The Reinventing the ATO—Program Blueprint (March 2015) sets out five principles to transform the taxpayer engagement experience with the ATO:
Principle 1—Easy to get things right
Contemporary digital experiences provided in the way people expect.
Principle 2—Tailored experience
Interactions are tailored and reflect people’s behaviour and circumstances.
Principle 3—Excellent service
Interactions are professional, respectful and timely.
Principle 4—Fair and respectful treatment
Contributing to effective tax and super systems is valued.
Principle 5—Service delivered in the most effective and efficient way
The ATO may not always be the provider of services to the community. The ATO will partner with service providers to deliver efficient and effective services.
The document goes on to articulate key elements in building community confidence, ‘Through insight and tailored engagement’. In summary:
The ATO has an early engagement approach to ensure people get things right initially, with mistakes less likely by pre-filling and integrating validation rules into software systems. These identify and prompt clients to review and correct mistakes themselves before they lodge.
Engagement matches client behaviour, for example if a genuine mistake is made the client and the ATO work together to resolve it, but if individuals, business, or intermediaries, decide to deliberately avoid or evade tax obligations they will be dealt with.
Tailored engagement based on risk, complexity and transparency level. These factors will determine the level of engagement from the ATO, low touch, medium touch or high touch.
The previous chapter has discussed the ATO’s development and delivery of its digital lodgement segments and products, and their tailoring to specific client needs to streamline taxpayer engagement and make compliance easier. This chapter considers innovation in the ATO’s communication systems and methodologies under its Reinvention program, in particular its recourse to the theoretical and methodological tools suggested by the new science of behavioural economics. From this perspective the regulator’s primary focus is to use systems and services to promote taxpayers to voluntarily comply.
Given that a high proportion of taxpayers with straightforward tax affairs engage with the tax system through tax agents, this chapter considers whether policy change is required to address the high use of tax agents. The chapter also considers the compliance burdens for individuals engaging with the tax system and whether there are options for reducing this burden.
The role of behavioural economics insights
The ATO has, and is, increasingly informing its engagement with taxpayers through use of behavioural economic insights (BEI) techniques. The Behavioural Economics Team of the Australian Government (BETA) , the Government’s dedicated central unit within the Department of Prime Minister and Cabinet (PM&C), explained that:
…behavioural economics examines why people’s actions deviate from the predictions of standard economic theory, which assumes that individuals always make choices that are rational and maximise their welfare. It combines experimental and field evidence with insights from disciplines such as psychology to develop richer economic models of decision-making.
The OECD Tax Forum has advised that the capacity to bring together information from a range of sources to form a ‘single view of the taxpayer’ is supporting tax administrators to examine the ‘type and timing of interventions that help taxpayers meet their tax obligations, including paying tax debts’.
The new ethos of tax administrators in comparable nations is to design systems and communicate messages that prompt taxpayers to honour their obligations and provide accurate information, as the ATO puts it:
We are committed to putting taxpayers at the centre of everything we do by making it as easy as possible for them to get things right and difficult not to.
According to behavioural economics experts, their approach enables tax administrators to better predict and influence the behaviour of particular taxpayers or taxpayer groups. For example, research has shown that increasing taxpayer confidence in the probity and fairness of tax systems increases the likelihood that people will honour their own tax obligations and willingly comply. Enforcement action against wrong doers and public disclosure of their activities supports the view that the compliance burden is being fairly shared. In addition to motivating taxpayers to meet their own obligations, it can reduce tacit acceptance of tax avoidance in the community, such as though acceptance of illegal cash paid activity or under disclosure.
Behavioural economics methodology
The Behavioural Economics Team of the Australian Government (BETA) has been charged with building capacity across the Australian Public Service to apply behavioural economics approaches to policy, program and service development with a view to outcome improvements. BETA has been in operation for two years as at February 2018.
The results of behavioural economics insights are difficult to attribute directly to outcomes because people make decisions on the basis of many environmental and personal factors. BETA senior officers appeared at a hearing in Canberra and gave evidence about the role of the unit and how it tests for ‘cause-and-effect’ improved outcomes using randomised controlled trials.
