The Australian Tax Office (ATO) aims to foster and support a tax system where ‘Australians value the tax and superannuation systems as community assets, where willing participation is recognised as good citizenship’.
Australian taxpayers primarily engage with the tax system during three key activities:
during income derivation and reporting (and payment of salaries/wages and superannuation contributions);
when purchasing goods and services; and
in reconciling their tax obligations on income earned during a taxable period (directly, or through a tax agent).
This chapter considers how taxpayers currently engage with Australia’s taxation and superannuation systems. It covers the ATO’s processes for interaction with taxpayers, in particular, with individuals and small business, and the design and refinement of user friendly software systems, tools and products to improve accuracy and taxpayer compliance. While it does not, in any detail, discuss specific tax regulation, the nature of Australia’s tax system and how this impacts willing participation is discussed.
Finally, the chapter considers the likely re-definition of the role of tax intermediaries in response to these factors going forward. The use of behavioural insights and education to support voluntary engagement, and future challenges and opportunities for tax regulation are dealt with in following chapters of the report.
Stakeholders in tax engagement
Four key stakeholder groups engage in Australia’s taxation system for individuals and small business—employees and employers, sole traders and tax professionals. The ATO also manages tax engagement with five other main client groups, comprising privately owned and wealthy groups; public companies and international businesses; not-for-profit organisations; superannuation funds, and tax professionals and other intermediaries.
As indicated by the terms of reference for this inquiry, this chapter will focus on the effectiveness of the ATO’s systems for engagement primarily with individuals and small businesses, and on its work with tax professionals.
Employees and employers
A key feature of Australia’s tax system is the use of unique engagement identifiers—for example, for individuals, a Tax File Number (TFN), and for businesses, an Australian Business Number (ABN). There are various implications if you do or don’t have, or don’t quote one of the identifiers in the system. As such, there are incentives to register in the tax system.
The majority of Australian taxpayers are individuals, mostly salary or wage earners who have taxes remitted from their regular pay by their employer to the ATO.
At the end of a financial year taxpayers are required to reconcile their tax paid on taxable income earned in the period and report this to the ATO by 31 October following the end of the financial year.
Prior to the cessation of printed ‘TaxPacks’ Pay As You Go (PAYG) employee taxpayers had limited direct contact with the tax administrator. Tax Packs were delivered to Australian households when self-assessment commenced—reflecting the complexity of the Australian taxation system—and ceased in 2012 with the advent of internet based tax lodgement (myTax) and on‑line support resources. The myTax system is part of the myGov website, and unlike the eTax system it replaced, the operation of myTax relies on internet connectivity during use.
TaxPack delivery once prompted the consideration and reconciliation of tax affairs by individuals directly, or prompted engagement of a tax agent. These sorts of prompts are now delivered via digital mechanisms.
Australian individuals have incentive to complete their returns by the specified due date to receive a tax refund or avoid being fined for not paying taxes assessed. Submitting a tax return results in an assessment of tax liability for the period, at a time after lodgement. Taxes may then be refunded directly to the taxpayer or a tax payment obligation is raised.
Employers are required to calculate PAYG tax and superannuation deductions and withhold and remit their employees’ tax deductions and superannuation components to the relevant entities in a timely fashion. Employee compliance costs for business can be significant.
PAYG arrangements scheme
The PAYG arrangements scheme allows taxpayers to meet their predicted tax liabilities by making progressive payments as income is earned during a financial year. This regime reduces the likelihood of a large tax bill at year end and provides government with a steady stream of tax revenue during the accounting period. The PAYG scheme was established in July 2000, replacing a number of reporting schemes and as such designed to provide both an instalment scheme and a withholding tax system.
PAYG withholding system
The withholding system requires an employer who makes a payment to a taxpayer for work, such as salary or wages, to withhold an amount from the payment and to remit it to the ATO.
PAYG employee taxpayers usually do not directly engage with the ATO until it is time to reconcile their taxes paid with income derived from all sources. Importantly, however, these taxpayers have already engaged with the tax system, albeit indirectly, through the regular remittances of income tax from their pay.
In January of this year the Inspector-General of Taxation reported on the Review into Aspects of the Pay As You Go Instalments System which highlighted, through feedback to the inquiry, the automated nature of PAYG tax engagement, and also the lack of community understanding of the tax system.
Mr Richard Highfield, a tax system expert and former Deputy Commissioner at the ATO, highlighted the superiority of the PAYG withholding system, which ‘relies on the use of withholding at source arrangements to collect individual income tax on employment income’, and noting that: ‘There is considerable international experience that draws attention to the superiority of collecting income tax in this way’.
Most taxpayers who earn business or investment income which is not subject to withholding at source are required to pay periodic instalments towards their annual income tax liability. Once registered in the PAYG instalments system taxpayers receive an Activity Statement from the ATO setting out the taxpayer’s instalment amount.
Individual taxpayers who have additional tax reporting obligations, for example for the Goods and Services Tax (GST), are required to report their PAYG instalments on a Business Activity Statement.
Under the Superannuation Guarantee (Administration) Act 1992 compulsory employer contributions, currently 9.5 per cent, are regulated to be paid to a mySuper fund (regulated designated superannuation fund) and calculated on an employee’s ordinary time earnings, paid on top of those earnings. The Superannuation Guarantee (SG) payments are now due be paid to the selected fund every quarter.
Industry Super Australia prepared a report in December 2016 which highlighted a significant level of employer non-compliance with the required contribution rules, estimated to be $3.6 billion in the 2013–14 fiscal year. The ATO administers major aspects of Australia’s superannuation system including the SG scheme and the superannuation co-contribution scheme. It is the regulator of 597 000 self-managed super funds (SMSFs) and supports approximately 250 APRA-regulated superannuation funds which have 34.5 million member accounts receiving contributions and paying benefits.
The Senate Standing Committee on Economics inquired into lost SG contributions, tabling its report Superbad—Wage Theft and Non-compliance of the Superannuation Guarantee in May 2017. It found one of the causes of unpaid SG payments was the misclassification of workers as contractors. This issue also affects tax engagement and is discussed in Chapter 6. The Senate Committee report explained:
Generally speaking, if a worker is classified as an employee, their employer has the liability to pay SG. However, if a worker is classified as a contractor, this is not the case. However, it can be complicated for an employer to correctly classify their workers for SG purposes, particularly as the definition of an employee in common law differs from the expanded definition provided in the SGA Act.
As the Inspector-General of Taxation pointed out in the Senate inquiry:
There are inherent difficulties associated with the employee/contractor distinction which stems from its common law definition of ‘employee’ with no determinative factor. There are a number of factors which have to be considered relative to each other, making a determination very much reliant on the facts of each case.
The Senate Economics Committee recommended that the Government investigate options to extend the ATO’s current private binding advice and administratively binding advice frameworks and make them available to workers as well as to businesses so as to clarify the definition of employee for SG purposes.
The correct and timely payment of superannuation contributions for genuine employees is fundamental to Australia’s retirement savings. As such, engagement in the super system is as important as is tax compliance for employees.
The ATO’s role in the superannuation sector is to ensure willing participation through:
Correctly registering new SMSF registrants on eligibility and advising of trustee obligations—this can be done via ATO Online which is accessed via myGov;
Lodging timely annual returns information and for APRA-regulated funds, their Member Contribution Statements on time;
Reporting complete and accurate information (all SMSFs must be independently audited); and, importantly,
Paying tax obligations on time.
The ATO provides tailored support and services for SMSFs including guidance on specific compliance issues through every stage of the fund’s life-cycle. The ATO’s 2017 client satisfaction survey found that SMSFs were significantly more satisfied with the ATO’s online services than they were with their pre-digital offerings. In addition, the ATO provided significant support for APRA-regulated funds during the SuperStream introduction.
Nevertheless, statistics in the section indicating high levels of employer non-compliance with the super contribution rules is concerning to the Committee. The Committee would support consideration of other proposals to improve compliance, such as making superannuation payments more regular, potentially in line with wage payments, and requiring superannuation funds to provide regular balance information so that beneficiaries can better determine what they are getting paid and when.
Small businesses are required to lodge a Business Activity Statement (BAS) and make payments for GST, PAYG withholding tax and SG contributions for employees, PAYG instalments, some Fringe Benefits Tax (FBT) and other incidental taxes. There are many tax trigger points where they need to explicitly engage with the tax and super system.
Small business owners comprise new-starters, many with no business background or accounting acumen and yet there are numerous regulatory and tax-related registrations and requirements in the architecture of business activities. As also outlined in Chapter 4, the ATO provides tax obligation and associated business supports for small business but for many the support of a trusted tax and accounting professional is required. As such, most small businesses employ accountants who also manage their tax affairs.
