The tax system has been described as an eco-system—with interdependent players at all levels having an impact on how well the system operates. As such, there are a number of key influencers of taxpayer behaviour and the way they engage with the tax system including:
ease and costs of compliance;
sense of procedural justice and fairness in how the system works;
perceptions of other taxpayers’ compliance and how non-compliance is dealt with;
trust and confidence in the Australian Taxation Office (ATO);
personal beliefs such as fulfilling a sense of duty;
risk appetite and the desire to avoid being caught or being penalised; and
financial pressure and economic conditions.
This chapter identifies the primary challenges Australia’s tax system faces in the near to medium term and some key challenges for the ATO in maintaining, and improving on, the existing high levels of taxpayer engagement.
The chapter discusses the impact of changes in workforce arrangements on the tax system and the issue of work-related expense deductions. It also addresses the risks of leaving people behind in the digital future, along with maintaining security of the tax system and taxpayer privacy in the evolving digital realm.
Finally, the chapter concludes the report in examining the latest system developments affecting the economy—the Financial Technology (fintech) sector and digital currencies—and the potential threats these pose to the stability of the tax system and taxpayer engagement more broadly.
Changes to the workforce
The Committee has heard, during its inquiry, about the changes in the workforce resulting from the trend to contract employment, rather than ‘traditional’ employer–employee relationships.
The rise of the contractor and of corporate sole traders, with more corporate structures and favourable deductions, could lead to Pay As You Go (PAYG) stream implications for tax collection. The problem is that the ATO will obtain fewer regular tax receipts and less surety of tax collection. From a superannuation perspective, some people are being classified by employers as contractors instead of as employees—and so these people may be missing out on their eligibility for superannuation guarantee contributions and regular PAYG withholding tax payments, thus creating disengagement from the tax and super system.
The Institute of Public Accountants (IPA) observed that:
…the growing number of self-employed businesses acting as contractors poses to the ATO a greater risk of losing tax revenue when compared to collecting PAYG from employed individuals’. Contracting has increased to 10 per cent of the workforce - driven by the sharing economy through online IT and mobiles, and incentives under the tax system, including greater employment deductibility, lower taxes and potential for income splitting.
The gig economy and the sharing economy
One of the reasons for the increase in this type of worker category is the rapid proliferation of two relatively new concepts—people working in the ‘gig economy’ and those operating in the ‘sharing economy’. Much of this transformation of the labour force developed over the last ten years with considerable restructure in Australian workplaces through offshoring of functions, online retail, greater automation and self-service in the economy and more portable, cheaper and connected tools of trade. Added to that was structural change following the resources boom. A considerable amount of labour moved from a full-time single employer model to a multi-job flexible and ‘uncertain hours’ model. Many of these jobs were self-created ‘gigs’ through freelance work or contracting. A wide variety of workers now fall into this category.
The gig economy tends to create cheaper labour in competition with traditional arrangements and as a consequence gig workers/contractors are a competitive labour hire option and thus a growing section of the labour market. However, this distinction may be exploited when, say, people who almost exclusively work together as a team with essentially the same functions and business goal are classified differently as contractor or employee in each other’s business.
The ATO provides a six part guide to the definition of a contractor versus an employee on its website. The basic difference given is that an employee works in your business as a part of your business while a contractor is running their own business. As the ATO states—
It’s against the law for a business to incorrectly treat their employees as contractors. Businesses that do this are:
not meeting their tax and super obligations;
denying workers their employee entitlements; and
illegally reducing their labour costs and gaining an unfair advantage over their competitors.
The ATO’s web information on this matter, which includes a video on common myths, indicates that this distinction is difficult to determine and enforce. Further details of employer tax engagement obligations, depending on classification, are as follows:
If your worker is an employee you’ll need to:
withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to us;
pay super, at least quarterly, for eligible employees;
report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits.
If your worker is a contractor:
they generally look after their own tax obligations, so you don’t have to withhold from payments to them unless they don’t quote their ABN [Australian Business Number] to you, or you have a voluntary agreement with them to withhold tax from their payments;
you may still have to pay super for individual contractors if the contract is principally for their labour;
you don’t have FBT obligations.
The difficulty in determining this distinction was previously discussed in more detail in Chapter 3.
The Institute of Public Accountants (IPA) considered the more generous tax treatment of a contractor operating under a corporate structure, means:
The tax system also incentivises individuals to contracting due to the perceived tax advantages. The tax advantages include the ability to claim a greater range of deductions than an employee, access to lower tax rates and income splitting opportunities. The lower income rate for incorporated businesses has further exacerbated the incentives for a contractor to use a corporate structure to gain access to more favourable tax rates. Employers too are attracted to using contractors as a way to reduce employee on-cost such as superannuation guarantee, leave entitlements and payroll tax.
From a specific tax perspective, one issue is that tax returns for contractors are not required until after the end of the next year, and longer—up to 22 months—if using tax agents, with the delays impacting the Government’s revenue. It can also result in tax compliance issues as the contractors must prepare and have available the necessary funds to meet their delayed tax obligations. As the IPA stated, for the starting-out contractor:
This can impose a burden–first year tax and then some of second year PAYG instalments for which they may have not budgeted.
The ‘sharing economy’ or ‘collaborative economy’ is often part of the gig economy. It has been described as a ‘peer-to-peer’ (P2P) based activity—acquiring, providing or sharing access to goods and services; and facilitated by a community-based on-line platform. The concept is based on the assumption that under-used private assets can be utilised for a market value and, as such, are cheaper than established markets. This economy has now expanded to encompass offerings like on-line share platforms advertising open work spaces for freelancers in the gig economy. The current forecasts are that this market will increase in value some 20 fold over the next ten years. A well-known example of the sharing economy which utilises people in the gig economy is Uber (a share ride system operating with private vehicles, akin to an unlicensed taxi market).
