the point though, in the context—

Senator DASTYARI: No, but then, Minister—

Senator Cormann: Sorry, the commissioner has previously said—and I think he might have said it before you got here, Senator Dastyari—

Senator DASTYARI: I was watching in my office.

Senator Cormann: that in this case the ATO systems actually worked. The alleged fraud was detected. It was investigated. It was stopped. There is an ongoing investigation, and of course all of the appropriate processes will continue to take their course. But the point is: the system actually worked.

Senator DASTYARI: Senator Cormann, my question is this. We are looking at improving the system, and we should always be trying to improve the system—

Senator Cormann: Absolutely. I agree 100 per cent.

Senator DASTYARI: We all agree on that. My question is really to the department, and this is the bit that I am just surprised about. If we are going down the path of a single payroll payout system to improve transparency, it sounds like this idea was bowled up many, many years ago. I am just wondering why it does not even really start until July 2018. It just seems like an incredibly long time for something that seems like a no-brainer.

Senator Cormann: Let me tell you that for these sorts of systems—I have had some involvement with them now—there is a lot of work involved in making sure that they work properly and that you do not expose yourselves to inappropriate levels of risk as you roll out these types of system improvements. We obviously always seek to take advantage of the latest available technology or the latest available ICT opportunities, but, in implementing any such improvements, you want to go through it in an orderly fashion. I do not think—

Senator DASTYARI: But you cannot even tell me when you were talking about it.

Senator Cormann: I have taken on notice the questions that you put on notice before.

CHAIR: Senator Dastyari, your time has expired. I am going to move to Senator Bushby. If there are no more questions from senators on this particular issue, we can—

Senator BUSHBY: I do not think I will take long. Can I thank, firstly, the commissioner for his comprehensive opening statement. Most of my questions have also been answered. The chair asked some questions about timing, though, and I am interested in one question on timing, which to some degree flows into the questions that Senator Dastyari—'Dasher'—was asking. I am impressed by the fact that three separate agencies independently uncovered evidence that this activity was occurring—quite separately. Obviously, in the end you came together to form one investigation. That happened over a period last year, I believe, given the dates you outlined earlier. At what time, though, did the fraudulent activity actually start occurring? How long before those three agencies became aware of the activity did it actually start?

Mr Jordan : I am not sure. As I said, it has not been years—

Senator BUSHBY: Yes, that is my understanding.

Mr Jordan : It has all been pretty quick and amazingly large, because—remember they offered inducements to employment agencies of $900, apparently to put people into them, and they did not charge a fee, so it was a nil fee. Sometimes, when you think something is too good to be true, it might well be. They were legitimately, apparently, on-selling health insurance, car leases and all that to all these consultants and making legitimate money out of that sort of arrangement, but, in terms of the actual starting date, perhaps Will Day might be able to help you out there.

Mr William Day : I do not have an exact date, but it was certainly pretty real-time information. In the months leading up to that initial referral in February and then from once our profiling and—

Senator BUSHBY: To clarify, you are saying it started occurring—

Mr William Day : February 16.

Senator BUSHBY: So it was the months before that the activity started?

Mr William Day : That is what I believe. We can take on notice the exact date.

Senator BUSHBY: So, within a matter of months, existing processes were uncovering evidence that there was a problem?

Mr William Day : Yes, and real-time—

Senator BUSHBY: And those three separate agencies, the ACIC, the AFP and the ATO, alerted separately over the following months that there was a problem, and investigations began independently in those three agencies and then came together at some later point.

Mr Jordan : Yes. The ACIC became aware in very early August, the AFP became aware on 30 August and the ACIC handed it over at the end of September to AFP. We later joined up with the AFP in the one operation.

Senator BUSHBY: What I am particularly interested in there, though, is the relative speed that the existing processes identified that there were problems occurring.

Mr Jordan : The speed of that bit—it took a long time from 16 February to get to where we got to because of the opaque nature, the layering, the hiding of everything and the use of all—

Ms Lendon : And the number of players.

Mr Jordan : And the number of players et cetera. There are 200 companies.

Senator BUSHBY: And presumably it was set up—

Mr Jordan : But, if I could just say, this is a pretty good thing that three agencies at a federal level, separately and independently, got onto this. I reckon that is a pretty good thing myself.

Senator BUSHBY: Thank you. That answered my question.

Senator BERNARDI: Mr Jordan, to confirm, the fraud allegedly started less than 12 months ago, effectively?

Mr Jordan : A bit more than 12 months ago.

Senator BERNARDI: And the headline figure of $165 million—

Mr Jordan : That was an original estimate that the AFP released publicly—that we gave them. We have issued assessments of 130, so we stand by 130 as the figure but we are still working through that.

Senator BERNARDI: But it is a significant amount of money in a short space of time.

Mr Jordan : It is a lot of money. Either way, it is a huge amount quickly.

CHAIR: Are there any more questions from senators on this particular issue? If not, we will move on. Senator Ketter.

Senator KETTER: Mr Jordan, I want to go firstly to the issue of First Home Super Saver Scheme. This is a measure that you are responsible for?

Mr Jordan : I will hand over. I think we will administer it, yes.

Senator KETTER: In terms of your capacity to administer it, there seem to be only two mentions in the measures affecting the ATO in the portfolio budget statement. Can you tell us why that is the case?

Mr O'Halloran : I am not sure I understand your question in terms of—

Senator KETTER: In the portfolio budget statement for the ATO, under the budget there is no specific mention of this measure—apart from a couple of line items in the table.

Mr Jordan : Are you asking me whether we have resources to do it?

Senator KETTER: Why are there no specific performance measures in relation to this measure?

Mr Jordan : I am not sure I can comment on budget papers. I may be incorrect, but it is a new measure. We are working on the administration elements subject to policy arrangements. I cannot answer your question. I might have to take it on notice.

Senator KETTER: There are no performance measures for this particular measure—perhaps that is a question for the Revenue Group?

Ms Mrakovcic : Superannuation actually falls under the Fiscal Group. I believe that superannuation was dealt with at yesterday's hearings. I am happy to take the question on notice and pass it to my colleague Mr Brennan.

Senator KETTER: You do not, at the present time, have any specific performance measures in relation to this matter you are going to be administering?

Mr O'Halloran : From my point of view, since the announcement in the budget, we have certainly been working on it, with Treasury obviously leading the consultation and the design—subject to the final policy and legislative settings. That has been our focus in the weeks since the budget.

Senator KETTER: In relation to multinational tax cases, can you give us a breakdown of the laws being used in the cases against the seven multinational companies referred to in the government release which related to the 59 multinational companies and the $2.9 billion that had been claimed?

Mr Jordan : While Mark Konza, the deputy commissioner in charge of international, and Jeremy Hirschhorn, who looks after the large corporate groups, are coming to the table, I will just say that there are no doubt a multitude of laws involved. The multinational anti-avoidance law, or MAAL, whilst perhaps not itself what has got the assessments in the prior years, has certainly been the impetus that has brought those companies to us. They are keen to get their structures to comply with the MAAL, and potentially with the diverted profits tax as well. In doing that, we are saying, 'We will only work with you on the future if you work with us on the past.' We are very focused on cleaning up the past and on agreeing an appropriate positioning for the future. But I will let my colleagues expand on that.

Mr Konza : The relevant laws are mainly those relating to transfer pricing and part IVA, our anti-avoidance provisions. There was a strengthening of the transfer pricing provisions in 2013, part of which strengthened the law going backwards and part of which established a stronger transfer pricing framework from 2013 onwards. In almost all those cases, I think, there has been consideration of whether there has been a tax avoidance scheme and whether transfer pricing adjustments are applicable for those taxpayers. As the commissioner said, the ecommerce cases were different from the oil and gas cases, because in some of those cases they were not returning sales to Australia at all. We were challenging those cases under the existing law about whether they should have been returning their sales under the appropriate tax treaties. We are also challenging the transfer pricing they had been using. However, the MAAL did represent a game changer for us in our relationship with those taxpayers, because when we were arguing with them about whether they should be returning sales in Australia and whether they had the right transfer price in place, we were arguing about 'forever'. When the MAAL came in, the MAAL settled the issue from 1 January 2016. They knew they had to return the sales from 1 January 2016, and they knew they had to deal with us on transfer pricing from that date as well. So then the back years became a much more manageable topic because they only had to deal with a certain number of years. They were keen to get sign-off on their restructure under the MAAL. We have been saying to them, 'You don't get our sign-off on your restructure on the MAAL until the back years have been cleaned up.' So that is the way in which those transfer pricing laws, the anti-avoidance laws and the MAAL have worked in combination to bring this situation about.

Senator KETTER: Just to be clear, were the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) and the Tax Laws Amendment (Cross-Border Transfer Pricing) legislation used as part of the case?

Mr Konza : I have to confess that the titles of those acts all sound the same to me. I cannot remember what is in which one, so I cannot give you a definite answer.

Senator KETTER: You can take that on notice. In terms of the $2.9 billion in liabilities that have been raised, can you provide de-identified liabilities in relation to each of the companies?

Mr Konza : We would be unwilling to do that because some of those companies, we would expect, will be themselves reporting their liabilities. If we give you some liability data and then they subsequently publicly report that data then we will have, effectively, identified tax information about that person. However, we have said that there were four ecommerce companies and three natural resource companies involved and that the adjustments ranged anywhere between $200 million and $900 million in the individual cases.

Senator KETTER: Of those cases, were all related to transfer pricing?

Mr Hirschhorn : We have spoken publicly about seven companies with $2.9 billion of liabilities, and we have also spoken publicly about expecting to issue $4 billion of liabilities this year against public groups and internationals. To give a sense of that, of that $4 billion, about $3 billion is directly related to transfer pricing matters. To give an order of magnitude, ecommerce cases relate to about a $1 billion of that, related party financing relates to about $1.5 billion of that and marketing hubs relate to about $500 million of that. Of the $4 billion in total, about $3 billion relates to those three discrete transfer pricing issues.

Senator Cormann: This is because our government has given the tax office the resources and the powers they needed to take effective action. You might remember, Senator Ketter, that in December 2015, sadly, Labor opposed our multinational anti-avoidance laws, which we had to get through the Senate with the support of the Greens.

Senator KETTER: I am going to move on to the issue of use of labour hire. There are some concerns that the ATO is increasing its usage of labour hire contractors and consultants. In fact, there were questions raised at additional estimates last year. There were questions put on notice. Senator McAllister and I asked questions on notice. In response to my questions, you said the cost of outsourced contact centre service contracts was expected to be $118 million for 2016-17. So my question is: who are the providers for this $180 million expenditure?

Ms Cawthra : We certainly have a range of labour options that we use inside the ATO to ensure that we have flexible and responsive client services. One of those is outsourcing and the opportunity to outsource some of our low-value work as in low-complexity work to those that are better suited to undertake that work. The use of outsourcing has, in fact, been ongoing over the last 10 to 15 years in terms of our changing nature of our work. In terms of the labour hire, it is a different way of managing labour and it is a small portion of our overall workforce, and we use it quite specifically to support projects of particular natures or, in fact, managing very short-term resourcing needs inside the organisation, and then we also use contractors who generally are in the IT industry who are coming in for very specific projects.

Senator KETTER: Okay, but my question was: who are the providers for the $180 million?

Ms Cawthra : We have a range of providers in there. One of those is a company called Serco. There are a number of others that I could take on notice or I could ask my colleague Melinda Smith who may, in fact, know the other ones more specifically. Sorry, I have been handed them. Serco, Stellar, Datacom and then we have new suppliers available Concentrix, Salma and Pro.

Senator KETTER: They are all providers involved in that $180 million figure?

Ms Cawthra : Yes, they generally provide services for call centres and for processing.

Senator KETTER: Is that $180 million in addition to the $298.5 million you list as providers for the direct provision of an unspecified number of staff?

Ms Cawthra : That would be in addition.

Senator KETTER: For what period does that expenditure of $298 million cover?

Ms Cawthra : I would have to take that on notice, Senator.

Senator KETTER: Okay. Can you explain why there are 1,093 contract notices published in relation to the $298 million of contracts and what these contract notices relate to?

Ms Cawthra : I would have to take that on notice, Senator.

Senator KETTER: Okay. There may be a series of questions that I might need you to take on notice. I might ask: how many people do you estimate are employed by the contracted call centres?

Ms Cawthra : We do not estimate that, we actually have service standards in place that make purchases either by the second or by the call or of that range. How many resources they then hire to answer that or to deliver that service would change, I would imagine, frequently much like our seasonality workforce changes. It is not a direct comparison because we do not have the same contract per FTE.

Senator KETTER: So you do not have any visibility of the number of people employed?

Ms Cawthra : No.

Senator KETTER: Do you have to provide computer access for those staff?

Ms Cawthra : Yes, we do, and they are open to the same pre-engagement checks that all ATO staff are, and they are also open to all of the audits required that ATO staff would be, including needing to do all the normal checks. They go through all of the advice around what they can access, what they cannot access and are audited accordingly.

Senator KETTER: What about their computer logons and monitoring?

Ms Cawthra : They are under the same requirements as we are.

Senator KETTER: So that includes work monitoring, browsing history.

Ms Cawthra : Yes, access history, exactly.

Senator KETTER: How many people do you estimate will be employed for the 2016-17 spend of $298 million?

Ms Cawthra : I might hand that to my colleague Ms Smith.

Ms Smith : I will need to take on notice the exact number. Are you referring to just in the service delivery capacity or within the outsourced capacity?

Senator KETTER: I was referring to the labour hire contractors and consultants.

Ms Smith : I might be able to give you some information that might help with your line of questioning. We measure the work as not a minute of work but as a second of work. That is how we quantify it, given that some people are full-time employees and some are part-time employees. Look at what we estimate this year with our call centres. We take about 9½ million inbound calls every year and of those calls about 65 per cent, when it comes to time spent on it, will actually be managed by our outsourced telephony providers.

Ms Curtis : I might be able to give you the answer on contractors and the labour hire, as opposed to my colleague who has been talking about outsourcing arrangements. We have 492 contractors on our books at this point in time and 370 labour hire. So, between those two, roughly two per cent are labour hire and just over two per cent are contractors out of our total workforce headcount. I can also tell you that over 90 per cent of our workforce is employed on an ongoing basis.

Senator KETTER: Thanks.

CHAIR: I am conscious of the time. We will be breaking at 11 o'clock. I will ask Senator Hanson to take us through to the break, but I make the panel aware that I have here a list of senators with questions that is longer than a Celine Dion song, so we might be here for a while.

Senator Cormann: But we are coming back after the break with Revenue Group?

CHAIR: We are coming back after the break, yes, but I think we might go even longer than that. Senator Hanson.

Senator HANSON: Do we have any call centres overseas, outside of Australia?

Ms Smith : No, all of our employees working in the outsourced call centres are Australians citizens and all of them operate onshore within Australia.

Senator HANSON: Are there any intentions to take them overseas?

Ms Smith : Not that I am aware of.

Senator HANSON: Mr Jordan, can you describe your responsibilities in the position you hold as tax commissioner?

Mr Jordan : My responsibility is to effectively be the CEO of a very large and diverse organisation and to chair the executive committee. I have seen through the members just sitting here now, together with a couple of others—there are six executive committee members, made up of three second commissioners—

Senator HANSON: I mean that you are, basically, there to ensure that people pay their taxes in Australia. My understanding is that you have nothing to do with policy; it is Treasury that makes taxation policy.

Senator Cormann: Mr Jordan administers our tax laws. Through the ATO he is responsible for enforcing the compliance with our tax laws, as passed by the parliament, and the policy responsibility in terms of advice to government, you are right, is within the Revenue Group in Treasury. I could now go into some quotes out of Yes, Minister where we talk about policy of administration as opposed to the administration of policy, but I will not go there.

Senator HANSON: I am not discussing policy. I just want to know the responsibilities of the tax commissioner. Basically, it is for people to pay their taxes in Australia and the collection of taxes?

Mr Jordan : Basically, we are responsible for the administration once a law is passed and is in operation, from that point on.

Senator HANSON: I will go back to the multinationals because that is of great concern to the Australian people. For approximately the last 30 years the multinationals have not been paying their taxes in Australia. It was reported that a lot of the large companies—Google, Microsoft and Apple—pay between 0.8 per cent and 1.5 per cent tax. In your opinion, why is this the case? Why are they not paying the right amount of tax in Australia?

Mr Jordan : I will give you the short answer and then hand over to my colleagues. You need to know the background to this. International tax laws were actually set by a committee of experts in 1923 in a report to the League of Nations. They were all about physical goods and factories' permanent presence in countries. Those laws, effectively, are still the laws we have today, and that is why the OECD has done this big project on BEPS—base erosion and profit shifting—15 action items—it is all going to change. All this old style that was designed in 1923 is going to change. Australia took the step a bit earlier with the MAAL, because the MAAL—

Senator Cormann: This is the multinational anti-avoidance law.

