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Tax reform: the lessons for tax administration in Australia.



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Tax Reform: the lessons for tax administration in Australia

American Chamber of Commerce

Michael Carmody

Commissioner of Taxation

Sydney

2 May 2000

Tax reform has thrown new focus on tax administration in Australia. It has also accelerated our learnings and given new impetus to reshape the way we operate.

Just to set some context, tax reform involves for us implementing, this year a major restructure of the community's revenue base through the introduction of the GST and related Wine

Equalisation and Luxury Car taxes combined with reduced tax rates and increased family benefits (some of which will be paid through the tax system);

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a significant overhaul of how people pay their taxes during the year through the introduction of the Pay As You Go system for instalments and withholding taxes;

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the introduction of the first stage of a system of binding oral advice for individual taxpayers with simple tax affairs and simple enquiries - extending the certainty offered by the current (written) private binding rulings system to people whose appropriate and preferred method of enquiry is through our infolines.

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registration of over two million businesses for their Australian Business Number and the establishment of the new Australian Business Register;

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registration and endorsement of the exemption and gift deductibility status of charities; ●

an extension of the Diesel Fuel Rebate for off road vehicles and the introduction of the new Diesel and Alternative Grants Scheme for certain on-road transport;

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the recently announced Fuel Sales Grant Scheme for regional and remote service stations; ●

the new product stewardship arrangements for waste oil that from 1 July will see us collecting the levy on relevant oils and paying benefits to companies recycling waste oil in environmentally appropriate ways.

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In addition it is only recently that we took responsibility for excise collection from the Australian Customs Service and the administration of some 200,000 self managed super funds.

And of course next year sees a complete overhaul of the country's business tax system.

All of this is occurring while we continue to manage our present tax, excise and superannuation systems.

Already a number of valuable lessons for the future of tax administration in Australia have been learnt. But it is not just tax reform that is shaping the future of tax administration. Other significant shapers are:

The very role and nature of our tax and revenue systems which requires that they be community based systems.

The expectations placed on members of the community under a self assessment system.

The expectations of the community in their dealings with the public sector in general and the ATO in particular.

The demands on governments for better community services contrasted with pressure on government expenditure and a resistance to tax increases.

The impact of internationalisation and the growth of the Internet and e-commerce.

What then do these issues translate to for the future shape of

tax administration? Put another way what will be the platforms of tax administration over the coming years?

Mutual Respect and Responsibility

Taxes, excise and other charges are by their very nature community based systems. They represent the decision by people to contribute to community assets such as infrastructure, education and medical care, and to fund support for those in need.

Recognition of this community decision is fundamental to the operation of effective tax administration. It tells us that tax administration cannot be something that is left to the ATO. That philosophy can and has worked but it is a recipe for a system to operate well below its optimum for the community. It is also a recipe to reinforce stereotypes, "us and them" antagonism and insular thinking and attitudes, all of which are dysfunctional at best.

Self assessment is recognition of the concept of mutual responsibility. Taxpayers have a responsibility to meet their responsibilities accurately. The ATO has a responsibility to assist and educate taxpayers in doing that and to bring to account those shirking their community responsibilities.

But the issue is much broader than that. At its base is a question of attitudes and behaviour, both inside my office and in the community.

Prevailing community attitudes can shape many things -individual attitudes and behaviour, judicial interpretations and the very shape of the law itself.

An optimal revenue system is one where the prevailing attitude between the community and the revenue authority is supportive.

It is one where traditional stereotypes on both sides are set aside.

It is one where the connection between paying taxes and having community facilities and services is acknowledged and reflected in attitudes and actions.

It is also one where we in the ATO recognise in our actions and attitudes the value of the choice made by people to meet their contributions, and the reality that knowledge of the

specific requirements of the law does not come naturally to people - things are not as obvious as they seem to us, who are trained in the law.

Attitudes like these need to be both learned and earned. But, successfully developed and nurtured, such foundations can do more to stamp out avoidance and evasion than any enforcement model left to the Tax Office alone.