Small businesses may be sole traders who, as of Tax Time 2016, had the opportunity to utilise myTax to prepare their tax return if they had simple tax affairs. Sole Traders could also access the myDeductions app for the first time in December 2016.
Businesses as purchasers and vendors
Businesses that purchase and sell goods and services subject to the Goods and Services Tax (GST) are required to register once they have reached a threshold of $75 000 gross business income in any 12 month period. Registration is otherwise optional. Once registered, an ABN is allocated which enables transacting within the GST system. Practices of cash acceptance for reduced payment for services so that the income is off‑the‑books means that not only is taxable income unreported but also the goods and services tax.
Evidence to the inquiry suggested that the GST regime provided some form of amelioration of cash economy activity merely because to claim back GST input credits a business would need to be working within the regulatory framework. For example, Mr Paul Drum of CPA Australia highlighted this:
…and this is behavioural economics at work—people are quite happy not to pay their income tax, but they are sure as hell going to claim back their input tax credit. So they wanted their 10 per cent back on their business input.
He also noted that, fundamentally ‘VATs and GSTs pick up some cash that otherwise would not be picked up, so they invariably pick up cash from the cash economy because people in the cash economy must still consume’.
The ‘refund churn’ created by the GST system was also discussed as it constitutes around half of all refunds in the tax system:
Fifty per cent of GST is actually refunded to taxpayers. It is a very high incidence. But a lot of that arises because you have taxpayers in business in export industries where their goods are exported free of GST. They incur GST when they make purchases, but they do not charge it when they make sales, so they get a refund of that GST. That is a design feature of a value-added tax, and it occurs in many other countries for example—the United Kingdom and Canada as well.
Other comment on the GST was more general, with reference made to the Australia’s future taxation system (AFTS) review report. Mr Richard Highfield described Australia’s complex GST system as one of the ‘elephants in the room’ for Australian tax reform, contrasting it unfavourably with New Zealand’s more comprehensive streamlined approach.
The level of regulatory detail entailed in review of these concerns was beyond the scope of this inquiry but the Committee notes it is an area of consideration for future tax reviews. However, on the broader issue of tax simplification, Mr Matthew Pawson, the 2018 President of the Tax Institute, drew attention to the many GST rulings resulting from tax complexity in this area—a problem also raised by Mr Pier Parisi and ECU Australia. As such, Mr Pawson advocated against a ‘piecemeal’ review of the tax system:
We have so many exceptions to the rules that it makes it very difficult for taxpayers to understand and for the ATO to administer it. You just have to look at the number of guidance statements that the tax office issues, the public rulings, private rulings—there are thousands of them. I do some lecturing to postgraduate legal practice students. It’s in the space of GST. We’ve only had the GST for 17 years, and there are already over 200 rulings. It’s a minefield of complexity.
The inquiry’s explanatory paper advises that there were 75 436 registered tax practitioners in Australia at 30 June 2016. The 2016–17 annual report of the Commissioner of Taxation notes that 33 800 were registered and active tax and BAS agents over the period. The ATO website highlights the important role tax practitioners play in the tax system:
In Australia, tax professionals have a critical role in the tax and superannuation systems. They are intermediaries, conduits and influencers of behaviour, providing expert advice to clients to meet their obligations.
Also noting why Australians employ a tax professional to help them meet their taxation and superannuation obligations, the ATO states:
They choose to do so for a variety of reasons including time, complexity and the peace of mind of having a professional managing their affairs. Many agents provide holistic, value-added services that support their clients to succeed; often preparation of taxation forms is only a minor part of their overall service.
The Australian tax system supports the use of taxation intermediaries as it provides taxpayers with a deduction for the cost of managing tax affairs (irrespective of complexity). The Committee heard evidence that this was inefficient, and that the calibration of the tax system towards overpayment of taxes with refunds provided for workplace deductions, for example, is fuelling a costly ‘refund churn’ while supporting late lodgement and late payment of tax obligations. The increased capacity for fraudulent activity with refunded tax overpaid was also highlighted:
My particular focus is on the personal income tax. You have millions and millions of taxpayers where the average refund is something in the order of $3 000 across all individual taxpayers. You have a huge traffic of refunds. It is very easy to conceal fraudulent refunds in a mass traffic of high-value refunds.
The ATO advised that 74 per cent of all tax entities (individuals and businesses) employ a tax professional to help them comply with their obligations. It is notable that only five per cent of small businesses do not use an agent for their annual return. Many small businesses also employ BAS agents to assist with their PAYG and GST obligations. The ATO emphasises that:
This means that tax practitioners—tax and BAS agents, accountants, lawyers and advisers—have a key role in influencing taxpayer engagement with the system.
There was speculation that the very high use of tax professionals by Australian taxpayers (even with basic tax affairs) is indicative of the perceptions of a complicated tax system, and fear of being penalised for making an error or omission. A continuing high level use of tax professionals by individuals despite easier and more efficient self-serve tax return mechanisms online may also reflect access and security concerns. Either way, tax professionals are an integral support to the architecture of Australia’s tax system.
‘A majority’ of taxpayers comply
Despite the intricacies of the Australian tax system in many areas, and the continuing high use of tax agents for (even simple) tax and reporting obligations, the ATO has advised:
Australia is fortunate to have a healthy tax system with high levels of voluntary compliance. Our tax system works on a self-assessment basis, and the vast majority of Australians and businesses do the right thing by meeting their obligations under the law without the need for intervention from the Australian Taxation Office (ATO). Most taxpayers respond well to help and support and the majority lodge and pay their tax on time (or soon after the due date) with over 95 per cent paid within 90 days.
Australia has had a self-assessment tax system since 1986–87. Under this system, willing compliance rests on some basic assumptions about Australians’ perception of the tax system, its role in raising revenue for government, and the ATO’s integrity as its administrator. The ATO’s 2016‑2017 Annual report states:
Our approach is based on the belief that Australians value the tax and superannuation systems as an essential part of effective government. They know that fair and efficient tax and superannuation systems, based on self-assessment, depend on people’s willingness to participate. Willingness to participate is driven by community perceptions of the integrity and complexity of the tax and superannuation systems and of the ATO’s integrity and professionalism.
The ATO assesses tax participation using four key indicators for each of its client groups:
correctly registering in the tax and superannuation systems;
lodging tax information on time;
reporting complete and accurate information; and
paying tax obligations on time.
The Tax Commissioner Mr Chris Jordan AO listed the factors that support taxpayer engagement:
How and how well taxpayers engage with the tax system is dependent on a number of factors, such as: the complexity or degree of difficulty, and, conversely the ease of compliance; perception of fairness of the system; social and cultural norms; financial pressures; broader economic conditions; the tax practitioners they use and others who influence people’s behaviour; importantly, confidence that others are doing the right thing in the system, and, if not, are being appropriately pursued by the ATO; and the quality of the experience people have when interacting with the ATO. These are all the sorts of things that drive engagement with the tax system.
The ATO 2016–17 annual report provides information on compliance by sector. As previously noted, individuals represent the largest segment of Australia’s registered taxpayers—over 10.9 million people, the majority of whom lodge and pay their taxes on time.
Small business (classified as those businesses with annual turnover of less than $2 million) is the next largest group—comprising 3.8 million businesses. According to the ATO, over 2016–17, 70 percent of small business paid on time, with some sectors, for example, the construction sector, lagging considerably behind.
Engagement by design
Australia’s taxation administration system is being reinvented under tandem commitments made within the ATO Program Blue Print and under the Government’s Digital Transformation agenda.
The objective of this system redesign is to reduce the time it takes to comply with the tax and superannuation system and, for businesses, to ensure tax engagement activities dovetail with the natural systems in operation within businesses. This serves the dual purpose of simplification of required regulatory activity and reducing time taken to comply. In addition, the reinvention aims for improved tax system transparency on the monitoring of and dealing with non-compliance in the system.
The Tax Commissioner advised:
Our intention is to make [tax] engagement easier, painless and infrequent for both taxpayers and their practitioners. We want a design for the majority of people who simply want to do the right thing. We want to lighten their load—especially for those who are low-risk, transparent with us, and have more straightforward affairs. Things like pre-filling data in tax returns, the myDeductions function in our app, and myTax itself on myGov are good examples of our services that do this.
Mr Neil Olesen, Second Commissioner, Client Engagement, explained this involves re-designing systems to meet client needs at the front end of the process, rather than focussing on end compliance:
Increasingly, our approach not only with small businesses but across the markets is to engage early with them and try and give people the tools and ability to serve themselves well, rather than a down-the-track, ‘Oh, you got it wrong—ha, ha, caught you.’ Rather than that model, we are trying to do things upstream in real time and get people on the right track, because all our experience tells us that getting people on the right track early and giving them the tools that make it easy for them to meet their obligations is a far more productive way, in the long run, to run an effective tax system.
