Role of the Committee
The primary role of the House of Representatives Standing Committee on Tax and Revenue is parliamentary scrutiny of federal tax administration. Prior to the 44th Parliament this function was conducted by the Joint Committee of Public Accounts and Audit, including, since 2007, through biannual reviews of the Annual Reports of the Commissioner of Taxation. These recurrent reviews continue to be conducted under Standing Order 215(c) which authorises the Committee to examine the annual reports of agencies allocated to it by the Speaker. In addition, the Committee may receive a ministerial referral to investigate areas of tax and revenue policy. The Committee also has the capacity to request the Inspector-General of Taxation, under section 8(3)(d) of the Inspector-General of Taxation Act 2003, to undertake aspects of inquiry into the tax system.
On the 25 November 2016 the Committee adopted the terms of reference provided by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP. The full terms of reference are detailed at the front of this report, along with an explanatory paper provided by the Treasury in support of the terms of reference. Both the terms of reference and the explanatory paper were published to the Committee’s website.
The scope of this inquiry was limited by nature of the role of the Committee—and through the terms of reference—to the prevailing and emerging taxation environment and tax administration within that context. The Committee has received high level commentary about taxation policy, most comment supporting policy streamlining; with reference to simplification as raised in Australia’s Future Tax System Review (the AFTS review).
The Committee has not extensively delved into the detail of taxation law, which is vast and beyond the capacity of the Committee’s resources in the period of inquiry. Rather, the Committee has explored the broader taxation eco-system, both domestic and global, the factors influencing that environment, and the way stakeholders perceive and operate within it. Importantly, the Committee has considered what influences positive taxpayer behaviour in their interaction with the tax system and what constitutes favourable engagement frameworks.
The Committee considered new payment platforms, use of Information Technology (IT), cyber-currencies and the potential use of blockchain technology for administrators and regulators. And against that backdrop, and that of the Government’s ‘digital by default’ agenda, the role of cyber‑resilience, cyber‑security and access to the tax system for all stakeholders; not just the digitally astute or the affluent.
There was limited specific comment during the inquiry on tax regulation per se. This response aligned with the principal intent of the inquiry as revealed in the explanatory (or background) paper provided by the Treasury to provide guidance on the reference. The explanatory paper is reproduced in this report following the full terms of reference. The paper refers to the AFTS final report which imagined a 21st century tax system which would ‘allow taxpayers to engage with it in ways that meet their needs and preferences’. During the inquiry the Committee received evidence to consider whether the current tax system—in an environment not envisaged a mere eight years ago when the Henry tax review reported—is doing that, or heading in that direction.
The explanatory paper specifically highlights exploring overseas tax agency experiences and the use of behavioural insights in how taxpayers currently engage, how they may engage in the future and how this information could inform the longer term tax policy agenda. It was from that stance that the Committee explored not only the existing taxation environment (altered since the AFTS review due in part to rapidly evolving working practices) but also the potential (and not necessarily distant) environment, including emerging technological opportunities and potential threats.
Terms of reference—included taxpayer disengagement
The terms of reference for the inquiry were principally about how taxpayers engage with the taxation system (be that overtly or indirectly) but the Committee was also tasked with considering the explicit decision by taxpayers to not engage with, or not fully engage with, the tax system through ‘cash economy’ or ‘hidden economy’ means. A fortnight after the Committee’s adoption of the inquiry, on 14 December 2016, the Government announced the Black Economy Taskforce, chaired by Mr Michael Andrew AO, Chair of the Board of Taxation. The Taskforce’s work covered a broader remit than undeclared cash income—also covering illicit trade and employer fraud, amongst other areas. An interim report was released on 9 May 2017.
The final report was released after the Federal Budget on 8 May 2018 which announced initiatives recommended in the report for near-term action. The report provides greater insights into the cash economy and how government agencies may help to tackle it.