The sharing economy continues to face regulatory and tax evasion contentions for the sharing platforms per se, which take a commission from users. But it is the rise of the gig economy, and its potential disengagement from the tax and superannuation systems, which will require the most monitoring and enforcement over the foreseeable future. This was explored by the Black Economy Taskforce, recommending that operators of designated sharing economy websites should be required to report payments made to their users to the ATO; and also proposing initiatives to counter ‘sham contracting’ (contractors who have a contrived business-to-business relationship).
Chapter 3 discussed Personal Services Income (PSI) rules in relation to contractor based employment with big sharing companies.
As discussed in the preceding section, the number of contractors as a proportion of workers is rising. The primary issue related to workers operating as contractors from a tax perspective is that under current arrangements ABN holders are excluded from the PAYG withholding tax system which provides for the regular payment of tax and superannuation obligations.
To combat the uncertainty and preserve timeliness in tax-related payments associated with contract work, the New Zealand tax system has introduced a contractor withholding tax at source system for self-employed businesses.
New Zealand’s comprehensive withholding tax regime does not require reporting by sectors at risk of non-compliance, as was recently advanced by the ATO. New Zealand has instead legislated to impose withholding tax at various rates on a whole range of identified at risk occupations, vocations or activities. The regime has recently been widened.
Mr Peter Vial, New Zealand Country Head and Tax Leader for the Chartered Accountants of Australia and New Zealand (CAANZ), highlighted the role of New Zealand’s Generic Taxation Policy Process (GTPP) in securing these reforms. According to Mr Vial, the GTPP is ‘the jewel in [NZ’s] tax policy crown’, and has been ‘instrumental in ensuring our legislation and policy is more cohesive, more robust and fair and efficient than it might otherwise have been’.
The GTPP is an ‘end to end process’, which guides how the taxpayer, and the business community in particular, engage with the tax system and ‘how they input into tax policy and law as it’s developed’:
It starts off with the government setting its tax policy work program, which is usually for an 18‑month period. The government consults with stakeholders like us and other key private sector stakeholders on what reforms should be on that program and what we would like included, and we often get measures or issues included on that work program. Then officials consult with the community, and particularly with the key stakeholders, as they develop the policy and turn it into law. By the time the legislative stage is reached and a bill is introduced, many, but often not all, of the issues and risks and drafting challenges have already been addressed. If not addressed, they have at least been aired and they are on the table.
Mr Vial said that the New Zealand withholding regime, which has been in place for several decades, has captured and kept contractors in the tax system. Recent amendments to the schedules had further expanded scope while allowing flexibility to the taxpayer:
For example, if you’re a journalist working as a stringer writing articles, or you are in a particular industry where your work is on contract and ad hoc, you are likely to be included as a vocation or activity in the schedule, subject to a withholding tax rate. The new changes allow people who are even outside that particular scheduler approach to elect into the withholding payment regime and to have tax deducted at source. It also allows them to elect their own rate of withholding tax, subject to minimums. So the regime has been broadened and made more flexible, and it has also been given some more teeth.
Based on the New Zealand system, the Committee recommends that Treasury considers an ABN withholding tax system at source for all industries with the potential for the rates to be industry specific.
As the New Zealand system demonstrates, this could be a defensible system, particularly for industries that engage in extensive contracting. Within Australia experience from the mandatory reporting requirements introduced for the construction industry has suggested that such interventions have potential to reverse ‘entrenched longstanding non-compliance’.
In addition, the Committee is of the view that the contractor assessment tool provided by the ATO could be improved, with reference to the tool developed by the Her Majesty’s Revenue and Customs (HRMC UK)which has more in‑depth and well targeted questions, to reduce errors and uncertainty.
The Committee recommends the ATO should review the functionality of the contactor assessment tool for accuracy and utility to taxpayers by reference to the functionality of the tool deployed in the United Kingdom, and report to the Committee on its progress.
During the conduct of the inquiry it was evident that the treatment of workplace deductions will need to be considered in the future. The issue of deductions was raised in relation to the possibility of eliminating the need for individuals to lodge tax returns. While the income elements of the tax return can now be pre-filled (effectively automated) it is primarily the inclusion of workplace deductions that would prevent the elimination of tax returns for most individuals.
In New Zealand taxpayers do not need to lodge a tax return. Mr Vial, CAANZ’s New Zealand Country Head and Tax Leader, explained how this was achieved:
…many New Zealanders do not, and are not required to, file income tax returns. Most individual taxpayers are unable to claim work-related deductions. Generally taxpayers who derive only wage and salary income and interest from dividends do not file tax returns. The reason they do not file tax returns is that their tax has been deducted at source and they’re not entitled to claim deductions other than in very narrow circumstances..
He further explained that one of the two allowable deductions is for the preparation of a tax return, which wouldn’t be required if you have not incurred premiums for loss of income insurance, the only other allowable deduction:
We have only two types of work related deduction that a wage or salary earner could claim. One is in relation to income protection insurance premiums, and many or most of them don’t have such insurance. The other is for the cost of preparing a return. Given that most of them don’t have to file returns, they are not entitled to a deduction for something they’re not incurring.
Other countries have a similar approach to New Zealand, including the UK. In Denmark, Sweden and Norway tax returns are completely pre-filled, requiring a positive response as acceptance in Sweden and a silent response in Denmark and Norway. This ‘push return’ approach is possible because their systems ‘feature comprehensive withholding mechanisms and little or no deductibility for expenses’. Note, however, as discussed in Chapter 2, the Inspector-General of Taxation cautioned the comparison against other tax systems where there may have been minimal ability to claim deductions before pre-filling anyway, and noting the ‘different socio-economic and legal frameworks in each system’, and as such, different cultural expectations and impediments.
