Chapter 4 Theme 3 – Policy Development
This chapter examines matters relating to policy development, including:
- Foreign investment
and revenue leakage
- The tax gap
- Private rulings
- The ATO’s role in
Employer superannuation guarantee charge obligations
The Committee asked the ATO about monitoring, auditing and prosecutions
in relation to superannuation guarantee obligations on employers.
The Commissioner of Taxation replied that most employers do voluntarily
pay their superannuation contributions, and that while complaints about
superannuation not being paid were ‘important’, that they made up a low
proportion on aggregate, making up only 0.17 per cent of the Australian workforce.
Further, it was noted that complaint levels related to the superannuation
guarantee charge had been steady since 2007-08.
The ATO noted that of that 0.17 per cent of employees that lodged a
complaint, approximately a third of complaints did not result in a liability
being raised because there had been a misunderstanding, superannuation may have
been paid into an account the employee hadn’t looked at, or the employee was
not eligible for superannuation.
The Commissioner also reported on recent trends in casework and
Last year, in 2011-12, we had 19,440 complaints. That was up
from about 18,000 in 2010-11. In 2010-11 we raised super guarantee liabilities
of something like half a billion dollars, of which we collected just under $300
million—$291 million. We were able to transfer to employees $269 million last
year. This year, in 2011-12, which is the current closed year, we raised $553
million in super guarantee. We are bringing back into the net half a billion
dollars a year. We collected $314 million and were able to put into employee
accounts $293 million. We did something like 11,000 cases to 30 June 2012. We
also did some proactive work which bought in $143 million in 2011-12.
The ATO indicated that it had 711 full time equivalent employees on
superannuation guarantee and choice initiatives, and that just under 250 of
those employees were specifically engaged on superannuation guarantee audits.
It was reported to the Committee that when the ATO started a complaint
case relating to the superannuation guarantee, it would risk rate the employer
by examining whether there had been previous complaints, whether the ATO had
previously raised assessments, and the compliance history of the business. If
the employer was rated anything other than ‘low’, the ATO would look at the
complaint, and also all of the other employees across the business.
The Inspector-General of Taxation reported that he had conducted a
review of the superannuation guarantee back in 2010, titled Review into the
ATO’s administration of the Superannuation Guarantee Charge.
The Committee reviewed the recommendations made by the Inspector-General
in his report, and was pleased to see
that, for the most part, these recommendations had been implemented.
Examining the three recommendations directed to Government,
recommendations 2 and 3 were adopted, and recommendation 11 was adopted in part.
As a result, it is now law that:
- employers report on
an employee’s payslip the amount of superannuation paid into the employee’s account;
- superannuation funds
notify an employee on a quarterly basis if superannuation is not paid into an
- if a company fails
and owes superannuation to employees, that the directors of the company are
made strictly liable for the unpaid superannuation liabilities of the company.
The Inspector-General of Taxation emphasised the value of the Government
adopting his recommendation concerning payslip reporting, noting that it would
bring potential superannuation payment irregularities to an employee’s
attention more quickly.
However, the Inspector-General also cautioned about increased regulatory
burdens for employers, noting the balance that needed to be struck:
All of this needs to be balanced because with the tax system
there are so many issues. When you start wanting all this extra reporting, you
have the small business community then complaining that there is too much red
tape. There is a very fine balance to be reached. For example, if I said that
there should be more audits there, I am sure that the small business community
might also have something to say about that. All of this is a delicate balance
and there are not necessarily quick fixes.
Examining the recommendations directed to the ATO, the vast majority of
these were adopted. The one recommendation not adopted by the ATO
(recommendation 4), is however already largely occurring, and that other
portions of the recommendation would require a reallocation of resources that
would not be beneficial to the operations of the ATO.
Foreign investment and revenue leakage
During the public hearing, the Committee asked the Commissioner of
Taxation whether there was revenue leakage out of Australia when foreign
capital entered and exited the country, and whether the Australian tax system
was being exploited by foreign sovereign or corporate structures.
The Commissioner replied that he was unaware of any circumstances in
which this had occurred when involving sovereign structures, noting Australian
laws dealing with capital inflows were complex and cover a range of contexts.
He noted that in relation to capital gains tax, there was a foreign
investment concession in terms of not having to pay capital gains tax except in
relation to land-rich companies. Further, the Commissioner advised that international
tax arrangements had been reviewed relatively recently.
Looking at the issue of revenue leakage, the Commissioner noted there
were always risks with dealings that occurred offshore or were conducted with
offshore arrangements. He identified the role of the ATO as follows:
Our role is to work out whether or not there has been abuse
of the existing law in some way, and we have seen arrangements that involve
international legs that tried to apply situations that do not reflect the
underlying economic substance of the transaction.