Under the reinvention program the ATO has various projects underway which support this approach, along with a broad ethos of integrating ease of use and reducing compliance time for taxpayers in all tax system interactions.
Business software packages have been devised which allow reporting of information and payments to the ATO in a less intrusive manner, avoiding duplication. This has been possible through a collaborative approach undertaken between the ATO and software providers as will be discussed later in this chapter. Further enhancements to such systems are possible by triggering reporting during the natural flow of business activity. Mr Peter Strong, Chief Executive Officer of the Council of Small Business of Australia (COSBOA) emphasised the value in this to small business operators:
I’m doing a pay run anyway. Why do I then have to do a GST or a PAYG? That’s the sort of process that we’re looking at: seamless and the complexity is covered within the system. I don’t see it; I’m happy; it’s done; I can go back to business.
The ATO has been working with the software development industry to enable the design of seamless business and reporting systems such that taxpayers can procure suitable software to support business activities and accounting systems but which also facilitate reporting and in some cases, payments to the ATO. Mr John Dardo, the ATO’s Deputy Commissioner, Digital Delivery and Chief Digital Officer, identified four foundation principles supporting this model for robust digitised tax system interaction:
The first thing is the standards…what are the standards that are consumable by everyone and agreed by everyone. That is one.
The second one is the interfaces. What are the interfaces that are available from the bodies, the accounting software, the payment providers, the banks or the new payments platform? What are those interfaces and the overlay services sitting on top of the payments platform, for example, that can be used or reused to do exactly what you described?
The third thing is that at a government or a regulatory level, you may not have to mandate it. If a software provider chooses to do that with a payment provider, be it a bank or somebody else or with the platform itself, that is cool.
The last thing is the attitude of society in terms of getting there or wanting it or needing it or asking for it. We will see an evolution to that. The question is when and how fast.
Mr Dardo’s last point highlights the tailoring of software which is possible under this model. And more tailored systems mean more user-friendly and efficient systems which foster willing participation. Such systems relate to the reduction in time and effort to deal with red tape which means that non‑compliance is less likely.
The ATO has developed a strong consultation model with a Consultation Steering Group overseeing formal arrangements. The agency has nine stewardship groups with diverse representation to enhance engagement with different client groups including tax practitioners, small business, the superannuation industry and others with a role in the tax and superannuation systems. In addition, the ATO is consulting ‘in the field’. The ATO’s Acting Deputy Commissioner for Small Business Ms Emma Rosenzweig outlined the approach:
We have a key stewardship group that has some peak body representatives and some key industry representatives. That is one mechanism that we use to get feedback from them. We are actually out talking to small businesses an awful lot. The commissioner talked about people asking to be shown products more. We have had a very deliberate program over the last eight or nine months where we are contacting new small businesses and offering to come out and show them a lot of the services and new tools that we have to help them.
We have also developed a program with the department of industry about being new to business. For any business that registers for an ABN and gives us their email address, we have a program of emails that go out in the course of the year. Rather than swamp them with a big pile of booklets when they start, they get some just-in-time information throughout the year about their obligations, particularly in that first year, to try and help them get off on the right foot.
She additionally noted that community consultation and outreach is a very constructive way to embed a compliance framework, and particularly helpful for new businesses:
Those new businesses get invited to tax essentials seminars in the first couple of months after they have started. Through that, we are able to talk to a lot of them about what they struggle with, where they find things challenging, and make sure that they have as much information and support as they need. So we are out there really talking to businesses an awful lot.
As Chief Digital Officer Mr Dardo advised of current consultation over development of minimum standards to ensure software developers are designing systems that are cyber-safe for businesses and secure for integration into ATO systems. Recent investment was in the development of a certification or register system, to ensure software developer or mobile app providers connected securely with core ATO systems, and that secure authentication is at the front of their systems; to vet identity and ensure secure access.
He also emphasised that consultation over an operational framework for the ATO’s digital ‘eco-system’ would be ongoing, with five key focus areas identified. It was expected that the minimum standards for the framework would be agreed by software developers, banks and superfunds in early to mid-2018 for implementation the following year.
Further elements of the cyber-safe framework are outlined in Chapter 6, ‘Challenges and Solutions’.
A discussion on the ATO’s partnership with software developers and stakeholders for system design and implementation follows.
Compatible lodgement platforms and products
The ATO is responsible for administration of taxation services and activities, but does not carry responsibility for policy design and review. Without broader jurisdiction over tax system reform and streamlining, the ATO has focused on delivery of systems and services to address identified problems. As Commissioner Jordan explained: ‘Our intention is to make this engagement easier, painless and infrequent for both taxpayers and their practitioners’.
Accordingly, technical solutions such as pre-filling, myTax, the individual and sole trader deductions app tool (myDeductions) and integrated software solutions for business like Single Touch Payroll systems (using Standard Business Reporting—SBR principles) are being progressively evolved to improve ease and transparency. This process is part of the ATO’s work with software developers to finesse products and services so that responses are tied to the ‘natural systems’ used by taxpayers, and consequentially will involve a process of continuous conversation between stakeholders in the tax eco-system.
Software development and SBR
The ATO’s Digital Strategy positions the agency as a facilitator of direct information with its clients—taxpayers, and with the third parties who hold their information:
Every connection within a digital eco-system is a flow of information and each part plays an important role in order for the ecosystem to function as a whole. Emerging and changing trends in technology will drive the evolution of our digital ecosystem–from the services we provide, the channels we make available, to the accessibility of these from current and future devices. Future success will be dependent on identifying the real needs of all clients (taxpayers and their representatives, including intermediaries), partners (eg government agencies, intermediaries, third party service providers) and staff.
The Strategy foresees flexible and customised modes of transferring information from taxpayers to the tax administrator via software which is customised to business needs—while at the same time meeting the data requirements of SBR.
The SBR was envisaged as is a whole‑of‑government business reporting standard which, through endorsement by the Council of Australian Governments (COAG) in 2008, was introduced in 2010. It was developed to have a single set of reporting definitions and eventually enable that information to be sent directly and electronically from business systems to participating government agencies. Compliance cost savings for business using SBR were predicted to reach $800 million per year accruing from reporting to government dovetailing with ‘natural systems’—those actions already being performed in the course of business operation.
The ATO Digital Strategy states:
Existing partners are expected to evolve their offerings to meet customer expectations and new digital solution providers will emerge with the ability to think and act differently. This will lead to services and functions being delivered differently as innovative approaches disrupt and transform the ATO’s traditional business model.
Small businesses can reap considerable rewards from this methodology because they carry a relatively greater cost of compliance burden than larger businesses. It also presents an opportunity for developers to produce customised interfaces for particular sectors starting with small scale business—but enabling ‘scale up’ possibilities.
The role of APIs
As discussed in Chapter 2, technical advances in the design and implementation of the ‘end‑to‑end solutions’ which service modern tax systems rely on the use of Application Programming Interfaces (APIs). An API provides software developers with key parameters so the Tax Office can glean required data from the information sent from taxpayers’ software systems. These systems may be created with very specific client functionality but, in communicating via an ATO API, will be able to produce the data the ATO requires.
According to Deputy Commissioner Dardo, Australia is in advance of other nations in the development and sophistication of APIs, and also in their implementation. He cited the ATO’s development of its SBR system as a case in point—
Our biggest investment in the IT space, our highest priority, is enabling standard business reporting. There is old world digital, which is portals type stuff. New world digital is machines talking to machines, so software. In that new world digital, what you must have is APIs, or application programming interfaces. If we go back a few years, in 2014, we only had 70 of them. We now have over 250 of them. A few years ago, we only had a small number of providers connected. We now have over 346 providers connected. Our biggest investments at the moment are how we turn those APIs into more resilient systems.
Mr Dardo noted that the critical areas of the ATO’s digital IT focus are in dealing with the sheer scale of data available, the availability of the ATO to meet client needs, the investment in this area for both function and security, and the development and enforcement of good standards:
As we become more connected, people are depending on us to be available more than just 6.00 am to 6.00 pm. So how do we make them more resilient? How do we scale up? Last year, we did 12½ million interactions in one of the gateways. We will probably hit a billion next year. So it will be 10 billion the following year. We are talking scale, availability, investment, standards, technology and security. That is our biggest focus in the digital world. So we are absolutely up for the journey.