Some participants have argued that Australia’s current treatment of workplace deductions is unique (and negatively so) amongst other OECD countries. The Tax Institute argued that:
Other countries provide only very limited and narrow circumstances where work-related expenses can be claimed.
The Institute’s submission also urged:
Implement Henry Tax review [ Australia’s Future Taxation System, AFTS review] Recommendation 11: Australia introduce a standard Workplace Expenses deduction, while retaining ability to claim more with full substantiation above threshold.
Mr Richard Highfield provided a table based on information included in the OECD’s 2006 tax review, which showed the various treatments of work place deductions in comparable countries. Australia and Denmark’s schemes were rated as more generous than other nations. The Tax Institute noted that in other OECD countries where final withholding and no deductibility for work‑related expenditure feature, most people do not have to lodge a return.
Mr Highfield elaborated on other nations’ workplace deductions requirements during a public hearing:
As I mentioned, there are countries where certainly the rules for deductibility are much tighter. For example, it has to be a condition of your employment. There has to be an authorisation by your employer that a car was required to be used for this particular purpose over this period of time or whatever. So there are much more extensive tests undertaken to validate deduction claims.
He questioned the nexus between valid work-related motor vehicle travel and work-related travel claims which are being claimed by three in 10 workers in Australia:
As it happens, motor vehicle expenses are the most common work-related expense deduction. Over 30 per cent of employees are claiming a deduction for work-related expenses. When you bear in mind that travel to and from work is not deductible, it is very hard to rationalise how almost one in three employees can justify use of their car for their work. Certainly there are occupations where it is valid and acceptable, but one in three?
The different treatments of workplace expense deductions emerged as a focus in discussion of tax simplification during the inquiry. Mr Highfield argued that: ‘Reform of WREs is long overdue given the compliance burden they create and the likely revenue leakage involved’. He quoted the AFTS Henry tax review, findings that:
There is a high degree of variation in WRE claims among individuals with identical occupations and income levels. This variability could be explained by: some taxpayers over-claiming (including expenses that might be private, domestic or capital in nature), given the limited ability of the ATO to audit WREs; some taxpayers interpreting expenses that are incurred in performing their job differently from other taxpayers (raising issues of complexity and transparency in the system); and differences in employer behaviour, where some employers pay for a particular type of expense while other employers do not.
In Canada, a country with a similar tax system and administrative arrangements to Australia, it is estimated that 10 to 15 per cent of WRE claims each year are invalid. If over-claims in Australia are of a similar order, this would equate to an over-claim of between $1.4 and $2.1 billion in 2006–07. While no tax system can achieve perfect compliance, the potential magnitude of non-compliance suggests that administrative solutions alone cannot address this issue.
CAANZ’s Mr Vial considered that an overhaul of Australia’s workplace deduction system would probably need to be part of a more systematic review to make it palatable to individual taxpayers accustomed to the claims system:
My view is that the removal of the entitlement was achieved with little fuss because the change was made as part of a package of reforms that included within a very short space of time reductions in tax rates, the introduction of our very comprehensive GST, and increases in social assistance. The packaging of tax reforms has been successful on a number of occasions in New Zealand, and that’s just one of them.
The Tax Institute also suggested that Australia should refer to New Zealand, and to the United Kingdom model, to achieve more streamlined processes for individuals with simple tax affairs.
CPA Australia agreed that, while not actually favouring change, any review of the current work-related expense deduction system should be part of a wider review. Mr Paul Drum, Head of Policy, CPA Australia stated:
One of the things that I did want to raise is that quite often in inquiries such as this, Chair, where issues of tax complexity are considered, the issue of either eliminating or capping allowable deductions for work-related expenses incurred in the derivation of one’s income is often raised under the guise of simplifying the tax system.
In other inquiries, this is not something that we have supported on the basis of an exclusive simplification measure and certainly not as a budget repair measure either. It is something that we could entertain as part of a broader review of the tax system. But if it is cherry-picked, the items are picked out one by one, we are not supportive of that approach.
He further elaborated on the Commissioner of Taxation’s public statement on the disproportionately high number of Australian taxpayers claiming certain work-related expenses:
He talked in a recent speech, for example, to the National Press Club, where he said half of all Australians are claiming laundry expenses and how could that be. So that does raise a red flag in the system and it raises questions that need to be answered. There are questions about travel expenses that people are claiming. We note that given 74 per cent of returns are prepared by tax agents, some of these claims that are now under question will be prepared by tax agents. We ask: how can that be? How can they be so different to what we would expect?
The Committee views a reform of the treatment of individual taxpayer work-related tax deductions to be important. This initiative would be in step with countries that have adopted ‘push returns’ for the majority of individual taxpayers with uncomplicated tax affairs. Evidence to the inquiry indicates that the high level of tax agent use by taxpayers with very straightforward tax situations is partly associated with an expectation that an agent will advise of deduction claims.
In many cases, individual taxpayers employing an agent to prepare their return on their behalf will now have an almost completed tax return pre-filled by the tax administrator. Therefore, the ability of a taxpayer to choose a standard deduction, or to substantiate every claim above the determined threshold, will streamline tax return lodgement and reduce compliance costs for many taxpayers. It will also have the effect of tightening the nexus between income earned and substantiated claims as there will be fewer of these in the system.
Furthermore, it will also reduce the potential for unfairness in the system when people cheat or when their workplaces have differing practices (for instance, legitimate laundering expenses for those wearing a ‘uniform’).
The Committee recommends that the work-related deductions scheme be reformed by introducing the standard deduction concept as proposed by the Australia’s Future Tax System Review.
Fairness would be maintained by enabling individuals to claim above the set amount by providing full substantiation through a tax return process.
This recommendation will align with the ATO’s plan to introduce a ‘push’ tax return (as discussed in Chapter 4).