The Commissioner also noted two recent public determinations that
covered arrangements involving leveraged buyouts by overseas investors:
A leveraged buyout is when someone gets a big loan, buys out
a shareholding in Australia and then divests some of the Australian assets and
uses the proceeds to pay back that loan. Where they do it as a matter of
business – this operates in terms of offshore private equity firms for instance
– they do it on a regular basis and their modus operandi is to buy companies
and divest of those companies in a short time, we have maintained our position
that we think that is on revenue account. So they are liable to Australian tax
if that occurs. What often occurs in some of these arrangements is that they
try to take advantage of what benefits exist in terms of the treaty network
around the world.
The Commissioner concluded by noting that such ‘treaty shopping’ was
subject to the ATO’s general anti-avoidance rules.
The Deputy Inspector-General of Taxation noted that there was an
inherent tension between what Australia wanted to do, and what other
jurisdictions did, and that the aim was to try and reduce any overall tax that
was unnecessary in cross-border transactions, and that there was always some
tension in dealing with other jurisdictions to ensure that everyone perceives
there to be a fair system and that there is a ‘fair game’ being played between
The Inspector-General noted that there was always going to be some
revenue leakage in foreign transactions, but that there was a balance to be
struck in considering these issues:
...at the end of the day you want to make sure that there is
not leakage that is really hurting the country. But, on the other hand, as a
Prime Minister of another country has said, we want the world to know we are
open to business. So there is a delicate balance to be reached here.
The Commissioner of Taxation agreed for the need for balance, and that
Australia had to bear in mind the fact that it was an open, small economy in a
global world, and that it was a capital-hungry country seeking to sell its
resources, and it had to work within that context.
The tax gap
The Committee has previously taken an interest in the tax gap. The tax
gap can be defined as the difference between the amount of tax payable if there
was complete compliance with tax laws in a defined period, and the amount
actually collected for that period. There is no generally recognised formula
for calculating the tax gap.
Methodologies to measure the tax gap
The ATO reports a growing interest in measurement of tax gaps
internationally, and that work is being done that may lead to better
methodologies. Further, different countries favour different approaches. The
United States focuses on non-filing, under reported income, and underpayment of
tax. The United Kingdom takes a ‘top-down’ approach, comparing actual revenue
with what might be expected from a comparison with national accounts. The ATO
takes a similar approach when looking at indirect taxation.
It was unclear whether the ATO calculates a comprehensive national tax
The Commissioner informed the Committee that there had been some tax gap
analysis conducted using a ‘top-down’ approach, in the area of the GST. He
expressed optimism that this analysis would be made public in time, and that
preliminary work had suggested the tax gap in this area was small compared to
most modern countries, and that it was also trending downward.
In relation to direct taxation, the ATO has started to use a ‘bottom-up’
approach, estimating components of the tax gap using surveys and administrative
and operational data. The ATO indicates that it will continue to follow
developments overseas with interest.
The Inspector-General of Taxation advised that to do full tax gap
analysis, random audits would need to be conducted to provide an untainted
dataset, but noted this would have a significant impact on the Commissioner of
Taxation’s resources, moving resources from conducting audits that may raise
some revenue to audits that would not be able to raise any revenue at all. However,
the Inspector-General also noted the usefulness of tax gap analysis, and that
even though gap analysis may provide an imprecise figure, that some measure was
better than no measure at all.
The ATO noted the differences between gap analysis and the definition of
the tax gap in Australia and other jurisdictions. It reported that in
Australia, the term tended to mean people who didn’t submit returns and
operated in the cash economy, whereas many international measures included
timeliness of lodgement and debt repayment, and the accuracy of returns.
Further, Australia’s system of full lodgement of returns for all income earners
was not the case internationally. The Committee heard that to obtain a robust
sample with which to do gap analysis, approximately 40,000 random audits would
The Commissioner also noted the work the ATO did with Treasury to
forecast expected revenue. He advised that Treasury had models of the economy
that were used to indicate the level of tax that should be collected, and that
the ATO worked closely with the parameters created by this modelling.
The Committee has also previously taken an interest in the ATO’s
provision of private rulings. A private ruling sets out the Commissioner of
Taxation's opinion about the way a tax law applies, or would apply, to a
taxpayer in relation to a specified scheme or circumstance. The Commissioner of
Taxation must administer the law in the way set out in the ruling, unless the
ruling is found to be incorrect and applying the law correctly would lead to a
better outcome for the taxpayer.
The Committee asked about developments surrounding private rulings. The
ATO replied that there had been a slight reduction in the number of private
rulings sought recently, and that most businesses were happy with the guidance
provided by the ATO. The Commissioner advised that private rulings were
primarily used for cases that are genuinely contentious, but that the ATO had
focused on improving its guidance materials:
We have a lot of guidance materials and we have stepped up
practical plans and common-sense rules of thumb that most taxpayers follow and
which usually get them the right sort of answer.