It is this that has led on our part to more transparency in our operations, with clear service standards and expectations in our Taxpayers' Charter, greater openness to scrutiny and more involvement of community representatives in development of our approaches to administration.

Reinforcing the development of a stronger community base for tax administration through practical involvement and recognition of the human core of tax administration is a common thread to any discussion of the future of tax administration in this country.

Integrated Design Approaches

Tax Reform has brought home that like many other large organisations, we are in the product design business.

Armed with this acknowledgment there is much we can learn from the developers of other products.

For example, the successful production and launch of a new car would typically involve an integrated design process that brings together the knowledge and expertise of the designers, the engineers and the marketers. Quite apart from the physical design, the process would involve market testing and marketing, manufacturing and supply plans. The process would also involve consideration of market and competitors' reactions. These elements would not be developed in sequential or compartmentalised steps. The product and related plans would, no doubt, go through many iterative steps as intelligence and expertise flows through the process.

Tax is a product. In its own way it involves, or should involve, these features of an integrated design process.

An integral part of this is recognising the impact of design choices and the need to recognise and, wherever possible, involve the community in the design process.

The tax law does not operate in a vacuum. While its primary purpose is to raise community revenue, its design will, intentionally or not, impact on market activities and decisions. Perhaps the clearest recognition of this is the coining of the phrase over the last decade or two of "unintended consequences".

Equally influential as the law itself, is the administration arrangements developed to give effect to that law.

The law will not operate unless we in the ATO have the internal capability - the systems, procedures, compliance and education strategies, and the interpretation and application skills - to effectively implement it in the real world. Equally, the law will not operate in the real world unless you know of its existence and can integrate it into your own business operations.

Oh, and in case you baulk at the mention of competitors in the context of tax law design, it is worth recognising that the efficiency of a country's tax system and administration can be a competitive factor in the international market. At the individual level the choice implied in competition can translate to a choice to seek to not participate in the system.

The need for integrated design processes have now been recognised in the Ralph Review recommendations.

Community involvement in the early stages of the design process has traditionally raised legitimate political concerns about reactions that might kill ideas before they can be properly developed.

The Ralph Review went some way towards greater early community involvement.

In my view, we will see a greater demand for greater involvement which, together with the general adoption of integrated product design approaches, has the potential to radically enhance tax administration in this country.

Market Sector and Individual Differentiation

A related design aspect is that of differentiation between market sectors and at the individual level.

Community expectations of their dealings with all

organisations are increasing as people get exposed to better business practices and understand the potential benefits of technology.

If anything, people's expectations these days about their individual dealings with the public sector, and their revenue authority in particular, are greater than their dealings with the private sector. After all they would say, it is their taxes that are paying the wages of public servants and more, better and faster service is their right. Some of the enhanced service initiatives we have generated to support tax reform implementation will in themselves generate new expectations.

People also have a rightful expectation to be treated as human beings and have their different circumstances acknowledged in their personal dealings with us. Put simply by way of example, people who have paid their taxes on time for years and slip up once do not expect to be treated the same as determined, habitual non-payers.

These expectations and the reality that human beings are at the core of our tax system are reflected in the Taxpayers' Charter. Our growing understanding of these issues and capacity to deliver will be a continuing major influence on the future shape of tax administration.

Tax Reform has brought another potentially exciting breakthrough in differentiation, in this case market segment differentiation.

We have now seen the first steps in a carve out of small businesses (with a turnover of less than $1m) from the general business tax rules.

An equity based view has held that the principles of the law should apply across the board to business operators. However this view of equity carried with it the result that compliance costs fell more heavily on small businesses - an inequity in itself some would say.

The first significant breach of this prevailing view came with legislative support for simplified GST accounting methods for small food retailers who do not have sophisticated point of sale equipment to automatically generate details of their GST free sales.

In early March we released details of the options available

for hot bread shops, milk bars, convenience stores and mixed businesses. For them, calculating their GST free supplies and acquisitions can be as simple as multiplying their sales or purchases by a "business norm" percentage determined by us in consultation with industry representatives.

Shortly we will be announcing business norms for delicatessens, cake shops, health food shops, fish shops, pharmacies and rural convenience stores that also sell petrol. These will radically simplify the GST for a further large section of the small business community.

