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Standing Committee on Tax and Revenue
26/06/2020
Commissioner of Taxation annual report 2018-19

KAYIS-KUMAR, Dr Ann, Senior Lecturer and Tax Clinic Director, School of Taxation and Business Law, Business School, University of New South Wales

MACKENZIE, Mr Gordon, Senior Lecturer, Tax Clinic, School of Taxation and Business Law, Business School, University of New South Wales

Evidence was taken via teleconference—

Committee met at 10:02

CHAIR ( Mr Falinski ): I declare open this public hearing of the Standing Committee on Tax and Revenue in reference to the inquiry into the Commissioner of Taxation annual report 2018-19. We'd like to get your opinions today. The media may cover today's proceedings on the condition that cameras neither film nor take photos of the private papers or laptops of committee members, the secretariat and witnesses and that reporting of the proceedings be fair and accurate. I welcome representatives of the University of New South Wales School of Taxation and Business Law. Do you, as a witness appearing before the committee, have any objection to being recorded by media during participation in this hearing?

Dr Kayis-Kumar : No objection, thank you.

CHAIR: Thank you. These hearings are formal proceedings of parliament. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. I invite you to make a short opening statement of no more than five minutes.

Dr Kayis-Kumar : Certainly. Thank you. I will start by saying it is a pleasure and honour to be appearing before this committee this morning. I am the founding director of the UNSW Tax Clinic. We are incredibly grateful for and heartened by the support that the federal government has provided to the National Tax Clinic program, including this committee's recommendations in relation to it. We're also grateful for the bipartisan support that this program has had and heartened by the considerable support of government agencies, including the ATO, the Inspector-General of Taxation and ASBFEO.

Industry has also been supportive of this program, including the in-kind support that KPMG and PwC have committed to the UNSW Tax Clinic—and also the social impact sector, including Financial Counselling Australia, with whom we work very closely. Our research partners, including the UNSW Business School, the Centre for Social Impact and the Black Dog Institute, show just how much desire there is within the community, across different avenues, for more support for the financially vulnerable cohorts that we are seeing.

We're also grateful that this committee recognises the role that universities can play and that they are strategically aligned when it comes to delivering client advice and community education, and also research into the systemic issues that are being faced by financially vulnerable small businesses and individuals. By doing so we hope to make a sustained and ongoing contribution, working with the federal government and policymakers to identify issues and, then, to work towards solutions, whether in policy or process. For that, we are very grateful for your time today.

CHAIR: Thank you. Can I open up to the committee—Julie, would you like to ask Ann any questions?

Ms OWENS: Thank you. The submission you put in really paints quite a devastating picture, literally, of hundreds of thousands of people in a position that they've probably been trying to ignore for quite a while. If you could have whatever solution you could put forward for this, what would it look like?

Dr Kayis-Kumar : That is the biggest question. One of the challenges for us was in identifying how large the problem was. It's important to note that this is a relatively early stage in terms of the amount of literature available. There's a dearth of literature in relation to financially vulnerable individuals and small businesses both in Australia and internationally when we look at tax and how that intersects. So this study is the first, and we hope that there will be others that can help to paint the picture in a more nuanced way.

We have found three key themes, and by understanding the themes it might be useful then for targeting the solutions. We imagine that rather than one single approach, there'll be a multifaceted way to address this very complicated issue. If I may, I'll start by highlighting the three key themes that have been observed in the paper in relation to taxpayers. The first one is that there are large numbers of individuals with many years of outstanding returns—and there are many reasons for that, which we'll dive into. The second element is that small businesses and, in particular, sole traders and microbusinesses, are faced with both financial literacy issues and tax literacy issues. And the third element, which is a fairly significant one, is the high psychological burden associated with tax. So if we were to be looking at crafting solutions, my suggestion would be that we identify the underlying reasons for each of those themes. Some of them are systemic and others are ones that we might be able to address with targeted interventions.

CHAIR: If I can jump in there—what are some of the targeted interventions you suggest in your paper?

