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Augmented tax assessments

CHAIR —I welcome officers from the Treasury and the Australian Taxation Office. Would you like to make an opening statement?

Mr Parker —No, we have no opening statement.

CHAIR —Thank you. I will start with some questions. It could be a nice, short, sharp inquiry, hopefully; there are only two senators and no opening statement. In principle do you agree that it is good for taxpayers to see how their taxes are spent?

Mr Parker —Yes. I think it would be very difficult for anybody to disagree with that, Senator. It is a matter of general transparency. It goes to the issue of democracy and consent, I think, to be governed, and in line with that the government already publishes a broad range of information in budget papers, MYEFOs and final budget outcome documentation, which is feet high. So there is already extensive information.

CHAIR —I do not disagree that there is a lot that is published and put out there. There are probably some sad individuals like Louise and me who sit down and read through MYEFOs and budget papers with great delight and interest, but the vast majority of taxpayers would not be inclined, or have the ability, to do that. The proposal here is one way of dealing with that. We will get into the details of the proposal itself in a minute but, in general, identifying and putting in place new ways of increasing that level of transparency which you agree is desirable would presumably be a good thing, subject to achieving a reasonable balance between cost and accuracy.

Mr Parker —Are you asking me whether in my opinion that would be a good thing? Is that the question?

CHAIR —Yes. You have indicated that that is generally a good thing. If you could increase the level of that, subject to cost being reasonable and ensuring that the increased level was reasonably accurate, then that would presumably also be a good thing.

Mr Parker —In abstracto, yes, subject to cost and practicality. Whether that goes to the question of whether the precise mechanism involved in the policy which is proposed and which is the subject of inquiry before this committee—

CHAIR —Let’s move on to the proposal, then. You have acknowledged, I think, that most people would acknowledge it is generally advantageous to increase transparency. What is Treasury’s view of this particular policy in terms of where its downsides are? Where are the problems that would need to be addressed in order to achieve increased transparency through a measure such as this?

Mr Parker —As I said, I do not want to offer an opinion on the merits of this particular mechanism. However, in the event that a mechanism of this sort were to be adopted by the parliament, there are a number of issues which would need to be thought through and there are some concerns with the practicality and the administrability of the specific amendments which were proposed in the House of Representatives and referred to this committee. I might leave the specific practicality and administrability issues to Mr Monaghan from the ATO. They essentially go to questions of the precise meaning of the amendments as proposed—how they would be interpreted and what they would require the ATO to do. So there are some issues of uncertainty there.

Assuming that uncertainty could be resolved in some way, there are some issues about what the ATO would be required to do in terms of the timeliness and accuracy that is implicit in the requirements which are put on the ATO. There is also an issue which goes to the administration of the assessment process and the link to the validity of the assessment process and what that might actually mean for the way the ATO administers the raising of taxes. I will leave that to Mr Monaghan to detail.

Before we get to those there are some conceptual policy issues which warrant being thought about further. As you know, there is the old saying, ‘Lies, damned lies and statistics.’ Essentially what is being proposed here is the presentation to taxpayers of statistical information. There are some issues of interpretation about precisely what is meant. Without going to the specific words of the proposed amendment, the underlying policy rationale as it has been explained is to explain to taxpayers how their money is spent. Not all individuals are taxpayers and many individuals are taxpayers but also recipients of money from a range of levels of government. To pick one particular example, we have the family tax benefit system. Up until a number of years ago it was possible to claim your family tax benefit through the tax system. That is no longer the case, but that essentially picks up the point that there is a financial relationship between the individual and the government which in that particular case is running two ways. Money is money so, if you label something ‘tax’ and you label something else as ‘family tax benefit,’ it is possible to abstract from the labels and go to the essential monetary point that many people who are paying taxes are in fact in net receipt of money from the Commonwealth. That is simply a reflection of the distributional policies which are embedded in the combination of the tax system and the transfer system.