The ATO and technology change
The ATO is responding to digital innovation which holds many benefits for Australia’s tax system, especially given Australia’s transfer payments are often dependent on information received by the ATO and that the ATO oversees other administered programs like the Private Health Insurance Rebate and First Home Saver Accounts Scheme. The benefits of digitised systems and high level computational capacity have been previously discussed in Chapters 2 and 3. However, these new systems and applications bring challenges in transition.
Is digital transition alienating some citizens?
While the digital revolution has brought many benefits to the tax, superannuation and transfer systems, it has also brought negatives. The most concerning from an economic stand-point—and not only at the citizen‑level but also at the tax administration level and more broadly for the ongoing stability of commerce and the economy—is the rise in cyber‑crime and scams. The Australian Competition and Consumer Commission (ACCC) has recorded a reported loss to Australian citizens from cyber‑crime and identity scams of almost $300 million in 2016. This alone is enough reason to understand why non-digitally savvy citizens shy away from, or refuse to engage with, internet-based personal data, reporting or banking systems. The Committee did not receive direct feedback on this occurrence but the nature of digitised Committee advertising processes would tend to exclude a digitally averse group.
Some people are not engaging with the new digital interface—which is the first-line engagement interface of the ATO—because it is unfamiliar and they aren’t ICT confident. These people are likely to become increasingly disengaged from knowledge of their own affairs and information about the system as a whole. Instead of a world of greater information, which digitisation is able to offer, theirs becomes progressively smaller. This is particularly concerning as the growing proportion of older Australians will hold the majority of household wealth, not only in retirement savings but also in valuable principal residences.
The ATO’s own website details the threats to an individual’s wealth through identity theft, which includes, amongst others:
Accessing your myGov account;
Stealing your superannuation;
Creating fake businesses and committing refund fraud in your name; and
Selling your identity to organised crime groups on the dark web or via other means.
The ATO goes on to say that ‘thieves need some basic details such as name, date of birth, address, myGov details or tax file number (TFN) to commit identity crime’. And it further warns digital non-natives that:
If criminals steal your identity, it can take a long time to fix. It may be difficult for you to get a job, a loan, rent a house, or apply for government services or benefits.
The ACCC identified in its last Scam Report a number of relevant issues for the digital inclusion of particular groups in the tax system, finding that:
The 65 and over age group was statistically more likely to send money when encountering fraud; and
Older groups were also more likely to fall victim to computer support fraud (remote access scams), due to their lower level of knowledge and confidence in using modern technologies.
A casual observer would infer that a taxpayer placing their information in a new digital set-up, with little expertise in the subject matter or the tools of application, bears much risk and few rewards. It is therefore unsurprising to note the uptake of tax professionals lodging individual tax returns in Australia. The cautious will offset their risk by engaging an agent. For those who have been self-lodgers but have experienced a malicious attack or ‘near miss’ in the absence of accessible non‑digital resources, they may choose to risk the consequences of disengagement.
The Tax Commissioner acknowledged this himself when he said at a hearing:
I get a lot of people saying to me: ‘My kids used MyTax. It was fantastic.’ I say, ‘Why don’t you?’ They say: ‘Oh, I don’t know. Sounds a bit scary.’ I think it is going to take a little while to get the migration of people into that.
The Black Economy Taskforce final report devotes considerable time to addressing identity crime concerns and on developing robust identity verification means. The report noted that: ‘It has never been easier for criminals to obtain false identity papers or ‘steal’ another person’s digital identity’ and that ‘in the 2015-16 financial year there was an 80 per cent increase in identity theft over the previous year’. The Taskforce recommends ‘a single individual identity to allow individuals to instantly and securely prove their identity using a digital identity credential, securely biometrically, when dealing with Government’ and to strengthen the integrity of the ABN system.
People with simple tax affairs who have been paper self-lodgers are now expected to obtain, upgrade and maintain a reliable IT system at their own (non-deductible) cost and take all the risk of internet security exposure at their end to operate a myGov and myTax account. Otherwise, these people are obliged to employ a tax agent who, in 2009, almost a decade ago, charged on average $206 for the cost of managing their tax affairs. The costs of managing tax affairs is tax deductible so for those on an average Australian wage they would be refunded approximately 32.5 per cent of this cost, but they would still need to meet the up-front costs for the service and the out-of-pocket cost of approximately $139.
The Chief Digital Officer of the ATO admitted that he was concerned about disenfranchising and alienating some citizens. He said:
Another thing I would say is that I do lose sleep over the fact that, putting businesses aside, we do have a percentage of the population that will never get to digital. My mum will never get to digital. She has poor English skills. Her idea of a phone is she wants the old Nokia handset where you just ring or it rings like anything else.
This raises a significant point related to accessibility—those from non‑English speaking backgrounds and with less proficient English skills may struggle to personally deal with their tax affairs, irrespective of the digital context, irrespective of how many years they have resided in Australia.
Maintaining privacy with digital engagement
The rise of digital engagement with the ATO also raises issues about maintaining privacy. As social media sites become more omnipresent, they provide considerable ground for governments to use as an information source to better understand the needs and behaviours of individuals and small businesses. The public are now starting to become aware or have a perception that governments are using social media in an intrusive way. This is leading to concerns regarding privacy breaches and perceived surveillance.
An Australian Broadcasting Corporation (ABC) article, in November 2016, warned that the ATO uses Facebook, Instagram and other social media to confirm the accuracy of information that is reported to it. While this may not be entirely accurate, the general public were made aware that, in a high profile case of suspected tax crime uncovered in 2017, one method of identifying a pattern of unusual taxpayer behaviour involved viewing images posted to Facebook.
The Office of the Australian Information Commissioner (OAIC) conducts an annual survey of Australian attitudes to privacy. The 2017 Australian Community Attitudes to Privacy Survey (ACAPS) found ‘that sixty-nine per cent of Australians are more concerned about their online privacy than they were five years ago’.