BETA’s submission advised that randomised controlled trials work by splitting testing into two population groups—a control group and an intervention group—and measuring the results for both. The submission explains:
A key pillar of behavioural economics is to test the application of potential biases and finding ways to mitigate or harness those biases that may prevent people from acting in their own best interest. Behavioural economics relies on rigorously testing the effectiveness of a policy intervention by using randomised controlled trials. Trialling takes account of the social context and any nuances in the policy area concerned. Increasingly, the policy development process requires that policies are underpinned by evidence, and randomised controlled trials are one avenue through which strong empirical evidence can be gathered.
As this is a relatively new policy application in Australia and the results are achieved over longer time frames, the reports of the effectiveness of such methods are derived from overseas experience, principally from the United Kingdom where the first Government BEI unit, the UK Behavioural Insights Team (BIT), was established.
However, Professor Hiscox, Head of BETA, observed that the ATO has been applying behavioural economics type principles to its taxpayer engagement approaches well before the discipline was formally recognised in policy development and citizen engagement. He said:
Before behavioural insights were embraced as a new, unique tool, Australia had implemented a range of policy and service delivery reforms that are compatible with behavioural insights theory. Default settings, such as pre-filled tax returns, are an extremely good example of this, saving taxpayers’ time and making it easier and simpler to comply with the rules. The ATO has been one of the pioneers of the world in this area.
Effectiveness of ATO behavioural insights measures
The ATO advised that it has been applying behavioural insights for a number of years to achieve a range of outcomes, including to:
encourage taxpayers to lodge and report, plus pay debts;
encourage taxpayers to shift to digital interactions;
encourage taxpayers to adopt new policies/obligations;
encourage willing participation and deter non-compliance by taxpayers; and
improve staff engagement and internal operations.
BETA has highlighted the ATO’s pre-filling of data for tax lodgements as consistent with the behavioural insight that individuals are more likely to comply when compliance is made as easy as possible. This also enhances the likelihood of accuracy of self-assessment.
Another successful focus for the ATO has been the use of behavioural insights in communications to improve debt re-payments. The ATO examined the language, structure and layout of a number of debt letters to increase payment compliance by being clearer about what taxpayers need to do and the consequences of not paying.
The Inspector-General of Taxation has noted that the ATO is also using behavioural insights in developing a ‘Debt Engagement Framework’ which supports re-engagement with taxpayers in telephone contact by helping them understand and manage their payment obligations.
The ATO advised that personalised text messaging had been a recent focus of this debt recovery work. Under the ‘Purposeful First Action’ model, where taxpayers receive more flexible or firmer responses based on analytics of their previous behaviours:
For example, we use various behavioural insight approaches to help people repay debts. In 2015-16, we issued 540 000 text message reminders to clients to pay on time. The use of reminders increased payments on time and led to payment plans being set up earlier than usual. Through this activity, $949 million was raised, and this strategy of gentle reminders to habitual late payers is now part of our business-as-usual approach.
The ATO has also used preventative text (sms) payment reminders to taxpayer businesses likely to ‘pay late or not at all’. These reminders have also been sent to those who have not paid after a lodgement due date has passed.
In addition, the ATO, within myTax, is focussing on ‘real time analytics’ to provide information to taxpayers on whether their workplace deduction amounts appear high relative to their peers. These taxpayers, using the myDeductions app, receive messages within the application to prompt appropriate action when it appears data input may not be authentic. For example:
In 2016 we began to use pre-emptive prompts that leverage the concept of transparency. For example, pop-up messages in myTax let taxpayers know if their work-related expense claims appear out-of-step with their peers, enabling them to review their deductions before lodgement of their tax return.
A new behavioural insights mechanism in this area will soon empower the ATO to disclose to credit reporting bureaus the tax debt information of businesses who have not ‘effectively engaged’ with the tax administrator to resolve debt issues. This will provide a powerful incentive for businesses to work on their debt arrangements and with the ATO on payment plans or jeopardise their business name and trading and credit terms which have in the past been unmarred by a tax debt.
Mr Paul Drum, Head of Policy, CPA Australia, provided an example of how different levers in a tax system, in this instance a GST or VAT, can work to motivate compliance outside of more direct enforcement methods
If you look at the Australian experience…there were hundreds of thousands more registrations for the GST than they [the ATO] knew there were businesses in Australia.— Some of that was because—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. — It drew a certain number of business into the net and the tax office at the time reported that there were businesses that came out and said: “We want to come clean”.
The Committee also considered evidence presented that urged some caution in the application of behavioural insights, in particular nudge policies, for two main reasons.