Mr Jordan : That is sort of where this new law is going to say that you have to start paying return and profits. Where your customers are, where your sales are, where the economic activity that created the revenue occurs—you have to start to put profits there and pay tax. That is why they have been able, over the last 10 years, say, to grow these companies enormously, and a particular feature of the US tax law enables them to hold the money offshore. So what they do not pay here, or anywhere else, they do not pay anywhere, whereas our laws would tax them on that.

America is very unusual—old-fashioned—in its foreign income law. That is why Apple, for example, has something like $130 billion sitting in Bermuda. That is why the foreign companies, US companies, have something like $2 trillion sitting in tax havens in Bermuda and the Cayman Islands, because they do not want to take it back to the US and pay tax there. So any tax they save overseas is a permanent saving. That has all changed now. That has all changed with the MAAL and with the new OECD things. So we are methodically working through all of these. Most are falling in line, because they know the game is up—most. A couple will not, and we will take them to court.

Senator HANSON: So what I want to ask is—

Mr Jordan : But I might pass over to my expert here.

Senator HANSON: So have we moved from basically a paper-based tax loss, and should we be moving to, or are we moving to, a transaction tax, where they will pay their tax on sales and not just write it off as a paper loss with their subsidiary companies?

Mr Hirschhorn : Could I make just a couple of comments to give some context. The figure of one per cent or two per cent of income is often thrown around as the tax that is paid by some multinationals. I will go back a step. If we look at corporate tax in Australia, there is about $70 billion a year in corporate tax. Of that, $45 billion is paid by large companies and multinationals—that is, about 1,100 companies pay $45 billion—about 100 companies pay $30 billion and about 10 companies pay over $20 billion.

Senator HANSON: Is the 90 per cent of corporate Australia mostly owned by multinationals? What is the percentage of multinationals owning corporate businesses here in Australia?

Mr Hirschhorn : Of course, any public company has a mixture of onshore and offshore ownership; it is very hard to tell, but—

Senator HANSON: But it is extremely high in Australia, isn't it?

Mr Hirschhorn : Australia is an open economy, and so, in the same way that Australians have many investments offshore, many of our companies have investment from offshore. I will take it on notice. But, in terms of the domestic companies, the largest economic activity we would see is coming from domestic companies. Some of these high-profile multinationals' inbounds are actually relatively small economic participants. They are very high profile, but relatively small. So what I would say is that it is a concentrated area, so we can have a good focus on it. But I can then look at the tax that let's say a foreign company should pay. With the committee's sufferance, I might just put some numbers on it to give a sense, at a high level, of how much tax you might expect a multinational to pay.

If a multinational had $6 billion of sales in Australia, we would first have to work out their profit, and their global profit from those sales—let's say 30 per cent is a very good profit, for a company. We get down to $1.8 billion profit from Australian sales. Australia says, under our treaty framework: we do not get to tax the entire profit; we get to tax the profit from the stuff that is done here. So we get to tax the selling activity, but we do not get to tax the manufacturing or the R&D, which might be taking place somewhere else.

So let's say the selling activity is worth one-third of that profit—and that would be pretty high to say the selling is worth equal to the R&D and the manufacturer overseas. That is too high, but we will use it for conservatism. We get down to $600 million profit that we can tax, which is $180 million tax against $6 billion of sales. It is not $1.8 billion of tax; it is $180 million of tax at a very rough indicative calculation.

What I would say, as Mr Konza has said, again, is: the beauty is there are not that many big companies, even big inbound internet companies. There are not that many. We can get our arms around them. We can meet them all. We can talk to them all. Historically, those companies said that the selling activity was a low-cost, outsourced service and they often charged at cost plus five per cent. So, if somebody had a couple of hundred million dollars of costs in Australia, they said that was worth $10 million profit. What the transfer pricing rules and the multinational anti-avoidance law have said—and, indeed, this is now, most recently supported by the diverted profits tax—is that that is not the case. You have to have a fair remuneration in Australia for the selling activity which is happening here under traditional transfer pricing concepts. That means that those companies—again, going back to that very simple numerical example—moved from a world of maybe paying a few million dollars tax to paying the $180 million tax. It does not move them to paying $1.8 billion in tax. So that is a very long way of saying that we actually are confident that most companies are paying about the right amount of tax, because it is so concentrated we can get our arms around them. In the e-commerce area, we are highly focused on those companies, we are supported by the law, they are paying more tax than they have, and you will start seeing those tax payments come through either in their company disclosures—although, as multinationals, they often do not disclose Australia separately, but you will start seeing those numbers starting to come through in the corporate tax transparency data.

Senator HANSON: You say it is about to happen. Has it be passed into legislation? Are we moving towards that? Or is it now up to you?

Mr Hirschhorn : We are talking about passed legislation, but I might pass to my colleague.

Mr Konza : As Mr Hirschhorn was saying, the tax planning technique that these companies used was to operate here but bill overseas. The MAAL is a new section of the act that gives us the power to strike down those arrangements where people have done that to avoid tax, and we are using that. We identified a total population of 221 taxpayers who we believed were using an operate-here bill-overseas business model. We have been able to clear 102 of them. We say, 'Well, they weren't really operating here and the law couldn't really be applied to them.' We have no taxing rights over people who trade with Australia. You have to trade in Australia to be taxed. So, if you have no staff here but someone buys your goods over the internet, then we do not tax that company. That gets taxed wherever that company is offshore. But, where they have staff here, we can challenge that, and we do. We have raised in excess of $400 million in income tax on assessment so far. We have raised $200 million in GST from taxpayers who have restructured so that they now bill if they return their sales here. We are working with 29 companies who have restructured or intend to restructure so that they bring their sales onshore. Of those, 18 have restructured, and we estimate that, based on their last tax returns, $6.4 billion worth of assessable income will now be reported in Australia each year that was not being reported here before. As a result of that change, more than $100 million extra tax should be paid per annum.

Senator HANSON: Is Lottoland paying tax in Australia? They work here, they employ about six staff, and it has been reported they do not pay tax in Australia. Can you tell me if they are paying tax? Will they be taxed?

Mr Konza : We do not comment on individual taxpayers, but I can assure you that Mr Hirschhorn and I have a team—it is more Mr Hirschhorn's team than mine—who are specifically examining internet-based gambling industry participants.

Mr Hirschhorn : I have just one last addition. There have been two important measures in the indirect tax space applying to multinationals selling into Australia. They are the extension of GST to low-value goods and the extension of GST to services. That also means that those multinational supply chains are subject to tax in Australia from the indirect tax perspective as well as from income tax.

CHAIR: Last question, Senator Hanson.

Senator HANSON: I will ask some more questions later.

CHAIR: The hearing will now suspend.

Proceedings suspended from 11:05 to 11:21

CHAIR: The committee will now resume with questions from Senator Bernardi.

Senator BERNARDI: Minister, I am going to address this to you because it was a budget measures, but it can get picked up by whomever. In the budget there was what has been deemed to be a 'surprise announcement' by people in the property sector in respect of developers and the treatment of GST when a new unit or a new land subdivision. My understanding of it—and I am happy to be corrected here—is that this reverses the responsibility for the payment of GST from the typical, which is the recipient of the GST, to the purchaser. Is that correct?

Senator Cormann: The measure that you described, which for all other senators is on page 38 of Budget Paper No. 2, is a tax integrity measure. I suggest it might be useful for the commissioner to provide some background to what it is that we are trying to address here, and then the officers from Revenue Group might be able to assist with some of the explanation of some of the policy rationale.

Mr Jordan : It is an integrity measure. Phoenixing—and I will pass over to Tim Dyce, who heads up this GST area—unfortunately has been more prevalent in the construction area than in other industries. What happens is they claim the credits for all the things they buy to construct, say, a block of units, sell the units with the GST, collect the GST and then phoenix the operation and move on to a new company to do the next one. This is trying to capture the GST on the sale.

Mr Dyce : What the commissioner said is correct. We have been experiencing significant problems over recent years with developments that often occur in a single entity. The time frame between the new properties being sold, subsequent business activity statements being lodged and then subsequent payment time frames occurring—there have been gaps in those payments. This is an integrity measure to ensure that the GST that was already included in the price is actually paid to the ATO, but the measure does not apply until 1 July 2018, so it is still being developed.

Mr Jordan : Do you want to touch on that reverse onus—who has got to pay the GST? That seems to be a question.

Senator BERNARDI: It is a significant departure from where the GST was implemented.

Senator Cormann: There are a few important points there. Purchasers will not have to register for GST in order to remit the GST to the tax office. Our advice is that the new arrangement will have minimal impact on purchasers since the majority of purchasers use lawyers or conveyancers for these transactions. It really is making sure that GST payments that have been received are actually ultimately directed, as they must be, to the tax office.

Senator BERNARDI: To be clear: I am not trying to catch you out here or create an issue. I am just trying to understand the principle behind this. It is applied to developers, and I accept the fact that there is a significant issue amongst some developers.

Senator Cormann: The principal issue is to get the GST that has been paid and make sure it is received by the ATO on behalf of taxpayers.

Mr Mills : It is designed to operate in a similar way to how stamp duty is effectively paid on settlement. The idea is that, like a number of disbursements that occur on settlement, stamp duty would be paid. GST on new residential premises would also be paid.

Senator BERNARDI: The principle of combating phoenixing and non-payment of debt obligations, including GST, could apply to other industries. Is that true?

Senator WILLIAMS: No.

Senator BERNARDI: Thanks, Senator Williams. I can't wait till you're in the tax office!

Senator Cormann: The evidence from Mr Jordan is that this particular risk is particularly prevalent in this particular industry. When it comes to property transactions, you are talking about potentially quite significant amounts for each individual transaction, so there is an elevated risk and an elevated exposure, which is why the government has heeded the advice that there was a need for an integrity measure, which is reflected in our budget.

Senator BERNARDI: Was the advice from the ATO as a suggestion or was it something initiated through the department?

Senator Cormann: In terms of who has initiated it, I will let the Treasury Revenue Group answer that, but it went through the normal budget processes, so it was something that was put forward—I believe by the minister for revenue—as a new policy proposal for the purposes of the budget process, and the recommendation was accepted by the cabinet.

Ms Mrakovcic : Before the break there was a bit of a discussion around Single Touch Payroll, and I say that this would come under a similar type of category in the sense that the ATO obviously has responsibility for the administration of the tax system. In the administration of that system they sometimes become aware of issues or opportunities. In this particular case the issue around the risks to the GST revenue base from phoenixing in this particular sector was raised by the ATO. It was brought to Treasury's attention, and then we had discussions with the ATO to better understand exactly what the issues are. We caucused with them in terms of what might be potential solutions, developed potential policy options and then basically put advice to the minister, as is generally the case. That was the normal procedure that was followed in this particular instance as well.

Senator BERNARDI: Okay. Can you explain why this is scheduled to start in 2018 given that there is an issue—no one is disputing that there is a significant issue—and it is simply a settlement transaction, which administratively should not be a huge burden for the purchaser, because generally it is handled through conveyancers. Why wasn't it implemented from 1 July 2017?

Senator Cormann: It is because orderly implementation means that you have got to follow through the proper process to ensure that we are in a position to implement this effectively and professionally with minimum disruption to legitimate activities that happen in the economy.

Senator BERNARDI: This is where we are possibly going to disagree in the sense that this is a significant amount of revenue—I think it is estimated at $660 million per annum. Is that correct.

Senator Cormann: This is an issue that needs to be addressed, and the government took advice on what the appropriate implementation time table should be. We accepted that advice.

Senator BERNARDI: Okay.

Mr Mills : If I might add something to that, it is not necessarily the implementation from our side that is solely at issue. The law societies of the different states have to adjust contracts together with the real estate institutes. They need to get that orderly process done. Obviously conveyancers and others need to get their processes in place. So it is allowing industry as well time to adjust to the new regime.

Senator BERNARDI: I am struggling to understand why it is such a significant adjustment given that this is treated just as stamp duty, for example—the example given earlier. When a settlement takes place on property transactions, banks are paid, stamp duty is paid, four different checks are cut for whatever purpose. Why—

Senator Cormann: It is not something you can implement in six weeks' time because obviously there is a whole range of stakeholders that would have to adjust their processes in order to give effect to this. The advice is that just over 12 months is an appropriate timetable. This is not unusual. When these sorts of changes get implemented or put forward from time to time, this is not an unusual implementation.

Senator BERNARDI: But it is a significant amount of money and it is targeting the sector that is basically ripping off the taxpayers.

Senator Cormann: It is not as if we are doing nothing in the intervening period. Obviously the tax office continues to do what they do to enforce the law.

Senator BERNARDI: What is the tax office doing about phoenixing in this area to try and redress the $660 million that the government, by its own figures, suggests it is losing every year?

Mr Dyce : We have significant compliance resources directed to these issues. We have a number of audits underway constantly and we make a number of adjustments in this space as well. I do not have the figures on that but it is not something that we do not currently work on. The legislative change will significantly reduce the resourcing that we need in this space because it will require payment at settlement rather than at some point later on. Can I also add that when we talk about the risk here, that is a proportion of the industry. There is still a significant number of players in the industry that operate quite appropriately. It is a balanced approach that we adopt.

Senator BERNARDI: In respect to your resourcing within the ATO, do you have an estimate of the amount of money that will be saved from your compliance department in this particular area as a result of this measure?

Mr Dyce : There was a figure in the budget papers but I do not have it at hand right now. But that was factored in too because, with this change, we will need less resources in this space.

Senator BERNARDI: So will those resources be deployed into other areas of compliance or are they a budget saving?

Mr Mills : We will work that out at the time because the measure comes in from 1 July 18.

Senator BERNARDI: Finally, Minister, what consultation took place through the industry in respect to this measure prior to it being announced?

Senator Cormann: I would have to take that on notice. This obviously comes within the portfolio responsibility of Minister O'Dwyer. I will consult with her and provide to you the answer in the usual way.

Senator McALLISTER: Can I start by getting an update on the salad issue. I understand that the tax office has now confirmed it has abandoned its intention to redefine salads.

Mr Dyce : We were never redefining salads.

Senator McALLISTER: Where are we up to then? You say 'salad'; I say 'salade'. Where are we up to with the salad project?

Mr Dyce : The law has remained the same since it was introduced in 1999 to apply from the year 2000. The ATO has not changed its view on this.

Mr Jordan : I think the issue is not salads but whether something is pre-prepared. That is the test.

Mr Dyce : Is the food marketed as a prepared meal? That has been in the legislation since the beginning.

Senator McALLISTER: I understand that you have written to stakeholders indicating you have abandoned your previous intention to issue an information brief about food marketed as a prepared meal.

Mr Dyce : We were working on a brief which we discussed with industry. They felt that it was not going to help them sufficiently, so we have stepped back from that for now, based on their advice.

Senator McALLISTER: Separately, I want to ask about the Aggressive Tax Planning unit. There was an article in The Australian indicating that the Aggressive Tax Planning unit has been closed. Can I have an update on that entity within the tax office?

Mr William Day : The Aggressive Tax Planning team fits within the Private Groups and High Wealth Individuals business line. It certainly remains in existence and in operation.

Senator McALLISTER: Who is the deputy commissioner with oversight over the Serious Non-Compliance unit?

Mr William Day : That fits within Private Groups and High Wealth Individuals, so that fits within my responsibility.

Senator McALLISTER: I want to ask you about the compliance program, or what may be called the Serious Non-Compliance unit. Is it still in existence?

Mr William Day : There is a tax evasion and crime team within Private Groups and High Wealth Individuals. That does the same work that the former Serious Non-Compliance business line looked at and includes a focus on financial crime, phoenixing and aggressive tax planning. That fits within the Private Groups and High Wealth Individuals business line. The compliance program was actually a publication process.

Ms Lendon : We have renamed some of the areas, but essentially the work fits within the tax evasion and crime unit, which covers off financial crime, as Will mentioned, phoenix and some of the investigations and prosecutions work.

Senator McALLISTER: So it has been renamed. Has there been any change in the resourcing for that group?

Mr William Day : There have been some resourcing changes over the years—

Ms Lendon : Essentially for the business line itself it has remained, for the last few years, around 1850 people. We can take that on notice if you want to get more specific about the areas within.

Senator McALLISTER: The whole business unit has 850 people—

Ms Lendon : 1,850 people.

Senator McALLISTER: What about the Serious Non-Compliance unit?

Ms Lendon : I will have to take that on notice and come back with the figure.

Senator McALLISTER: When was the Serious Non-Compliance unit closed and then its responsibilities transferred to this entity with a new name?

Mr William Day : There was an amalgamation of business lines, from memory, in late 2013, and that is when Private Groups and High Wealth Individuals assumed responsibility. The resources have been stable over that period of years since the new business line was formed.

Mr Jordan : You have to realise that each business line has its own support structure and its own facilities et cetera. We had Aggressive Tax Planning, Serious Non-Compliance and Private Groups and High Wealth Individuals. Most of the Aggressive Tax Planning and Serious Non-Compliance were with the Private Groups and High Wealth Individuals, so it was an attempt to be more seamless in terms of the operation rather than having three silos, effectively—we do not like to talk about silos; it is one ATO. Whenever you have a different business line, it has its own structure, its own support network et cetera. It was a way of streamlining management and delivering the same outcomes across the business line, high-wealth individuals and private groups where the aggressive tax planning and serious noncompliance was occurring.