The data also indicated that despite risks to privacy being of increased concern, Australians are not using or aware of basic privacy protections and rights. For example, the survey found, that the majority surveyed did not read the privacy policies of websites used and 43 per cent did not regularly adjust the privacy settings on their social media accounts.
Furthermore, approximately 25 per cent of those surveyed have rarely or never questioned an organisation why they need personal information, despite this being a basic privacy right; and 58 per cent were unaware they can request access to the personal information a business or government agency holds about them.
According to the survey, more than eight in ten (83 per cent) believed the privacy risks are greater when dealing with an organisation online compared with other means. And yet, respondents were more relaxed about government holding their information than they were previously, with the trust differential widening for dealings with commercial entities.
In 2017 one in six (16 per cent) would avoid dealing with a government agency due to privacy concerns, with six in ten (58 per cent) avoiding dealing with a private company—a 42 point gap. By contrast, there was smaller gap of 37 points (23 per cent versus 60 per cent) in 2013.
Asked about the degree of trust given different types of organisations to look after their personal information, respondents indicated that Health service providers continue to be the most trusted organisations with eight in ten Australians (79 per cent) trusting them, followed by financial institutions (59 per cent), and government departments (58 per cent) respectively. Insurance companies (40 per cent) and charities (38 per cent) are trusted by four in ten. People aged under 35 were also significantly more likely than people aged over 55 to trust organisations of all types.
Similarly, on sharing of information—one third (34 per cent) of the community was comfortable with the government sharing their personal information with other government agencies. But only one in ten were comfortable with businesses sharing their information with other organisations.
While the Committee understands the enormous benefits both to the end user and government in the use of digital formats, these findings indicate that careful management of the transition to fully digital tax engagement processes and services must be a priority for the ATO. This would include conducting evaluations of taxpayer readiness to stage the process.
The Committee recommends that the ATO should adopt a roadmap for the abolition of paper-based returns, including testing and trialling with user groups.
For the foreseeable future, the Committee recommends that the ATO maintain paper-based returns and the distribution of paper publications on request to those people who choose to engage this way.
Additionally, taxpayers seeking non-digital tax resources for tax returns at a myGov Shopfront should be assisted on site.
Tax forms and basic information packs should be available on site—or the inquirer added to a dynamic mailing list which enables a current tax return pack to be promptly posted to them.
Cyber resilience of the tax administrator
The rise of digital systems and other technological change raises ATO security issues, in particular the security of records held by the ATO. The ATO has prioritised internal data management as part of its commitment to deliver secure, stable and reliable online services to taxpayers using a range of authentication capabilities, and managed by a team dedicated to complete compliance and adherence to those capabilities.
The Committee sought information from the ATO as to the actions that it is taking to ensure security of information held and shared—in particular in relation to software providers and those connecting to a core ATO system.
The ATO’s Chief Digital Officer provided a comprehensive overview of what is being considered and what is being developed—explaining the five elements of focus which include certification, authentication, data sovereignty, the supply chain and finally, encryption. He elaborated:
The first area is how you certify or register a provider, be it a software provider, mobile app provider or somebody who connects to our core systems. How do you certify them before you let them connect? What are the minimum standards they must have? How do we get that agreement?
The second area…is what authentication they must have at the front of their systems. If they just have password controls with no brute force protection that will be insufficient. So we are working through what they need to step up to on the front of their system. Whether you are a software provider or mobile app, how do we know that you really do know your client and how do we know that that client really is who they say they are based on your controls?
The third one is…around data sovereignty. So if you do have data stored in an offshore location and are you a software provider, what assurances do we have that there is not sovereign risk to that data, that a local governor or a national body or the security agency of that country does not access that data at will?
The next…the supply chain…if you are a software developer and you have data in your systems, and you are letting that data be shared or used by other software developers and we cannot see that and your clients cannot see that, that is a risk.
The final area is encryption. When you get data, when you store data and when you move data, how do we encrypt it in all of those steps? What are the algorithms or the rules we have to encrypt the data so that even if somebody intercepts it, they cannot actually do anything with it?—What you may have to do is have rules that say it is encrypted between the points and the people that touch it are registered or whitelisted so that you have assurances that it is encrypted between, encrypted at rest and encrypted between again.
Asked about the incidence of breaches Mr Ramez Katf, the ATO’s Chief Information Officer, said that he was not aware of any and further advised:
We have a very strong interest and investment in our cybersecurity holdings. We have a lot of people dedicated to that activity. Our cybercapability is multilayered. We have ISM compliance capabilities, we have authentication capabilities and we have a range of different vulnerabilities that we continue to address on a regular basis. It is one of our most important capabilities. We have quite a strong team focused on making sure that we have complete compliance and adherence to those capabilities.
The ATO also stressed that being cyber resilient and secure is a dynamic and ongoing challenge:
With regard to consultation, we will never finish this journey. What we have made really clear to developers, banks and super funds is that we will agree on a maturity framework. We will continue to have to escalate the requirements as malicious players continue to get more sophisticated.
To improve online security for the individual, the ATO has enabled more unique personal identifiers like voice imprint technology. The Commissioner of Taxation espoused the benefits of this new innovation, pointing out that the ATO is a pioneer in voice imprint for a transacting authorisation. He said:
By using your voice to authenticate your identity, when you say, ‘In Australia my voice identifies me,’ our app takes you to your own account and you can transact. You can put these figures in, you can make instalments, you can change your details, you can lodge your return, all through your smart device, using your voice to authenticate yourself. We in Australia are the first to enable anyone to transact. I think Citi, the American bank, brought it in after us, but we were the first to have voice authentication to transact. You have to go through myGov and link MyTax first, and then, when you download the app, it does ask you those questions to authenticate you that you would be asked in MyTax. But, once you leave your voice as a print, that is it; you can use that on the go, grab the stuff, chuck the receipt away—you are done.