Firstly, the use of real time analytics may lead people to repeatedly test or game the system, for example in the myDeductions app, such that they reduce the value of their claim until the point that the system no longer generates a warning.
Mr Michael Croker of Chartered Accountants Australia and New Zealand (CAANZ) warned against this:
There is the sense, the idea, that you do it yourself online, with MyTax for example—you type in work boots at $1,000 and a nudge message comes up and says, ‘No, that’s just beyond the pale’, so then you type in $800 and then $600—and that you experiment with online claiming and try to check out when do you come into the benchmark that’s acceptable.
Secondly, there is the chance that disengaged individuals who have no, or limited understanding of the tax system are ‘nudged’ into it inappropriately or with little support, and thus may make poor tax driven decisions. This is something increasingly likely given the Australian tax system’s interactions with social welfare and data matching.
The submission from Dr Chardon, Dr Freudenberg and Professor Brimble, taxation and finance law academics from two Queensland universities, suggested:
The ‘nudge’ concept comes with the risk that taxpayers may have no cause to engage with the tax system over many years and then suddenly be forced to engage with a system with which they have had little interaction with over their adult life. We therefore submit that any automated or ‘nudge’ systems be balanced with greater taxpayer education about the basic concepts of tax and superannuation that need to be understood in order to prevent poor financial decisions and to ‘make decisions in their best interests’.
This concern over the financial literacy of the taxpayer and the understanding of their circumstances being a consideration in impersonal dealing with the ATO was echoed by ETax Accountants, who argued:
…it should not be a role undertaken by the ATO, nor any 3rd party not directly involved with the individual taxpayer, to tell a taxpayer how their affairs might fit into a certain “box”—especially when those parties might make such recommendations with no knowledge of any but the roughest details of the individual’s tax and financial affairs, or without qualifications to offer such guidance (as might arguably be the case with, for example, some advice dispensed to taxpayers by ATO call centre staff or 3rd party employees at ATO contracted call centres).
Given potential concerns that some behavioural economics mechanisms may not act in the best interests of the taxpayer, the Inspector-General of Taxation recommended that the ATO could review current behavioural insights work by BETA, the NSW Government’s Behavioural Insights Unit (BIU) and in other comparable service delivery agencies:
…in particular any work being done outside of the debt area, how it is assisting taxpayers to make decisions in their best interest. In doing so, [it] could consider the taxpayer’s best interest, how it varies across different taxpayer groups and how it is determined. In this regard, [it] may find learnings from the UK in relation to practising mindfulness by public policy makers particularly useful.
The Committee has considered the concerns voiced in relying too heavily on behavioural insights research in taxation engagement, along with the fact that many of the policies attributed to behavioural insights could be categorised as sound tax administration approaches that reflect current technology, rather than carefully created policies based on behavioural economics.
The evidence appears to be that behavioural insights and the ATO’s partnership with BETA could provide a useful adjunct to conventional approaches in some policy areas, and the Committee is supportive of these policy approaches, however there was evidence presented that urged some caution in their application. An example of an unintended response to inbuilt system nudges is the incidence of ‘gaming’ deduction applications to determine the highest allowable deduction.
Notwithstanding this possibility, the Committee was impressed with the benefits that behavioural economics brings to policy development and implementation. The Committee was particularly encouraged by the outcomes of policy implementation being tested using control randomised trials. The Committee would encourage the ATO to examine how it could use such techniques and test them against current implementation programs to understand if it materially changes implementation strategies.
The Committee otherwise considers that the current level of investment in behavioural insights approaches by the ATO appears to be reasonable given the relative infancy of the discipline and the lack of international evidence to support its medium to longer-term effectiveness.
Behavioural insights policy appears to be a strategy appropriate for people on the margin or tipping point of tax non-compliance, not entrenched tax evasion. Its benefit may be that it is a relatively small investment in nurturing a tax compliance culture and thus keeping the majority of taxpayers on the right path.
The Committee recommends that the ATO should continue to deploy behavioural insights approaches to increase taxpayer engagement. The ATO should, however, examine and report on the results of these programs or activities, recognising their limitations within an overly complex tax system.
Until more evidence of its long-term effectiveness is available, the Committee would not encourage the ATO to invest in radical changes in administration based on behavioural insights. There is, however, potential to build on behavioural insights trialling methodologies, and other proven performance focussed systems, to drive improvements in ATO performance and services.