More significantly, however the Government has announced the introduction from 1 July next year of a simplified income tax system for businesses with a turnover of less than $1m. The potential for many of these businesses is that the calculation of their net income for tax purposes will be as simple as keeping records of their business receipts and payments.

Put another way, the potential for many small businesses will be a requirement that they keep little more than the records they need for their own business management purposes. Oh, and by the way, we will provide them with a free electronic record keeping package to do that.

Grasping the potential of this initiative for small businesses could radically reshape tax administration for a significant segment of the business market.

Marketing, Education and Support

Just as there has been a dawning recognition that like many businesses we are involved in product design, so too has tax reform brought with it a recognition that professional marketing and education is an integral feature of that design process and therefore of tax administration.

This has come with a thud rather than a gradual dawning. The sheer magnitude of the tax reform implementation task has required a massive marketing and education program.

Of course, when you reflect on it, it is all rather obvious.

Any revenue system relies on the willingness of the community to by and large meet their obligations. People are more likely to do that if they understand the rationale for changes. Certainly they will not do it if they simply do not

understand what the law requires of them.

The learnings from tax reform implementation and the quality of the marketing and education products will build on our existing support programs (including the rulings programs) and, as such shape the future of tax administration in Australia.

Integrated Compliance Approaches, Risk Management and a Shift to Real Time Interventions

We have been on a continuing journey in developing the best approaches to ensuring that there are high levels of compliance with our revenue laws. This has led us to a greater understanding of risk management - the self assessment system has at its heart a recognition of the efficiency of risk management - integrated design approaches and a shift to real time interventions wherever possible.

Two examples serve to illustrate this.

Recent experience in the area of transfer pricing helps illustrate the nature and benefits of integrated compliance strategies.

For many years we have conducted transfer pricing audits and while some inroads were made the outcomes were slower than we believed necessary. This is particularly the case given the increasing pace of internationalisation of trade.

In recent years we have put in place a more integrated approach that is making a real difference - one that we are intent on building on. This integrated approach has involved:

the release of a range of rulings giving detailed and practical guidance on our view of the law; ●

a round of record keeping reviews involving around 200 companies; ●

a risk rating and subsequent initiation of almost 50 audits based on the results of those review; ●

involvement of recognised external experts and increased emphasis on building our skills base in this area, including engaging expertise in industry

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economics; developing closer working relations with overseas tax administrations and influencing the development of relevant OECD guidelines; and

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improvement in our Advance Pricing Agreement procedures and methodologies. ●

The results speak for themselves:

quite apart from the direct audit results to flow from this integrated program, the tax paid in the returns lodged by the group of companies involved in record keeping reviews nearly doubled to some $166 m in the year following the reviews;

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we have also moved from a position where we had 18 Advance Pricing Arrangements in the previous eight years to one where eight have been completed in the last nine months, with a further 36 where applications have been received or foreshadowed. In addition there are another 28 companies talking about entering the program.

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The move to APAs in response to this suite of compliance strategies is significant because it involves agreement on future pricing strategies that ensure Australia is getting its fair share of revenue from the international transactions.

In a sense it is the ultimate real time approach in that it locks in appropriate pricing for what is typically a five year period. Some of Australia's largest payers of company tax are now in the program.

Currently unilateral APA's (that is with the ATO only) take an average of 3.5 months. Bilateral APA's involving the other relevant Revenue Authority typically take 14.5 months. Both of these are well ahead of, for example USA timeframes.

Our strategies in dealing with excise evasion on fuel illustrate the role remedial legislation can have as part of an integrated compliance strategy and also the advantages of getting on the front foot and dealing with issues before they get out of hand.

Complaints of fuel substitution involving abuse of lower excised petrol and diesel, heating oil and solvents were raised with us in mid 1999 after we took responsibility for

excise. Previous attempts to deal with this through the use of special chemical markers and testing involving a fleet of trucks had, in our assessment, proved largely ineffective. As a result the government implemented a systemic solution recommended by us following consultation with the legitimate excise payers industry. This solution involved revised excise tariff arrangements with effect from mid November 1999 along with some administrative action on "at risk" products. These actions immediately closed off the excise evasion practices then in place, while protecting compliant parties.