However, Mr Jordan went on to lament:
…most people we talk to about it say, ‘That is great. You should tell people about that.’ It is often difficult to get mainstream publicity, mainstream exposure, for these good things that we are doing.’
The Committee sees that the ability of the ATO to manage the implementation of digital security systems as critical for the integrity of the tax system. It will also be important for the developers of tax law and the ATO as administrators of that law to identify and address potentially disruptive technology.
Emerging financial technology
Evidence was submitted to the inquiry about the potential impacts of new financial technology on the auditability of many transactions and how these might integrate into the tax system. These developments included new payment platforms, blockchain and digital currencies.
New payment platforms
The Reserve Bank of Australia (RBA) announced the central bank’s New (digital) Payment Platform (NPP) on 13 February 2018. The NPP allows for transactions between individuals or individuals and businesses or between businesses in real time.
The RBA Governor Philip Lowe stated at the launch:
The public launch of the NPP represents the delivery of a major piece of national infrastructure.
In particular, the NPP and the initial overlay service, Osko, will allow financial institutions to provide improved services to Australian businesses and consumers, including to:
make real-time payments, with close to immediate funds availability to the recipient;
make and receive payments on a 24/7 basis;
have the capacity to send more complete remittance information with payments; and
address payments in a relatively simple way.
Around 60 banks, credit unions and building societies will begin rolling out services to their customers from today, with the number of financial institutions and accounts linked to the NPP progressively increasing over the coming months.
The Committee heard from two independent platform providers about the new payments arena and the benefits of a strong regulatory framework—PayPal Australia is well established in the digital payments market, while Airwallex is a boutique payments provider start-up.
Paypal Australia noted that the integrity of its payment platform is critical and as such it invests heavily in data protection:
The essential element of the PayPal wallet is that the wallet holder can make payments or send funds to a third party, whether another PayPal account holder or a PayPal merchant, without ever disclosing to that other party the funding source that they have used for their payment. All financial data is encrypted and held by PayPal so that the source of funding is known only to the wallet holder and to PayPal. Trust in the efficacy, security and certainty of our product and associated services is at the heart of our customer and merchant value proposition.
Significantly, Paypal operates a system based on trust, security and certainty, despite the massive volume of transactions processed through the platform. Mr Simon Edwards, Director, Government Relations, reported on the quantum of this data—and the rise of cashless transactions using mobile networks:
To give you an idea of the scale of this business, in the June quarter of this year PayPal processed 1.8 billion transactions worth in excess of $106 billion US dollars. Importantly, in the same quarter, the average number of transactions per PayPal active account user increased to 32.3, which represented a 10 per cent increase over the previous year, and the volume of mobile payments on our platform increased by more than 50 per cent, accounting for a third of all payments made using PayPal.
As mentioned in Chapter 5, the ATO has noted that even though digital systems can potentially identify any data, the Tax Office is not envisaging the NPP as a data gleaning mechanism:
We see that the NPP will be able to facilitate interactions. The overlay services that sit over the top of that and/or the identity requirements that sit in it are something for government and/or industry to really work through. I imagine that there will be a range of discussions about what may or may not sit in the NPP.
At a hearing in Canberra, Dr Anthony Richards, Head of Payments, RBA clarified the benefits that the NPP could bring:
The NPP has been designed as a platform for innovation that will benefit end users of the payments system—households, businesses and government entities. One key feature that will facilitate new services will be the ability to include much more data with the payment—up to 280 characters of data as opposed to the current limitation of just 18 characters in the direct entry system. Richer data will facilitate e-invoicing and straight through processing and is likely to offer enhanced functionality to government agencies, including those under the DHS umbrella.
Besides real time 24/7 operation, this is the significant benefit of the NPP—the rich data abilities which will enable business-to-business invoicing information which benefits businesses in the data flow to other agencies, like the ATO, in the course of a natural business function. This means no duplicated effort and its simplicity aids willing participation in the tax system and reduces compliance costs.
The greatest hurdle for tax administration in the current fintech space is that the data may be rich but it is voluminous. The Attorney-General’s Mr Daniel Mossop, Director, Financial Crime Section, referred to the technical challenges imposed by Fintech innovations:
The pace of innovation in that space is a constant challenge, in terms of capturing those transactions, particularly in a way that provides intelligence to law enforcement and national security agencies, but also one that provides some level of oversight for the ATO.
Mr Edwards of Pay Pal Australia recommended:
As the private sector drives momentum towards digital payments, governments can, in my view, do a number of things:
support the further development of a digital applications industry;
give consideration to the governance of data sharing by government agencies such as to advance public interest while substantially recognising and protecting both individual privacy rights and the concept of a free society;
build upon the NPP, with government payments in real time utilising popular consumer payment systems;
support Australian online retailers selling to the world by considering regulatory actions in the context of the global market—for example, to review and revise international tax agreements for the digital age that reflect digital commerce—; and
develop internationally consistent regulation in data privacy, security and, ultimately, taxation to enable global trade at the lowest possible transaction cost. In this regard, I would specifically call out the need for the development of a digital identity for companies, businesses and individuals.
The ATO stated in a supplementary submission that it ‘looks to identify potential future developments (including technologies) that might impact the tax and super system’. The submission also states that the ATO has been in discussion with a number of technology and advisory providers to ‘explore the potential for emerging payment technologies to enhance aspects of administration of the tax and super system’.
The Committee does not believe these transaction platforms pose a large problem for tax compliance at this stage because most of the transactions occur through platforms with links to financial institutions from which the ATO can access data. Issues may arise in the future as the volume of transactions increases, or if the ATO was unable to access information about these transactions.
Blockchain is an electronic distributed ledger system that enables unique identifiers of transactions that are secure and robust to potential manipulation. The ledgers are generally public.