The benefits of such trials are obvious in implementing new systems. As such the Committee encourages the ATO to use such systems for both future implementation and ongoing improvement projects.
The Committee recommends that the ATO should make greater use of behavioural insights techniques, such as randomised controlled trials, before full implementation of new initiatives to determine if such changes are indeed better than current practices, and if so, which changes are the most effective.
The ATO could also run continuous trials (using methodology such as, but not limited to, the Lean Six Sigma system) on communication platforms and channels to ensure that its systems are constantly being tested and improved.
Behavioural insights in other service agencies
Notwithstanding the recommended caution in this area, it is noted that the ATO works with BETA to promulgate of the behavioural insights principles which inform the ATO’s program design, development and implementation to other services agencies. These BEI principles include:
designing processes, systems and approaches that minimise effort to meet obligations;
providing certainty about our procedures, timeframes and how to fulfil obligations;
targeting our approach and personalising messages;
providing transparency about what we know and what we are doing; and
informing people of how their behaviour compares to the general population.
The ATO has stated that in establishing and refining its approach it has looked to the experiences of like-minded tax agencies including from Canada, , Singapore, the USA, New Zealand and the United Kingdom. It is also noted that the ATO participates in the OECD’s Forum on Tax Administration, and has maintained that compared with other tax administrators, is in advance in achieving a comparatively favourable collectable debt to percentage of collections using its work on debt letters.
Chapter 2 provides examples of advances to date overseas in comparable countries, notably a research partnership between Belgium and the London Universities to trial debt letters, similar to the ATO’s work, as well as advances in Sweden and Estonia on pre-filling, and the use of telephone campaigns in Canada, the United Kingdom and Norway, and reminder calls in Belgium.
To assess the effectiveness of the ATO’s promulgation of measures to other federal service agencies, the Committee sought evidence from a variety of such agencies but most declined to submit information on the basis of the infancy of their insights application work, or its application in areas they considered to be unrelated to the Committee’s inquiry into federal tax administration.
In the absence of direct evidence received on the service delivery strategies of other agencies, the Committee referenced research work submitted to the Regulatory Institutions Network at the Australian National University. In particular, the Network’s 2010 Occasional Paper No. 15 examined responsive regulation approaches in a variety of federal and state government agencies and overseas agencies, including the New Zealand Inland Revenue (NZIR).
The NZIR work considered the approaches of these administrators and regulators, who are mostly using a regulatory pyramid approach where the ‘light touch’ strategies like education, persuasion and advisory initiatives sit at the base of the pyramid, with heavier hand enforcement and punitive interventions progressing to the apex of the pyramid.
The occasional paper assessed the ATO’s current regulatory approach under the ‘Cooperative Compliance Model’, which is also a pyramid-based approach, and concluded that by comparison: ‘[the ATO’s] Model emphasises the need to better understand why people are not complying, and to develop appropriate and proportionate responses’.
The ATO has formulated a tool to analyse taxpayers’ reasons for behaving in a particular way, which is based on Business, Industry, Sociological, Economic and Psychological reasoning (BISEP). The BISEP model was first developed 20 years ago for the 1998 Cash Economy Task Force to better respond to the systemic causes of tax non-compliance. It conceptualises clients under four main categories:
disengaged clients who have decided not to comply;
resistant clients who don’t want to comply;
captured clients who try to comply, but don’t always succeed; and
accommodating clients who are willing to do the right thing.
The ATO also publishes a’ Statement of Intent’ (which is a response to the Government’s ‘Statement of Expectations’ of the administrator) which outlines its relationships with the Government, the Minister, the Treasury and other regulators and how it will be accountable and transparent and its governance and financial procedures.
The ATO’s Compliance Model, as previously discussed, is based on a pyramid of engagement. The Reinventing the ATO Program Blueprint details the future direction of the agency and the expected change in client experience. However, it appears that the ATO does not currently have a contemporary document which outlines in practical terms how it will engage with taxpayers along the spectrum of compliance or uncertainty in interpreting the law it administers over time.
A public engagement strategy used by another Federal government agency provides a possible approach. The Civil Aviation Safety Authority (CASA) publishes a ‘Regulatory Philosophy’ which outlines the principles by which it will administer its regulatory functions. This regulatory philosophy is referenced in the Minister’s Statement of Expectations to CASA and it provides a useful benchmark against which external stakeholders can judge CASA’s actions and provides CASA staff with clear and codified expectations in discharging its regulatory functions.