The Committee’s focus in the inquiry has been on cash transaction tax avoidance in legal trade, that is, the non-declaration of some or all cash income in the course of earning income—and how this may be deterred. There is, however, discussion of the nexus between this tax avoidance and illegal activity as set out in the evidence.
The inquiry was advertised by media release, social media, the Committee and Parliament House websites and through Committee Members. The Committee sought submissions from relevant Australian Government and State Government departments and agencies, peak associations in the tax and superannuation and business sectors, regulatory bodies, academia, consultants, the emerging financial intermediary sector and social and community support organisations. Some of those contacted took up the opportunity to make a written submission to the inquiry while others participated in public hearings.
The Committee received 31 submissions (26 primary submissions and five supplementary submissions) to the inquiry, mostly regarding the engagement aspects of the inquiry—fewer addressed the cash economy and in some cases noted that a separate submission had been prepared for the independent Black Economy Taskforce. The submissions to the inquiry, with the exception of one submission with contents withheld, are available on the Committee’s website and the full list is available in Appendix A of the report.
The Committee held 13 public hearings in Canberra, Sydney and Melbourne. Transcripts of these hearings are available on the Committee’s website and a full list of public hearings and participants is available in Appendix C of the report.
The Committee would like to thank all participants for their thoughtful consideration of the issues. The Committee acknowledges the important contribution to the inquiry by individuals who prepared written submissions and those who committed to attending hearings—and to the valuable contribution by tax professionals, businesses, peak associations/unions and academics who attended hearings and/or made written submissions.
The Committee also formally recognises the particular co-operation and appearances of the Commissioner of Taxation and his staff in preparing submissions and responses to questions on notice and appearing for hearings; and that of the Inspector-General of Taxation (IGT), his Deputy and staff in examining the details of the terms of reference both in writing and at hearings. The Committee has found the past review work undertaken by the IGT most valuable and also his current work in the review of the future of the tax profession, which at the time of writing is yet to be reported on.
Fewer individual taxpayers have participated in the inquiry relative to organisations, government agencies and academics—however, academics and individuals representing organisations including tax professionals and businesses have commented on personal experiences and those of members, clients or family. This mix is unsurprising given the Australian cultural context. The subject matter is likely to reduce the gathering of primary evidence from the Australian ‘in the street’—taxation generally being accepted as a necessary impost and a subject area requiring expertise. The history of the Committee also shows lower levels of general public comment than social policy subject matter committees.
Context of inquiry subject matter
The remainder of this chapter provides an overview of the vision and recommended facets of a well-functioning tax system as envisaged in the Australia’s Future Tax System review (AFTS) report, in particular regarding the client experience of the tax and transfer system. This report stated that a modern tax system required ‘citizen-centric design’. Although this report went into tax regulation detail at both federal and state/territory levels, beyond the scope of this inquiry, it does provide an important context for the tax environment (which is largely still the same framework) that stakeholders are operating in and engaging (or disengaging) with. The report was specifically referred to in the explanatory paper to the terms of reference to this inquiry and it provides context for discussion in other chapters of this report.
Following the AFTS overview this chapter outlines the Reinventing the Australian Taxation Office (ATO) Program which was announced in a ‘blueprint document’ in 2015 as the forward-looking direction of the Australian tax administrator. Its key focus was on repositioning the ATO as ‘a contemporary, service-oriented organisation’.
The other chapters in the report broadly cover the following areas:
Chapter 2 discusses modern taxation administration and relevant contemporary developments overseas;
Chapter 3 details the tax engagement points (or cycle) for the main stakeholders and the way in which they engage or are expected to engage with the tax system;
Chapter 4 considers the mechanisms the ATO uses for outreach, education and the facilities it provides or intermediates for stakeholders to engage with the tax and superannuation system (covering behavioural insights and compliance costs in these dealings);
Chapter 5 discusses the nature and prevalence of cash economy tax evasion, its nexus with criminal activity, the potential impact of digital payment systems and currency, and considers possible measures to reduce cash-based activity.