This is a slight tangent but we got into it in the Henry review when we were asked to look at the tax and transfer system. When you take two steps back from that and think of the tax and transfer systems as a combined entity, it looks rather different to when you just look at the transfer system and just look at the tax system. Obviously, if you stare at these issues for long enough, you can get into all sorts of levels of detail. I do not want to get into a detailed conceptual argument here. If you just focus for example on someone who is paying $1,000 tax but they are in receipt of $10,000 of FTB and you say to them, ‘Your $1,000 of tax was spent on the range of issues which is required to be said,’ is that actually an accurate reflection when they are in net receipt of money?

CHAIR —It probably is to the extent that they are paying tax. As recipients of the government benefit, they would be aware that they receive government benefits. The same argument that you use could be used for yourself. As a taxpayer, your salary is paid ultimately by taxes but you pay tax as well.

Mr Parker —Yes.

CHAIR —That said, a measure that is presented once a year to you—although I imagine you would probably have a pretty good grasp of it anyway—showing the way that the taxes you have paid have roughly been divided up by government spending and allowing you to compare how that looks from year to year and build up a picture over a number of years may well be quite useful for you if you did not have the inherent knowledge that you do. Even though it may not accurately reflect the transfer of payments between yourself as a taxpayer and the government in full, it gives you a picture and an understanding to some extent of how government is taking the taxes you pay and how they are applying them in the business they go about from day to day.

Mr Parker —Yes, sure; I am not dissenting from that at all. I am simply making the point that, if you choose to describe someone’s financial relationship with the government in one respect, it is essentially arbitrary when there are other financial relationships there. We could redesign—

CHAIR —It comes back to the purpose of why you would be doing this.

Mr Parker —Yes.

CHAIR —It is not necessarily to give an accurate and full description of the financial relationship between a taxpayer and the government, but it is to give them an indication in general of how their taxes, along with the taxes paid by every other individual in the country, are applied in what the government does—particularly not just in a single year but over a period of years to see how that might vary and to paint a picture of what their governments are doing for them with their taxes.

Mr Parker —Yes. I am not dissenting from that; I am simply making the observation that the distinction between tax and some other benefit is essentially arbitrary and depends on how it has been defined, one way or the other. There is one other conceptual thing which has occurred to us—perhaps before passing to the practical administrative issues—and this in a sense is just flipping the conversation we have just had over the other way. You mentioned that we are looking at the way taxes are spent. That is not the totality of the relationship that government has with the economy in an economic sense. There are a whole bunch of tax expenditures, for example. It is a slightly odd label, but everybody understands that what it means is—

CHAIR —Concessions too.

Mr Parker —a concession in the tax system which is equivalent to tax and spending. If you wanted to sit down and design a system of this sort, ought the tax expenditure to be counted as an expenditure for the purposes of this exercise or not? These are questions we need to raise.

CHAIR —And you have issues of other taxes—

Mr Parker —Sure, exactly.

CHAIR —which are not income tax, which are raised by the government and then fall into consolidated revenue—

Mr Parker —That is right.

CHAIR —and form part of the spending. I understand that there are a lot of issues that we could spend days going through to try to work out, but I think that the inherent intention of this amendment is to provide something simple and consistent. It might not represent—for the reasons which you have raised just then, which I acknowledge—an absolutely accurate picture in a single snapshot of where your taxes have gone, but it would give you an indication. And it would be particularly valuable, I think, for a taxpayer over a period of years to see how that might change. That is really, I think, the intention behind this. If the intention were to have an absolutely thoroughly accurate snapshot at any particular point, or at the point where the tax assessment is issued, of how that money would be spent, I do not think you could ever do it and I do not think anybody would suggest you could. But there is value, as we discussed, in increasing the transparency. If we could get to a point where we could have a consistent picture that is given to a taxpayer on a yearly basis so that they could look at it and get a feel for how their money is being spent and, over time, a feel for the change in how that money is being spent, I think that would be valuable for the taxpayers. I have more questions, but I will call Senator Pratt.