Mr Olesen explained how symbiosis with commercial applications was a key objective for the ATO in design of APIs:
Philosophically, we are committed to making services available for consumption into commercial software. As we make services available that we might choose to use ourselves and make available to the public ourselves, in parallel, we make the APIs available for software developers to consume and incorporate into their own products, because we understand that the commercial providers of software are probably the best people to innovate and integrate and provide good services to people. And, if they can access the services we want those people to have through the APIs that we make available, then that is a very good place for us to be. That is, in fact, our key direction—trying to make all the services that we have available for consumption and integration into software products.
Mr Matthew Prouse of accounting software platform specialist Xero Australia reported that there are approximately 70 software developers now working with the ATO in this collaborative space. He advised that even niche applications, such as those developed by the private sector for the childcare industry, are able to work in with the ATO’s systems by utilising the SBR framework:
So a number of developers are creating software for businesses, taxpayers, tax agents and industry using that SBR framework. Seventy is a good number. It is a good starting point. There are some very large players in that space that employ hundreds of staff. We and MYOB are both appearing before this committee today. We sit in that space. There are some very small developers as well that are working and developing quite innovative solutions for their specific niche. It might simply be, ‘We develop software that completes one particular form that is really important for a particular industry’.
Partnership, not competition
The Tax Office’s Reinvention program recognises that to gain the desired experience for taxpayers, the ATO will have to work closely with software developers. The ATO’s Digital Strategy, December 2016, also states this clearly, anticipating that fulfilment of tax and super obligations will form an integral part of taxpayers’ core business processes, and based on the ATO’s robust collaboration model with software developers. The strategy also stipulates that:
All services and interactions will be digital and utilise SBR-enabled technology and infrastructure. This will enable businesses and tax practitioners to connect with the ATO and across government.
Mr Timothy Reed, Chief Executive Officer of MYOB Australia, endorsed the ATO’s development of tax platforms and digital tools in collaboration with industry:
Let me start by saying that I think the ATO blueprint is absolutely headed in the right direction—that they are building a digital platform and they are opening APIs to connect to providers such as MYOB and our competitors. So I think that is the right direction. I empathise with the challenge that they have; they have a bus that is moving down the highway and they have to try and refit it and retrofit it as it moves, and that is never an easy thing. But there is no doubt that at times the change and the rollout of that change creates a challenge for us and for others in the industry.
Mr Prouse emphasised that the ATO is seen as a partner and not a competitor with the private sector in meeting these development challenges:
As a software developer, we do not see the ATO as a competitor. Fundamentally, the ATO is our partner. They are the wholesale provider of a lot of the services and infrastructure that we are reliant upon to deliver services for small business. Historically, if you think about it, the ATO has always provided stationery and, effectively, a safety net of services and functionality for individual taxpayers and businesses. I go and choose to employ someone in my small business and my employee needs to complete a tax file number declaration form. — I would not say the ATO is competing with us there. It is the same for things like business activity statements. There are requirements for individuals or taxpayers to have access.
Mr Prouse did, however, ask for the Government’s commitment to evolution of reliable platforms and products around which the private sector can continue to innovate solutions, saying:
We recognise that the ATO has taken significant steps, but the needs of Australian small business threaten to outpace the technical capabilities of some of these government agencies. As paradoxical as it sounds, technology presents an opportunity to humanise the bureaucracy. It can provide taxpayers with real-time access to government information and assistance. The creation of APIs and deeper connections to business software like Xero can lead to 24/7 accessibility anywhere, any time on any device. Business owners ultimately want a tax system that is as simple, safe and user friendly as internet banking. For Australian small business to have confidence to grow, they need certainty about government platforms and policies. We urge policymakers to continue their efforts to make tax digital here in Australia and embrace cloud technology. We at Xero stand ready to partner with you in this endeavour.
At hearings, Deputy Commissioner John Dardo reiterated the conviction that the partnership model is crucial to the ATO’s future vision. He cited the ATO’s shift in focus from portal delivery to enabling products using SBR which are designed to connect with the accounting products that taxpayers use, not duplicate them:
For businesses, it will be a basic product. You can view and you can probably do some very basic things. We will never do payroll. We will not do your accounting systems. We will not do the complex stuff. It is a very basic view product. For tax agents, we currently have a product that is old. We will refresh it in the coming 12 months. But we are not going to try to compete with software developers in terms of the really awesome stuff that exists in the new practitioner lodgement system or practitioner enabled software. Over time—it might be a few years—even the agent portal will probably diminish because they will be able to do it in their software once, not twice. — Our main game is enabling the natural system, not the portals for business and agents.
Digitalisation and tax complexity
As noted, it is not the ATO’s role to initiate wholesale tax reform, nor to address those aspects of the law that create complexity for tax administration. This is the Government’s role and the Treasury is the responsible agency.
The most far reaching and recent review conducted for the Treasury into tax simplification was the inquiry in 2008‑09 into Australia’s future taxation system (AFTS), widely known as the Henry tax review. During the inquiry there were calls for reconsideration of a number of recommendations made in the review report (May 2010).
Treasury’s Mr Graeme Davies, Acting Division Head, Tax Framework Division, however, explained why Treasury took a very conservative stance on tax reform:
If we think about the tax system, it gets complex for a reason, and that reason is you start with a system and then you keep adding onto it, changing it, adjusting and reforming it. Almost every area of the tax system you look at has that as its characteristics. That is the original idea that was somewhere in the eighties, nineties or early 2000s, and we have since made a number of amendments in there. This is a gross generalisation, but—almost every time amendments like that happen—what is really hard to do when you are amending one part of the law is understanding what it does to the other parts of the law. Those interactions get more and more complicated the more and more amendments that are in there.
In view of this, Commissioner Jordan listed the ATO’s strategies to address the challenges for taxpayers in navigating a relatively complicated tax system:
I can see a number of key strategies that we will need to, or will continue to, pursue and deliver on—very much a service ethic in the ATO, helping to facilitate people through what is a complex system; a focus on prevention rather than correction; greater and more sophisticated use of data for both service and compliance—it is important to use that for a service element as well; increased use of behavioural insights to help us work more constructively and collaboratively with taxpayers to get the right outcomes; increased digital offerings; leverage our relationships with industry; greater collaboration with the tax profession to tackle matters jointly; and to drive significant cultural change in the Australian community to perhaps the way some people approach their obligations, particularly around the cash economy and some of those issues where it might be okay to cheat a bit on our tax returns in our deductions. A significant education campaign is required there.
The ATO’s Chief Digital Officer Mr Dardo explained how well designed digital products can simplify the system for users, without changing the underpinning legislation: ‘If you have data, you can actually simplify what you do with it or behind it or around it. In a digitised world, you actually are moving away from forms’.
Mr Dardo went on to emphasise that the ATO is thus ‘not digitising the paper form’ but ‘thinking differently’, highlighting significant progress with BAS, including, in 2017, the issuing of ‘push returns’:
A simplified BAS is an example. It has been simplified for particular segments. There are some options about how you do and do not report through the year for small businesses. So that exists. In a digital world, sometimes you can simplify just by hiding the complexity. You do not actually have to legislate for it or change it. You just hide it. This year, we had push returns. Push returns were available for a particular client segment where, based on previous years, we knew they did not have complex affairs. We just said, “We think this is your position” and they just went,”Actually it is”.
Ms Rosenzweig, of the small business area in the ATO, referred to work on the old and new iterations of myTax and how the new version is considerably more customised for each client:
But if you compare the myTax product, for example, to the old Etax product, you find that it only asks you questions that are relevant to you. So it is not making you step through every possible question that an individual might have to answer. It does really tailor it down to the data that is relevant to you. I think in lots of ways, in seeking reporting from people, we are asking for the information and they do not have to fill out a checklist of “Did you have CGT [Capital Gains Tax]? Did you have this?” It is more about seeking the data that is relevant to them, which then hides all the complexity that is just not relevant.
Mr Andrew Watson from the Tax Practitioner Digital Service area of the ATO spoke about further advances, in which the data is the locus of function rather than form filling per se. He cited the Single Touch Payroll as a good example of this:
… the concept is around how that data helps a citizen fulfil their obligations under the tax law. Consider some of those obligations under the law. Income tax rates are based on net income over a 12-month period versus the GST, where we have obligations on a monthly and quarterly basis but the rate is still the same. Those obligations can be met in different ways. From a design point of view, the differentiation of forms and data is often spoken about. So the concept is around how the data meets the obligations. I think single touch payroll is a really good example of our first step on that journey of people meeting obligations through data. It just takes forms out of the equation. At some point, though, it is a policy thing about how the data lets you meet your obligations as a citizen under the provisions as they exist. A lot of them were designed around a form filling culture.