Chapter 6 concludes with the key challenges of the current and emerging tax framework for taxpayer engagement—essentially being the willing and unimpeded participation of taxpayers—and any potential solutions (or future-proofing preparations) required.
Australia’s Future Tax System review findings—2010
The vision of Australia’s future tax (and transfer) system for the first half of the century was described in the executive summary of the AFTS Review Report to the Treasurer, December 2009. The tax system was envisaged to be efficient, equitable, transparent and effective and would need to support ‘per capita income growth rates at the upper end of developed country experience’. It would do this through high workforce participation, efficient savings and investment in education and infrastructure. It was also envisaged to encompass the following characteristics:
Through both its direct and indirect effects, it would support the commitment to Australian values of fairness, and support for those who are disadvantaged. It would exploit opportunities to reduce compliance costs and make interactions with the tax and transfer system easier, more certain, and more understandable. It would enhance the accountability of governments to their citizens.
The architecture of a best-case tax system for Australia was proposed in the review and the main proposals were outlined under nine broad themes. The report collectively made 138 specific recommendations under the following key areas—
Revenue raising through four efficient tax bases:
private consumption; and
economic rents from natural resources and land.
Configuring taxes and transfers to support productivity, participation and growth.
An equitable, transparent and simplified personal income tax.
A fair, adequate, and work supportive transfer system.
Integrating consumption tax compliance with business systems.
Efficient land and resource taxation.
Completing retirement income reform and securing aged care.
Toward more affordable housing.
A more open, understandable and responsive tax system.
While several of the preceding nine areas are beyond the scope of this inquiry, the Committee did receive comment in many of them. On a high level, it is difficult to examine taxpayer engagement without the context of the taxation regime within which it occurs. Themes in category one, ‘revenue raising on four efficient tax bases’, which highlight the tax engagement entities and engagement points—and in category nine, which stipulates that citizens should have access to a more transparent and understandable system (and more effective mechanisms to engage)—hold the most applicability to this inquiry.
Category nine is about being ‘citizen-centric’ and highlights, significantly, how critical the maintenance of the integrity of the tax system is and that ‘threats be promptly dealt with as they emerge’. More will be discussed on this in Chapter 3. Chapters 5 and 6 of this report consider threats identified in this inquiry which may have non-trivial impacts on the stability of the tax system, impede its operation and reduce stakeholder confidence in engaging. Chapter 5 focuses on the cash economy in particular.
Some aspects of the AFTS review report theme three—’an equitable, transparent and simplified personal income tax system’—have also been raised during the inquiry, including rationalising deductions and offsets. The Committee was therefore unsurprised to receive commentary in evidence that taxpayer engagement occurs within a complex and often daunting tax and superannuation environment and that compliance costs for the taxpayer can be high.
There has been very little change to the overall framework of Australia’s tax and superannuation system since the AFTS review was started a decade ago but there have been myriad of changes within the system. For example, the superannuation system experienced no less than 16 regulatory changes effective as of 1 July 2017.
The head of the AFTS panel, Dr Ken Henry AC (current Chairman of National Australia Bank) recently reflected on tax reform progress since the review. He said:
Australia’s economy is fundamentally in a good place with strong jobs growth and near-record high business conditions, likely to be supportive of strong business investment. We have a lot going for us, but not everything.
He highlighted two changes to Australia’s business environment since 2008—which cause significant impact on the tax system—dramatic changes to the labour market including rising part-time and casual work and employment status changes, along with transformational technological development disruptions. In addition, he highlighted the fastest growing population in the developed world, along with an ageing population. The Committee has explored, in particular, the impact of the first two challenges on the tax system—labour and technology change, and they will be discussed in Chapter 6. The demographic changes further affect various areas of taxation policy and engagement.