Senator PRATT —I have a range of questions, but I might just pick up on some of what the chair has raised so that we can continue thematically. I would be concerned about whether what is listed here is a true representation of expenditure. For example, under item 7 it talks about taxation revenue going to the states, territories and local government, although much of that expenditure also relates to health, education and other types of activities that are listed at item 6. How accurate is the information listed before us as a true representation of government expenditure?

Mr Parker —There are essentially two issues in that sense. One is a measurement issue. The government does publish breakdowns of total expenditure into the categories. We publish probably the most digestible and high-level cut at that every year in the ‘budget glossy’, so called. It is at page 38, I think—a couple of pie charts of revenue and expenditure. Eventually all of these things can get sorted out, but these things are not sorted out on 30 June every year.

Senator PRATT —How soon do people start getting tax returns lodged and looking for their money back? It seems to me that there is a direct link between you getting your tax assessment and any money back and at the same time the government being ready to give you this information. Is there a problem there?

Mr Parker —Yes, there is a problem in terms of the ability to administer these things. It goes, as I mentioned at the outset, to timeliness and accuracy. Every year we publish the Final Budget Outcome, which has detailed reporting on what actually happened for the financial year. It can be amended in the event of new information as you get it, if there are errors and so forth. That is required to be published by 30 September every year. When I sign off on the accounts for the Treasury, that is generally in August or something like that, once the whole thing has been audited properly.

Senator PRATT —Is it September because it takes time—

Mr Parker —It takes time, yes.

Senator PRATT —to pull that kind of information together?

Mr Parker —That is right. And someone could lodge their tax return straightaway, essentially.

Senator PRATT —And yet this proposed legislation provides a direct link that says a tax return shall be issued and a notice shall be issued with this information. It does not have any exemptions or exclusions, so it would mean no tax return until at least September, but then there is the question of the accuracy and whether this information is likely to change slightly over time as well. In that context, it says:

The taxpayer’s share of the Australian Government net debt for the financial year, to be calculated by dividing the Australian Government net debt by the number of individual taxpayers.

How many taxpayers is that? Does the number of taxpayers change? Do you know how many taxpayers you are dividing that by? Could you do that calculation all at once, or would it need to be done many times and the information result changed? Is it a true representation? Is an individual taxpayer an individual person? Should it relate to the amount of tax that they have paid?

Mr Parker —We have wondered about all of those questions and some more as well. I would like to ask Mr Monaghan.

Mr Monaghan —From our point of view, if we need to provide personalised information to taxpayers, that information has to be timely, accurate and final. So, to the extent that there is a lack of the data which we need to provide with an assessment, we would have to wait until we had that. If that was not final and accurate until September then we would not be able to provide that to taxpayers before then. Where the information to be provided is part of the assessment process, we would have to be extremely careful that the information we provided was timely, accurate and final. That would mean that we would not be able to issue assessments until we had that.

In speaking of the process of assessment, it is also important to note that taxpayers will challenge the validity of an assessment process, in particular the service of the assessment, where they feel there is an opportunity to succeed in a challenge. Some taxpayers will challenge the process where they feel that there is an inaccuracy in that process. So we would have to be very careful that what we provided to taxpayers was, as I said, accurate and final.

Senator PRATT —If you are creating a direct link between how much someone is getting back in their tax and a statement like this and if the information in the statement changes at some point in the future are you arguing that taxpayers will perceive that that is a reason to challenge their assessment, or can they just object to the information provided?

Mr Monaghan —It is highly likely that some taxpayers will challenge an assessment process where they can. Where we are providing information in addition to the normal assessment process it is inevitable that some taxpayers will challenge that, at least in the early days. We would then be in a position of having to decide what to do with all the assessment if there was a systemic issue. If there is a challenge to a tax technical point like whether you can deduct some particular expense or something we can corral those assessments, which we do, and we take no recovery action until a court case is resolved. We would be concerned where there could be a challenge to the actual process, a systemic challenge, that would create a lot of uncertainty as to the assessments issued to everyone else.