The Second Commissioner noted there had been a major review and
re-engineering of the private rulings process, as the ATO had struggled with
timeliness of rulings, rather than quality, but that the process had yielded
improvements in timeliness and maintenance of quality. She further advised that
the ATO would prefer more people, if they required definitive answers, to use
the private ruling system to secure certainty.
The Committee was also advised that there tended to be more ruling
requests when new provisions were enacted rather than when there were periods
in which taxation legislation was relatively settled.
The Committee asked whether private rulings were being codified, with
the ATO advising:
Part of our process is to look at ruling requests from two angles.
One is: is it telling us there is a need for education, or is there a risk that
we will need to do further reviews? The preference is to opt for education if
we can. [Secondly] …is there something here that could be codified in a public
ruling, a class ruling, or some other product. Rulings are not always the
answer to what’s being asked; sometimes it is something like a simple
checklist, but it can be a whole range of things.
The ATO’s role in shaping legislation
Increased consultation between the ATO and Treasury
The ATO noted that a closer relationship with Treasury in discussing
proposed tax legislation had yielded significant benefits:
I strongly believe our early involvement in policy and law
design helps ensure that implementation and ongoing administration issues, as
well as compliance costs for the community, are taken into account during the
The ATO also noted the existing protocol between Treasury and the ATO
had recently been revised to encourage greater cooperation and consideration of
practical implementation during the law designing process. It was further noted
that the protocol was consistent with a number of other government initiatives
designed to support greater consideration of the implementation issues at the
Cabinet stage of decision making.
Mr John Malkovich, a long standing member on several ATO forums noted
the benefits of greater Treasury involvement to understand the practical
application of legislation:
...I talk to a lot of people who say: ‘The last thing I feel
like doing is sitting down and doing any books, reading brochures, or doing
this. I just wish I didn’t need to do it. What can we do to simplify it?’ If
Treasury heard that sort of feedback on what some of the hurdles are for small
business people before anything becomes law, before it becomes policy and
before the ATO needs to administer it that would help immensely. A lot of the
time the ATO says ‘We only administer it. There is only so much we can do,’ and
they go back to Treasury and say, ‘What can be done?’ But I think if it were
done earlier on it would make things a lot easier.
COSBOA reported to the Committee that it had noticed the increased
coordination and cooperation between the ATO and Treasury, noting that Treasury
was openly working through policy propositions to understand the practical
implications of legislative changes, and that this visible liaison had
contributed to marked improvements in outcomes for small businesses.
In reply, the ATO noted there had been Treasury participation in the
Commissioner’s Small Business Consultative Forum, and that Treasury had found
their involvement with the forum useful. Further, Treasury was involved as an
observer at the National Tax Liaison Group meeting.
The Second Commissioner reported that while Treasury was a comparably
small agency, they had sought to consciously engage the ATO at senior levels,
and had also started their own consultative forum to meet with key members of
the tax industry for ‘frank and confidential discussions’ on key issues.
The Tax Institute supported the remarks of the Second Commissioner,
agreeing that Treasury had increased its consultation following a strategic
The Commissioner of Taxation noted the importance of his role in
relation to Treasury:
In terms of the advice, part of the role—and it is not a role
associated with the application of the law to taxpayers—is to see how the tax
provisions and the superannuation provisions are working on the ground. There
is an implicit responsibility, albeit not under the independence rules, to
advise Treasury and the government of the day about what we are seeing on the
ground. That is a very strong and important role of the commissioner. When we
play this role, we play it wearing a different hat; we play the role wearing a
hat as an advisor to the government through Treasury on what we are seeing in
Government Response to Recommendation 2 of JCPAA Report 426
In its last report on tax administration, the JCPAA recommended that ATO
notifications to the Government, either directly or through Treasury, on tax
policy and legislative problems be made public within 12 months of submission,
along with the Government’s response. The Government responded, disagreeing
with the recommendation, stating:
There is a significant risk that publishing ATO notifications
to the Government about potential legislative problems could lead to
uncertainty and confusion in the taxpaying community about how the ATO will
administer the existing laws. Dialogue between the ATO, Treasury and the
Government may canvass a range of issues which could colour the interpretation
of the existing law and existing ATO published views.
At his appearance before the Committee, the Commissioner was asked for
his opinion on the Government response, with the Commissioner noting the matter
was one for the Government, and that his statutory responsibility was to remain
independent of decisions made by the Government:
The Australian system gives the Commissioner the opportunity
to make those decisions with integrity in accordance with the law in a way that
meets the statutory responsibilities that are on the Commissioner.