Having achieved that result we detected evidence that a practice of importing toluene for fuel substitution was occurring in response to our action to close off previous evasion practices. The Tax Office provided advice to the Government on measures similar to those introduced in November 1999 that take away the ability to import toluene for tax evasion and fuel substitution purposes. Again, these measures protected the interests of legitimate users. This racket was closed off well before it reached anywhere near the dimensions of previous fuel substitution practices.

We are continuing to assess petroleum excise compliance levels and will continue to refine the arrangements in a systemic way to combat evasion, if required.

It is fair to say these integrated approaches are at least in part cause for increased revenue collections that have seen, for example an increase in effective tax rates for large companies in recent years.

Our experiences in designing more integrated approaches are reflected in the development of our compliance model.

Our pursuit of a greater understanding of the impact of these approaches and of behavioural responses has led to our work with the Australian National University and the establishment of the Centre for Tax Integrity.

These pursuits will continue to shape the future of tax administration.

Advancement through Technology

Technology can be both a facilitator and driver of change. While in the international tax community we have been

recognised as a leader in the use of technology, tax reform implementation has given us new impetus in this area.

We in the ATO would see it as a major lost opportunity for the community if we did not fully exploit the opportunity to use developments in e-commerce to ease the cost of implementation of the new tax system. We believe we would be equally remiss if we did not take the opportunity presented by tax reform to promote Australian business being on-line to compete effectively in today's increasingly global marketplace. This is particularly true of the Australian small business community.

Our existing paradigms for pace of change and speed to market in this and so many other areas of our operations are being thrown out the window as we are being called on to continue to manage today's tax system while implementing the new.

This is another important driver for taking full advantage of developments in e-commerce in implementing tax reform. This is particularly the case in meeting our responsibility for supporting and educating business and professional communities.

These drivers further occur within the context of the commitment by our Prime Minister, in his Industry Statement, "Investing for Growth", of 6 December 1997, to the delivery of all appropriate services electronically on the Internet by the year 2001.

These imperatives have led to a number of developments, some of them I suspect world firsts. These include: ●

a comprehensive reform website with a tax planner/timetable that integrates requirements with support tools and an e-mail facility alerting people to updates;

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a remote laptop computing facility to support over 3000 field staff in providing on the spot up-to-date advice, information and support;

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a free baseline electronic record keeping software package designed to help small businesses move from shoe box record keeping to having readily available business planning and tax records simply by taking the time to enter daily receipts and payments;

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the first major use in Australia of public key technology to provide privacy, security and authentication for internet based transactions between taxpayers and the ATO; and

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Tax Reform and Technology Expos for tax practitioners featuring presentations, workshops and product exhibitions designed to give hands on experience in the use of the various electronic tools developed by us to support the implementation of tax reform.

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As the children of the Internet generation move into positions of business and community influence, there is little doubt in my mind that there will be a major impact on the whole tax design process. For example, it is by no means fanciful to see greater integration through technology of business transactions and tax collection.

Technology can also help us improve in differentiating our treatment of taxpayers according to their individual circumstances - a form of mass customisation.

As I said advancements in technology can be both a facilitator and driver of change.

International Leadership

The Internet and e-commerce have given new impetus to the impacts of internationalisation of economies and trading.

As a result the days of tax administration as a country specific issue are numbered, if indeed they have not already passed.

International rules for rights to tax are being re-examined and a new paradigm of co-operation between tax administrations around the world will be required.

We have been active in stimulating the international debate on these issues through the release of our Tax and the Internet Reports and our work at the OECD.

The OECD has a lead role in the areas of international taxation.

As part of this, five joint business/government Technical Advisory Groups have been established. These cover issues such as business profits, income characterisation,

consumption tax and examination of the relevance of commercial protocols and current commercial practices for remotely accessing and verifying information.

Australia, through the ATO, is the only country to be represented on each of these Advisory Groups.