Senator McALLISTER: Was it previously the case that you had two deputy commissioners working across this set of tasks?

Mr Jordan : There was a deputy commissioner in charge of serious noncompliance and there was a deputy commissioner in charge of aggressive tax planning. One is now in charge of GST and the other is now in charge of our Smarter Data analytics, looking at how to identify cases for serious noncompliance and that sort of thing. They are still involved in that area in a sense. As I said, it was a streamlining of management without necessarily reducing any focus or staff numbers. We will get back to you on the actual numbers in the areas.

Senator McALLISTER: You mentioned that the compliance program was a program that was delivered within that unit. I understand that it involved publishing information—

Mr Jordan : Compliance is an interesting thing. Some people have little pet things, obviously, and some strong opinions. The compliance program was a booklet. We used to print it and we used to send it out to all sorts of people: 'Here you go. Here is a little booklet.' We would post it. Well, you know what? The world has changed. We do not keep printing booklets and posting them out to everyone; we put it on our website. We call it 'Building confidence' because it is about confidence in the system. It is a living thing that you can change at any time. Rather than, 'Here's a booklet that we're going to print, and we're going to send out thousands of copies to all sorts of people,' we thought we would be better off having a living, breathing document that can be adapted and is online. When this person goes on about this 'compliance program used to outline current areas of concerns'—we still do that, but we do not print it out and send out thousands of copies of them.

Senator KETTER: Mr Jordan, I preface my questions by saying that I have a great deal of respect for the ATO and for your leadership of the ATO. I must say that our work in this committee in relation to the issue of unpaid superannuation did challenge some of that confidence. I want to give you the opportunity to talk to us a bit more about that, particularly in relation to some of the recommendations from that report which talked about the ATO being more proactive in superannuation guarantee initiatives and devoting more resources to this particular issue. Do you have a response that you would like to make?

Mr Jordan : I have got a very brief response, and then I will hand over to James O'Halloran, who heads up superannuation. I mentioned just before that the whole superannuation guarantee system was designed in 1993. I cannot even think of where computers and internet were in 1993—whether they were there or whatever—because it was so long ago. We have got a system of reporting once a year, after the event. Superannuation contributions are based on ordinary time earnings.

Let us take a simple case. You are employing someone, you send us what they earn at the end of the year, you give the employer a statement of earnings and we prefill that into their tax returns. The super fund gives us the super contributions that you made on behalf of that employee. As I understand it, because the super contribution is based on ordinary time earnings, not what was actually earned, sometimes 9½ per cent of the figure we get from you does not equal what we got from the super fund. That is in the simplest of cases. If you have got multiple employers and multiple super funds—it is an old-fashioned way of doing this. That is why that committee is there, to try to modernise the process. I think around 40 per cent of the cases in unpaid super are small businesses that have gone broke. They just did not have the money. They spent it on other things and they did not pay the super. That is only being required to be paid quarterly. I will hand over to James.

Senator KETTER: Mr O'Halloran, my time is very brief. If you would not mind, could you get to the heart of it?

Mr O'Halloran : Sure. With reference to the Senate report, whilst I cannot go into the policy recommendations, what the ATO has been focused on for some months now, as you would appreciate, is a number of things: firstly, moving to increase the use of more-sophisticated case-selection models so that we can in fact improve the percentage of ATO-initiated cases versus employee-notification cases. As a result of the focus on the administration of SG from the ATO's perspective, we had a follow-up meeting with the Fair Work Ombudsman in May with a view of formalising more regular reporting of information. I think it is now quarterly instead of six monthly. The former members, if you like, of the agencies—and probably the Fair Work Ombudsman—have agreed to have a regular regulators' meeting across SG of our own volition. The next meeting is due towards mid to late June—the initial meeting, if you like. That will be a quarterly meeting with regulators across the full spectrum of SG, superannuation guarantee, from a range of perspectives. We will meet more formally and more regularly than had been the case.

We have certainly also moved to acknowledge, as a result of other law changes, that the super business clearing house can now be available to small businesses up to $10 million. How that take-up goes is probably an issue that will play out in the marketplace. In terms of better promotion of the obligations and the requirements for employers, last week we issued, through a tax agent magazine and through other information, what is called the SG health check. We have also started to release a 'SG six steps' brochure which, again, is about lifting the profile of how to prevent non-compliance around SG from employers. I will pause there.

Senator KETTER: Thank you, Mr O'Halloran, I think I got the gist of what you are saying. I go back to you, Mr Jordan. You made a comment earlier about the merits of having a fortnightly payment of superannuation, as opposed to the current situation, which is quarterly. Have you made the case to the Treasurer or to Treasury in relation to that view?

Mr Jordan : Single Touch Payroll is based on a reporting function, not a payment function. The payment of pay-as-you-go withholding and superannuation is at the end of each quarter. Small business is quite sensitive on this issue.

Senator KETTER: They use it as a cash flow tool.

Mr Jordan : Some are concerned that their cash flow would be severely impacted. You can sit there and say—

Senator KETTER: But it is not their money, Mr Jordan.

Mr Jordan : You are preaching to the converted here. You see, it is a sensitive issue. It has spooked small business a little bit, Single Touch Payroll. They are concerned that it is a Trojan horse—that, once it comes in, payment will be required as well as recorded.

Senator KETTER: I understand that. My question is, do you have a view that moving to a more frequent method of payment, such as monthly—have you made that recommendation to government?

Mr Jordan : I have not made that recommendation. I am very careful with what I say. I think adopting Single Touch Payroll will be a marvellous thing for the economy and for us to be able to better data match with Centrelink. Get that up and running and not have a fight with small business around the payment side of it. Let us get the system up and let us see how all that works on the reporting side, and what we can do better, knowing the amounts, regardless of whether we have got the—

Senator KETTER: I have got a couple of other questions, if you do not mind, Mr Jordan. The other area of disappointment for me was in relation to the lack of any work done by the ATO to estimate the superannuation gap. I know that you are working on that issue. Can you give us an update as to how close you are to providing an estimate.

Mr O'Halloran : Last time that I reported to this committee or the SG inquiry, I had said that we were continuing to work to better recognise the cash economy, for want of a better word, and some issues out of that. We have advanced that work so that we now have what we believe, as subject to some finalisation, to be of greater reliability in relation to the methodology that we have applied to SG. We have advanced that far. As I touched on at the last committee, and I think it might have been from some of the members, it was recognised that there needed to be some quite detailed explanation on the SG gap, the trend over time et cetera, so that is the advance we have made to date. Certainly we are now looking at that as part of a broader discussion around a number of other gaps that the ATO will be working through as quickly as possible.

Senator KETTER: When will you publish that estimate?

Mr O'Halloran : I certainly have not finalised a publication date for the SG, but certainly we are now more confident in our methodology as a result of the work that we did to include the cash economy, which was some of the independent advice that needed to be brought in.

Senator KETTER: In relation to the multi-agency working group that is looking at this issue, when will the government release the report?

Senator Cormann: I will have to take that on notice.

Senator KETTER: The group was due to provide an interim report to the minister at the end of January and the final report in March.

Senator Cormann: It is obviously not my portfolio, so I will consult with Minister O'Dwyer and I will provide an answer in the usual way.

Senator KETTER: Mr O'Halloran, just going back to the estimate of the superannuation gap. You have talked about doing a top-down estimate. Will you be doing a bottom-up estimate as well?

Mr O'Halloran : Not at this stage.

Senator KETTER: You have got the data to that enables you to make those estimations, and you have been critical of other attempts to quantify the superannuation gap. I am interested as to why you will not go down that track.

Mr O'Halloran : The best advice I have got is that if we settle the top-down gap methodology it gives us a broader indication as to, if you like, the scale, size and scope. There did seem to be an ongoing, perhaps differing, view in the public conversation that a bottom-up gap will actually give us cases. I am still not convinced, on advice I have got, that is the case. As with our other gaps, the gap will give us a sense of scale and size and relativity, and then we will be able to drill down through more sophisticated analytics to get a sense of the market disbursement. That would then be coupled with other data and also, as I said, an increase in the ATO initiated casework.

Senator KETTER: The design working group, coming back to the design of the Single Touch Payroll—Mr Jordan, you have talked about the issue of ordinary time earnings and the complexities associated with that. A document prepared for the group's 18 May meeting indicates that employers will not be required to report ordinary time earnings. Is that correct?

Mr O'Halloran : I can cover that. There are two things. Firstly, we have been under the banner of Single Touch Payroll signing off two things that you have raised. We have certainly been discussing this with superannuation funds, as part of the emergence of the need for more event-based reporting for the superannuation industry coming out of new measures—SuperStream and probably Single Touch Payroll—to make sure that we at least design, in a couple of ways, the ability to report SG contributions. In other words, as part of the design, which is over an 18-month framework, we are certainly conscious of not designing out the ability to be able to report SG payments.

Senator KETTER: So a decision has been made as to whether ordinary time earnings will be paid?

Mr O'Halloran : No—sorry. Secondly, because SuperStream has been designed, probably in the last 12 months or so, on things that are reported out of the pay slip—in other words, to complement the payroll reporting—there are two options that will be reported. Either ordinary time earnings or the SG liability. So it is an either/or at this stage. There are two schools of thought at the moment. The software does not naturally report ordinary time earnings is the school of thought of some parts of industry. That is not necessarily universally agreed. The other school argues that, for the way they operate, they feel that they can report the actual SG liability a lot easier. Similar to the implementation issues that were raised earlier, clearly there is a balancing act between having a system that is unable to be reported and recognising some of the current functionality that can be built on.

I would go back a little bit to SuperStream, as it has come up a few times this morning. The journey for the ATO in trying to use technology to get greater transparency and self-management and self-awareness, particularly of taxpayers—we have had myGov, we have had pre-filling, we have had SuperStream for example—means all of these things now couple to a logical place in terms of SuperStream, which, again, starts to give people the same amount of information so that they can monitor and hold others accountable, so the ATO can be more responsive, rather than reactionary. That, to me, is a sensible use of technology. I do make a point that some of this technology is actually built on much of the same sort of progression. There is some sequencing that needs to be done with industry and particularly the superannuation industry.

CHAIR: Senator Ketter, we are going to move on. I am acutely conscious of time. We will be breaking for lunch soon. I understand Senator Williams has a short line of questioning, and then I am going to ask Senator Di Natale to take us through to the lunch break.

Senator WILLIAMS: Mr Jordan, you might be able to help me. In estimates last time I asked about Operation Nosean and how much money was owed to the ATO in relation to a gold scam or fraud, if I can call it that. Who is the expert? Mr Dyce, can you update me and the committee on where you are up to as far as how much is owed to the ATO? What do you think your liability is? Have you recovered moneys since last estimates et cetera?

Mr Dyce : The work is ongoing. We have a number of cases that we have dealt with. To date we have raised approximately $706 million in liabilities—so that is liabilities—

Senator WILLIAMS: Yes; that is owed to you.

Mr Dyce : that is owed to us—from 221 audits. There are currently 90 audits on hand, expected to raise another approximately $102 million.

Senator WILLIAMS: So you will be expecting in excess of $810 million will be owed to the ATO?

Mr Dyce : Yes.

Senator WILLIAMS: Last time you told me that some matters had been referred to the DPP and others to the Serious Financial Crime Taskforce. Have any charges arisen from the referrals to the DPP?

Mr Dyce : As far as I am aware, the DPP is still assessing those and charges have not been laid yet. I am not sure about the time frame for the DPP appearing before this committee, or if they are appearing before this committee. It might be a question you want to ask them.

Senator WILLIAMS: Okay. Has your enforcement action and the publicity surrounding it ended this scam, do you think?

Mr Dyce : Yes.

Senator WILLIAMS: You think it has? The ATO was withholding GST refunds until they could determine that they were legitimate GST refunds. What is the status of that investigation?

Mr Dyce : Some of those refunds are still being withheld. In some situations we have raised assessments, which have absorbed the refunds. I am not aware of any of those moneys having been returned, but we were quite careful about when we chose to retain the refunds.

Senator WILLIAMS: Are you investigating any refineries?

Mr Dyce : There is a whole cross-section of players in the industry being looked at, from suppliers through to refiners, yes.

Senator WILLIAMS: So you are investigating refineries?

Mr Dyce : Yes.

Senator WILLIAMS: Including in Western Australia?

Mr Dyce : I cannot talk about specific matters.

Senator WILLIAMS: Fine; thank you very much, Mr Dyce. Mr Jordan, I want to take you back through a bit of history. Operation Wickenby and the Paul Hogan-John Cornell issue: it has been in the media a bit of late because of Andrew Robinson, who was a solicitor who represented Mr Hogan. The impression I get from the media is that Mr Hogan—you obviously sued Mr Hogan, took him to court and then you came to some agreement, some settlement. Is that correct?

Mr Jordan : It is difficult to talk about individual taxpayers—

Senator WILLIAMS: That one is pretty high profile!

Mr Jordan : but in circumstances where there has been quite misleading commentary, I do feel at times, to ensure that people can have confidence in our system and in what we do—this recent Operation Elbrus has brought out a whole bunch of old stuff from Wickenby. In one Daily Telegraph long article, it actually said 'Hogan is successfully taking a civil action against the tax office'. There was no civil action and, therefore, it was not successful.

Senator WILLIAMS: There was also one statement that I read in The Australian saying that Hogan would be happy if the ATO gave him $10 million. That was certainly not the case, was it?

Mr Jordan : I am not aware of that. I am aware of—and I think you mentioned him—Andrew Robinson, the lawyer acting for Hogan. I saw some things on the Ross Greenwood show. Ross Greenwood did an interview where they were talking about Hogan being ultimately exonerated from anything, that Robinson's allegations of wrongdoing were simply not true and were found to be not true. Sometimes people make statements that do not quite match up to the reality of the situation, even when they were involved in the deed of settlement around the matter. So you have got the paper saying there was a successful civil action, when there was not any. You have got people saying it was proven to be not true. Even recently, in the US Hogan started an action to recover $30 million that was still held by Strachans, which was the Swiss firm that started Wickenby. Obviously that was something of interest to us as well. Because someone does not go to court and get formally charged, it does not mean—I am talking in a general sense—they have not paid a substantial amount of tax to settle the matter.

Senator WILLIAMS: Even if you have some confidential agreement, you are covered by parliamentary privilege here, I believe. That is true, chair, isn't it? Witnesses are under parliamentary privilege, yes?

CHAIR: That is true.

Senator WILLIAMS: In the settlement, did Hogan make payments to the ATO? Yes or no?

Mr Jordan : Look, I mean—

Senator WILLIAMS: I think it is in the public interest, being the tax collector you are.

Mr Jordan : I do not want to go back. All I will say is, in a general comment, if people are not taken to court and charged, it does not mean substantial amounts of money were not paid to settle issues.

Senator WILLIAMS: So I take it from that that substantial amounts of money were paid to settle issues.

Mr Jordan : Sometimes substantial amounts, in the tens of millions, are paid and that covers the liability. As we see with this project Elbrus, it takes a lot to prove criminal intent. And the criminal intent is what really takes a long time. It really takes years to go through the courts. So from our point, if we get tens of millions of dollars that covers tax and penalties, we will often settle, quite rightly, because we have got the money.

Senator WILLIAMS: I will take it from that—I read into that—that the people we are talking about paid tens of millions of dollars to the ATO to settle the issue. I can take that with confidence, can I?

Mr Jordan : At times—I cannot talk about specific issues, but yes—if we get what we think is the tax due to us, with penalties and interest, we will settle it.

Senator WILLIAMS: Which could be tens of millions of dollars.

Mr Jordan : Absolutely.

Senator WILLIAMS: Thanks, chair.

Senator DI NATALE: I have some questions around the Medicare levy and the Medicare Guarantee Fund. Let me start by clarifying some points about the Medicare levy. The Medicare levy raises about $11.7 billion when you subtract the money that goes to the NDIS. Is that right? Can I just confirm that?

Senator Cormann: This was actually a matter that was dealt with in some great detail in Treasury Fiscal Group.

Senator DI NATALE: I had the Treasury Revenue Group as the people to ask.

Senator Cormann: The Treasury Revenue Group will be able to assist you in terms of any of the features of the Medicare levy and any questions that you have in terms of the proposed increase of the Medicare levy from half a per cent from 1 July 2019. In terms of interactions with other aspects—like the ones that you have just mentioned—our efforts to fully fund the NDIS and the like, these were matters that were traversed in some detail in Fiscal Group.

Senator DI NATALE: No, I am not really interested in the NDIS component. I suppose I want to establish, just for the record, that the Medicare levy, when you take out the NDIS, only partially funds the cost of Medicare. Is that correct?

Senator Cormann: That is right.

Mr Jeremenko : That is correct. The Medicare levy, if you take out the NDIS component, in 2017-18 will raise $12.1 billion.