Dr Kayis-Kumar : What we suggest in our submission, and in the paper as well, includes things like expanding the number of tax clinics available so that there is more manpower, if you will, to help people with direct client advice. But considering the context that we're in at the moment, in the face of the COVID pandemic and the economic aftershocks of it, we expect the numbers to be even more significant as time goes on, this year and next. So we'd need more than just clinics—law reform might need to be implemented. So one of the things that we're exploring—and this is in early-stage research—is the serious hardship relief provisions, how they're currently designed and how there may be unintended consequences in that design in the modern world.

CHAIR: Julie, do you have a question?

Ms OWENS: Yes. You talked about the lack of data on this. I think the inspector-general is currently looking at an inquiry into debt, because some of the debt has been around for so long and there doesn't seem to be any real data even on what it is, let alone why it is. So are you suggesting that there needs to be a much more substantial investigation, if you like, and collection of data on the why as well as the what?

Dr Kayis-Kumar : That's a good idea, and I think that would be useful. A lot of what we've found since we started exploring the issues has been unexpected results for us, so understanding more about the issues that are facing this otherwise silent and marginalised cohort of taxpayers would definitely be useful.

Ms OWENS: I have one more. I'm just going to put my 'it's all about the money' hat on for a minute. If you've helped 150-odd clients, as I think I saw there, with about $3 million in debt, how successful are you in actually reducing the debt for the tax office? Is this a sensible and viable thing to do if you only care about tax collection?

Dr Kayis-Kumar : That's a really good question. We have been surprised by the number of debt collection issues. When we first established the clinic, we thought we'd be getting a lot more ATO lodgement, objection, audit and litigation matters. The debt collection piece has been substantial. On one hand, I definitely appreciate your point, but there are two key elements at play here that have flow-on effects or ripple effects. The first one is that, if those debts are partially reduced or waived, it's because they were already uncollectable or there may have been other mitigating factors for why they should be reduced in the first place. Often our clients will come to us because of various issues, and it's important to recognise that each client, of course, is an individual with their own experience, and that has flow-on effects for their family and the community that they're in. Things like mental health problems, domestic and family violence, and marriage or relationship breakdowns lead to those external flow-on effects, and tax is just one symptom of the bigger problem, and debts overall are substantial. So the second element then is: how does chasing those debts that may have already been uncollectable, for example, impact the community, and how does that affect tax morale? Those are big issues and really substantial challenges for policymakers and government.

The other element is that tax clinics provide a cost-effective approach to dealing with this cohort of taxpayers, because they are facing long-term outstanding lodgements and other issues, like mental health and potentially fear of government agencies, including the ATO. Having a university based tax clinic program makes it a lot easier and more cost-effective for the ATO to engage with these taxpayers.

Ms OWENS: Thank you.

CHAIR: Bert, you have a question, I believe.

Mr VAN MANEN: Yes, thanks. Thank you for those opening comments. I have a couple of questions if I may. Firstly and, I think, most importantly, how well known is the availability of this service around the country in your experience?

Dr Kayis-Kumar : Thank you so much for that opportunity. I might defer to Gordon. We have relied heavily on the existing network in the community sector. Gordon, would you like to elaborate on that?

Mr Mackenzie : Yes, thanks. First of all, apologies for being late. I received a brilliant training session yesterday, and I managed to screw it up when I tried to get on this morning. So my apologies for that. When we set up the tax clinic in Australia—

CHAIR: Sorry, I have to interrupt there and say that, if you screwed up technology, you should become a member of parliament!

Mr Mackenzie : Is this being recorded? Can I cite you on that? I'm a member of the Rotary Club in Sydney, and the then president was Keith Garner, who heads up Wesley Mission. So, when we set up the tax clinic, our first port of call was Wesley Mission. That's why we got engaged with the financial counsellors. We've moved on from that and we're now talking to Australia-wide financial counsellors. As Ann quite rightly said, the target market that we are looking at is being serviced by financial counsellors. To be blunt, they're our marketing arm. They're the people that give us the warm leads on the people in need. This would give the committee a bit more visibility of the kinds of people we're talking to. Quite often, they're a victim of domestic violence, where the perpetrator of the violence has destroyed all their records, and perhaps they've been in business together or perhaps they had a family trust. Of course, when the tax office comes knocking on their door, saying, 'You've got a couple of outstanding tax returns,' these people, besides suffering the stress of domestic violence, simply don't have the records. That's an example of the target client base. I hope that helps.