Tax systems and services
The ATO commitments to taxpayers under the Government’s Digital by Default policy are extensive:
Individuals— For those who choose to prepare their own return, myTax will continue to evolve to provide streamlined pre-filled assessments, expanding to a ‘push’ tax return for certain taxpayers, eliminating their need for lodgement. As more comprehensive data on individuals’ income and deductions is captured in real-time, the option to develop a progressive variable tax withholding rate will be explored.
Business owners—will have a streamlined registration process and access to a secure whole‑of‑government account with a digital mailbox and a ‘tell us once’ feature (as individuals already do with myGov). Business owners will be able to access contemporary, digital services from any device and manage third party authorisations at a whole-of-government level. Businesses will transition to event-based reporting to government, which will be automated via integration with their natural systems (eg via software).
Super funds—will be able to use new digital services so that more of their obligations can be managed electronically. By delivering integrated services (eg via SBR-enabled software), the timeliness of processing rollovers and contributions will be increased, with data for employees, employers and funds improved through real-time validation.
Tax practitioners—Tax practitioners fulfil a critical role in the tax and super systems. We will provide products and services that will integrate with their systems and make more data available to allow them to be more productive. Cloud authorisation and SBR-enabled practice management software will enable tax practitioners to work anytime, anywhere in a cloud-based or hosted solution. We are improving the ability for tax practitioners to authorise their staff to provide services to clients on their behalf.
Software developers—We will work closely with developers to implement solutions that make fulfilling tax and super obligations easy for users and a part of core business activities. All services and interactions will be digital and utilise SBR‑enabled technology and infrastructure. This will enable businesses and tax practitioners to connect with the ATO and across government.
In progressing this agenda, the ATO has prioritised innovation in provision of key platforms and services for individuals and sole traders, including the ‘myTax’ system, data pre-filling and, more recently, refinements to the myDeductions app tool and the Contractor Assessment Tool.
Similarly, for small business, the Single Touch Payroll system is listed by the Digital Transformation Agency as a key government platform in its Digital Transformation Agenda—providing streamlined business activity and reporting functions and, potentially, greatly reduced compliance costs. The Single Touch Payroll is possible because of the SBR framework, as discussed previously.
The features of these key platforms or services are discussed in evidence as follows.
The internet-based myTax system, accessed through the myGov ‘portal’, replaced the e-Tax lodgement model from 1 July 2016. It has resulted in significant benefits to individuals and, more recently to sole traders, who now have access to more pre-filled data and a faster and simpler service. As the service is internet based it doesn’t require downloads and can be accessed from a range of internet enabled devices. As at January 2017, just prior to the ATO’s first submission to the inquiry, myTax had been used to lodge over 3.2 million tax returns.
The ATO has espoused the benefits of myTax pre-filling to taxpayers:
myTax pre-fills tax returns with information reported by third parties such as financial institutions and employers. Pre-filling also enables the identification of lost or forgotten records and accounts, such as lost bank statements and payment summaries sent to previous addresses. This minimises omitted or incorrectly reported income and other errors for individuals and has been received very positively by the community.
Mr Olesen stated that while the costs of myTax are relative to those for the paper-based system, there are real advantages for the individual taxpayer in digital self-assessment:
Under paper returns, we had the same costs, so in a sense I think you are looking for the relative cost. I think the other thing to look for is the benefits. The amount of feedback we have had from people who do their own returns about the speed and ease of completing an online tax return has just been phenomenal. Frankly, I have genuinely been really surprised by how good that has been. For your average citizen, I think they have gone from an average tax return preparation time just with the old e-tax model, let alone a paper one, of about three-quarters of an hour. The average preparation time under myTax is more than halved—I think around the 15-to‑20‑minute range, from memory. There are some phenomenal benefits there, including speed of refund as well.
The ATO reports that: ‘Over five million individual clients and sole traders have a myGov account linked to the ATO’, with the main myGov platform used to disseminate tax system correspondence, including notices of assessment or statements of account. Since October 2016 the myTax service has featured the ability to access a web chat service when using myTax—an interactive help service called ‘Alex’—and the unique ability to share a myTax screen whilst discussing a matter on the telephone with ATO staff.
The introduction of a web chat service was recommended by the Inspector-General of Taxation, along with voice recognition authorisation. In the 2015 review into services and support for tax practitioners, the Inspector-General had recommended that the ATO increase use of such modern modes of communication, in particular in ‘…developing a “web chat functionality”, to provide tax practitioners with useful information’. Other services for tax practitioners are discussed later in this chapter.
Part of the improvement in myTax could be attributed to pre-filling. Pre‑filling is a service the ATO has offered since 2007, originally through eTax, to assist taxpayers finalise their tax returns.
The Inspector-General of Taxation’s submission noted the OECD view (2011) that timely data provision is important for the utility of pre-filling. The Inspector’s 2013 review of data matching also indicated that lack of timeliness in submitting pre-filled data is an obstacle to early lodgement. The need for improved comprehensiveness, availability, and reliability of data was also raised.
The introduction of formal third party data reporting regimes potentially reduces compliance costs to individual taxpayers and significantly:
It also has the ability to be an effective compliance response to deal with some taxpayers omitting or underreporting income.
Input to the Inspector’s 2017 work plan process suggested the ATO could do more to assist taxpayers by collecting more data. However, the Inspector‑General considered that targeting effective areas for matching and ensuring potential providers were technically enabled with ‘natural systems’ would be more important. In addition, the ATO now receives much expanded ‘as-of-right’ third party data under the Taxation Administration Act 1953 (TAA 1953) as a result of changes introduced progressively from 1 July 2016–1 July 2017 and stemming from the Tax and Superannuation Laws Amendment Bill (2015 Measures No. 5) Bill 2015.
The Tax Act now requires third parties to report on government grants; consideration for government services; transfers of real property; transfers of shares and units in unit trusts, and business transactions made through payment systems. This is in addition to the pre-existing third party data received which already included:
Wage and salary data from employees;
Government welfare payments from Centrelink and other providers;
Interest income from financial institutions; dividend income from share registries; and
Medicare levy surcharge and private health insurance policy details from private health insurers.
This is clearly a powerful source of information for tax compliance inducement and enforcement, depending on how the data can be currently utilised by the tax administrator. The pre-fill function can now provide sufficient information to completely pre-fill many individuals’ tax returns.
At hearings, Professor Michael Hiscox,(then) Director of the Behavioural Economics Team of the Australian Government (BETA) suggested that the ease offered by software developments such as pre-filling supports voluntary compliance:
To the extent that the technology enables a lot of those interactions to be easier and simpler for people, compliance becomes much easier because all of that data is available and fed into the system so that the delivery of the service is actually better, simpler and easier for people. We expect it to have positive effects and to encourage more compliance because it is the easiest thing to do. You would have to do more to stay outside the system, or it would be more costly for you in terms of time and resources.
Professor Robert Slonim, a professor of economics with 20 years of behavioural economics expertise and the Head of BETA since July 2017, highlighted the important moral nuance of individuals having to change correctly presented information to incorrect information to gain an advantage, rather than filling out incorrect information themselves. He said:
What I would argue is that if people were to want to actively provide false information, prepopulating it makes it more difficult because they have to change it and actively go and take something that has been provided that is truthful.
Professor Slonin thus indicated that a moral ‘nudge’ may also work where people are asked to ‘sign off’ on the accuracy of inaccurately pre-filled information (where it is to their advantage). A Committee Member made the point that pre-filling is not always accurate—‘I think I earned $5 000 last year, according to the ATO. It was not quite right. It was just as well I did not accept it’.
Second Commissioner Olesen made the important distinction between what taxpayers can now view—for individuals and small business—and what the ATO can view:
…originally, when we got that data—going back to 10 or 15 years ago—it was for us to see, after the event, whether you had returned all of your income. With new technology and the earlier availability of the information, increasingly now what we do is make available to you what we know so that that helps you fill in your tax return.
Further discussion on pre-filling appears in Chapter 4, in regard to compliance cost reduction and the likely impact on use of tax agents for simple tax returns.
Deduction and contractor assessment tools
The Commissioner of Taxation mentioned in testimony the ease and convenience of pre-filled data for taxpayers completing digitised returns. He indicated, however, that even though a ‘push return’ was a near-future possibility in this area, the desire of taxpayers to claim a deduction remains a hurdle. Given that individual deductions may be claimed by taxpayers under the Tax Act, and that the proportion of claims by individual taxpayers is so high, a deductions processing tool, the myDeductions app has been developed by the ATO for use with myTax.