Senator DI NATALE: And outlays for Medicare in 2016-17 when you compare Medicare as in MBS expenditure and PBS expenditure, $34.2 billion?

Mr Jeremenko : Senator, 2017-18 is the year that the Medicare Guarantee Fund starts.

Senator DI NATALE: Okay, so that is 2017-18?

Mr Jeremenko : So 2017-18 is $33.8 billion.

Senator DI NATALE: Just under a third?

Mr Jeremenko : Correct.

Senator DI NATALE: So just under a third pays for it.

Senator Cormann: We did go through these in some detail, but page 167 will tell you that the Medicare Guarantee Fund is made up not just of the relevant revenue from the Medicare levy but also of the relevant proportion of personal income tax receipts sufficient to cover the cost of the MBS and the PBS.

Senator DI NATALE: I will get to that in a moment. What is the policy purpose for having a special levy that only pays for a proportion of what it is intended to pay for?

Mr Jeremenko : The Medicare levy has been part of the system since—

Senator DI NATALE: I am not asking you about the history of it. What is the policy purpose for having a levy that only raises a partial amount for what it is intended to pay for?

Ms Mrakovcic : That goes to issues of policy.

Senator DI NATALE: I will not progress that. Let me go to the issues around—without a lot of debate around whether the Medicare levy is fair or not—an income tax system that is based on the principle that the more income you earn, the higher the marginal rate of tax is. Is that correct?

Senator Cormann: It is reflected in marginal tax rate—that is right.

Senator DI NATALE: That is what we mean when we refer to a progressive income tax system. Does the Medicare levy increase according to income, apart from individuals where it starts at $21,000 and families at $36,000?

Senator Cormann: Self-evidently, for those Australians who are subject—that is, not exempted from paying the Medicare levy—it is applied as a uniform rate, currently two per cent. It is proposed to increase to 2.5 per cent from 1 July 2019. That is the way the Medicare levy structure—

Senator DI NATALE: I know; I understand that.

Senator Cormann: has operated since its inception and, incidentally, the previous Labor government four years ago—

Senator DI NATALE: Correct. I am not asking them.

Senator Cormann: I am responding to the question in the way—

Senator DI NATALE: We have limited time, Minister.

Senator Cormann: Sure. The very important principle here is this: the half a per cent increase in the Medicare levy, because it is a percentage of your income, means that the less you earn the less you pay, and the more you earn the more you pay.

Senator DI NATALE: That was not my question, Minister.

Senator Cormann: If you are currently exempted, you will continue to be exempted, and the relevant income thresholds that facilitate the exemptions are indexed on an annual basis. So we would assert it is a very fair way of doing it.

Senator DI NATALE: I was asking Mr Jeremenko and—I am not sure how to pronounce your name. Do you want to give me a clue?

Ms Mrakovcic : Mrakovcic.

Senator DI NATALE: Okay, I would have said that. Mrakovcic. We have a progressive income tax system that is based on the principle that the more you earn, the higher the level of tax that you pay. That is not what happens with the Medicare levy, is it?

Senator Cormann: It never has happened with the Medicare levy.

Senator DI NATALE: No, I am not asking for history.

Senator Cormann: Sure, but I have already answered that question on behalf of the government, and that is the way the Medicare levy has operated since its inception.

Senator DI NATALE: Can I ask you a few more questions about the Medicare levy? Can we start by clarifying that the Medicare levy—and the government's proposal is to increase it from two to 2½ per cent—is taxed on someone's taxable income after tax deductions? Is that correct?

Mr Jeremenko : Taxable income is what the Medicare levy is applied to—correct.

Senator DI NATALE: Just being clear, for example, we have heard—

Senator Cormann: The taxable income is what the income tax rates are applied to too, so that is the same arrangement.

Senator DI NATALE: Let me ask a few questions about that. We have heard about, for example, these millionaires who have so many deductions that they fall below the tax-free threshold. They would not be subject to the Medicare levy, would they?

Mr Jeremenko : The Medicare levy is applied to taxable income.

Senator DI NATALE: If somebody has so many deductions that they manage to bring their tax below the tax-free threshold—for example, there are 48 millionaires we saw reported somewhere—they would not be subject to the Medicare levy, would they?

Senator Cormann: This sounds like a hypothetical proposition to me. The officer has answered the question.

Senator DI NATALE: It is not hypothetical; it is a statement of fact.

Senator Cormann: The Medicare levy is applied to taxable income but, incidentally, income tax rates are applied to taxable income too. Obviously, as you have indicated before, the higher your taxable income, the higher the marginal tax rate that will apply to your income.

Mr Jordan : Can I make just one little comment here. It is not on the Medicare levy, but it is on the label in the tax return I think you are referring to. Every year, it seems to get a bit of publicity, and I want to investigate whether we can put another label in the tax returns to stop this from happening. The label is called 'Expenses for managing your tax affairs'. You see someone earning a million bucks and then you see a $1.1 million claim for managing their tax affairs, and you say, 'That's outrageous, are they paying an accountant a million bucks?' But what is included in that is not just the fee you pay to the tax agent, but any penalty interest you might have paid to the tax office. Because penalty interest is tax-deductible. If we owe you interest, it is taxable to you, so you might get one of these high-wealth individuals who we have nailed for 10 million bucks of extra tax and some of that might be $1 million of interest. It goes into that box, and I would break that box up, because this keep coming up.

Senator DI NATALE: How many of those 48 would be in that category?

Mr Jordan : I cannot—

Senator DI NATALE: That is not what I am here to ask, but I would be interested, on notice, if you could take that, and I get it. Let us move into another box then. Let us talk about the people, for example, the 81,000 individuals who have four or more investment properties and are negatively gearing those investment properties. They would pay less as a proportion of their total income of the Medicare levy than someone, for example, one of their tenants, who has no deductions. Is that correct?

Senator Cormann: Income tax rates and the Medicare levy are applied to taxable income.

Senator DI NATALE: Is that correct? I am asking just a simple question. If you are negatively gearing for properties and you are one of the 81,000 people who have four or more investment properties and you have deductions as result of those investment properties, you will be paying less of the Medicare levy as a proportion of your taxable income than somebody who might be renting one of those properties, but has no deductions.

Senator Cormann: The higher your taxable income, the more tax you pay, and the lower your taxable income, the less tax you pay.

Senator DI NATALE: I am talking about a proportion of your income.

Senator Cormann: In the income tax act there is no such thing as a reference to negative gearing, if you are saying to me that a taxpayer essentially is able to claim relevant deductions. Once you get to the taxable income, that is what determines the level of tax you pay, whether that is income tax or the Medicare levy. That has always been the case, and that is the way the system would continue to operate under our proposal.

Senator DI NATALE: This is a yes or no question.

Senator Cormann: Well, I am providing the appropriate context.

Senator DI NATALE: As a proportion of your income, if you are somebody who is claiming that level of deduction, you will be paying less Medicare levy as a proportion of your total income than somebody who does not have those deductions. Is that correct, yes or no?

Senator Cormann: The higher your taxable income, the more Medicare levy you will pay, and the less your taxable income, the less Medicare levy you pay.

Senator DI NATALE: Mr Jeremenko, would it be fair to say that the Medicare levy then amplifies those tax breaks that are enjoyed by property investors? Is that correct?

Senator Cormann: You are asking the officer for an opinion here, and you are not entitled under the standing orders to ask officers for an opinion. Again, it is self-evident that the higher your taxable income, the more Medicare levy you pay, and the lower your taxable income, the less the Medicare levy you pay.

Senator DI NATALE: Let me then ask some more questions. I do not think we are going to get very far on this line of questioning itself. It appears evident from your answers, minister, that those assertions are correct.

Senator Cormann: My answers are standing for themselves, and the answers that I am providing you are the answers. I am not going to let you put words in my mouth. I am giving you the answers I am giving you.

Senator DI NATALE: I am just asking for a clarification, so that I can understand whether the Medicare levy applies after deductions. And, therefore, somebody who—

Senator Cormann: I have already answered the question. Obviously, your taxable income is determined by gross income minus allowable deductions. And the tax is applied to taxable income, whether that is the income tax assessment or the Medicare levy. It is applied to taxable income. The higher your taxable income, the more tax and Medicare levy you pay, and the lower your taxable income, the less tax and Medicare levy you pay. That has obviously been a feature of our tax system for a long time.

Senator DI NATALE: That is clear, but the assertion I put to you was that the amount of Medicare levy you pay, as a proportion of your income, is reduced if you have those deductions.

Senator Cormann: Again, I think this question—

Senator DI NATALE: It is a yes or no proposition. I do not think you can—

Senator Cormann: The answer is, as I have indicated several times now, under our proposal, which is 100 per cent consistent with the measure introduced by Labor four years ago, the more you earn the higher your taxable income and, obviously, the higher the amount of Medicare levy you will pay.

CHAIR: In the three minutes you have left, I would not suggest asking the same question over and over again.

Senator WHISH-WILSON: I am not going to. I am going to ask a question on the same subject. Has the department done any modelling or any work on how much more you would raise if the Medicare levy were taken from pre-tax-deductible income—that is, from gross income?

Ms Mrakovcic : In my view, those questions go to policy delivery and process and I do not think it—

Senator WHISH-WILSON: It is a revenue question.

Senator Cormann: You are asking a question that goes straight to the heart of the cabinet deliberative processes—the budget process. You are asking what—

Senator WHISH-WILSON: Chair, I have a point of order. That is not what I asked.

Senator Cormann: Your question is: what options has the government considered in the context of the budget process. That is really what you are asking.

Senator WHISH-WILSON: That is not what I asked, Senator Cormann. I asked the department if they had done any work, modelling or simulation or otherwise on how much the Medicare levy would raise if it were on—

Senator Cormann: We will take a question on notice.

Senator DI NATALE: How does the Medicare Guarantee Fund actually guarantee the funding of Medicare?

Can you explain that, because no-one has been able to explain that to me so far.

Senator Cormann: It was very eloquently explained yesterday when these questions were raised in the appropriate part of Treasury, namely the Fiscal Group, by Senator Gallagher. What the Medicare Guarantee Fund is designed to do is provide clear visibility of the relevant costs in relation to funding Medicare services and relevant expenses in relation to the PBS and the relevant funding. That, of course, helps to provide public confidence that funding for these important services in the healthcare space are guaranteed within the budget—fully funded and guaranteed within the budget.

Senator DI NATALE: Where does the guaranteed part come from?

Senator Cormann: It is a decision of government as part of the budget process.

Senator WHISH-WILSON: Could I ask very quickly, Mr Jordan where we are at with the information from the Panama Papers? Were there any additional tax liabilities raised as a result?

Mr Jordan : Work has been progressing through JITSIC, the joint body that I chair but Mark Konza runs operationally. I will let him update you on the latest work that we have been doing with over 30 countries.

Mr Konza : We have been working with over 30 countries to share the information that is available and to share the different analytical techniques that countries use to identify the people who were using Mossack Fonseca. That main goal of the group now is to—rather than look at those taxpayers, it becomes the responsibility of each revenue administration. We are now working together to see who the intermediaries are, and that has been a quite interesting exercise in itself. What we have discovered is that the intermediary market in providing hidden or secret tax services is a lot more developed than we expected.

Senator WHISH-WILSON: I have a point of clarification on that, Mr Konza. Are you looking specifically at shell companies there?

Mr Konza : We are looking at the legal and accounting firms that will supply you with the share companies in a secrecy jurisdiction. They will supply you with the directors who will sit on that company for you and they will supply you with access to banking and so forth that you need.

Senator WHISH-WILSON: Is this information useful for you at all in terms of progressing the policy of cracking down on concealed beneficial ownership?

Mr Konza : It will be—yes. We are currently working on about 10 different sources of data. I am aware of more data sources that are going to come to us in the course of this calendar year. Mr Jordan in the past has spoken about the fact that what people need to get their head around is that they cannot trust people to keep their information absolutely secret. They should be coming out and being more transparent. As far as Australia is concerned, there were about 1,300 individuals who we eventually identified as being in the Panama Papers. We have positively identified over 1,100 of them, so we are down to the last 202 individuals that we want to positively identify—that is, match them up with who is in our tax system.

Senator WHISH-WILSON: Is it too early to know about liabilities from those individuals?

CHAIR: That is the very last question, Senator Whish-Wilson.

Mr Konza : Yes, it is far too early, I am afraid.

Senator WHISH-WILSON: Can you give us an idea of—

CHAIR: No—that was the last question. Thank you very much, Senator Whish-Wilson. You may put a question on notice. We have the commissioner staying until 2 o'clock. Thank you very much, Commissioner.

Proceedings suspended from 12:20 to 13:21

Senator GALLAGHER: The ATO has been participating in the Small Business Roadshows with the Minister for Small Business. This might be a question for one of your colleagues. Have you been doing that by invitation from the minister or have you had involvement in organising the roadshows?

Ms Lendon : We have been doing a range of roadshows, of which one is by invitation of the Minister for Small Business to participate in and come along with information, support and guidance about the sorts of products that we have that support small business. So we have those, but we have also had other community forums that we have participated in, which we have organised ourselves, where we link with local chambers of commerce and so on to provide information and show people the support and guidance that we have.

Senator GALLAGHER: I am specifically interested in the Small Business Roadshows that Minister McCormack has been holding. You have just participated in those. Is it Treasury who would organise those meetings? Would it be the Markets Group? Who supports the Minister for Small Business?

Ms Mrakovcic : I would say that it would be either Markets Group or Corporate Group.

Senator GALLAGHER: What resources do you provide to these Small Business Roadshows? How many people attend?

Ms Lendon : I would have to take that on notice, but we normally have at least one or two people go along. It will cover issues like our debt area, and it will cover areas around small business topics—so experts who work on advice products and things like that. It also covers supporting products so that we can demonstrate those to people as well. I cannot say exactly how many attend, but it would be a handful of people. We normally draw from the area that is closest to where the event is being held. So we draw our staff from the local area so that we minimise any costs of travel and things like that.

Senator GALLAGHER: Could take on notice the resources given to that and also how many of them you have attended. I think there have been over 30. Can you tell me whether you have attended all of them. That would be useful. Commissioner, last time we met there was an issue, which we touched on briefly then, around the passing on of tax debt information to the credit agencies. I raised with you that some concerns had been raised with me. You undertook to have a look at it. I understand, from the Small Business and Family Enterprise Ombudsman, who we talked with last night, that she has had some good discussions with the Australian Tax Office around the concerns that she has raised, which were similar to the ones I raised, and that you had taken some decisions about how this was to be rolled out—that it was to start with your more difficult, higher debt clients and that you are going to roll it out as a pilot. I think those were the words that were used. Could I maybe get a short update on that?

Mr Jordan : Yes. Robert Ravanello is in charge of debt.

Mr Ravanello : We have been consulting with a number of externals about the measure, including the Small Business and Family Enterprise Ombudsman. At this stage we are planning, subject to legislation being passed, that it will be a phased rollout. Initially, the entities that we are likely to report will be those who already have their debt information in the public domain—so those perhaps with insolvency action underway—and, at that end, work out the procedures and the processes with ourselves and the credit reference bureaus and then progressively move down from there. So, yes, we are planning a phased approach. Also in line with the announcement, there are a number of safeguards in the measures to make sure that people that we are reporting are given every opportunity to remedy their debt before we report them.

Senator GALLAGHER: The decision to roll it out as a pilot has been taken in response to concerns that have been raised?

Mr Ravanello : The measure allows the ATO to report debts that meet the criteria to credit reference bureaus. It does not oblige the ATO to do that, so we have chosen to take a phased approach to rollout just to be sure we get the measure right, iron out any issues and give the community plenty of warning before it affects most people.

Senator GALLAGHER: Thank you. I just wanted an update. We will keep an eye on that. Commissioner, in relation to another question I asked last estimates about Pauline Hanson's One Nation being registered for GST purposes, I think you undertook to have a look at that. Can the committee be provided with an update on that?

Mr Jordan : Yes, we can do that.

Mr Dyce : Whilst we cannot talk about individual organisations, what we can say is there is a system in place where organisations that are required to register can follow an automated process on the ATO's website to undertake that registration and that automated process allows them to nominate an earlier date to the date they are actually going into the system to be able to ensure that their registration applies from when it should have.

Mr Jordan : Also, if they do go backwards with registration and they have done things that have caused the GST, they need to report and all that sort of thing—back as well; it is not just to say, 'I am registered two years ago.' You would have to put in BASs and make payments.

Mr Dyce : And make payments as appropriate, yes. There may be interest charges obviously for payments that should have occurred previously that did not occur when they should have.

Senator GALLAGHER: So in relation to the specific question I asked, are you able to indicate to the committee whether there were any fines or consequences or interest?

Mr Dyce : I cannot talk about individual organisations.

Mr Jordan : But you can be rest assured that, as in any other case, if we are aware of something that we would make sure that any liability was paid and any interest will be charged.

Mr Dyce : And interest is typically charged.

Mr Jordan : As people come forward, there is typically no or very little penalty other than the interest.

Senator GALLAGHER: Other than what you owe.