Mr VAN MANEN: Yes, thank you. I've just done a quick check locally. I'm based in South-East Queensland, halfway between Brisbane and the Gold Coast, in Beenleigh. Griffith University, which is in the electorate neighbouring mine, does actually have a tax clinic, which I wasn't aware of. You learn something new every day! But, more importantly, a lot of people you're dealing with through the clinic would also have interactions with Centrelink. What's your experience in working with those clients? Because their tax affairs are not up to date, they would then have difficulties in their interactions with Centrelink and maybe with being eligible for the right amount or appropriate payments from Centrelink to assist them through their circumstances as well.

Dr Kayis-Kumar : Yes, absolutely. I think you've hit the nail on the head. A lot of the lodgement issues that we see with our clients have to do with that interaction of the tax and transfer system. If you're not up to date with your taxes, then that's a barrier to accessing a lot of the Centrelink payments. Many clients who are in this position are financially vulnerable, and the question then becomes, 'Do I pay for food, transport and accommodation or do I pay for a registered agent to help me with my returns?' That's quite a stark and problematic aspect of what we're seeing, and we're seeing it quite a lot.

Just to follow up on the point that Gordon made as well, one of the strategic reasons why we haven't been mass-marketing the availability of tax clinics is that we really want them to target financially vulnerable people. When we were setting up, we were initially very concerned that there might be people coming to us who could actually just go to a registered agent. Screening for that would be a very time consuming process and might involve considerable opportunity cost, and we would be seeing people who might not actually need us. And we definitely don't want to be seen as cannibalising the market share of registered tax agents for paid work. That's definitely not how we see our contribution within the tax landscape.

Mr VAN MANEN: Interestingly, from having a look at the Griffith University tax clinic website, they have an online application form that needs to be completed. First that would be reviewed and then the person would be advised whether or not they would be able to use the services of the tax clinic.

Dr Kayis-Kumar : Each clinic has its own operating model and its own eligibility framework, and so of course Griffith's probably best positioned to respond in relation to theirs, but for what it's worth—

Mr VAN MANEN: I'll definitely go and have a chat with them.

Dr Kayis-Kumar : Please, that would be tremendous. I'm sure they would appreciate that too. For us, we've noticed that, because our clients—from what we've been hearing from our financial counselling contact—have those issues like poor mental health and financial distress, it's more effective to have a warm referral basis for that particular cohort, otherwise we're at risk of telling them to go somewhere, and they might not follow through with that, whereas this way someone is holding their hand through the system and helping them navigate it.

Mr VAN MANEN: I suppose an important point to understand, at least for me—and I apologise if you covered it off in your opening remarks and I didn't hear it properly—is how the tax clinics are funded generally.

Dr Kayis-Kumar : That's something that we're very grateful to the federal government for. There is, at the moment, $1 million for 10 university based clinics, so each clinic gets $100,000 a year.

Mr VAN MANEN: Is that sufficient to cover the cost of the services you provide, or is there a capacity to expand if the funding envelope is expanded, perhaps not from the federal government but from other sources?

Dr Kayis-Kumar : We would be tremendously, immeasurably grateful for any increase in funding. To give you an idea of our current operating model, we employ, on a part-time basis, three registered tax agents who have their own practice but give us a full day of their week. We also employ admin on a part-time basis to field calls all days of the week, and we open 48 weeks in the year. So we're already stretching the budget. The School of Tax and Business Law and the faculty of UNSW Business School have been very supportive of this program, and I'm very grateful for that. Any increase in budget would mean that we could help more people. To give you an idea on that current model that we're at: in six months we've helped about 100 people. That's a 2½-days-a-week piece. If we were to have a full-time Monday-to-Friday operation, with clients seen Monday to Friday, that would just be amazing and it would help us to not just help those individuals but also better understand the issues that people in similar situations are facing. In doing so, we could be an even more effective bellwether and, hopefully, ideally, make recommendations that can better target this cohort of financially vulnerable people and small business.

Mr THISTLETHWAITE: I'm particularly happy with your submission given that you're located in my electorate.