The Commissioner explained how this app streamlines the claims process for taxpayers and enables a repository of claim supporting evidence:
With the app I mentioned, myDeductions, if you have a bit of bank interest and you earn a salary or wage…when you make a donation you can take a photo of the receipt, put it in under the drop-down menu ‘Donations’ and it is done, by Briefcase or something. If it is under $300, I think you can deduct it straightaway. It is 100 per cent business use, of course. You can put that in ‘Work related expense’ and it uploads directly to the right labels in your tax return. So, if you just have a few deductions or donations during the year, and all your income side is done, it is uploaded, literally, and you can look at it all.
For sole traders in business, it is pretty much the same. We have a simplified version for them. On the go, between jobs, they can input their income and their deductions, and it is all uploaded. Now, that is only for sole traders, like an individual who might be a tradie or something like that, or a consultant doing some work. It is all done. It is all there for them. Quarterly instalments can come in and you can vary them, all on your smart device.
However, ETax Accountants considered that the ATO ‘has unnecessarily gone further to invest in the development and operation of more complex tools and services, including mobile apps for recording deductions, which were pre-existing offerings available elsewhere at low or no cost to consumers.’ The submission recommended that:
The ATO should not behave as a taxpayer-funded competitor against free‑market Australian businesses, including against tax agents, and should not seek to copy, duplicate or challenge commercially available services without clear, early-stage and public justification and evaluation including transparently addressing costs and contestability.
This view contrasts with the fact that the cost of hiring a professional tax agent to complete a tax return is a taxpayer-funded cost through the allowable deduction for management of tax affairs.
There was also concern from some participants that the online tools could prompt individuals to start making claims they had not been able to make in the past. The Chartered Accountants Australia and New Zealand (CAANZ) commented:
…there is this sense that in an online, do-it-yourself world that you will, in your own mind at least, start to justify this thinking: ‘I am entitled to certain deductions. I have heard about claiming car expenses. I have heard about claiming laundry and uniforms.’ And on it goes. However, if they went to a tax agent—a good one—and the law was applied correctly, they would be told, ‘I’m sorry, that’s not deductible.’
There is a view, however, that the very high reliance on tax professionals to complete the tax returns of individuals with simple tax affairs is driven largely by the desire to claim deductions, particularly work-related expense deductions, or the concern taxpayers may miss out on the possibility of having a legitimate deduction. For example, Mr Highfield, an academic and tax expert, cited the high number of taxpayers with simple tax affairs who engage a tax professional and who claim work-related tax deductions:
Analysing records in the ATO’s Sample File, approximately 59 per cent of tax agent-prepared returns (representing around 5.6 million taxpayers) disclose income only from employment, pensions, and investments… just about all of the income of these taxpayers can be pre-filled by the ATO. Further examination of Sample File records reveals that for these taxpayers their deduction claims are concentrated on work-related expenses (81 per cent)…
Contactor assessment tool
The evolution of the gig (freelance worker) and sharing economies (where resources are ‘shared’ for a fee) have heightened the need to more clearly differentiate between the definition of contractors and employees. The evolution of this differentiation as a current tax system challenge is discussed further in Chapter 6.
The ATO provides guidance on how to determine whether a worker is an employee or a contractor. Other countries have developed their own contractor assessment tools to help determine this distinction. Tax and Superannuation Australia, in a supplementary submission following appearance at a hearing in Melbourne, outlined how the UK’s HMRC contractor tool offered superior features as it posed in-depth, and more questions.
There was some support in evidence for the review of Personal Services Income (PSI) rules in the Australian context to address potential inequities for employees who will miss out on workplace entitlements, such as superannuation, due to the contract-based nature of employment with big sharing companies like Uber. There was also the risk that taxpayers using the ATO’s contractor tool would determine their status as a contractor given the significant tax concessions provided, or may inadvertently make errors. Notably, the ATO’s website recommends obtaining a private ruling or independent advice in the case of uncertainty.
In regard to review of the PSI laws, Mr Tony Greco of the Institute of Public Accountants (IPA) referred to recommendations made in the 2010 Henry (AFTS) review report:
…the Henry review… picked up on this point, asking why we have a different tax outcome for the same activity. There are some fundamental policy issues there that I think need to be addressed, and I think they can’t be ignored, given the fact that people can theoretically put themselves in the contractor space and avail themselves of all these tax concessions. And then you have someone very much in the same space being treated as an employee. So, I think there are some fundamental issues there. At the end of the day, if it mainly is a reward for personal effort, why do we have these differences in the tax treatment? So yes, we would like to see the PSI rules simplified.
Mr Greco elaborated his concerns about possible confusion and uncertainty for workers in this sector, who often lack tax literacy, as making the distinction is even difficult for ‘seasoned professionals’. He noted:
The ATO, to their credit, have tried to introduce a contractor tool, where you answer a series of questions and it spits out a result, but the Tax Office will not stand by the result of that tool. If, according to that tool, you qualified as a contractor and subsequently you’re found not to be a contractor, they’re not going to stand by that. People don’t have an ironclad way of ensuring they’re on the right side of the line.
He also raised the significant potential impact of this uncertainty and room for mixed interpretation of the rules on the broader tax system:
Given the risks involved in a significant number of people moving across into that contractor space under the existing rules, I think there is scope for simplification. But I think there has to be an acknowledgement that there’s a revenue risk associated with a mass movement from PAYG to people in the contracting space…That shift into contracting space is only going to get bigger. So, we have advocated that the rules have to be simplified.
There was also discussion of improvements that could be made to the ATO’s online contractor assessment tool, which by comparison with the United Kingdom’s model is less comprehensive and accurate in its assessment of status.
Efficient products for business
The ATO has developed a suite of products to assist small business comply with broader tax obligations in easier and more efficient ways. The enabling platform for most accounting software products designed for small business to integrate with the tax and superannuation system is the SBR regime, as previously discussed. As at 21 December 2017 the taxonomy (dictionary) for government digital services commenced using SBR definitional taxonomy terms, with the Australian Reporting Dictionary phased out on 30 January 2018. SBR supports the potentially transformational business systems being rolled out by the ATO, including the Single Touch Payroll and SuperStream.
Single Touch Payroll
Signal Touch Payroll (STP) systems provide a digitalised payroll process which is compliant with ATO requirements for data and payment transfer in a pay-run. Using STP is a mandatory requirement for employers with 20 or more employees from 1 July 2018. These businesses will be required to use an approved STP software package, to provide the payment information, withholding amounts and superannuation liability the day before each pay day, rather than the current annual reporting requirements. Along with the compliance benefits to the ATO of enabling this reporting information in a timely fashion, there are considerable benefits to business as Mr Dardo explained:
If you are doing payroll and you are doing it with paper or Excel and you move to a digital payroll system that is much more automated and much easier, particularly if you have more than two or three employees, you will notice a difference. So as software developers make more and better products available and as the law changes to say, ‘Look, single touch payroll requires you to report payroll events every payroll event, not once a year on a payment summary’, we will probably see a combination of the education, the service offering, the better product and the law shift requiring businesses to move…
Despite the expected benefits of the STP for businesses, some will require additional support to transition, as Mr Dardo explained:
For some businesses, there is more work that needs to be done to help them understand that spending three hours trying to format a spreadsheet or trying to keep a paper record and doing everything three times might not be as easy as actually moving to something that is a bit more digital. That is one. The second one is they might genuinely be not digitally literate.
Mr Dardo also contended, however, that as software providers develop more user-friendly interfaces that digital literacy or uptake will shift.
STP is anticipated to be mandatory for all businesses with 19 or fewer employees as of 1 July 2019—assuming the passing of legislative change.
E-invoicing is a system which produces an invoice in an electronic format provided by the seller to the customer which follows a natural reporting system and avoids the duplication of record‑keeping (and potentially also reporting) effort. An e-invoice can meet the requirements under the Tax Act for businesses to provide a tax invoice to customers providing the e-invoice contains the regulatory information required for a tax invoice.
One of the impediments to real-time, expedient e-invoicing is the ability to record the required information in the data transfer. Dr Anthony Richards, Head of Payments Policy, RBA outlined the data rich benefits which the New Payments Platform (NPP) offers. In terms of data contained in a transaction between parties and financial intermediaries in the NPP, he said:
It can contain anything. There will be just a lot more room for different fields in the message. You could have GST type information. You could have a hyperlink to a document. You could have a field that triggers an overlay service that kicks in. There are all sorts of things that are possible once you have a lot of data going with a payment rather than just 18 characters. Currently, you cannot even put out your full name in those 18 characters.
COSBOA anticipates that e-invoicing will ‘expedite payments and also provide timesaving for businesses that will no longer need to type and retype invoices or use PDFs and the like to communicate B2B (business to business)’. E-invoicing also provides an opportunity for regulators to ‘reward those who use transparent and compliant accounting and sales systems’ by reducing compliance-related contact.