Mr Jordan : What you owe plus interest.

Mr Dyce : Interest is charged too.

Senator GALLAGHER: That is uniformly applied?

Mr Dyce : Yes.

Senator GALLAGHER: Commissioner, has the ATO been asked for any assistance in the AEC investigation into Pauline Hanson's One Nation?

Mr Jordan : Which one?

Senator GALLAGHER: Into the Electoral Commission's investigation.

Mr Jordan : Not that I am aware.

Mr Dyce : Not that I am aware of.

Senator GALLAGHER: I wonder if you know whether Mr Ashby's company needs to log its use for business purposes in the company's annual tax return?

Mr Dyce : We would not be able to talk about specific taxpayers.

Mr Jordan : If a company got payments like the use of something they would have to return that, I would imagine, as income and then claim deductions against that.

Senator GALLAGHER: Thank you. I have some questions around the bank levy. The legislation for the bank levy has just been introduced into the House. As I understand it, the EM makes clear that Treasury modelled the economic impacts of the bank levy.

Senator Cormann: Say that again.

Senator GALLAGHER: The explanatory memorandum says that Treasury modelled the economic impacts of the bank levy. Would we be able to have a copy of that modelling?

Senator Cormann: I will take that on notice.

Senator GALLAGHER: The problem with that, Minister, is that if you take it on notice and we are meant to pass the legislation in the next couple of weeks—

Senator Cormann: But you have already said that you support it.

Senator GALLAGHER: Yes, but I am gathering information. We went through this yesterday.

Senator Cormann: I know, and I have taken it on notice, which, as you know, is my prerogative at this table. On budget night the shadow Treasurer indicated that the Labor Party supports the major bank levy, so unless you are suggesting that there has been a change of mind then I do not really understand what you are suggesting.

Senator GALLAGHER: That is not a fair response. It is an entirely fair question. We are asking for a copy of the modelling that has been mentioned in the EM in the legislation that was introduced at lunchtime, mindful of the fact that the government wants this to pass, we believe to take effect by 1 July, and that this modelling will assist with our consideration and debate on the legislation. It is not a question of whether or not we support it; it is about whether we have the information available to us that you have had in developing this legislation.

Senator Cormann: And I have taken the question on notice. I will consult with the Treasurer and we will provide an answer in the usual way, obviously mindful of the timetable involved with considering this legislation through the parliament. I again note that the opposition have already indicated that you would be voting in favour of the major bank levy.

Senator GALLAGHER: So will you undertake to get back to us—whether or not you provide the modelling is a separate matter—on that question prior to debate on that legislation?

Senator Cormann: Yes.

Senator GALLAGHER: Thank you.

Senator Cormann: Sorry—prior to debate? I am not aware when the debate will happen in the House of Representatives.

Senator GALLAGHER: Well it is going to have to be soon.

Senator Cormann: Prior to debate in the Senate.

Senator GALLAGHER: Okay.

Senator Cormann: Given that these are the Senate's estimates.

Senator GALLAGHER: There is also a part of the EM which said that various assumptions were made with respect to the incidence of the levy. Can you outline what those assumptions were?

Senator Cormann: I have already taken questions in relation to the modelling on notice.

Senator GALLAGHER: So you will include that?

Senator Cormann: That is right.

Senator GALLAGHER: All right. Were there changes to any of the legislation through the consultation period?

Senator Cormann: I will let the officers provide some more detail, but the legislation implements the budget measure as outlined in Budget Paper No. 2, so it is consistent with what was announced on budget night. What has happened since then is consultation with relevant stakeholders about practical implementation arrangements. The Treasury can provide further detail on that.

Ms Mrakovcic : Just to explain: you would have seen from yesterday morning that Mr Lonsdale had the primary responsibility for the bank levy. It falls under the financial markets division of his group.

Senator Cormann: Which is why we dealt with these questions yesterday, when Mr Lonsdale was here.

Senator GALLAGHER: And he is coming back this afternoon, isn't he, with Markets Group?

Ms Mrakovcic : Markets Group are following.

Senator GALLAGHER: And would I be better to direct this at them?

Ms Mrakovcic : As I said, it is just that—

Senator GALLAGHER: All right.

Senator Cormann: He has conducted the consultations.

Senator GALLAGHER: Sure. We will come back to that. Is Revenue Group responsible for the tables in

Budget Paper No. 2, the revenue projections?

Ms Mrakovcic : Do you mean the actual costings of the revenue measures?

Senator GALLAGHER: Yes.

Ms Mrakovcic : Yes. Tax Analysis Division undertakes those.

Senator GALLAGHER: That is in your area?

Ms Mrakovcic : Yes.

Senator GALLAGHER: There are three different tables that I am interested in. There is Budget Paper No. 2, page 24, which shows a revenue total of $6.2 million—

Senator Cormann: Billion.

Senator GALLAGHER: Billion, sorry. I am thinking in ACT dollars. And Budget Paper No. 1, page 10-24, also has a revenue table that has a four-year total of $7 billion. Can you talk me through the difference in those?

Ms Mrakovcic : I will make two observations. The first is that we have organised for people in the costings area to go along to the markets group session this afternoon. And the second point I will mention is that with the costings—and I will try to actually address the question if that helps so you will not need to follow up—the actual measure on page 24 would incorporate all the components of the costing. So it would be the amount raised with the levy and also take into account the deductibility of those payments company tax.

Senator Cormann: It actually says that in the measure description. It says that the $6.2 billion over the forward estimates period is net of interactions with other taxes, principally corporate income taxes. That has been an item for discussion for some time. And then of course there is a difference because—then of course there is the presentation of the expected revenue on the cash basis and on a fiscal basis which is also another reason for variation between some numbers.

Senator GALLAGHER: Yes. Okay.

Ms Mrakovcic : And then you would also have some of that appearing under 'bank levy', and the deductibility of the company tax in the company tax line.

Senator GALLAGHER: Okay. We might come back to this, because I have quite a lot of questions.

Senator Cormann: I am mindful of the fact that we have the commissioner here too. Are there any more questions for the commissioner on matters related to the ATO?

CHAIR: Yes, there are just a couple, I think, from

Senator GALLAGHER: I know you appear together.

Senator Cormann: I am just mindful that the commissioner will be leaving at two.

CHAIR: We will get the commissioner out by two. We have a couple of questions, I think, for the commissioner. Senator Bushby, you have the call.

Senator BUSHBY: Excellent. Thank you. There were some questions earlier this morning about what the government is doing to tackle the broad classification of tax avoidance by multinational companies. I think you talked about some of the new measures that were in the budget, particularly the MAAL. What was the full range of new measures that were contained in this budget to tackle multinational tax avoidance?

Ms Mrakovcic : I might just get the acting head of—

Senator Cormann: Are there any questions for Mr Jordan?

Senator BUSHBY: No, I do not have any.

Senator Cormann: We might just want to take—

CHAIR: Sorry. Does anyone specifically have questions that require the commissioner to be here?

Senator ABETZ: Mine are about deductibility and how the ATO treats them but I am sure that somebody else could assist.

CHAIR: Senator Roberts?

Senator WHISH-WILSON: I have a couple of quick questions—

CHAIR: Hang on. Senator Roberts, did you have questions for the commissioner?

Senator ROBERTS: Yes.

CHAIR: For the commissioner?

Senator ROBERTS: Yes.

CHAIR: I will go to Senator Roberts then I will come back to you, Senator Whish-Wilson. Sorry, Senator Bushby. Senator Roberts.

Senator ROBERTS: Thank you, Chair. And thank you all for appearing today. Commissioner, how many people are employed in the ATO?

Mr Jordan : We have ASL—average staffing level—of something like 18,400 or 18,500. I think that is full-time equivalents. In terms of actual numbers, it is probably more around 20,000, including part-time people et cetera.

Senator ROBERTS: Thank you.

Mr Jordan : But the Minister for Finance is extraordinarily focused on the average staffing levels.

Senator Cormann: We are very keen to ensure that the Public Service is as efficient and effective as possible.

Mr Jordan : And any time he wishes to gratuitously increase that—

Senator Cormann: We want you to do more with less. That is what we want.

Senator ROBERTS: Have you heard of W Edwards Deming?

Mr Jordan : Sorry?

Senator ROBERTS: Have you heard of W Edwards Deming? He is the American statistician who became a management consultant and is credited with turning around the Japanese industry in the seventies.

Mr Jordan : I am afraid not.

Senator ROBERTS: Okay. He said 95 per cent of the problem in an organisation is the system not the people. So I just thought I would throw that in there. But before we—

Mr Jordan : I am not sure I want that statement. Are you saying we should have less?

Senator ROBERTS: We will get to that. Will Australia follow the lead of the United States and the United Kingdom with dramatic tax cuts to business and household rates?

Senator Cormann: That is a policy question, which is a matter for government. Of course, as you would be aware, we have legislation in front of the parliament at present to reduce the corporate tax rate for all businesses to 25 per cent to the period to 2026-27. The parliament, and the Senate in particular, passed the first three years of what is a 10-year price tax plan by reducing corporate tax to 25 per cent for all businesses with an annual turnover of up to $15 million a year, in a phased-in period over the next three financial years—2016-17, 2017-18, 2018-19, that is.

The government would like to see the whole package legislated. Obviously in the United States they are proposing to reduce the corporate tax rate to 15 per cent; in the United Kingdom they have already reduced it to 19 per cent and they are proposing to go down to 17 per cent. Australia is a trading nation, reliant on foreign investment to continue to develop and grow our economy to its full potential. We compete internationally for capital, for foreign investment. We need to be competitive. At 30 per cent, our corporate tax rate is too high; it is very high by international standards; at 25 per cent it is fair to say we would be middle of the road in terms of the OECD average. We certainly continue to commend the legislation that the government has put forward to the parliament. We do not have any plans at present to go beyond reducing business taxes to 25 per cent for all businesses, consistent with the legislation that is before the parliament.

Senator ROBERTS: Thank you. You mentioned earlier this morning about $2 trillion offshore from American companies. If America—when America—reduces its corporate tax rate to 15 per cent will a lot of that be going home?

Mr Jordan : As I understand it, President Trump is also, in addition to the normal corporate tax rate, considering—I am not sure he has announced it but he was certainly considering it—a once-off, 10 per cent, I think it was, tax rate on all those profits that are held offshore, to allow them to bring them back and tax it at 10 per cent. They are largely, as I understand it, held in US Treasury bonds. The American system only taxes foreign income in a real old-fashioned way when it is physically remitted back to the US. So, with their 35 per cent rate, plus a state tax, which is deductible, you often get up to about 40 per cent. So that is why that $2 trillion of foreign earnings is being held offshore and the proposal is to tax it at a flat 10 per cent to try to get them to bring it back into their economy.

Senator ROBERTS: If he is successful, a lot of American money will be leaving foreign countries and heading home?

Mr Jordan : A lot of it is sitting in Bermuda and the Cayman Islands. It is already gone. It is sitting in tax havens because the interest it earns on the bonds is tax free.

Senator ROBERTS: So a lot of the American corporations have their money parked in tax havens?

Mr Jordan : It seems to me that, if the US rate is 15 per cent—the minister said—as a proposal, the impetus or the reasoning for companies to avoid our rate at 30 diminishes; because they might as well just pay some tax here and get a credit for the tax back over in the US.

Senator ROBERTS: Thank you.

Mr Jordan : So the argument goes: the lower the rate here and the lower the rate over there, the more likely they are to just pay it and transfer it back and get a credit back home.

Senator ROBERTS: So on that basis, lowering the tax rate in Australia could actually raise revenue, because more people would pay tax?

Mr Jordan : That is probably a matter for Treasury but I understand there is various modelling that shows secondary-round effects of greater activity occurring, and therefore more pie, albeit at a lower rate.

Senator ROBERTS: The reason I mention—

Ms Mrakovcic : Sorry, Senator. I was just going to say that we had this conversation last Senate estimates, and, as I said at the time: while you anticipate that from a cut in the corporate tax rate, you would have an increase in economic activity. And, with that increase in economic activity, comes revenues associated with that. We also mentioned that—and you pointed out to me the existence of Laffer curves, and I said that, yes, certainly, while there was a familiarity with them, you would not necessarily expect that you would have a complete recovery, because at the end of the day you are cutting the corporate tax rate. But I think the key thing is and the point that you have made is that you do actually get higher revenues associated with the higher economic growth and higher real wages that are associated with that cut in the corporate tax rate.

Senator ROBERTS: Commissioner, you also mentioned that the tax system we operate under, or suffer under, today—and that is not a reflection on you; that just reflects what I see as a mess—goes back to 1923, roughly.

Mr Jordan : That is the original design of the international tax framework about allocating profits between countries.

Senator ROBERTS: And since then we have put bandaids on bandaids.

Mr Jordan : Many bandaids.

Senator ROBERTS: Many bandaids, thank you. In 1953, Robert Menzies passed the double taxation act—I cannot remember the exact name of the legislation—whereby foreign companies do not have to pay corporate tax in this country. Is that right—double taxation recognition?

Mr Mills : I think you are referring to the International Tax Agreements Act. That is designed to, effectively, allocate through treaties the taxing rights between Australia and other countries.

Senator ROBERTS: So foreign companies in this country do not have to pay corporate tax?

Mr Mills : No; foreign companies operating in this country that have operations with what is called a permanent establishment here are required to pay tax on the profits of that activity.

Mr Jordan : That is the point I talked about. That framework of permanent establishment sort of means physical presence. With all this e-commerce stuff, they have been avoiding that by not having that physical presence. That is why the rules need to be redesigned, to capture the new forms of business.

Senator ROBERTS: Perhaps we can have a longer talk about that one day, if I could come and have a briefing on the 1953 legislation.

Mr Jordan : Sure.

Senator ROBERTS: That is not as I understand it, so I obviously need some instruction there. When we had a phone conversation a few months ago, Commissioner—you can remember that—I asked you what you expected to recoup from—

Senator WHISH-WILSON: It would have been very memorable.

Senator ROBERTS: There you go. Was it memorable?

CHAIR: Let's get on with it. We do not have very long.

Senator ROBERTS: Thank you.

Mr Jordan : What can I say? This is a lose-lose situation.

Senator ABETZ: You remembered it, so it must be memorable.

Senator ROBERTS: Exactly, thank you. In that phone conversation—and this is not a reflection on you because I think we have established that we have many bandaids and the tax system is so convoluted and so messy—it took you about 20 minutes, from memory, to come up with an answer as to how much you expected to recoup from changes to the laws to ensure multinationals paid their company tax. I did not get confidence from that. Again, it is not a reflection on you; I think it is a reflection on the system, hence W Edwards Deming.

CHAIR: Senator Roberts, you have got to ask a question.

Senator ROBERTS: Could you tell me whether or not you have had any discussions with regard to comprehensively reforming the tax system?

Senator Cormann: That is a question for the Treasury revenue group rather than for the ATO.

Ms Mrakovcic : Sorry, Senator, can you ask the question again?

Senator ROBERTS: Have you had any discussions with regard to comprehensively reforming the tax system and making it not just lower in rate in a few areas but simpler and lower overall, and perhaps—along the lines of what the commissioner was talking about this morning—looking at other forms of taxation replacing taxation on earnings?

Senator Cormann: These are, of course, policy questions for the government of the day. The government's focus always is to ensure that our tax system is as efficient and the least distorting possible, mindful, of course, of important equity and fairness considerations as well. We have set out to make our tax system more growth friendly since coming into government. Among other things, that has included the abolition of the mining tax and the carbon tax. It has also included various initiatives to support small business. It has included our efforts to make our business tax rates internationally more competitive. It has also included making the tax arrangements underpinning our superannuation system fairer and more sustainable into the future.

This is clearly an ongoing effort and an ongoing program of reform. What I can say is that, in the period of our government, all the way through since the 2014-15 budget we have imposed on ourselves a tax as a share of GDP cap of 23.9 per cent. The revenue forecasts and the revenue projections are based on an assumption imposed on the model that tax as a share of GDP is not allowed to go past 23.9 per cent. Within that, the question then becomes: how can you raise the necessary revenue for government—as much as necessary and as little as possible—in the most efficient and least distorting and appropriately fair and equitable way out of the economy? That is what the government is always focused on. In the end, taxes need to be as high as necessary and should be as low as possible. They need to be administered as efficiently and as effectively as possible. Obviously, you always have to be mindful of making sure that the burden to raise the necessary revenue for government is spread as fairly and as equitably as possible on top of the economic efficiency considerations. In short, that is an ongoing focus for the government.

Senator ROBERTS: The way that I would interpret that is: we are going to continue with the same tax system we have—complex, inefficient—and we are just going to adjust and tinker with the rates, and that is it.

CHAIR: Senator Roberts, have you got a question?

Senator ROBERTS: Yes. Can we have a discussion one day about getting back to a simpler tax system.

CHAIR: You cannot make appointments in this room; make appointments outside of this room.

Senator Cormann: I am always very happy to have discussions.