In considering whether publication of a regulatory philosophy would be appropriate for the ATO, the Committee notes recommendation 112 of the Australia’s Future Tax System (AFTS) report which suggested that:
The government should commit to a principles-based approach to tax design as a way of addressing the growing volume and complexity of tax legislation, and as a way of helping those laws to be interpreted consistently with their policy objectives.
The Committee considers that the most relevant insights would be derived from the experiences of tax agencies in comparable countries and that the ATO would be in a strong position if it was able to demonstrate that it had benchmarked its key publications and forms against measures in comparable countries using behavioural insights approaches.
The ATO and BETA through their partnership could:
monitor taxpayer engagement strategies, based on behavioural economics, in relevant countries and consider for implementation in Australia those policies with proven effectiveness compatible with the Australian system; and
review existing ATO engagement strategies against behavioural economics benchmarks, to test consistency with best practice, and assess the implications of shortfalls for tax engagement—and ultimately compliance and revenue—from ineffective approaches.
In addition, the Committee sees value in implementing AFTS recommendation 112 and suggests that the ATO follow the example of other Federal administration service providers by preparing and publishing a ‘Regulatory Philosophy’. This would be consistent with the ATO’s current principles-based approach to tax administration, but set benchmarks for the ATO to better assess how it assists taxpayers make decisions in their best interest, and how best to motivate that engagement.
The ATO consider adopting a Regulatory Philosophy to codify the principles on which it will administer tax laws and engage with taxpayers.
A regulatory philosophy could provide the approach to the administration of the current tax law rather than forming the basis of tax law changes. It would be a philosophy of client engagement now and into the future. The purpose of such a philosophy would be about taxpayer engagement with the tax system and tax administrator—and fair administration of tax law. However, it may also be a useful starting point from which the Government could build to form principles for the design of new tax laws.
Educating the community
The foundation of effective taxpayer engagement is having at least basic levels of taxation system literacy. This was highlighted in the submission from Queensland academics Dr Toni Chardon et al, which argued that improving tax and financial literacy across the community is fundamental to increasing voluntary engagement. Further, this is not just at the school level but available at all life-stages.
As at June 2015 the proportion of Australia’s resident population born overseas was estimated to be 28.2 per cent and many from diverse non‑English speaking backgrounds. Of the 2015–16 intake of migrants, of 189 770, 68 per cent came as skilled migrants, and so would be deriving income and required to have an understanding of Australia’s tax and superannuation systems.
The Commissioner of Taxation outlined the ATO’s response to the diverse needs of taxpayers in the community in the foreword to its primary submission:
As part of our holistic approach to engagement, our digital push is complemented by a refreshed face-to-face strategy. We have opened up new avenues for our clients to engage and interact with us—showing a friendlier face of the ATO and providing help in the form of ‘show me how’ sessions for small businesses and agents in both regional and metropolitan locations. We also continue to conduct our schools and migrant education programs which help young people and new arrivals learn about and engage with the tax (and super) system by connecting teachers with resources and expert tax officers.
The Institute of Public Accountants (IPA) maintained that broad education needs to occur at the grass-roots level to support tax literacy and effect cultural change towards compliant behaviour. Some approaches it suggests include:
mandating electronic transactions;
whole of government education, not just by the ATO—tax is ‘the price for a civilised society’;
educate children about this in school curriculum;
imposing penalties on those without a valid Australian Business Number (ABN);
warn of the dangers of cash transactions—poor workmanship, health and safety, legal implications;
that retailers upload daily transactions to the ATO; and
a domestic tax amnesty, offering reduced penalties.
Dr Chardon and et al cited research indicating that although Australians are broadly tax literate, they find basic tax concepts more difficult to understand than basic financial concepts. Specifically, tax areas which are poorly understood include the rate of the super-guarantee, the difference between deductions and offsets, and broad concepts of capital gains. It was also found that groups with a greater engagement with the tax system, for example small business owners, had higher tax literacy.
These experts therefore argued that a developed education program is necessary to address deficient knowledge in this area:
We argue that opportunities to educate and inform taxpayers at various stages in their education and work life should be encouraged and should focus on those areas identified as being poorly understood by taxpayers in our research and those areas that can best help taxpayers ‘make decisions in their best interests’.