There are also likely to be efficiency benefits to small businesses in utilising e-invoicing over the alternative paper tax invoice, as Deputy Commissioner Rosenzweig explained:
There has been some research done—I think I probably have some figures—about potential savings per invoice going down from about $30 an invoice to process a paper invoice down to about $9 to process an electronic one. In addition, you can get paid faster. If the processing is faster, there is faster payment.
The ATO’s Chief Digital Officer Mr Dardo reasoned that e-invoicing will be a catalyst for greater digitisation of business systems:
‘If I’m doing e-invoicing, I might as well do the rest of it.’ The other lever will be increasingly as it becomes more normal for them to interact with others digitally, because others expect to be receiving stuff digitally or to be sending digitally, we may see the pressure of society actually starting to shift.
Mr Prouse of Xero Australia spoke about the progress of the development of e-invoicing standards in Australia:
So through the Digital Business Council, Xero has been participating in the development of e‑invoicing. E-invoicing is an industry-wide standard. It is involving software developers like Xero, payment providers, the banks and the ATO through the Digital Business Council. We recognise that e-invoicing is going to be a key part of the national business infrastructure for Australia.
The ATO’s work around the invoicing is similar. The important thing about e-invoicing is getting the content of that invoice transferred from one business to another without any data entry. So I am not having to read a paper invoice and double-check that it is a ‘three’ and not an ‘eight’ or an ‘eight’, not a ‘three’ and manually enter that information. It is more than just exchanging pictures of invoices. It is about the data.
The Committee has noted that some jurisdictions overseas have mandated e-invoicing. However, the inquiry received no evidence supporting the need in the Australian context for mandating such services. Rather, if correctly designed at a system level, the benefits of such a service will be manifest and not require mandatory uptake as consumers will naturally take up such services.
Introduced in 2016, SuperStream is a mandatory system for employers to meet their superannuation contribution requirements. The system transmits funds and relevant information from employers to the employee’s superannuation fund directly with data to the ATO linked to the payment by a unique payment reference number. The ATO receives the relevant information of these payments in a consistent format to help transfer the data directly into an employee’s fund.
Mr Reed of MYOB Australia noted the compliance cost reductions for business resulting from the introduction of SuperStream:
SuperStream has materially reduced the amount of time it takes an employer to report super each quarter. I think the first client I spoke to who used our super compliant services said that it went from four hours to four minutes for her to do super on a quarterly basis. Those sorts of changes have come through…Everybody has to now report digitally. Regulation forced that change despite the fact that it was actually a big benefit to the business.
The ATO notes one significant benefit is the ability to use a single channel to pay multiple funds. The ATO’s submission details that: ‘It is expected to deliver savings to employers of approximately $350 million per annum. Single Touch Payroll will further streamline and automate reporting obligations for employers through their regular payroll events’.
The ATO focuses on employers at high risk of not meeting their superannuation guarantee obligations for their employees.
The role of tax practitioners and intermediaries
In his 2015 review of the ATO’s services and support for tax practitioners, the Inspector-General of Taxation concluded that taxpayer reliance on tax practitioners in Australia has gradually increased since the implementation of self-assessment (in 1986), due to a number of factors, being:
the complexity of the business operations and related regulations;
the individual taxpayers involvement in investment activities and income sources other than personal exertion;
the scope and complexity of tax law and related compliance; and
the use of the tax system to deliver social policies as well as to collect revenue.
High reliance on tax agents
As discussed in Chapter 2, although data assessments of tax agent usage may not be internationally comparable, Australia is considered to have one of the highest levels of reliance on tax practitioners of any OECD country. In 2015–16, the ATO reported that 74.2 per cent of all individuals and over 95 per cent of business taxpayers used the services of a tax practitioner. The Taxation Commissioner stated that: ‘The 74 per cent figure is a blended thing; something like 90 per cent of businesses use an agent and something like…Sixty-eight per cent of non-business individuals.
The Board of Taxation cited the Inspector-General’s 2015 report to observe:
… These current levels are among the highest in OECD countries, exceeding those of Canada (39 per cent), the United States of America (40 per cent), New Zealand (50 per cent) and the United Kingdom (67 per cent). This highlights that tax practitioners, in Australia, have even a greater level of influence on taxpayer compliance.
In relation to longer term trends in the use of tax agents, the ATO’s Mr Olesen confirmed that the introduction of self-assessment in 1986‑87 had driven a spike in tax agent use, up from about 20 per cent in the 1980s. The Tax Commissioner considered that the size of the TaxPack had probably contributed to that rise, driving many people with simple tax affairs to a tax agent because it looked daunting. There were also other incentives to using an agent, such as the lodgement extension to May the following year and a tax agent’s expertise in taxpayer deductions.
In a supplementary submission, the ATO advised that: ‘Available data indicates a slow rise in the number of businesses using tax practitioners over recent years, while the number of individual taxpayers using a tax practitioner has remained steady at approximately 74 per cent’.
Mr Highfield, in testimony, reiterated evidence in his submission to the inquiry, that despite the ATO making much progress in the last decade with pre-filling, ‘almost three-quarters of individual citizens use a tax agent’. Hence, the high rate of tax agent use by individuals, he argued is—‘simply to do with deductions’.
Deputy Commissioner Rosenzweig stated:
We are also conscious that small businesses really engage a lot through agents and intermediaries. A lot of our research shows that they go to an accountant as the primary source of their information and advice about the tax system.
The Tax Institute cited the 74.2 per cent figure to indicate the ‘strong indication that taxpayers are heavily reliant on agents to meet their tax obligations. However, the submission noted that use of agents is not consistent across all taxes, nor all interactions with the ATO.
New tax intermediaries
In addition to the traditional tax intermediaries noted above, there are increasingly new players providing services and products within the tax sphere. The Inspector-General’s submission highlighted the emerging significance of software developers whose products are being developed to communicate directly with ATO systems, including SBR and STP enabled systems. The customer support from these new intermediaries, and associated costs, is also expected to transform the experience of taxpayers and their advisers in managing their tax affairs.
The Inspector-General’s submission further observed that as the ATO continues to roll out technology supporting self-management of tax affairs, adoption of these systems by taxpayers will depend on there being ‘ready access to adequate hardware, software and robust internet connections’. In this way, the broader sphere of software and hardware developers, along with telecommunications providers, will be important to service delivery.
The Taxation Practitioners Board reported that some of its members were concerned that the increased sophistication and automation of accounting software, digitisation and the streaming of services, such as the STP and simplified BAS, could ‘reduce the value of tax practitioners’.
In his submission, the Inspector-General of Taxation rejected this view, noting that the ATO had taken seriously concerns about the utility of services and quality of communication with tax agents, which his Office had identified in its 2015 review of the role of tax agents and acknowledged the ATO’s assistance to them. The submission further asserted, that:
The ATO’s ongoing service delivery should not detract or dissuade taxpayers from seeking independent tax and legal advice on their tax affairs. The ATO cannot and should not be the sole source of advice for taxpayers.
Tax agents into the future
In regards to the future role of tax agents, the Inspector-General’s submission also cited a recent OECD study which foreshadowed a transformation to a more strategic role, in the context of financial planning and business advice. Further, improvements in data analytics, predictive modelling and advanced design support systems might be expected to provide a basis for agents to provide this more tailored advice.
CPA Australia considered this process to be already well advanced:
Most tax professionals provide whole-of-business services and are no longer focused entirely on tax return preparation. In fact, for tax professionals, tax return lodgement is now often regarded as a by-product or the end result of better business advice and better automated processes and systems.
The Inspector-General identified the quality and reliability of ATO systems as an underpinning consideration in this transition. The Inspector’s submission also recommended that a more thorough review of this by an independent body, such as the Productivity Commission, could consider the broader cost implications for taxpayers of compliance, including further risk management and enforcement activities by the ATO.
At a hearing in Canberra, Tax Institute President Mr Matthew Pawson noted:
Intuitively, the no-return proposition infers there will be less work about for tax agents, and one would argue that this position is not in the best interests of our members. Possibly so. However, The Tax Institute is awake to the reality that the impact of disruptive technology is inevitably going to change the nature and role of the traditional tax adviser.
The Inspector-General of Taxation is currently undertaking a review of the role and future of tax practitioners which is due for release by June 2018. The Committee awaits the conclusions of that review for more industry specific views and directions which may impact taxpayer engagement with the tax system and engagement with tax practitioners specifically.
Tax agent portal and products
The ATO has made commitments to ensure that services available to tax agents support their real business practice needs into the future. Over the last decade, this has meant delivery of combined services in the Tax Agents Portal, ATO online and practice management software. More recently, as discussed below, the focus has been on the necessary integration of the ATO managed portal with commercial practice products.