Senator WHISH-WILSON: I have a quick question for Mr Jordan. I was asking previously around Mossack Fonseca and the Panama papers and the experience in the tax department in your ongoing investigations. How close are we, or what barriers are there, to getting a register of beneficial ownership of companies put in place?

Ms Mrakovcic : That question is probably best put to markets group.

Senator WHISH-WILSON: Why?

Ms Mrakovcic : They have responsibility for it.

Senator WHISH-WILSON: Okay.

Senator Cormann: They are next.

Mr Jordan : We would administer any law that required that, but there is no law there.

Senator WHISH-WILSON: But you are doing the investigation into considering ownership of companies.

Mr Jordan : Typically, as with Operation Elbrus we talked about before, there are a whole lot of opaque and difficult companies and people put in, between real controllers, the controlling mind and all of that. All I would say about a register of beneficial ownership is what someone says someone else owns, so—

Senator WHISH-WILSON: There is no way to enforce it.

Mr Jordan : it could be good, but it could just be a lot of stuff that does not really help us. If people want to do the wrong thing, they will put all sorts of different names in places. I am not sure it is a panacea, as such.

Senator WHISH-WILSON: Do I ask petroleum resource rent tax questions to you guys?

Ms Mrakovcic : It depends on the nature of the question.

Senator WHISH-WILSON: It is certainly one industry where I do not think, in relation to Senator Roberts' question, you will be seeing big oil companies in a rush to go back to the US, considering they are not paying a huge amount of petroleum resource rent tax here. What is the estimated total of the PRRT credits for 2016-17? Is that something that you guys are working on? I understand in this year's budget it was around $1 billion per annum—that is what was in the budget papers—but do we have an estimate?

Mr Hirschhorn : I think the number in the budget forecast is $900 million, but I would have to check that.

Senator WHISH-WILSON: That is for 2016-17?

Mr Hirschhorn : I think the forward estimate was a flat $900 million per year.

Senator WHISH-WILSON: I have a similar question about the tax credits. We saw a $40 billion increase in 2015-16 to a total of $238 billion, which the committee heard in evidence. Do you have a forecast for accumulated tax credits for the next financial year or over the forward estimates?

Mr Hirschhorn : We do not forecast that. What we do though is, after companies lodge their returns, aggregate that data. Of course, the key factors which will drive that are any further investment in Australian petroleum and gas resources. We would expect that to be less over the last year, given that the resources are coming close to coming online. There will be augmentation.

Senator WHISH-WILSON: Are you able to forecast it? Is it technically feasible?

Mr Hirschhorn : No. Generally, the tax office is not in the business of forecasts—Treasury are—but it is probably not a number that is particularly useful to forecast.

Senator WHISH-WILSON: And deferred tax—the liability number? You do not think that is—

Mr Hirschhorn : It is in the sense that the Treasury group will forecast the tax, which is more useful than the carry forward credits.

Senator WHISH-WILSON: I am asking about the $238 billion of deferred tax liabilities. Let us say we have about a billion dollars at the moment that has been paid, which is roughly your expectation over the forwards, and we currently have a deferred liability of $238 billion still to be paid at some point in the future. That is 238 times the current liability of $1 billion. I would have thought this would be very important for you to forecast.

Mr Hirschhorn : I think it might be worth clarifying. The $238 billion is the amount of expenditure which is available to offset future incoming revenue payable to the PRRT. It is not future tax payment; in a sense it is a carried-forward loss.

Senator WHISH-WILSON: Could you call it a tax credit?

Mr Hirschhorn : It is more a carried-forward deduction than a credit. There has been testimony in the corporate tax avoidance inquiry and in other places in relation to Petroleum Resource Rent Tax collections over the next few decades. For anything more I recommend you go to Treasury or indeed the independent Callaghan review, which spent a lot of time modelling how the gas fields would pay PRRT in future.

Ms Mrakovcic : We have responsibility for forecasting PRRT. We basically take into account recent experience, the revenues and the forecast revenues. We take into account, understand and know what expenditure is being carried forward, and we take into consideration any knowledge that we have from consultation with industry et cetera to gain some idea of how it will be expended, but essentially we rely on the information that we get and recent experience.

Mr Brine : Our models for forecasting PRRT revenue are reasonably simple base-and-growth models. We have a small number of taxpayers paying PRRT. We consult with the industry, the department and sources in the private sector to get a sense of volumes of production from those projects, what is happening with prices, and we feed those into the growth rate we apply to the current receipts. I am conscious that much more work was done on the longer term PRRT collections as part of the recent review. Mr Francis might be able to speak about that.

Senator WHISH-WILSON: The committee is going to look at that. I think we are going to hold a separate hearing and call in the Callaghan review people to give us that evidence, but the companies themselves in Perth a few weeks ago could not tell us exactly how much they were expecting to pay and over what time period either. It is such a large deferred tax deduction. There must be budgetary impacts here. We are talking about hundreds of billions of dollars.

CHAIR: How is the Tax Avoidance Taskforce going to operate? How much revenue is it expected to raise? How is it resourced? How many officials does it employ? How many audits do you already have under way?

Mr Jordan : I will have my colleague go into that detail. We are well on the way to recruiting the specialists. That has been longish and quite difficult, because there is no liquid market of international tax specialists, transfer pricing specialists and people with large corporate experience of structuring and so forth. Because of the flexibility we are providing, we have attracted some really good people at a very senior level that would never necessarily come and work for us on a full-time basis. I had an idea that we have rolled out, which someone gave the name Opening Doors. That tries to provide, typically for females who have reached senior management level in big firms—which is client centric and where everything has to be done immediately—and had one or two kids, arrangements that are more conducive to part-time work. So we are offering work from nine till three and no school holidays, and some of that work can be done from home. We are trying to design a work pattern and attract talent that we would never otherwise get. I think we have had about 30 really highly skilled people come on board who can fit that nine-to-three, no school holidays and a bit of work at home model.

CHAIR: If only we did that in the Senate!

Mr Jordan : It has really attracted some fantastic talent. It is an initiative that we are going to grow because we think we can take on some good people we would never otherwise get. Mark, can you give us a quick update.

Mr Konza : The task force covers more than 1,000 staff who are deployed in our public groups and international division, our private groups and high-wealth individuals division, our smarter data area, our law area and a few other smaller areas as well. The funding that we received gave us the opportunity to increase our staff by an additional 253 in 2016-17, and that builds up to an aggregate total of an additional 390 by 2020. Of the 253, we have currently filled 220 positions and we have current recruitment processes in train to pick up the rest. Among those 220, we have brought in 80 external recruits, including 16 legal and accounting tax specialists. They are the people the commissioner was referring to who are already advanced in their careers and are joining us. They provide guidance and mentoring to our graduates and less-advanced staff. So the task force is building up very well and the results to date have been very pleasing. Given we are a little behind on the staffing, it has been gratifying that the results, nevertheless, show that we are right on target—

Mr Jordan : Can you mention the figures?

CHAIR: What are the results?

Mr Konza : I do not have the figures to hand on the liabilities for the task force itself, but the task force has been working on the large multinationals. The 'seven for $2.9 billion' has been a real focus of the task force. The MAAL has raised $400 million in income tax and $200 million GST and brought an additional $6.4 billion worth of income onshore from next year onwards. It has also been working on the diverted profits tax, which starts on 1 July this year.

CHAIR: Is it fair to say that you have surpassed your forecast collections?

Mr Konza : No. The collections that we have received have to be attributed to the original funding base that we already had—

CHAIR: Sorry. Order! I am having trouble hearing the answers.

Mr Konza : The task force funding continued a major funding source for us and added extra to it, but there was a base funding that was already in place—a base staffing of the ATO. When we get the results, we attribute the results to both the base and the task force, to make sure that everyone in the ATO has to earn their keep. When we attribute the over $4 billion that has been raised in regard to multinationals this year, it means that the task force is ahead of schedule but has not met its overall obligations for the whole period.

CHAIR: Thank you. We look forward to hearing about its progress.

Mr Jordan : I do not want to understate the $6.4 billion of income that is going to come in, as agreed. That is agreed. There are no court cases; these people have agreed with us to restructure to put more income into Australia that reflects the actual economic activity. That is pretty cool to get that bit agreed. So that is not like a liability; that is just that each year now there is going to be $6.4 billion more from these companies being thrown into the Australian economy as income.

CHAIR: Mr Jordan, I am conscious of the fact that I kept you for five minutes more than we said we would. Senator Whish-Wilson, do you have a question for the commissioner specifically?

Senator WHISH-WILSON: No, I do not have a question. I just want to get something on the record: just to congratulate the tax office for their win against Chevron recently. I believe that this is the first estimates since that occurred. Fingers crossed for the High Court challenge.

Mr Jordan : We still need to get through the High Court.

Senator WHISH-WILSON: Yes—fingers crossed.

Mr Jordan : And there are a number of other cases lined up ready, depending on what happens there. So I appreciate that. I would like to thank the committee for what I believe is the sensitivity you have shown us during a very difficult that we at the ATO are going through. So I thank you for that.

CHAIR: Thank you, Commissioner. There are a couple of questions for the ATO, but the commissioner can leave. Is that possible?

Mr Jordan : Who is coming?

Senator Cormann: Who has to go?

Mr Jordan : Who has to go? I have to go. You will do it for another hour?

Mr Mills : Yes.

CHAIR: Thank you. It will not be another hour; I promise you that. But there are a couple of outstanding questions.

Senator ABETZ: I have a bracket of questions relating to tax deductibility for organisations that claim to have that status. In particular, I refer to the organisation referred to as Market Forces, who advertise that donations to them can be tax deductible. If I can take you through what has been gleaned from the internet, Friends of the Earth has a number of affiliate members.

Mr Mills : Before we get too much further down this path, we cannot comment on individual organisations.

Senator WHISH-WILSON: Would this be the Department of Cultural Policing? Perhaps another session.

Senator ABETZ: Well, are you aware that organisations are portraying themselves as being tax deductible to the public in circumstances where they themselves are not tax deductible? If you just bear with me in relation to that, if we have a look at the ABN and the current details of the ABN for Market Forces, they are not entitled to receive tax-deductible donations. The Australian Charities and Not-for-profits Commission tell us there is no record of Market Forces with them, but we are told you can become a Market Forces donor, and they tell us:

Being a Friends of the Earth affiliate, 15% of donations goes to cover the costs of administration and finances that FoE does for us, leaving 85% of donations we receive going directly to funding our campaigns and core staff. You won’t find a better conversion rate from funding to action than that. All donations over $2 are tax deductable.

So is this not really an exercise in money laundering, where a donation is made to Friends of the Earth, who then clip 15 per cent and pass on 85 per cent to a clearly non-deductible organisation? I was wondering whether these types of matters excite the interest of the Australian Taxation Office. How many such cases has the Australian Taxation Office dealt with, and are you willing to have a very close look at this Market Forces scam, as it seems, where they hold themselves out to the public as being tax deductible but they are not so registered? They are not tax deductible, but they launder the money through Friends of the Earth.

Mr Mills : I will make a couple of observations, and I might ask my colleague Will Day to make a couple of observations as well. As I said, we cannot talk about the specific organisations involved, but as a general proposition, in order to have deductible gift recipient status, obviously organisations need to have a constitution that complies with requirements to be in the space. That means that objectives have to be appropriate. Obviously if they are not acting in accordance with the objectives that are laid out for them then they could lose that status.

Mr William Day : Part of the responsibilities of our private groups and high-wealth individuals business line is to look at the charity and not-for-profit sector. I cannot comment specifically on those particular matters that you have raised but I can say that we do work closely with the Australian Charities and Not-for-profits Commission. We undertake monitoring and compliance activities to give confidence to the community as well as work closely with organisations in the not-for-profit sector to make sure that they do manage their tax affairs.

Senator ABETZ: Is there a capacity for organisations to basically pass on or delegate their DGR status to affiliates or autonomous member organisations? That seems to be the crux of this what I think is a scam, where an organisation is not registered with a charities commission, it is not tax deductible in its own right, but you donate through Friends of the Earth. They clip off 15 per cent and then this affiliate gets money at 85 per cent. Given that the donor, one assumes, gets a 30 per cent or 40 per cent or whatever income tax deduction, that is a good scam all around, especially in this case for market forces.

Senator WHISH-WILSON: What is your question, Senator Abetz?

CHAIR: Order.

Senator WHISH-WILSON: You are giving him a rant, Chair. He has had a five-minute rant on this. What is his question?

CHAIR: You have had plenty of rants here today, Senator Whish-Wilson, so just back off.

Senator ABETZ: Could I invite the ATO to have a very close look at this matter. I am happy to share the documents with you. Should I be sending them to you, Mr Day?

Mr William Day : Yes, that is appropriate. I would be happy to receive them.

Senator LEYONHJELM: I have got two series of questions. One is in relation to the increase in excise on loose leaf tobacco. Do we have the right people here? The increase in excise on loose leaf tobacco in the budget, just remind me, when is that due to take effect?

Mr Dyce : I will have to check on that.

Senator LEYONHJELM: It does not matter.

Mr Dyce : I can take it on notice.

Senator LEYONHJELM: When you have checked on it, if you could just let me know. As I understand it—and correct me if I do not understand this correctly—the increase in tax on loose leaf tobacco is based on a recalculation of the amount of tobacco in an ordinary cigarette. Is that correct?

Mr Dyce : That is my understanding.

Ms Mrakovcic : It is probably more appropriate for Treasury to answer this. My colleague, Ms Purvis-Smith, will answer it.

Senator LEYONHJELM: My understanding is there has been a recalculation of the amount of tobacco in a cigarette and that that has been used as a basis for the increase in excise on loose leaf tobacco. Is that right?

Mrs Purvis-Smith : I might take you through a few steps. There have been two ways of taxing excise, one for loose leaf tobacco and one for stick tobacco—cigarettes. The intent of the change is to ensure that manufactured cigarettes and roll-your-own tobacco receive comparable tax treatment. The per stick rate is an excise rate that has a definition in the law—it is, in stick form, not exceeding 0.8 grams of tobacco. So it is the maximum rate of grams of tobacco content that can be in a stick of cigarette.

One of the reasons that this was done was so it was not weighed. This was a simplicity measure when it was introduced so that each and every stick of cigarette did not need to be weighed individually to work out how much tobacco was in each and every stick. So it was a maximum. It was up to a maximum of 0.8 grams of tobacco.

So, in making equivalent the excise rate on cigarette sticks to that on the loose-leaf tobacco, an assumption is used of the maximum amount of tobacco in a cigarette. That is in the act. We became aware that this provided relatively favourable tax treatment to loose-leaf tobacco and roll-your-own tobacco because the 0.8 grams, the maximum amount, was used to make it equivalent. So, in the process of making the excise equivalent, this makes it equivalent by using a rate of 0.7 grams per tobacco stick to work out how much excise is paid on loose-leaf tobacco.

Senator LEYONHJELM: How did you come to the conclusion that 0.8 grams per stick was not the right amount?

Mrs Purvis-Smith : From a range of forms and a range of sources. We are on an IDC with the department of immigration, who look at tobacco and illicit tobacco. As well, industry are part of that process. We became aware that the 0.8 was the maximum, and using the maximum meant that the roll-your-own was being treated more favourably than per sticks.

Senator LEYONHJELM: You did not answer the question. How did you come to the conclusion that 0.8 was too high? It has now been reduced to 0.7. How did you come to that conclusion?

Mrs Purvis-Smith : We took information from a range of sources.

Senator LEYONHJELM: What information did you take?

Mrs Purvis-Smith : There is information from the material on the IDC with the department of immigration. We also took information from industry as well. Putting that information together, we also found that the assumption used was the maximum amount. The maximum amount was not the average amount in each stick of tobacco; it was the maximum amount possible. So making it equivalent at a maximum amount meant that the roll-your-own was being treated more favourably.

Senator LEYONHJELM: Did you weigh any cigarettes?

Mrs Purvis-Smith : No.

Senator LEYONHJELM: So who did weigh them?

Mrs Purvis-Smith : Industry is part of the information and part of the IDC with the department of immigration, and they have access to data that we do not have. We also have access to ingredient data and information. We took a view that the having 0.8 as the maximum amount, the maximum rate, was treating roll-your-own tobacco in a relatively more favourable form than the per stick rate.

Senator LEYONHJELM: What do you understand is the average weight of tobacco per stick now?

Mrs Purvis-Smith : The average rate is very difficult to form because we do not ask companies to weigh each and every individual stick.

Senator LEYONHJELM: But if you have not weighed them and you have not got data on weight, how do you know that it is not 0.8?

Senator Cormann: I think it would be very inefficient if the government had to weigh individual cigarettes in coming to a view as to what the appropriate revenue—

Senator LEYONHJELM: What I am trying to establish is: how do you come to an average if you do not weigh anything?

Senator Cormann: The policy objective here is to align the tax treatment of roll-your-own cigarettes.

Senator LEYONHJELM: You are obfuscating. I am trying to get to the basis of a decision here. Stop obfuscating.

Senator Cormann: I get your point. There is no obfuscation. I am just putting into context that the—

Senator LEYONHJELM: I know what the context is all right.