The evidence to this inquiry is that the transparent nature of the ledgers means that they are unlikely to pose a significant risk for tax administrators as the ATO will be theoretically able to observe transactions and the ledgers may even have a positive use within the tax system.
Mr Mossop of the Attorney-General’s Department believes:
I think theoretically there are a lot of advantages for blockchain and distributed ledger technology as a single immutable source of truth. That might have benefits in some areas of law enforcement, where you might have registries that are more difficult to dupe or verification can occur at the time of entry.
The significance of the blockchain from a current tax perspective is that it forms the foundation for the transacting of most cryptocurrencies, famously for bitcoin, discussion of which follows. All the computers in the blockchain network repeatedly agree that the distributed ledger is true by using an algorithm called a consensus mechanism. This process uses enormous amounts of electricity. This has led some to believe the blockchain concept will have a limited commercial use for asset or data management at this stage until a less energy hungry method of verifying the blockchain is developed.
However, Dr Chris Berg, in his private capacity, said at a hearing in Canberra that:
Blockchains are likely to bring about enormous changes to the way we work. For now, though, and to conclude, we’ll leave it that any use of new digital technology for government revenue has to place fundamental values, like privacy and the rule of law, at the centre.
Dr Berg also opined the potential benefits of blockchain in audit and tax administration:
…blockchain applications make things like real-time reporting and payment of tax obligations possible. A large public company, for instance, could place its accounts on a publicly verifiable blockchain, substantially reducing or eliminating the need for auditors. We’re not proposing requiring real-time blockchain reporting as a regulatory requirement, but we would urge shareholders in public companies to consider demanding this of management. We can also see some attractions for small- and medium-sized firms of real-time blockchain reporting, as this would automate tax compliance and make business activity statements redundant. The ATO, in our view, should develop guidelines for real-time blockchain reporting that it would consider to be reasonably compliant.
Mr Edwards of Paypal Australia raised what he believes is the most critical issue surrounding the advancement of all online digital activity—that of secure identification mechanisms in the system. He noted that one of the potential options for the use of blockchain to validate identity:
This is an international issue. It is one that the private sector is looking at worldwide. It is one that governments are looking at worldwide. I’m aware that within the Australian government today there are a number of agencies that are trying to look at how do this. This is the fundamental issue to crack. You will have probably been advised already in terms of the notion of blockchain technologies. Fundamentally, this concept of identity is at the heart of what blockchain is trying to overcome or the problem it is trying to resolve.
Mr Alistair MacGibbon, the Prime Minister’s Special Adviser on Cybersecurity, at a hearing in Canberra clarified—significantly—that although the validity of the Bitcoin in a blockchain register may be verified, the identity of the owner or owners is not, which would be a fundamental issue for taxation matters:
It does not track back to me in particular; it just says that this bitcoin is a bitcoin. It does not say that it used to be owned by Alastair MacGibbon, and now it is passed to Jason. But it says that it is a bitcoin.
Further, Mr MacGibbon elaborated:
There is a dark web that is not searchable by our favourite search engines; you need to specifically go to it using browser technologies—Tor technologies, onion routers—to get to these websites. So only someone with particular bits of software on their computer can get to it, and then you can transact in ways that are not observable.
Similarly, the Governor of the RBA Dr Lowe raised the need to develop a strong identity and authorisation system in the financial sector as key areas to be resolved in a timely manner. He preferred non-regulatory resolution by industry participants, but failing that, the Payments Board ‘would need to consider what steps it might take to promote the public interest’.
Digital, electronic or cyber-currencies act in a similar way to paper money only they are electronic and generally involve the transfer of tokens to enable the transactions. The most well-known of these, Bitcoin, is enabled through the new technology medium of blockchain, discussed above.
These currencies pose a risk to tax compliance to the extent that their use can be hidden through private facilitators of the currency, in a similar way that paper cash transaction can be hidden from tax agencies, enabling money laundering on a significant scale. This was mentioned in Chapter 5.
The ATO provides considerable guidance on the current tax treatment of digital currencies, in particular Bitcoin, on its website, with information current as at 16 March 2018. Prior to the update on 16 March 2018 the 21 December 2017 information particularly referred to Bitcoin. It noted that Bitcoin operates like a barter system, with similar tax consequences. The ATO website now states that:
Our view is that Bitcoin is neither money nor a foreign currency, and the supply of Bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.
You need to keep the following records for cryptocurrency transactions:
the date of the transactions;
the amount in Australian dollars (which can be taken from a reputable online exchange);
what the transaction was for;
who the other party was (even if it’s just their bitcoin address).
Furthermore, it states that where you use Bitcoin for personal transactions there will be no income tax or GST implications and also any capital gain or loss will be disregarded as it will be treated as a personal use asset (unless it exceeds A$10 000). A business receiving bitcoin, however, will need to recognise that transaction in Australian dollars as part of ordinary income using a fair market exchange value at a reputable bitcoin exchange dealer. This recording process is the same process as receiving non-cash consideration under a barter transaction.
It appears to be the case that the trail of ownership and exchange will eventually rely on the data stored in the underlying blockchain ledger to test the voracity of taxpayer records. Given that cryptocurrency data is not currently regulated, and any means of the ATO being able to access it, as third party data, and then decipher the information in any efficient and meaningful way will be the key to taxpayer engagement in this market.
On 27 October 2017, the RBA’s Dr Richards echoed this, saying:
The use of bitcoin and other digital currencies as an actual method of payment remains relatively limited in Australia, as elsewhere. From the bank’s payments policy mandate, digital currencies do not currently appear to raise any pressing regulatory issues. As you noted earlier, cryptocurrencies can serve as a means of payment in the illicit economy. Accordingly, their use may have some implications for tax authorities. They raise more significant issues for authorities tasked with crime prevention and detection. The distributed and cross-border nature of digital currencies like bitcoin means that regulation of the core protocols of these systems is unlikely to be effective. Authorities have therefore tended to focus on the on-ramps or the off-ramps—that is, the links to the traditional payments system. In some jurisdictions, central banks and other authorities have taken action in relation to digital currency exchanges, such as the measures taken by the People’s Bank of China earlier this year.