Dr Kayis-Kumar : Thank you.

Mr THISTLETHWAITE: In your submission you point to recommendation 34 from the 2016-17 annual report, about establishing a fully independent low-cost external support mechanism. Has that been acted on? Has that actually occurred or is that this funding program that you've just mentioned?

Dr Kayis-Kumar : My understanding is that this is the manifestation of it, the National Tax Clinic program, yes. The ATO is a silent partner in that sense. We're given independence. Each clinic has the ability to determine its own model. We're very proud of the work that we've done at UNSW Tax Clinic, and we've been seeing results for both clients and the research piece so that we can help even more people at scale. I can give you an example of someone within our electorate that we helped last year, if you like.

Mr THISTLETHWAITE: Yes.

Dr Kayis-Kumar : This was a single father with a three-year-old. He had a history of mental health problems, including schizophrenia. He had been in and out of various jobs and was, at that point in time, unemployed and living in community housing. He came to us because he had over 10 years of outstanding lodgements, and the ATO had sent him some letters. At the end of the day, by the time he left the clinic, we had resolved his tax problems, but he also got a refund of over $6,000. Six thousand dollars might not seem that much to a lot of people, but for him it was really life changing. He was able to update his whitegoods and he took his son to the aquarium for the first time.

Mr THISTLETHWAITE: Great. That's wonderful. How many of these tax clinics are throughout the country? I know you've mentioned the 10 that are funded by this program. Are there others that are independently funded?

Dr Kayis-Kumar : In terms of independent funding, I'm not sure. But I hear that there is another one that is opening up in Perth. I believe July will be the launch date. Once that is launched, it will be 11. To give you some background as well in terms of our footprint, generally, all clinics—if they are open at the moment—have transitioned to virtual or telephone appointments. That's what we're doing at the moment. We already had a footprint across New South Wales. Being one of two in New South Wales, we thought it was our duty to serve as much of the New South Wales community as possible. So we have clients hundreds of kilometres north, south and also as far west as we can because of the network of financial counsellors that we're tapped into.

Mr THISTLETHWAITE: It sounds like it's a wonderful program. It makes us think about why we didn't do it earlier. We all know that there's a very well-established—compared to this program—and well-funded system of community legal centres throughout the country, of which we have another great one in the Kingsford Legal Centre in our area.

Dr Kayis-Kumar : Yes.

Mr THISTLETHWAITE: I could envisage something like that growing out of this. Is it your aim to eventually move to a network with a funding model such as that?

Dr Kayis-Kumar : Absolutely. That would be our ultimate vision for this program. When I was an undergrad, I volunteered at the KLC. I was in their domestic violence clinic when it first opened. For us, seeing this become part of the social impact landscape would be the ideal vision. There is an otherwise unmet need for independent and free tax advice. We've really been shocked at the scale of it. If there could be an established nationwide platform for this, that would just be amazing.

Mr THISTLETHWAITE: My final question is: where are you on the campus?

Dr Kayis-Kumar : We've got a different model to the KLC. We can't be housed within the KLC, because of the key regulatory definitions around tax advice and legal advice. I won't bore you with the detail, unless you'd like me to, but we—

CHAIR: He just wants to come and get some free advice. You understand that?

Mr THISTLETHWAITE: I want to come and promote your good work.

Dr Kayis-Kumar : I would love to take you up on that if that's something that you're interested in. That would be tremendous. Thank you. Because of our integration with the financial counselling sector and the community centres, we've actually piggybacked off the KLC's approach on community centres. So we have outreach locations at South Eastern Community Connect and also at The Junction Neighbourhood Centre. We also work with financial counsellors through their warm referral platforms. Pre-COVID, we had a base at Wesley Mission's CBD office, and that meant that there were transport routes across that network to Bondi Junction, the CBD and Eastlakes. In addition to that, if a client is unable to come out in person for whatever reason, whether it's care responsibilities or just because they're hundreds of kilometres away, then telephone appointments are a model that we use. Our view is that where you live and where you're located shouldn't affect whether or not you have access to this service. So that's what we've been doing.

CHAIR: Ged, did your question get answered in that?

Ms KEARNEY: I just have a couple more questions. Is that okay?