Senator Cormann: The policy objective is to align the tax treatment. The implied suggestion in your question is that somehow the government should weigh individual cigarettes, and obviously we do not support that proposition.

Senator LEYONHJELM: I am glad to hear that. It would be highly inefficient and the chances of me supporting that proposition would be less than zero.

Senator Cormann: That is the implication of your question.

Senator LEYONHJELM: No, it is not. What I am trying to work out is how the Treasury comes to the conclusion as to the average weight of a stick of cigarettes.

Senator Cormann: The officer has now several times—

Senator LEYONHJELM: No, she has not answered the question.

Senator Cormann: If I may, the officer has now on several occasions put to you that this is based on expert advice and that they have gone through a process where they have developed these assumptions and this methodology. This is based on the best available advice in the circumstances.

Senator LEYONHJELM: Indeed. And I am asking some questions as to what that methodology was.

Senator Cormann: She has talked you through that methodology.

Senator LEYONHJELM: Okay, so repeat that methodology for me, Minister, because I never heard it.

Senator Cormann: She has talk you through the methodology and that is that—

Senator LEYONHJELM: In that case, repeat it for me, please.

Senator Cormann: Please! Through a relevant interdepartmental committee involving the immigration department and Treasury officials, and involving consultation with industry stakeholders and relevant experts, assessments were made as to what the appropriate number should be. That is the basis on which—

Senator LEYONHJELM: An assessment?

Senator Cormann: Well, a judgement has been formed that 0.7 grams is the more appropriate number.

Senator LEYONHJELM: So the previous tax was based on an assumption that there were 0.8 grams of tobacco in a stick of cigarettes. Now there is an appropriate—what was the term?—judgment for which neither you nor the officer provided data or a basis for reaching it other than that it was the judgement and that a more appropriate figure is 0.7 grams. What I would like to understand is how you arrived at that figure of 0.7 grams. What did you do? Who weighed cigarettes and what is the average weight of tobacco in a stick of cigarettes?

Ms Mrakovcic : Ms Purvis-Smith has indicated that that was information we received the context of attending an interdepartmental committee that was looking at this broad range of issues. We obviously rely on industry consultation and information provided by experts in these fields. It is not a matter of coming to a judgement. It is coming to an awareness that this is information that has been provided to us and there may be a need to re-examine the way that the existing policy works. So, in a sense we received the information, there was a process it went through and a policy judgement was made, and that is a matter for government.

Senator LEYONHJELM: Do you actually have an average figure that you are working on for the amount of tobacco per stick of cigarettes?

Mrs Purvis-Smith : It is very difficult to get an average per stick, but we know that the 0.8 is not an average; it is a maximum—the maximum number of grams of tobacco in a stick of cigarettes. The equivalisation assumption used the maximum amount of tobacco allowable in a per stick cigarette.

Senator LEYONHJELM: I understand your point about that. What I am getting at is could it be 0.74 or 0.75 or 0.76 grams?

Mrs Purvis-Smith : An awareness and a judgement were made as to coming to 0.7 grams. We used as much information as we could to arrive at 0.7 grams.

Senator LEYONHJELM: The other aspect about this, though, is that if 0.8 were too high how do we know that 0.7 is not too low? The difference is 14.3 per cent. It amounts to an increase in tax of 14.3 per cent. I would like to know whether it really was a decision based on data or was it just an arbitrary figure or near enough.

Ms Mrakovcic : We would have received information from others that 0.7 would be more appropriate. The only thing I can do is offer to take the question on notice to provide you with additional information.

Senator LEYONHJELM: All right.

Ms Mrakovcic : But, just to be clear, that issue around the judgement I mentioned was not a policy issue. It is basically that Treasury, as a department, does not have the practical experience to come to that judgement. We would be informed by the information that others would be giving us on what would be an appropriate view as to the amount of tobacco in a cigarette. That would inform the advice that we would put.

Senator LEYONHJELM: I would like to leave this issue as a question on notice. What is the average that you were advised? I accept that you did not go and gather the data and weigh cigarettes and all that yourself. What is the average that you were advised? What led you to believe 0.7 is closer than 0.8. The point I am trying to make here is that if you increase the tax on loose-leaf tobacco by 14.3 per cent, without good data to say that 0.7 is more reliable than 0.8, than it is a policy decision.

CHAIR: Those questions have been taken on notice.

Senator KETTER: What work has Treasury done in relation to modelling the economic benefits of the government's centrepiece of its economic strategy, which is the company tax cuts? Has the Treasury done any economic modelling in relation to the company tax cuts that have already been legislated?

Senator Cormann: Treasury does not conduct modelling after the parliament as legislated a measure. We had an extensive conversation in the context of the 2016-17 budget, and subsequently, about the measure that was included in the 2016-17 budget to reduce the business tax rate for all businesses progressively over a 10-year period, to 2026-27, down to 25 per cent. At the time the proposition that was put by Treasury was that the tax package as a whole would, over the long-term, permanently add one per cent to the size of the economy. That is course is something that was extensively discussed at the time.

Senator KETTER: My question relates to that part of the package that has been legislated.

Senator Cormann: You do not conduct modelling after you have legislated a measure. Modelling is undertaken as you put together new measures, new policy proposals, because you want to change policy. We have not changed policy. What we have done is implemented the first three years of a 10-year plan. In fact, we have been able to secure passage through the parliament of 100 per cent of the plan that falls due during this term of parliament. Obviously, with your modelling you focus on those areas where you want to consider changes in policy and not those areas where you continue to implement existing policy. The question for the Labor Party is one of whether you want to increase taxes on small and medium-sized businesses. That is really the question. The question is whether you want to increase taxes on small and medium sized businesses, whether you want to put jobs at risk, whether you want to put investment at risk or whether you will support the business tax cuts that have already been legislated by the parliament.

Senator KETTER: Ms Mrakovcic, how do you put a budget together over a period of time without having some sort of economic modelling to form a basis for the budget?

Ms Mrakovcic : That is a very broad question. I will make one observation that is relevant to the question you asked. In the past there have been questions about the cost of the measure, with respect to the cut in company tax rates, and we have mentioned a number of times that the costing does not include the second-round effects in terms of the growth dividend—the benefits in terms of higher economic growth and therefore the high revenue that comes from that. That reflects the approach that is actually taken to the way the budget is put together, and the modelling of that. I think we traversed this ground last time. You have the estimates that are put together over the budget and forward estimates period of four or five years. There is a difference between the forecasts and the projections. Then there is the approach that is taken in the context of preparing the medium-term fiscal outlook. Then of course there are broader considerations if we are doing modelling well beyond that period. In a sense, there is no right answer. It is a case of understanding the context in which the modelling is being done or the budget is being put together.

Senator Cormann: The specific answer to your question is: you do not in each budget remodel every measure from previous budgets. What you do is consider the policy positions and programs as they stand, and you form a judgement about whether there has to be any variation in your estimates as a result of economic or other parameter variations. But you model the effect of policy change when you make a decision about a policy change. That can be a policy change on the revenue side or the spending side of the budget. It can be a policy change in relation to capital investment. But you do not keep remodelling ad infinitum, at every budget and budget update, every single measure of previous budgets. That is not something your government did, it is not something that our government does, and it is not something that would, with all due respect, be practical.

Senator KETTER: Ms Mrakovic, are you familiar with what the average corporate tax rate in Australia is?

Ms Mrakovcic : Are you asking whether I have an understanding of what an average corporate tax rate is?

Senator KETTER: Is it correct that the average corporate tax rate is about 17 per cent in Australia? I am looking at the March 2017 Congressional Budget Office report, International Comparisons of Income Tax Rates. Are you familiar with that?

Ms Mrakovcic : This is by the Congressional Budget Office in the US?

Senator KETTER: Yes.

Ms Mrakovcic : I am not aware of that specific document, no.

Senator KETTER: This document reports that Australia's average corporate tax rate is 17 per cent and the effective corporate tax rate is 10.4 per cent. Page 3 of the report says:

Companies consider the average corporate tax rate when deciding whether to undertake a large or long-term investment in a particular country.

Are you familiar with that view? Do you agree with it?

Ms Mrakovcic : When a company makes a decision to invest in a country, it takes into account a very broad range of circumstances. Every company would look at what the corporate tax rate is, but they would also need to come to a view about a broader range of issues, including what deductions might be available to them. They might look at broader issues like the reliability of supply. There are a whole gamut of tax and non-tax issues that go to decisions being made. But I take the point that, in the context of the CBO paper you are quoting, they would have been looking at the tax rates and making an observation on the tax rate issue.

Senator KETTER: Could you take that on notice?

Ms Mrakovcic : I am happy to.

Senator KETTER: There is another view expressed in this document:

The effective corporate tax rate, which is a measure of the tax on a marginal investment, is more informative for decisions about whether to expand ongoing projects in those countries in which a company already operates.

Ms Mrakovcic : The observation has often been made that, if you are not doing business in a country and you are exploring broader opportunities, you may not have sufficient information on the detail of the tax system and what features of it may or may not be available to you. So the headline rate may be the thing you focus on. The more familiarity you have with a country, especially if you have existing operations there, the more likely you are to have a more informed understanding of that country's tax system. That may be a different view.

Senator KETTER: Could you take that on notice as well?

Ms Mrakovcic : Yes, I am happy to take that question on notice.

Senator KETTER: I will turn to comments that have been reported today by Professor Gregory of the Australian National University, who, basically, is saying that we are heading towards a budget crisis. Are you familiar with this article and Professor Gregory's comments?

Ms Mrakovcic : I did read the paper this morning.

Senator KETTER: It says that the 2017 budget is built on heroic assumptions about company taxes and wages growth returning to pre global financial crisis levels.

Senator Cormann: We, obviously, disagree with this. We went through this in some detail with the secretary of Treasury, Mr Fraser, yesterday. As Mr Fraser repeatedly put to this committee, the budget is based on the best forecast and best estimate, based on the best available information and advice. Obviously, forecasts are forecasts; they are not actuals. We stand by them. As we indicated yesterday, if you look at the relevant economic growth forecasts of the RBA, if you look at the relevant economic growth forecasts of the International Monetary Fund, for example, you will see that ours are very prudent and appropriate forecasts.

Senator McALLISTER: I am hoping that we can talk a little bit more about guaranteeing Medicare, establishing the Medicare Guarantee Fund measure on page 167—

Senator Cormann: We talked about that in fiscal yesterday.

Senator McALLISTER: We did. I am interested in the revenue implications and the profiling of that. Will you confirm that an individual on $50,000 of taxable income will pay more under this measure?

Ms Mrakovcic : Sorry, an individual on $50,000—

Senator McALLISTER: Of taxable income will pay more under this measure.

Senator Cormann: Than who?

Senator McALLISTER: Than they would had the measure not been introduced.

Senator Cormann: Obviously, unless you are exempted from the application of the Medicare levy. Incidentally, the exemption arrangements are the same as were in place under your period in government when you increased the Medicare levy by half a per cent—except that we have continued annual indexation of the relevant income threshold. For those Australians who are not exempted from paying that Medicare levy, the less you earn, by way of taxable income, the less you pay. And the more you earn, by way of taxable income, the more you pay. This is why the previous Labor government thought that this was a fair way to ask Australians to share in the cost of the National Disability Insurance Scheme, which all Australians potentially benefit from. And that is why we have done precisely the same—

Senator McALLISTER: Chair, are you going to let him go on?

Senator Cormann: I am answering your specific question.

Senator McALLISTER: I am simply asking for a yes or no. So an individual on $50,000 of taxable income will pay more under this measure.

Senator Cormann: An individual—

Senator McALLISTER: I will take that as a yes.

Senator Cormann: I am answering your question. An individual on a taxable income $50,000 will pay less than an individual on $200,0000 of taxable income. That is why, in the judgement of this government, consistent with the judgement of the previous, Labor, government, we believe that this is a fair way to ask Australians to share in the cost of fully funding the National Disability Insurance Scheme—which is a scheme that all Australians potentially benefit from.

Senator McALLISTER: I am going to take that as a yes.

Senator Cormann: If you say that again, I will correct you again. Somebody who is earning $50,000 of taxable income will pay less—

Senator McALLISTER: Will pay more—

Senator Cormann: than somebody who earns $100,000 of taxable income, who will pay less than somebody who earns $150,000 of taxable income, who will pay less than somebody who earns $200,000 of taxable income. The point—

Senator McALLISTER: But more than they would have been paying had you—

Senator Cormann: It is very interesting—

CHAIR: Order! Can we have the question answered, please. Everyone is getting a little tetchy. This is a very long session. Let us get on with it. Everybody needs to get on with it.

Senator Cormann: This is why four years ago Labor increased the Medicare levy by half a percent for all Australian taxpayers, who were not exempt at that time from paying the Medicare levy, and we are doing the same. The principle is: the less you earn, the less you pay. The more you earn, the more you pay. And if you are currently exempt from paying the Medicare levy you will continue to be fully exempt.

Senator McALLISTER: This is a factual question: will a person on $60,000 a year pay more as a consequence of this measure than they would otherwise have paid?

Senator Cormann: I will continue to take these questions on behalf of the government. Somebody on $60,000 a year will pay less—

Senator McALLISTER: Will pay more than they would have otherwise—

Senator Cormann: in the additional Medicare levy than somebody on $100,000 a year. And somebody on $100,000 will pay less than somebody on $150,000 a year—

Senator McALLISTER: That is the answer to another question but not the question I am asking.

Senator Cormann: That is of course why this is a very fair way to ask all Australians to share in the cost of what is a very important scheme—

Senator McALLISTER: It is a pretty simple question: will they or won't they pay more? You do not want to talk about it. You just—

Senator Cormann: Labor introduced the National Disability Insurance Scheme without fully funding it. It is quite cruel to create the expectation for people that a particular service will be available when it is not fully funded.

Senator McALLISTER: Your government has been threatening to—

CHAIR: Order! I do not think we are getting anywhere. We might just cease with this line of questioning for the moment. We will move on to questions from Senator Rhiannon.

Senator RHIANNON: Is part of the rationale for changes to MITs in relation to housing to encourage foreign investment?

Senator Cormann: It is to encourage additional investment in social housing, but I will let Treasury take you through it.

Ms Mrakovcic : As the minister indicated, the government is introducing a new investment vehicle in order to encourage affordable housing.

Senator RHIANNON: But it is to encourage foreign investment to some extent, isn't it?

Ms Mrakovcic : Certainly foreign investors can invest in a managed investment trust.

Senator RHIANNON: And it has been made more attractive to encourage that. It has been made more attractive, so that would appear to be part of the motive.

Senator Cormann: The objective is to increase supply of affordable housing, and as such this is one measure of a comprehensive package of measures—

Senator RHIANNON: This is one way to achieve that.

Senator Cormann: to boost investment in affordable housing. That is right.

Senator RHIANNON: If so, how is that consistent with the government's other proposal to discourage foreign investment in Australian real estate?

Senator Cormann: You have to be a bit more specific.

Senator RHIANNON: You are restricting foreign investment in new apartment buildings to less than 50 per cent.

Senator Cormann: There is still a substantial amount of foreign investment that is able to be directed into these relevant developments.

Senator RHIANNON: But you have another trend going on there—there is one to encourage and one to discourage.

Senator Cormann: We are not discouraging investment. We are limiting foreign investment in a particular category of development. The overall effect of the package is that it will facilitate additional investment from a variety of sources, including, as far as the managed investment trust measures are concerned, in the form of foreign investment, in order to boost the supply of affordable housing.

Senator RHIANNON: But, to achieve that, what is the government's estimate of the additional affordable housing supply from managed investment trusts?

Senator Cormann: I think we went through this yesterday and took a whole series of questions on notice in relation to this. We will cross-reference it, but I am happy to take that question on notice again to see whether we can add some members to that for you.

Senator RHIANNON: It is also relevant here. What happens to the community housing providers and tenants after three years if the investor wants to sell to realise a capital gain?

Ms Mrakovcic : I would assume that there would be an ongoing stream of investors who would be signing up to these measures in order to provide affordable housing. So I do not think it will be a one-off in and out. I think there is a sense that investors interested in contributing to or investing in affordable housing would sign up to these community housing providers and become part of that investment stream into affordable housing. Ms Davy, I am not sure if you can add anything to that.

Ms Davy : I can add something. The affordable housing MIT is required to hold the property for at least 10 years, so that should provide consistency of tenancy.

Senator Cormann: The beauty of the managed investment trust is that investors can move in and out. So it is not as if, because somebody wants to cash out, the managed investment trust will not continue to operate. That is a very important point here.

Senator WHISH-WILSON: [inaudible]

Senator Cormann: That is a different question. The implication of the question by Senator Rhiannon was that because an individual investor wants to leave somehow that puts the overall investment at risk, and that is not true.

Senator RHIANNON: I just want to understand this because it seems as though there have been some contradictory statements there. Ms Mrakovcic, you said that you are expecting an ongoing stream signing up and that it will not be just one-offs. I certainly was not suggesting it would be one-offs. That is precisely what I am trying to understand. My question was: what happens after three years if the investor wants to sell to realise a capital gain? That is something that you need to come to grips with and you have not answered.