While the Committee took a significant amount of evidence speculating on the potential risks of digital currency, the Committee has also noted recent advice from RBA Governor Dr Lowe, that the use of these currencies is very low now and is likely to stay so.
It is clear that in future, Governments will, however, need to ensure that tax regulators are able to audit these currency providers. Commenting on this during the inquiry, Mr Mossop of the Attorney-General’s Department reported:
The reality for us is that it is not a good medium. You cannot live in the digital currency economy. You can probably buy a coffee at a trendy cafe in Melbourne but there is not a lot that you can do. You cannot buy groceries from Woolworths or buy a car. By and large, you cannot do that in bitcoin yet, so you cannot live in that digital currency world. At some stage, you need to cash it in or cash it out. But, as that progresses, the availability of retailers and average shops or retailers who will take that type of currency may increase. And then it starts to become a bit more of an issue.
That is something we are considering, at the moment, and we are looking at reforms to bring those digital currency exchanges, the on ramps and off ramps—where you would change it for real-world currency, fiat currency, into the AML regime so that people are identified and that gets reported to AUSTRAC. This is so there is some oversight when people are coming on or off the digital currency, out of the digital currency world.
Mr Mossop made a significant point about the future of exchange (essentially in a product you can’t see or touch and which has no value in terms of sustenance, comfort or shelter—products used in traditional forms of barter). This would indicate that a cryptocurrency will either eventually need to be cashed out and thus the potentially significant tax implications to be considered—or lose its underlying ‘market’ value and as such become a low value or worthless product, potentially with loss impacts in the magnitude of losses currently recognised as ‘cyber scams’.
Similarly, Dr Richards of the RBA stated:
Households seem very content to leave their transactions balances and their savings in commercial banks, building societies and credit unions. In large part, this may reflect the protection that they know they have from the Financial Claims Scheme. It is possible to see a world where households choose to keep some of their transaction balances outside of those accounts, but I struggle to see a world where they would be comfortable holding large amounts of their balances in, for example, non-guaranteed systems.
The Committee notes there appears to be a high degree of uncertainty surrounding the tax treatment of cryptocurrencies. The Committee noted the change of definition of Bitcoin and Bitcoin transactions as described by the ATO per website advice on 21 December 2017 and then updated on 16 March 2018 (with no preceding reference or detail of what the change meant in practice). Furthermore, the ATO website advises that the ATO is currently consulting with industry and inviting feedback on ‘practical compliance issues arising from cryptocurrency to cryptocurrency transactions’. The consultation closing date through the ‘Let’s Talk’ medium was 20 April 2018.
The Committee sees this area of taxpayer engagement as evolving and notes that it requires a watchful eye by the tax administrator and financial regulators.
It is evident that to meet the current and emerging challenges of a 21st century tax system the ATO cannot operate as an administration, collection and enforcement agency in isolation. It must also be a collaborator to strengthen, protect and maintain the security and integrity of the tax system—and the control and access to highly sensitive data.
The biggest threat to the operation of digitised transaction, recording and reporting systems, and benefits accruing from single step processes for multiple functions, is weak security and poor authentication measures in those systems. The ATO is investing in maintaining digital security and while the committee is not in a position to provide an evaluation or audit of these investments, it appears that these investments and the processes around digital security within the ATO are sound at this stage.
At an operational level, while the ATO is confident that the service outages affecting its business over December 2016 and February 2017 have led to a more resilient and reliable digital platform, concerns in the community, in particular among tax professionals, means that maintaining utterly reliable and efficient tax services for all community sectors will remain a priority and a challenge for the ATO well into the future.
Reports during the inquiry that the ATO is not listening to businesses who must carry lengthy downtimes for regular ATO system upgrades and maintenance, of distress to individuals subject to debt allegations which result from data error, or to individuals who have failed to comply because they simply do not understand what is required of them or, again, to people in the community who, for whatever reason, are not prepared for digital engagement, suggests the ATO must respond.
As discussed early in this report, the ATO is cognisant of the connection between confidence and trust and the voluntary compliance of taxpayers. Trust develops from accountability and from the taxpayer’s confidence that he or she will receive fair treatment from the tax administrator under the law.
The ATO’s effective management of taxpayers personal data will be vital not only to maintain taxpayers’ confidence in data collection but also to the operation of the tax system overall. The Committee believes that this will become an increasingly important issue into the future and that, therefore, the rights and obligations of both parties within the tax engagement process should be now be clearly defined.
In the interests of promoting fairness and taxpayer confidence in Australia’s tax system, the Committee recommends that the ATO should work to develop a framework which clearly outlines the rights and obligations of both parties in the tax engagement process for adoption in the near future.
The process, involving the review of high level ATO mission statements, would be consistent with the ATO’s principle-based approach to service delivery and support design of a Regulatory Philosophy document.
The Committee also recommends that, in implementation and change management programs, the ATO should include a service level agreement with end users, especially tax agents, that includes amongst other things, consideration of payments to end users for poor delivery outcomes.
This is proposed in recognition that the ATO is a monopoly provider that is not subject to contestability in its service delivery.
In this regard, the Committee reiterates its view that the ATO should treat all providers in the tax engagement process according to the principal of competitive neutrality, so that taxpayers can access tax services and supports in the most suitable way to meet their needs.
The Committee recommends that the ATO should engage with all service providers according to the principle of competitive neutrality, allowing taxpayers the ultimate choice of which channel of access or service to use, and which channel is in their best interests.
Mr Jason Falinski MP