Tax intermediaries have had access to a dedicated tax portal since 2012, with refinements evaluated in the Committee’s annual report review inquiries since 2014. In 2016, a schedule for trial and feedback on the phasing in of the new Practitioner Lodgement Service (PLS), and phase out of the old electronic system though to Tax Time 2017 was provided to the Committee.
During the current inquiry, Commissioner Jordan described recent progress (at late March 2017) noting the importance of the ATO’s partnership in design with software developers:
The practitioner lodgement service…is to enable [agents] to do one lot of input from their client into their system which goes directly into our system. Instead of the two screens—I have my practice system and then I get onto the tax office—it is all one. So that should save a lot of back-office time. It might be more difficult for agents to charge for, because it is re-keying and it is not face-to-face time; it is just connectivity with us…
That is why we see that as a pretty important development to have fully up and running, but it does depend on the software providers working with us. We are happy to do a lot of the grunt work and develop a lot of the relevant coding and APIs, and provide them at no charge so they can then take it into their product.
Mr Olesen discussed the integration of commercial product interfaces with the tax agents’ portal:
We have made the services available, but they are being integrated into the commercial software providers’ software because it is their software that most tax agents use in their practice to run the practice. The goal…a tax agent would be able to run their entire practice off the practice management software that is provided by their commercial provider, and all the services that they need to access from us would be accessible through the practice management software that their software provider has provided them.
The ATO’s Chief Information Officer Mr Katf elaborated:
What we are providing is a platform that people can connect to. How they choose to do that, through what type of software, we have left open to them. At the moment, most of those are targeted to either tax agents or small business. There are some that are targeted at individuals and, therefore, they interact that way.
Deputy Commissioner Rosenzweig cited, as an example, a cash flow management product for small business and their agents:
One of the products that we have just been developing and piloting is a cash flow management product. That was really developed in response to the fact that small businesses do often struggle with cash flow and that then manifests in a lot of the problems that we see in the tax office…It is a tool that small business advisers as well as accountants can work through with their clients in a very practical way to help them manage their cash flow and get it back on track. — It is a product that we are going to white-label so that professional bodies and accountants can use it in their own way, as they think is most appropriate, with their clients..
The Inspector-General referred to recommendations made in his 2015 tax agent services review, that the ATO increase its use of modern modes of communication for tax practitioners, such as by introduction of unique identifiers or voice recognition, and by developing a ‘web chat functionality’ to provide tax practitioners with useful information. The submission noted progress, with voice recognition now in place for taxpayers and the implementation of the Alex ‘virtual assistant’ who ‘understands conversational language and can clarify what you want and answer your questions.’
Feedback from agents and individuals on the Alex online tool, however, was mixed. Mr George Abernathy was frustrated by the tool’s limited comprehension of enquires and called for intelligent staff to be deployed. CAANZ observed that: ‘Alex does not yet reflect artificial intelligence characteristics but is nonetheless based on software that learns from previous interactions with users. It will be interesting to see how the functionality of this virtual assistant will improve over coming years’.
CAANZ also critiqued the current utility of other online tools, noting:
In terms of accessing tax information and online assistance products such as tax calculators, a number of attempts have been made to improve the ATO website although the generally held view amongst our members is that the website remains very difficult for experienced tax professionals (let alone ordinary taxpayers) to find the information they need. Searches on the ATO website will often result in a confusing number of “hits”, many of which can be irrelevant.
Taxpayer engagement in Australia, on the basis of willing participation—reporting, lodgement and timely debt payment—is high. The proportion of taxpayers deliberately disengaging and those oblivious to the system appears to be small but there are hidden costs and losses, such as through refund churn, including of the GST, compliance costs in hiring tax professionals to provide clarity in a system dogged by complexity, or merely in duplicated compliance efforts.
The Committee notes the benefits which accrue to the tax administrator in richer and faster data transfer and in timely reporting and payments with the mandated use of payroll and super systems developed using standard platforms and ATO developed APIs. The Committee is aware of the initial cost burdens of complying with such policy decisions but also of the considerable benefits which accrue when tax compliance is embedded in activities naturally occurring in the course of business.
The Committee was nevertheless concerned that the ATO is seeking to provide services to end users to the exclusion of other providers. The view of the Committee was that the ATO should pursue a strategy of creating a platform that facilitates other providers to create services. Such an approach is not uncommon in information technology companies, the most commonly cited example being the Apple eco-system embodied in iTunes.
Evidence suggested that the ATO’s collaboration with software providers to enable free-design of tailored products for varied small business situations—providing the required data and information parameters are embedded in those systems—appears to be a model which is working for the co-developers. It is unknown how satisfied businesses are with these solutions, given lack of direct evidence. However, the Committee heard there is considerable competition in the Australian market (around 70 software developers competing in general business suite products) which would encourage the development of desirable products—products that are easy to use, reduce duplication and ultimately reduce costs. This can only buttress willing participation in the small business sector. Measures to improve capacity to run seamless compliant operations in an increasingly non-cash environment will naturally foster tax and superannuation engagement.
The Committee anticipates the increasing demand for payment in electronic media is likely to reduce the opportunity for some currently cash dominant industries to disengage. Chapter 5 explores the cash economy and the prevalence of this in the small business sector.
With new digital platforms, more thorough pre-filling and access to a deductions management tool the majority of individual taxpayers now have the ability to relatively quickly and inexpensively prepare and lodge their tax returns digitally. Despite this, the Committee heard that nearly three quarters of individual taxpayers still engage a tax professional. Part of this may be due to impediments to digitally self-manage tax affairs like the ‘ready access to adequate hardware, software and robust internet connections’ while others may involve cyber-concerns. The Committee recognises other reasons for taxpayers not lodging digitally and this will be discussed further in Chapter 4. The Committee supports choice of constructive compliant engagement.
In addition, there are individuals who have complicated tax affairs where it may be unwise or most difficult to self-manage and these individuals would be expected to employ the services of tax professionals. The value of tax and accounting specialists in small business is reflected in the 95 per cent usage. A further discussion of the role of tax professionals and current threats to taxpayer engagement are explored in Chapter 6.
Tax regime simplification
As has been repeated throughout inquiry evidence, Australia’s tax system is complicated—also detailed in previous tax system reviews—and would benefit from wholesale reform. The system has layers of incremental change and as such, any single change has collateral impacts.
However, the Committee accepts that the long-term maintenance of willing participation, that of engagement in the tax system, is significantly hampered by the underlying design of a complicated tax regime.
The Committee recognises the considerable in-roads made in the client engagement experience as suggested in recommendations detailed in section G4:’Client Experience of the Tax and Transfer System’ from the report of the Australia’s Future Tax System Review, May 2010. It is pleasing to see that citizen-centric tax engagement systems have been developed for individuals and small business with a focus on simplifying and tailoring information and reducing time and cost burdens.
With the integration of data from interdependent transfer system agencies as well as extensive third party pre-filling and tools to assist self-management of deductions, many individuals have the capacity to digitally self-manage their tax affairs. The system is also transparent in that the taxpayer knows the data that the ATO uses to pre-fill, and communication can be timely.
Likewise, small businesses have become the beneficiaries of business software packages with up-to-date and user-friendly interfaces developed by the professional software industry using ATO programming interfaces. This way, systems meet tax and business functionality and reduce costly duplication.
However, the Committee can see that positive taxpayer experiences are created by a positive tax regime framework, and that is a framework which balances simplicity with fairness.
As new technologies disrupt and transform commercial environments, new imperatives have arisen which will be addressed in Chapter 6, covering challenges and solutions. The Committee therefore believes it is timely for the Government to revisit consideration of Australia’s broader tax regime and what reforms are required to place the Australian tax system in the best possible position, not only for domestic taxpayers but for all Australian residents.
The Committee recommends that a review of Australia’s tax system should be undertaken before 2022, with the purpose of making recommendations on how to simplify the present tax system, in order to reduce both the quantum of tax law and improve comprehension and compliance by people without expertise in taxation law.
This review is timely in light of the rapidly evolving digital environment, new commercial and financial platforms, increasing data volumes, identity and authentication threats and significant demographic and labour market challenges. All of these impact tax revenue and compliance.
Any future blueprint of Australia’s tax system should follow the principles of simplification, transparency, sustainability and minimising of compliance burdens.
Given the challenges to tax law reform, in the immediate term, the Committee commends the ATO for its investment in sophisticated Application Programming Interfaces (APIs) for the refinement and improvement of online tools, such as the workplace deductions and contactor assessment tools, to increase the reliability of its assessment results and reduce risk to taxpayers.