Senator PRATT —Why, because the bill outlines that this is your share of debt and because this is how much tax you pay? Is it those kinds of relationships?

Mr Monaghan —Where we need to provide precise information, as I have said, it would need to be accurate, final and ready in time. To the extent that there is any uncertainty in terms or uncertainty in whether the data is final or accurate that would bring serious disruption into the assessment processes and would also cause delay because we would need to wait until we were sure we had what we could reasonably argue was timely, accurate and final information.

CHAIR —Are you seriously suggesting that you think that challenges to assessments as to the final amount of tax payable by taxpayers would be made and would have any chance of succeeding because you might have issued a tax receipt which had a break-up which was based, and clearly notated as being based, on the budget figures as opposed to a final figure? I do not disagree with you when you say that taxpayers, if they think they have a chance of successfully challenging assessment, will do so if they have the resources. It is a resource intensive thing to do to challenge the ATO and its assessments. I cannot imagine any legal advisor providing advice to a taxpayer that, because the tax receipt, which is attached to the assessment, which was calculated based on tax laws that are either right or wrong in terms of how you have applied them, might succeed based on a separate tax receipt. I find that quite incredulous.

Mr Monaghan —If we are required to provide information to taxpayers in a personalised way—

CHAIR —It does not affect their assessment at all.

Mr Monaghan —No, but it affects the assessment process. So, if there was a requirement that the process of assessment must include certain information—

CHAIR —It is not the process of assessment. Once the taxpayer’s assessment has been calculated and you establish, from the ATO’s perspective, what the taxpayer’s liability to the government is then you take that figure, which has been calculated quite separately, and apply that to the tax receipt. It does not impact at all on the actual figure.

Mr Monaghan —But it does affect whether the assessment was properly made and served.

CHAIR —If you put appropriate riders on the tax receipt then and say that, due to the fact that the final figures have not yet been released, this tax receipt has been calculated against the budget figures, or MYEFO or whatever it might have been, which were the most recently available figures, then that surely squares that away. It is as accurate as it could possibly be at that date.

Mr Monaghan —That, of course, always depends on what the law requires. The point I am making is that, for us to provide personalised information to taxpayers, we would need to have that in a timely, accurate and final way and, where there was uncertainty in any of those things, we would have to wait.

CHAIR —I do not concede the issue that you would have people challenging the bottom line of their assessment based on the fact that the tax receipt was not based on the final figures. But to the extent that what you raise is an issue in terms of the uncertainty of what you actually use for your tax receipt that could all be clearly established as part of the process of putting it through. If that is an issue in terms of the way this is worded that can be addressed.

Mr Monaghan —The critical issue is when would we have, under any particular legislative proposal, accurate and final information that the legislation was requiring us to provide to taxpayers. To the extent that that was not available we would not be able to issue assessments until it was. It would depend on how the legislation was framed. Mr Parker has pointed out that there is a range of budget expenditure data which is not available until September. It is some time after the current financial year when the actual number of taxpayers would be known. Taxpayers lodge over a long period of time and someone can be a taxpayer and not lodge but they are still a taxpayer. There are taxpayers who may lodge as non-taxable. We might assess them as owing a very large amount of money which they might never pay. If there were a proposal that was framed around the assessment amount raised rather than the amount paid, that would create a problem for us as to what information we provided.

CHAIR —They are all good practical questions but they can all be addressed.

Mr Monaghan —I am not denying that.

CHAIR —We can say that these are the issues that need to be addressed in order to be able to provide taxpayers with a greater degree of transparency as to how the taxes are generally spent—a greater degree of indication and a greater degree of knowledge. All those practical problems—I am not denying that some of them appear to be quite valid, maybe all of them—could all be addressed by sitting down and working through them.

Mr Monaghan —That is possible. I am not denying that that is possible. I am pointing out the practical questions for us in meeting a requirement to provide information to taxpayers.