…it is my experience that this Government and successive
governments have been very careful in not impeding the statutory independence
of the Commissioner in relation to the application of the law to various
taxpayers nor regarding the risk management choices that we make in terms of
how we allocate our resources. I can state quite categorically that the level
of independence in Australia is very strong and very rigorously protected.
In considering the Government response further, the Committee inquired
as to the volume of advice provided to government that could be considered to
be technical, with the Commissioner replying:
The majority of them are of a technical nature, but they all
build in terms of the ongoing legislative workload that a government might
have. It would need to make choices in terms of whether or not it decides to
accept advice that we provide through Treasury and when that can happen.
Sometimes minor changes can take a long time. The more significant ones from
the Government’s perspective are done more quickly.
The Committee remains concerned that failure to comply with the
superannuation guarantee charge remains a problem for working Australians. Ensuring
employers pay into employee superannuation is of critical importance, as losing
a job and finding no superannuation has been paid into an account has the
potential to be devastating. However, the Committee notes that this remains an
issue because of unaware or unscrupulous employers. The Committee was pleased
to hear that complaints in this area had been steady, and compromised a small
percentage of the Australian workforce.
The Committee notes the resources put in place to address superannuation
guarantee charge issues, as well as the way in which the ATO deals with these
issues, risk rating employers who have been subject to a complaint, and
conducting further investigations when justified.
Additionally, the Committee notes the Auditor-General’s statement that
he was considering adding examiniation of the superannuation guarantee charge
to his forward planning program.
The example raised by the Inspector-General of Taxation surrounding
payslip reporting of superannuation payments serves as a good example of the
Inspector-General identifying systemic issues and recommending changes that
assist all taxpayers.
Considering the positive reception of the recommendations of the
Inspector-General of Taxation in his Review into the ATO’s administration of
the Superannuation Guarantee Charge, the implementation of the majority of
recommendations, and the rationale behind the rejection of recommendation 4,
the Committee is of the opinion that there is no need to specifically encourage
further implementation of these particular recommendations.
With regard to the tax gap, the Committee would also like to see more
work done on tax gap analysis. While the evidence presented to the Committee
doesn’t suggest that Australia has a significant tax gap, it would still like
to see more work done in this area.
The Committee notes that requiring a sample of approximately 40,000 random
audits would make comprehensive gap analysis difficult in several ways. However,
the Committee does not believe that a large tranche of random audits is the
only way to conduct some meaningful analysis of the tax gap.
The Committee wishes to see more information on gap analysis measurement
in next year’s submission, and resolves as follows:
That the Australian Taxation Office examine tax gap
methodologies to produce a comprehensive national estimate, and report to the
Joint Committee of Public Accounts and Audit on the positives and negatives
of these methodologies and whether implementation is practical.
That this report form part of the Australian Taxation
Office’s submission to the Joint Committee of Public Accounts and Audit’s
2013 Annual Public Hearing with the Commissioner of Taxation.
The Committee was pleased to hear that the ATO had done some tax gap
analysis related to GST collections, and would like to see this document made
public as soon as it is finalised.
That the Australian Taxation Office publicly release its tax
gap analysis relating to Goods and Services Tax collections when the analysis
has been completed.
Looking at the issue of private rulings, the Committee was pleased to
hear there has been some levelling of the playing field in the use of private
rulings, with a move to guidance materials, rather than making determinations
for individual taxpayers. While there is a place for private rulings, in the
interests of openness, all taxpayers should generally be subject to the same
The Committee was also extremely pleased to see improved cooperation
between the ATO and the Treasury on both revenue analysis and policy
development. ATO involvement in evaluation of legislation allows for the
practical implications of legislation to be considered, and should generally
lead to better outcomes for Treasury, the Australian Taxation Office, and, most
importantly taxpayers in general.
The recent adoption of a new protocol to provide a framework for working
arrangements between the Treasury and the ATO provides an important formal
mechanism to guide interactions between the organisations, and should support
The Committee notes the response of the Commissioner of Taxation to its
queries about the Government Response to JCPAA Report 426, and supports
the statutory independence of the Commissioner of Taxation.
However, the Committee voices its dissatisfaction with the response made
by the Government. Although the Government Response highlights the potential
for taxpayer confusion, it fails to acknowledge or consider the potential
benefits of transparency and showing the continuous improvements made to the
While the position of the Government is understandable, the Committee
believes taxpayers can determine the difference between formal statements made
by the ATO to taxpayers, and advice to Government from the ATO that may never
become law. Further, the Committee believes that taxpayers would understand the
risks involved in relying on information from the ATO that had not become law.
Further, the Committee notes the Commissioner’s statement that the
majority of advice provided to government regarding legislation is technical in
However, at this stage, the Committee falls short of reiterating its
recommendation, acknowledging the formal position of the Government on this
matter. The Committee believes that the principles of increased transparency
and demonstrated improvements should be further considered by the Government in
relation to ATO notifications.