CHAIR: Yes. We'll run a little bit over time with this witness. Sorry, Ann and Gordon.

Ms KEARNEY: Thank you for what you do. We actually have a similar service here at Melbourne university. You talked about your relationship with financial counselling services, which is excellent. What's the relationship like at the other end with the ATO? How do you find dealing with the ATO? How do you interact with them? I'm just interested in that end of the spectrum, if you like.

Dr Kayis-Kumar : Thank you for that opportunity, because we haven't really had the chance to elaborate on that. The clinic supervisors, who are our registered tax agents, have told me that the ATO is generally very supportive of clients who want to get back on track. When it comes to procedural issues and process issues, there may be certain constraints there, and sometimes they are as a result of the laws themselves. For example, with that serious-hardship relief piece, one example that springs to mind is that the ATO can't release a taxpayer from their debts if they are GST related. This brings up a really serious issue around tax justice, if you will, because a lot of people have been transitioning from being characterised as employees to contractors. We've got an increased incidence of the gig economy, and those liabilities will be classified as GST based in many instances. At the moment, there's no ability for tax relief for GST liabilities, but there is relief for things like CGT liabilities. So one hypothetical scenario that presents a perverse problem in outcome is that you can have taxpayers getting relief for CGT debts that they incurred as a result of the sale of investment properties if they have since experienced financial hardship, but you can't have a sole trader, a subbie, who has not been able to keep up with their financial obligations and tax obligations get relief for GST related debts.

Ms KEARNEY: Do you think that is an area worth looking at?

Dr Kayis-Kumar : We would be very grateful for a conversation about that. I'm currently working with Professor Michael Walpole, the co-founder and head of school of the School of Taxation and Business Law, and Kevin O'Rourke. We're researching this. It's early research, but we'd be very grateful for the chance to share our recommendations in this space.

Ms KEARNEY: Thank you for that. There are other programs like Tax Help. What's your view of that program, and how successful do you think it is? Do you think there's the opportunity to perhaps meld the two programs, or are they just too different and a different cohort is helped by that program?

Dr Kayis-Kumar : That's a really important question. One of the ways that we've been conceptualising the role is looking at what the gaps are in what Tax Help provides. Tax Help is, obviously, an ATO run program that is free, which is terrific, but they don't provide tax advice in the sense that we provide tax advice that is independent and from a registered agent. The limitations of Tax Help's criteria mean, like I was saying, that for people in the gig economy, if you have an ABN, you're out; you're not eligible for ATO Tax Help. That presents an issue, too, particularly for this sector and particularly for this client base, where tax literacy is a big issue. So the way that I see the opportunity for the clinics to contribute is in filling the gap between Tax Help and where their help stops and the independent paid tax advice from the tax profession. We see that there is that gap between those two services.

Ms KEARNEY: I imagine that the demand for your service is much greater than you can supply. Do you have long waiting lists, and are there people you can't get to, given the very limited resources that you're working with?

Dr Kayis-Kumar : We have an interesting phenomenon at the moment. There was a point where we had a two-month waiting list. At the moment, we've been profoundly troubled because we were expecting to be inundated but we haven't been. We've circled back with our referral pathways, and the financial counsellors have told us that they are worried that not enough financially vulnerable people are reaching out to them. So they're expecting a financial tsunami come the end of September, and we're also expecting, in turn—the second-order effect—to be inundated with people with tax issues that have caught up with them. But also there are the financial implications more broadly.

CHAIR: I'm going to jump in on that. Isn't it incumbent upon yourselves and FCA to reach out to people, rather than waiting for them to realise that they're in trouble? Clearly, they're getting themselves into a lot of trouble at the moment. Shouldn't there be a more proactive reach-out program going on?

Dr Kayis-Kumar : How do you engage people who are otherwise not engaged with the existing system? That's a really good question. Financial Counselling Australia probably has better visibility on all the things that they're doing. At the moment, we're still operating at capacity so, in that sense, we're not by any means sitting idle. We do have a fair amount of work. What we are doing is working on capacity building with financial counsellors as well. That's to position ourselves so that when we do get more and more issues then we, as a national program, are ready to deal with it. For example, one of the ways that we've done that is the direct nationwide referral pathway between financial counsellors and the National Tax Clinic program.