As discussed previously in this report, comparable tax jurisdictions, such as the UK and NZ, have recognised that educating the community is an important support to behavioural insights measures. This is both to promote positive attitudes to tax compliance and to inform people about the nature and values of the tax system, as well as their obligations.
The Committee is aware of concerns among taxpayers that some segments within our society are not paying their ‘fair share’. If this concern became widespread, and firmly held, it could undermine the very nature of Australia’s low touch compliance environment. As such the Committee views it as critically important that while the ATO explains what measures it is taking to ensure integrity, it also educates people that non-compliance is very low, and that fairness in the system is a priority focus.
Noting the research results presented by Dr Chardon et al, the Committee also sees potential for more work to be done to determine whether high profile allegations of non-compliance (the majority of which are in fact compliant, and the result of people’s misunderstanding between concepts such as revenue and profit) are undermining people’s confidence in the system.
Information and transparency
One of the key recommendations of the AFTS report (under Category 9, ‘A More Open, Understandable and Responsive Tax System’), was that not only should the tax system be responsive to threats as they arise but that it should be understandable—‘with citizens having clear rights to information on the tax system and their experience with it’. Presumably this provides context, promotes taxpayer ‘buy-in’, and ultimately supports compliance.
The report also suggested that citizens should be able to access ‘through a suitable choice of channels, comprehensive and timely information on their tax and transfer affairs’ and how these outcomes may have arisen and be affected by the choices they make. The Committee notes the ATO has come a long way in providing this offering through digital channels like myTax.
Additionally, the AFTS report recommended that Governments should make data and analyses of taxes and transfer payments publicly available to ‘inform and encourage community debate about the performance of the tax and transfer system’. The ATO does make available sample taxpayer datasets for research purposes and discloses its current research projects on the agency’s website, however this detail is not available online. Citizens are asked to email the ATO Corporate Research Area for this information.
The Committee sees benefit in the ATO adopting a more transparent approach to its research and findings, and should publish online information on status updates and data relating to its research.
Face-to-face with small business
The Commissioner of Taxation has noted his support for continued face-to-face liaison with the small business community to assist them with business engagement issues and tax literacy, and to provide feedback about the tax system. He stated:
We also have in place a range of channels and forums for taxpayers to voice their feedback and views about the tax system. For example, our Small Business Consultation Panel has more than 500 small businesses who are willing to use their practical insights to help us design an improved experience for others in their market segment. We also have our ‘Let’s talk’ platform where any member of the community can contribute ideas and have their say on tax and superannuation topics, and we have an online testing environment called ‘ATO Beta’ that lets users test and provide feedback on our new digital offerings.
In its previous annual report review the Committee recommended the ATO ensure the continuation of small business ‘fix it squads’ to support these businesses through digital transition. The ATO’s submission to the current review, reported:
We continue to lead the cross-government small business ‘Fix-it squads’ comprised of taxpayers, intermediaries and government (federal and state) representatives who collaborate to design and implement a better experience. These Fix-it squads look at ‘life events’ take a whole-of-client approach and consider engagement for a variety of systems, regulations and government portfolios.
ATO Deputy Commissioner Digital Delivery Mr John Dardo acknowledged that there are key small business obstacles to streamlining compliancy obligations for the sector, but considered these could be partially overcome with more ‘user friendly’ systems. He said:
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. That is increasingly shifting. In the past, if you looked at a Xero, MYOB or another screen, for example, you had to be a bit of a bookkeeper or an accountant type to try to navigate your way through it. As they produce more user friendly interfaces and more stuff that you can use on your iPhone or your iPad, we are seeing more businesses going, ‘Cool, I think I can do this.’
He added, however, that ‘in some cases, businesses feel they have an interest in not using the software or the accounting systems’.
Mr Oleson, head of the client engagement group ATO, emphasised that rather than trying to catch people out the ATO’s approach is now to ‘engage early with them and try and give people the tools and ability to serve themselves well’. He went on to explain:
…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.
Ms Rosenzweig, small business section ATO, also highlighted the investment in face-to-face activity with small business over the 2017 year, largely in forum situations including showcasing services and new tools. She also highlighted tax essentials seminars which were run in tandem with programs co-developed with the Department of Industry for new businesses:
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.
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.