Senator PRATT —It does seem like a lot of work in terms of why you would bother creating this much technical detail for an individual taxpayer. In a general sense this kind of information would look the same for your average taxpayer in terms of the proportion. If they pay a little bit of tax then -

CHAIR —Because the proportion would be the same it would make it quite simple to calculate it once you put the processes in place.

Senator PRATT —There are other complicating factors. Can I ask about hypothecated taxes, are they lumped in here generally?

Mr Parker —I am not sure. We do not have very many hypothecated taxes.

Senator PRATT —We do have a few, so how would you treat something like the Medicare levy.

Mr Parker —The Medicare levy is not hypothecated.

CHAIR —It goes into consolidated revenue does it?

Senator PRATT —How would you take that back out to make a true representation of this?

Mr Parker —We are not sure. As Senator Bushby has said, all of these issues could be addressed but, on the basis of what is actually before the committee and what we have been asked to respond to, they still remain to be addressed.

CHAIR —That is why you are here to help us work through these issues.

Mr Parker —Sure.

CHAIR —On the hypothecated taxes issue if the Medicare levy is not hypothecated, presumably that means it goes into consolidated revenue, why do we maintain the Medicare levy then? Why do we not just build that into income tax?

Mr Parker —That is a good question.

CHAIR —Was it ever hypothecated?

Mr Parker —I am not certain about the answer to that question. The Henry report, for example, looked at this issue against the vision of a much simpler personal tax system with a higher threshold. It was proposed that the Medicare levy be absorbed into tax rates. On the other hand, as a matter of practicality, I am not sure what the specific evidence was for this statement, but it is one of the more popular parts of the tax system.

CHAIR —So perception by taxpayers is probably the reason it is still there, in terms of an understanding of where their money is going and how it is being spent. That probably serves to underline the advantages of a tax receipt type of system, whereby people have a greater understanding that when they pay their money some of it will be going to health and some of it will be going to defence and some of it will be going to other aspects of government expenditure.

Senator PRATT —A receipt does not imply some kind of accuracy attached to that, though. Taxpayers’ assessments all happen at different times, which means surely the figure of what is in someone else’s receipt will change according to how much tax someone else has paid or is going to pay.

Mr Parker —That would depend on how you set it up.

CHAIR —Has the department ever looked at an idea like this before—a tax receipt or a way of giving a better understanding to taxpayers as part of their annual assessment or otherwise of how taxes are spent?

Mr Parker —I am not certain.

CHAIR —Would you mind taking that on notice?

Mr Parker —Sure.

CHAIR —Has the department done any work on how government expenditure can be most clearly apportioned amongst functions?

Mr Parker —The whole structure of the budget documents is essentially founded on generations of work and research which has gone to the structure of the national accounts and so forth.

CHAIR —I am asking the question because of the issues surrounding the different ways that money is actually raised and then how it is spent and how you might apportion that so that people can get a better understanding of where the money comes from or where it goes to. Once the relevant systems have been set up, and presuming that we could address the practical issues that both the ATO and Treasury have raised, what ongoing costs would there be to the system?

Mr Monaghan —Clearly the costs depend totally on how it is set up, but our estimates are that providing additional information in the assessment process would cost us in the order of $10 million over the four-year funding—

CHAIR —Where would most of those costs come from?

Mr Monaghan —It costs money to prepare and print an additional page; it costs money to include it in the system—you can imagine the volume we produce, and the system is very sophisticated.

CHAIR —You would have to include it in enveloping machines and all those sorts of things.

Mr Monaghan —And make sure it is the right one—the one that matches that taxpayer. We would expect to get a lot of phone calls about what it meant. That would be an additional cost. So it just depends how it is done. Our preference is always, whatever the issue, not to tamper with tax time or with the assessment process, because it is a very complex, very sophisticated process.

CHAIR —But it is complex because it has been tampered with on many occasions.