Ms Mrakovcic : Can I just clarify: are you talking about the managed investment trust—

Senator RHIANNON: Yes.

Ms Mrakovcic : or are you talking about the ability for individual investors to gain a benefit in terms of CGT if they invest in affordable housing? Both measures were actually in the budget. I may have misinterpreted—

Senator RHIANNON: I am going to go on to CGT, but I am still on MITs with regard to that question.

Ms Mrakovcic : Just to clarify, my answer went more broadly to the investment in affordable housing by individuals.

Senator RHIANNON: Okay, then I will ask it again. What happens to the community housing providers and tenants after three years if the investor wants to sell to realise the capital gain?

Ms Davy : That sale of the investment in the MIT should not affect the tenants and the community housing providers. To qualify for concessional treatment under the affordable housing MIT, the investment MIT has to hold the property for 10 years. If it sells the property in a period sooner than 10 years then there will be a 30 per cent final holding tax rate on the proceeds of any capital gains. But investors in the MIT who hold units in the MIT, if they are individual resident investors, can get a 60 per cent CGT discount on the sales of their investment in the MIT if they hold that for at least three years.

Senator RHIANNON: So if you hold it for at least three years this CGT benefit kicks in. Is that what you are saying?

Ms Davy : Yes.

Senator RHIANNON: I want to clarify this some more. There is a proviso in the qualification for the 60 per cent CGT discount that the discount will be pro rataed for periods when the property is not used for affordable housing purposes. Does that mean that the property's tenancy and rent levels can change?

Mr Brine : I think that might be a feature of the alternative policy that the deputy secretary mentioned earlier. There were two policies around affordable housing. One is a tax incentive for investments in affordable housing where you have to hold the property for three years and make it available below market rates through a charitable body. If you make it available for less than three years that capital gains tax is pro rataed. There is a separate policy around managed investment trusts where a managed investment trust manages a suite of properties and people buy and sell the units in that managed investment trust. But that managed investment trust needs to hold the property for 10 years. So I think it might be possible we have the two slightly mixed up.

Ms Mrakovcic : Yes, I was just going to clarify the same point. I think that that description that I heard actually relates to the operation of the individual investor in affordable housing.

Senator RHIANNON: Thank you for clarifying that. I will need to read more on this. Is this in one of those summary documents that you have that you can provide us with a link to? I think I would like to go back and read it and then come back and put questions on notice.

Ms Mrakovcic : We can provide you with the detailed information on this.

Senator RHIANNON: Thank you very much. I know there are two reforms to negative gearing—investors can no longer claim travel to their property as a deduction and only the original investor can claim the depreciation on appliances. Will these reforms have any impact on house prices? Have you made an estimation with regard to that?

Ms Mrakovcic : These are largely seen as integrity measures.

Senator RHIANNON: What does that mean?

Senator Cormann: There was a view that in particular the deduction that was available for the cost of travel to an investment property was not being used for its intended purpose and that in all of the circumstances it should not continue as an allowable deduction. When it comes to depreciation for relevant plant and equipment on relevant properties, the judgement is that, if you pay for it yourself, you depreciate it and, if you do not pay for it yourself, you do not depreciate it.

Senator RHIANNON: The capital gains tax discount has gone from 50 to 60 per cent. Has Treasury accounted for a possible inflationary effect on prices from this increase to the discount?

Ms Mrakovcic : Do you mean in relation to the costing?

Senator RHIANNON: To house prices. I am just trying to understand. You have made a decision, and it is quite a big decision. I think many people were expecting it to go the other way. You have increased it. On what basis have you increased it? What did you figure out it would do to the market?

Ms Mrakovcic : I go back to the point that the intention of the measure was to promote investment in affordable housing.

Senator Cormann: Again—and we went through this with you yesterday in Fiscal Group in some detail—the intention and the objective of the package overwhelmingly is to reduce housing affordability pressure by facilitating an increase in the supply of housing. We expect that an increase in the supply of housing will have the effect of reducing housing affordability pressure. We will of course monitor the effect of the policy measures moving forward and, if and as required, will make further judgements.

Senator RHIANNON: That did not really give us much detail, Minister.

Senator Cormann: That is because it is very difficult to make the sorts of assessments that you are seeking. You are essentially asking us for a theoretical assessment of what will happen in a market where there are a lot of moving parts. That is not a straightforward proposition.

Senator RHIANNON: I think that is why the foundation of your affordable housing package is sand at the moment, as we found out yesterday.

Senator Cormann: I disagree. The foundation is to facilitate an increase in supply in order to reduce housing affordability pressures. It is the most substantial housing affordability package by a federal government ever.

Senator RHIANNON: Just because you declare it as 'housing affordability' does not mean it will deliver that. You have not been able to consolidate or detail how it is going to deliver it.

Senator Cormann: Let us go back to basic economics. Basic economics is that to the extent that you have an affordability issue it is because demand exceeds supply. If demand is higher than supply, prices will go up. If supply is higher than demand, prices will go down. If you want to make something more affordable in the context of strong and growing demand, you have to make sure that supply can keep up with demand, and that is precisely what the government is seeking to do through this package. The government is seeking to boost supply in order to take pressure off housing affordability in the context of strong demand in certain markets around Australia—I hasten to add, not all markets around Australia but certain markets around Australia.

Senator RHIANNON: Minister, you have just detailed there that, by increasing supply, prices will go down—your very words—and that price is keeping up with demand. Does Treasury think and do you think that these measures will affect prices?

Senator Cormann: You are actually again verballing me.

Senator RHIANNON: No, I am not. I am just repeating your lines back to you.

Senator Cormann: I will tell you precisely what I said. I said that, in a market where supply exceeds demand, prices will go down. That is basic market dynamics.

Senator RHIANNON: Yes, 101.

Senator Cormann: Exactly. What you then said was that I have somehow suggested that, because we are taking measures to increase supply, prices will go down. What I am suggesting to you is that, because we are increasing supply, we are reducing pressure on housing affordability. Obviously there continues to be both supply-side and demand-side parts of the equation. We believe that demand for housing will continue to be strong moving forward, but, to the extent that we can increase supply to help ensure that it can absorb that strong and growing demand moving forward, it will mean that housing affordability pressures will be reduced.

CHAIR: Senator Dastyari, take us home to three o'clock, and then let these poor people go home.

Senator DASTYARI: We will see how we go, depending on the answers. Ms Mrakovcic, fill me in on the details here: how long have you been leading Revenue Group now?

Ms Mrakovcic : One year—or just over one year.

Senator DASTYARI: Okay. Minister Cormann, I am sure you recall this was part of the national debate. About two years ago, the then Treasurer, Mr Hockey, put on the agenda the debate about the taxation arrangements around tampons and how that relates to other matters. Ms Mrakovcic, without my having to traverse old ground, you would be well familiar with the debate that we are talking about here?

Ms Mrakovcic : I would not say that I was well familiar with it.

Senator Cormann: What are your questions?

Ms Mrakovcic : I think I have heard reference to it.

Senator Cormann: What are your questions?

Senator DASTYARI: Two years ago the Treasury, as I understand it—I am not quite sure where in Treasury—did a calculation of what the cost would be of the removal of GST status from tampons.

Senator Cormann: I would have to take that on notice to see whether we can confirm that for you.

Senator DASTYARI: Okay. The information was in media reports two years ago. Ms Mrakovcic, would Revenue Group be the people who would normally do that type of analysis?

Ms Mrakovcic : What type of analysis?

Senator DASTYARI: The analysis if you were to remove GST status from something. Where in Treasury would that be done?

Senator Cormann: Treasury would not ordinarily do such work unless it was tasked to perform such work, and that is then really a question for the government in terms of—

Senator DASTYARI: Well, Minister, two years ago that work was done, and it was a figure of $120 million over four years.

Senator Cormann: I have taken it on notice.

Senator DASTYARI: My question is to Treasury: Ms Mrakovcic, has any other work being done in the past year on this matter, since you have been leading Revenue Group?

Senator Cormann: I will take that on notice.

Senator DASTYARI: They are sitting there.

Senator Cormann: I will take on notice whether any other work was done over the past two years.

Senator DASTYARI: The list of these measures and these matters and how they are classified—is that kept through Revenue Group and then you advise the ATO? How does that work structurally?

Senator Cormann: The point I would make here is that the policy judgements made by the government on the revenue side of the budget are reflected in the budget papers, as they have been reflected in the Mid-Year Economic and Fiscal Outlook before Christmas and as they have been reflected in previous budgets. As you would be aware, the government has not made a decision in relation to the specific issue that you have raised. As such, that really, from the government's point of view, is where the situation currently stands. Now, if that were to change—

Senator DASTYARI: Senator Cormann, that is not quite correct. My understanding of what happened—and I think the information you are giving here is incorrect—is that two years ago the Treasurer took it to the state treasurers and started a national debate with them about this matter. Certain state treasurers were in favour and others were not in favour of this measure happening, and that is where the national debate rested at that point in time.

Senator Cormann: No, no, sorry. What I said was 100 per cent correct. What I said to you was that the federal government has not made a decision to make any changes in relation to the issue that you have raised.

Senator DASTYARI: Then, Minister, that is a decision—

Senator Cormann: No change is reflected in the budget papers for the 2017-18 budget. I am not aware that any change was reflected in any previous budget papers under our government—or under your government, for that matter. If, at a future time, a proposal on this or any other potential revenue related measure were to be put forward, it would manifestly be a matter for government consideration, and, at that time, the relevant work would be done by Treasury.

Senator DASTYARI: Okay. Senator, I want to put this question to you, then. I just want to be clear on this. What you are saying, then, is that it is a matter of federal government policy, not state government policy, and the federal government, to use the language you used, has made no decision to change. I could argue that is 'has made a decision to not change'.

Senator Cormann: There are a lot of conversations about a lot of issues a lot of the time. But (1) the GST—

Senator DASTYARI: But the whole point is—

Senator Cormann: is a revenue source that goes 100 per cent to the states, and (2) there has been no decision by the government to make changes in relation to this. But, as you would be well aware, any changes to the GST, because it is a revenue source that goes 100 per cent to the states, does require the unanimous agreement of all the states. But there is no such proposal that has been put forward.

Senator DASTYARI: That is okay. The point that is important is that obviously the state treasurers in many cases have changed since this debate began two years ago. Particularly my home state of New South Wales is a clear example. I suspect you will find that the NT and other places have changed, and Western Australia has changed as well. Minister, is what you are saying that, as far as you are aware, this is not a proposal that is currently on the table?

Senator Cormann: The states, as you would be aware, did not agree with the proposal that was put forward by Treasurer Hockey at the time—

Senator DASTYARI: Two years ago.

Senator Cormann: and consequently no decision has been made to make the change that you are asking questions about.

Senator DASTYARI: My question then, Minister, is: is this a proposal or idea that is currently on or off the table?

Senator Cormann: Well, it is something that was not supported by state and territory governments and as such, because this is a revenue source that goes 100 per cent to the states, that would ultimately be a question for the states.

Senator DASTYARI: Two years ago, the decision—

Senator Cormann: We have not pursued this again since then as far as I am aware.

Senator DASTYARI: Ms Mrakovcic, can you explain to me how all this works—what is on and what is off the list; that decision—for someone who is an outsider and a layman? I am sure that a lot of work goes into this, so my apologies. For those determinations, is there a list that sits somewhere in Revenue Group that says what is in and what is out? It is obviously not with the ATO. Where does it—

Senator Cormann: In relation to which? You have to be a bit more specific.

Senator DASTYARI: In relation to issues such as the fact that a condom does not attract GST status and a tampon does—I assume there are two lists somewhere on which there is a condom on one and a tampon on another?

Senator Cormann: Under the Intergovernmental Agreement on Federal Financial Relations and Commonwealth legislation, if changes are made to the base of the GST—and your questions go to the base of the GST—

Senator DASTYARI: Yes, it does.

Senator Cormann: they would need to be supported by all of the states and territories. It would also require the passage of relevant legislation by both houses of the Commonwealth parliament. The government undertook to raise the issue that you have raised some years ago, as you have indicated, and to seek the state views on the matter. At the Council on Federal Financial Relations Tax Reform Workshop on 21 August 2015, the states and territories considered a proposal to remove the GST from relevant products. As there was no unanimous agreement at that time, no change to the existing GST arrangements was—

Senator DASTYARI: Minister Cormann, I am in complete agreement with you. Everything you are saying there is matters of fact that we both agree on. The reason why I asked those questions at the start was that I did not think there was a point in rehashing the past. My question—

Senator Cormann: Well, you asked about the past, and—

Senator DASTYARI: I think it is quite a simple question. Either you do not have the answer or you do not want to answer. My very simple question was this. The determination about how an item and legislation are interpreted, so how individual items will fall within GST classification—is that something that is retained by the Revenue Group, or is it contained within Treasury? Or is it the ATO?

Senator Cormann: The law is the law is the law. Obviously, there is a list of exempt categories. In terms of how the ATO administers the relevant GST legislation—

Senator DASTYARI: Yes, that is the question. Thank you, Minister.

Mr Mills : As to the administration, the GST law is relatively clear on a whole range of things, but the specifics in relation to the particular kinds of products you are talking about—I will ask.

Senator DASTYARI: Thank you. That is the question I asked.

Mr Dyce : Obviously our first port of call is the legislation, Senator. As Mr Mills said, some items are specifically categorised in the legislation.

Senator DASTYARI: Are tampons specifically in the legislation?

Mr Dyce : I would have to take that on notice.

Senator DASTYARI: Can you take this on notice for me: are tampons specifically in the legislation? Also, are condoms specifically in the legislation?

Mr Dyce : I will take both of those on notice. Where there is uncertainty about a particular item, obviously we would look at the legislation to help guide us.

Senator DASTYARI: And then who makes the ruling? ATO obviously makes the ruling, with consultation with—

Mr Dyce : The ATO would, but, if it were something sensitive, we would talk to Treasury about it to see if our interpretation was consistent with the intent of the law. That is normal practice.

Senator DASTYARI: Fair enough. Minister, you pointed out that two years ago there was an inability to reach consensus on this matter. That is unfortunate, I believe. Considering that there have been changes to the make-up of the people who would be required to reach consensus, what would the process be for there to be a change?

Senator Cormann: I am not aware that there is unanimous support across states and territories.

Senator DASTYARI: I did not say there was. I am saying that the make-up of the people who are required for unanimous support has changed.

Senator Cormann: Unless there is a level of evidence that there would be a unanimous view now that there was not in the past, this is really a theoretical question.

Senator DASTYARI: My specific question is not a theoretical one; it is the process one. What would the process be?

Senator Cormann: Obviously, if there were evidence of unanimous support, that is a matter that the relevant body could again consider.

Senator DASTYARI: And what is the relevant body we are talking about here?

Senator Cormann: It is the Council on Federal Financial Relations.

Senator DASTYARI: Apologies for my ignorance here, Minister. How regularly does that meet? Is that a body that meets quarterly, twice yearly, annually?

Senator Cormann: It meets twice a year.

Senator DASTYARI: Are they set meetings?

Senator Cormann: These are meetings that are scheduled twice a year.

Ms Mrakovcic : I believe it is twice a year.

Senator DASTYARI: This may be already available on their website.

Senator Cormann: These are publically—people are aware when they make statements.

Senator DASTYARI: If you want to take it on notice and point me to the right direction for where I can find the information—but I assume there is one in the first half of the year and one in the second half of the year, obviously?

Senator Cormann: Broadly speaking, yes.

Senator DASTYARI: The next meeting of this, obviously, considering the diaries of the people involved, would already be set?

Ms Mrakovcic : I honestly do not know. It falls under Fiscal Group with Commonwealth-state relations, but I am happy to take that on notice.

Senator DASTYARI: It is a PM&C issue, not a Treasury issue?

Senator Cormann: No, it is a Treasury issue, but for Fiscal Group, which was here yesterday.

Senator DASTYARI: I apologise. I assumed it was—

Senator Cormann: But we will get that information for you.

Senator DASTYARI: Mr Dyce, you were going to take away some specifics. Can you take a bit more of a broader question on notice as well—and you kind of half answered it here; I am conscious of time—about the issues and items that are not specified, where you have to make calculations about whether something is a luxury item, a food item or a hygiene item, about how and what processes are in place for you to make them? Some of these align; I am sure. Things are more than one thing.

Mr Dyce : We are happy to get material back to you on our normal processes.

Senator DASTYARI: Finally, Minister, the question you took on notice was whether any calculation had been done—

Senator Cormann: Since 2015.

Senator DASTYARI: since 2015. The media reports of 2015 were that it was $120 million over four years. If you come back and the answer is that none has been done, I guess the question that I would put, which you can take on notice, is whether the government was prepared to have another look at the recalculation of that.

Senator Cormann: I will take on notice to see how we can assist you with that.

CHAIR: Thank you to the ATO and the Revenue Group. You may now go. We will call the Inspector-General of Taxation.