Reinventing the ATO Program Blueprint summary
In 2015 the ATO announced it had implemented a broad program of change or ‘reinvention’ which it laid out in a program blueprint following initial consultation and co-design with stakeholders. This was partly precipitated by the Australian Public Service Commission’s capability review in 2013 which tasked the ATO with transforming ‘its existing processes, systems, culture and its highly capable workforce to be more agile, responsive, efficient and effective’. The reinvention program was designed to better meet ‘…the needs and expectations of the community, while delivering on our commitments to government and the community’.
The Commissioner of Taxation, Mr Chris Jordan AO promised to transform the way in which ATO clients experienced the tax system:
We will be unwavering in our focus on improving the client experience, and will constantly check to ensure we are providing contemporary service that is conducive to willing participation in the tax and super systems.
The program considered how to emphasise a culture of integrity and driving cultural change to align with the new, more technologically focused client experience in the tax and superannuation systems. The new client experience was being driven by a changing business and working environment and the changing expectations and capabilities of Australian taxpayers—along with meeting efficiency gains in the ATO.
The program comprised:
behavioural and cultural elements;
locally managed change and application of continuous improvement; and
six strategic programs overseeing 100 projects.
The APSC’s capability review summed up the important and varied role of the Australian tax administration agency, noting it was not purely a collector of revenue, but also involved in social policy and transfer payment programs:
The ATO is the government’s principal revenue collection agency and administers a wide range of tax legislation. It has an important role in various other economic and social policies as a large payer of government funds, administrator of major elements of the superannuation system, custodian of the Australian Business Register and provider of valuation services through the Australian Valuation Office. The work of the ATO touches the lives of all Australians. Revenue collected supports most publically funded services and plays a vital role in ensuring Australia’s prosperity.
The Australian National Audit Office (ANAO) has recently tabled a performance audit report of the costs, savings and benefits of the Reinventing the ATO Program, approximately 2.5 years after the program commenced. The ATO was found to have been unable to measure and monitor the total costs of implementing the 100 reinventing the ATO projects due to low levels of staff conformance with internal cost tracking requirements. The collective costs of 67 of the 100 projects which had available data were estimated to be $300 million from 2013-14 to 2018-19. Monetary savings had not been tracked but as at April 2017 internal reporting on financial benefits were introduced across the office, including on these 100 projects.
It is important to note, however, that tangible outcomes of the 100 projects were identifiable and the ATO’s response to the ANAO findings clarified that most of the reinventing of the ATO program was in cultural change and localised action rather than through explicit programs. The purpose of the reinvention program was to transform the agency to provide ‘a stronger connection to the community and an openness and willingness to change in order to maximise willing participation in the tax and superannuation systems’. Through a connected benefits management system that links projects and program outcomes the ANAO determined that there was indeed a general improvement across the ATO’s corporate benefit categories of integrity, willing participation, revenue and productivity from 2013–14 to 2015–16 (merely two periods), particularly in the areas of willing participation and revenue.
Within the integrity category the Committee noted that community satisfaction with ATO performance had actually deteriorated between 2013‑14 and 2015‑16. This may merely reflect the views of those seeking a particular performance outcome/decision by the ATO rather than those enjoying the ‘improved client experience’ as reported under the much improved category of willing participation.
Notwithstanding this, given the tendency of the ANAO’s review finding, the Committee’s overall impression is that the Reinvention program has failed to achieve its agreed outcomes. The serious service outages over December 2016 and February 2017 and the ATO’s failure to recognise or chart ongoing problems —with the technical criterion for a breach being over four hours of outage, suggests that the ATO’s performance could look much worse.
The Committee notes that willing participation is clearly a key measure of success in taxpayer engagement. Willing participation will reflect the percentage of taxation collected which tax regulation allows. The quantum of tax collected, on the other hand, reflects the underlying structure of the tax system, the buoyancy of the economy and whether it is efficient, effective and fair.
As the AFTS review highlighted in its final report, simplicity in the tax system is not costless and that there are winners and losers in tax reform in the short to medium term. This, and the certainty of the tax and superannuation system framework, impacts taxpayer ‘buy-in’—and ultimately affects their engagement or ‘willing participation’.