Mr Monaghan —I mean the process; not the content of the assessment but the sheer process of processing taxpayers’ returns, many of which are now lodged electronically through e-tax.

CHAIR —But they all get an advice on paper of their assessment, at least to their agent if not to them directly?

Mr Monaghan —Yes, they do. That is right. But the process of capturing either a paper or an electronic return, undertaking the assessment process and issuing the assessment in a timely way—and taxpayers expect it to be timely—is a very sophisticated process. We would be concerned about any addition to that process. Some taxpayers will challenge the process of the assessment—not the amount, not the way their liability is calculated, but the actual process. Some taxpayers will challenge that where they get a chance. It has happened in the past many times.

Senator PRATT —Clearly this is therefore something that everyone will be affected by, in the sense that, while some people will dismiss it, it will also have a snowballing effect because it is every taxpayer.

Mr Monaghan —Yes. If it was a challenge to something which occurred in every assessment process, that would cause, we believe, major disruption to the issuing of assessments. In particular, if the challenge to an assessment process came from someone who owed money, not someone who was getting a refund, we would clearly have to go through processes to convince a court that the money was properly owed.

CHAIR —That is no different to how it is now.

Mr Monaghan —Sure. Exactly. But we would be concerned if there was an additional step in the assessment process which—

CHAIR —It is not an assessment process. The assessment would be completed and then that—

Mr Monaghan —If the service is tied to the provision of some information, we would be concerned about such a structure.

CHAIR —The question was about costs. Is that $10 million an ongoing annual cost or does it include a setting-up cost as well?

Mr Monaghan —It is $10 million over four years, with the bulk in the first year.

CHAIR —So the bulk is upfront. Do you have a break-up of that $10 million over those four years?

Mr Monaghan —I would have to take that on notice.

CHAIR —If you could take that on notice, it would be appreciated. I have a couple of final questions which are simple ones. How many Australians receive individual taxpayer assessments each year, roughly?

Mr Monaghan —Roughly 10 million, but I will confirm that.

CHAIR —What proportion of those incur a positive net tax liability?

Mr Monaghan —I will double-check, but I think it is about 25 per cent.

CHAIR —If you could take that on notice as well, that would be appreciated.

Mr Monaghan —We will confirm that, but it is in that order.

Senator PRATT —Just to confirm, the bill as currently drafted would delay tax returns beyond September at least?

Mr Monaghan —It is not my role to comment on the bill as such, but I repeat that, if we have to provide personalised information to taxpayers, it has to be timely, accurate and final. Where that is not the case, we would have to wait until we had that information.

Senator PRATT —How do the government and the agencies currently provide publicly available information about expenditure? What might the tax office and the Treasury be doing to improve that?

Mr Parker —As I have said, there is a range of information published at almost any level of detail you could wish for about expenditure, including the portfolio budget statements of each portfolio. In terms of accessibility and digestibility, the so-called budget overview, the glossy, is now part of the lexicon. Most people will go to that before any other document. That provides a summary. In line with the general move into the electronic medium, all of that information is available online from Treasury and other websites.

Senator PRATT —As simple as you might like it, or to drill down—there are quite good pie charts that are pretty good representations, and then you can drill right down into as much complexity as you could possibly bear.

Mr Parker —Yes. It is all online, including the monthly department of finance financial flow statements.

Senator PRATT —I do not have any further questions, thank you.

CHAIR —I have one follow-up question to that. Do you have any understanding or estimate of what percentage of Australian taxpayers would actually access that information?

Mr Parker —I expect it would be a small number.

CHAIR —Probably a small proportion of one per cent of taxpayers, I would venture to suggest.

Mr Parker —Possibly.

CHAIR —Thank you very much for your assistance tonight and thank you for coming in late, out of hours. It is greatly appreciated. We cannot always see you at times that would be more convenient to you, so I appreciate the time you have taken to come here. I declare this hearing closed.

Committee adjourned at 8.45 pm