With the support of the ATO's project lead, Tim Brushaber, I have initiated that with Financial Counselling Australia and its associations and the National Tax Clinic program. That will mean that we're well-positioned to be fully integrated. But I definitely hear your point. The challenge with this segment also is that it's hard to know when someone is in financial distress. A lot of the time, there are a number of factors at play in severe and high levels of financial distress, from financial across to social elements. So identifying this client base is something that we're still looking at—how we can best identify and quantify the size of the problem. That was really the driver behind the research that we've conducted so far. But I agree: there is still a lot of research to be done in this area.

CHAIR: I think we could spend half an hour on that issue alone. However, Mr van Manen has a follow-up question and then Mr Young. Then, I'm afraid, we're going to have to let you go.

Mr VAN MANEN: Thank you, Chair, and thank you Ann and Gordon. I have a follow-up question on that comment about your concerns, and those from the financial counselling sector, about a lack of interaction, given the impacts of COVID-19. The evidence I'm getting from my community service sector groups is that with the advent of the higher jobseeker payment, in particular—but also with JobKeeper, to an extent—that's it's actually helping a lot of people in this space at the moment. But I think, as you quite rightly flagged, there is the risk of what's going to happen in September as some of these start to stop or tail off. I've had feedback from one of my community service groups that the people who they're normally helping are actually donating back to the group because they've got extra funds at the moment. That's a really interesting situation.

The other concern I have is that people who are receiving JobKeeper in this space possibly don't understand that there's an income tax liability with that. I'm concerned that it may create issues for some people down the track. That's probably more a comment than a question, but I'd be interested to know if you've had any feedback of that sort or seen that as a result of these increased payments people are receiving currently.

Dr Kayis-Kumar : Yes, I agree with you; that's one of my concerns as well, that the JobSeeker top-up and JobKeeper are taxable, and that if, for whatever reason, the tax isn't being withheld then the clients may not realise, depending on their overall income levels, that they might actually have a tax liability, or even not as large a refund. That can definitely be problematic, and there are different ways where that can have ripple effects. For example, women who are experiencing financial abuse often rely on their tax refund as the only independent-source lump sum that they receive in a year. If that's reduced, then that can be a problem.

Mr VAN MANEN: Thank you for that.

CHAIR: Terry, you're up.

Mr YOUNG: Ged has covered some of the questions I had. I've heard a lot about solutions as far as throwing money at things, but I'm also interested in what your recommendations are as far as changes to legislation and things like that—I was interested when you said they can't get relief on GST. Have you got any other solutions besides the funding? We all know that the funding is one of them, but have you got any other solutions or recommendations that we, as a committee, could take on board?

Dr Kayis-Kumar : I'm more than happy to share with you the four recommendations that we've got and the paper underlying those in relation to serious hardship relief. I'd be very grateful for the opportunity to share that paper with this committee. The other aspect that I think is really important is that we've uncovered this from just one year of operations, so ongoing support and the opportunity to have platforms like this—where we can have two-way communications, share ideas and share observations—are really invaluable. We've been surprised by the extent of issues that we could not have anticipated had we not been researching in this space. The signal that having a national tax clinic program gives, not just to the university but also to the community, is really valuable as well. Those things all align quite strategically to better understanding and addressing the systemic issues.

CHAIR: On that note, I am going to have to wind it up because we're more than 10 minutes over. We might invite you back on that point about how to stop people getting into distress. There was another issue around tax debt forgiveness. As I understand it from the ATO, they're not legally allowed to forgive a lot of their outstanding debts or work with people to collect 25 [inaudible], and the vast majority of their historical debt is in that position. So, if we can, I'd like to get you guys back to talk through some of those issues.

Thank you for coming today. If you have been asked to provide additional information, which you just offered to do, could you please forward it to the secretariat by 10 July. If the committee has any further questions, they will send you these in writing through the secretariat. A transcript of the proceedings will be forwarded to you for correction in due course. Thank you for your time today.

Dr Kayis-Kumar : Perfect. Thank you all so much. We really appreciate your time and support.