Consistent with what I have said about community based tax systems, we have established an E-Commerce Consultation Forum to ensure we have business input into the development of our positions.

Through my role as Chair of the Forum for Strategic Management within the OECD we are promoting greater collaboration between tax administrations.

As part of this we have been actively involved in developing a web based service for Revenue Authorities. This service was developed for the OECD Forum on Strategic Management.

The site (www.fsmke.org) was proposed in February 1999 and launched in November 1999. It was the result of a joint 'virtual' development - there was only one physical meeting of the developers - by representatives from Australia, Canada, Japan, Netherlands, Norway, USA and U.K.

Once the site is bedded down other revenue authorities will be able to contribute their information and learnings.

The site is multilingual and provides ready access to information from participating revenue authorities about their strategic directions, compliance, service and electronic initiatives, planning processes and so on. Chat rooms are being developed to support further interactions.

Integrity and Professional Expertise

Some things have and will continue to be the bedrock of tax administration. Our integrity and professional expertise are two of these.

Neither of these can be taken for granted and need to be continually nurtured.

While there are the highest standards of integrity among my staff, we are also an organisation made up of human beings, with the potential for human failings.

There will be failings, and when this happens, the people concerned let themselves, their colleagues and the community down.

Recognising this, what is important is that we have measures in place to reinforce integrity and detect and deal with lapses. It also means having the integrity to deal with lapses appropriately in spite of the inevitable reaction that comes from the publicity of unpalatable but necessary actions.

Against this background, we have an Integrity Advisory Committee that advises on whether our endeavours are realistic, achievable and accord with best practice standards. The Ombudsman together with representatives of the Australian Federal Police and the Public Service and Merit Protection Committee sit on this Committee.

We have fraud awareness and ethics programs including the award winning interactive Judge for Yourself Program in which over 90% of staff have participated.

Other supporting initiatives include a concern line for staff, an independently reviewed whistleblower program. And we are going to establish the role of an ethics counsellor.

We also have a comprehensive fraud control program developed with external expert assistance.

Backing up these measures we have experienced fraud investigators and, of course, work jointly with the AFP and DPP as necessary.

No integrity system left to us can, however be failsafe. It is important that we have a community safety net - one where members of the professions and the community see it as part of their responsibility to openly inform us where they detect something is wrong. This is a reflection of the mutual respect and responsibility I have spoken of.

Continued nurturing of another bedrock of tax administration - our professional expertise - is overseen by the Professional Excellence Committee, which includes representatives from the professional and business communities.

Our training and development programs are backed up by research, precedent and case management tools and a system of peer reviews that support the quality and consistency of our technical decisions.

We also have post issue quality reviews of our technical advice which provide feedback to further enhance our professionalism. For this purpose external representatives are involved in reviewing a random selection of written work covering private rulings, other written advice, disputes and, more recently, audit casework. Settlement cases under our new settlement guidelines are being brought within the scope of these quality reviews.

It should be clear from what I have said that professional expertise for a confident and forward looking revenue authority goes beyond expertise in the law - fundamental though that is. The future requires continued nurturing of our expertise in the law and increasing expertise in such areas as investigation, auditing, design, managing, marketing, relationship management, technology, training, litigation, debt collection, project management, economics, and so the list goes on.

There is a further dimension to integrity and expertise that we have exhibited and that will continue to shape tax administration into the future. That is the fortitude and skill to take on the tough issues notwithstanding the negative reactions that can come from some.

As I have said we have demonstrated that in our preparedness to appropriately deal with failures of integrity within the organisation. We have also demonstrated that through the work of our High Wealth Individuals taskforce. And we have demonstrated it in taking on aggressive tax planning.

Conclusion

Implementing tax reform is a big exercise and the responsibilities we have been given in that is a vote of confidence in the staff of the ATO. At the same time there is the longer term issue for us and the community of continuing the drive to enhance tax administration itself.

It is important therefore that we take time to reflect on the lessons from tax reform and past experience to develop together a pathway to continue to advance tax administration for Australia.

I hope the insights I have shared with you today contribute to that journey.