Mr David Weickhardt, General Manager of MYOB Australia, referred to the strain put on small business in adjusting to the scale of transition in today’s digital environment, including as new digital platforms are rolled out through the tax administration. He stressed that this should not be underestimated and that education support for small business was vital. He gave statistics on the impact of one significant example, the roll out of the Single Touch Payroll system:
It does require quite a bit of adjustment for small businesses going through it. There are one-off costs for people. The education comes back to the single touch payroll. We are anticipating multimillion dollars’ worth of calls into our call centre as the single touch payroll gets rolled out. So government support in terms of education also making that transition easy for businesses is I, think, really important.
The potential of social media, SMS, voice biometrics and online assistance
As discussed previously in this chapter, the ATO is supplementing traditional mailed correspondence and phone calling with text messages and app prompts. The ATO also utilises other contemporary direct and indirect communication methods. One of these is social media platforms. The OECD has said that social media technologies have the potential to ‘bridge access and take-up gaps still faced by many traditional online government services’.
The ATO currently uses social media to provide the latest information on tax and superannuation changes, products and services, promote new initiatives, and to send reminders. It has also been used as a mechanism to warn of ATO phishing and other fraudulent scams. These messages are using Facebook, Twitter, LinkedIn and YouTube—for example, in early 2017 the ATO ran an on-line campaign entitled ‘Be aware of what you share’ which received 8.6 million views of advertisements, with over 800 000 video views and 12 600 clicks on these advertisements. Another example is the ATO’s use of social media messaging to promote online lodgement options during the 2016 tax time period.
The Inspector-General of Taxation has identified Information and Communications Technology (ICT) improvements that the ATO could implement to assist taxpayers, many of whom regularly visit the ATO website. As noted in the previous chapter, his 2015 review of services and supports for tax practitioners, the Inspector-General recommended that the ATO increase its use of ‘modern modes of communication’. Other recommendations considered the publication of practical online user guides for certain ATO platforms and developing a ‘web chat functionality’ to provide tax practitioners with useful information. The Inspector also advocated for simplifying proof of identity for tax practitioners through the use of unique identifiers or voice recognition. The ATO has now implemented these recommendations.
Voice biometric identification is now available to all taxpayers. The ATO website notes that this technology offers a secure, faster and easier way to access ATO online services and telephony, and without the need for a password. As at Tax Time 2017 clients have used their voice as identification in over 53 000 instances and used the ATO app with voiceprint over 91 000 times.
In February 2016, the ATO launched a ‘virtual assistant’ on its website called ‘Alex’ who ‘understands conversational language and can clarify what you want and answer your questions.’ According to the Commissioner’s 2017 Annual Report Alex has resolved more than 81 per cent of client queries at first contact since the launch. However, Mr Abernathy, an individual taxpayer, discussed in his submission some deficiencies in the current virtual assistant approach.
The Inspector-General has not yet had an opportunity to examine the effectiveness of these new technologies. The Inspector-General of Taxation, (IGT), in his submission to the inquiry, invited consideration by the Committee of the ATO’s experiences with these new innovations, suggesting the Committee may wish to ‘explore any additional measures to enhance its service delivery to the community’.
The ATO has also improved access for individuals and sole traders to view their business activity statements online and as such have the power to know and ability to pay activity statement debts online. The ability to set up payment plans via the ATO website is now also possible for debts up to $100 000 for both activity statements and income tax.
Nobody left behind—the challenges of digital transition
The future of tax administration is clearly a digital future but the smooth transition to it will take considerable effort by individuals, business and government. The ATO is open about its desire to encourage people to engage with it in a digital context. The supplementary submission to the inquiry states:
It is our intention to transition as many taxpayers as possible to digital services consistent with the approach for all government services.
As Mr Weickhardt of MYOB pointed out in evidence, this transition is not cost-free for small business nor for individuals. As previously mentioned, there are considerable new fraud and identity threats in engaging in a digital world where increasingly sophisticated scams are conducted as this becomes a lucrative criminal activity.
The ATO’s supplementary submission addresses the many support services provided for those who are less or not digitally engaged. The ATO recognises that digital exclusion extends beyond inaccessibility to internet services, noting that:
…some members of the community may be unable to interact digitally as a result of low levels of digital literacy, language, geographical or cultural barriers. Others choose not to interact with us digitally.
The ATO commits to providing support services for taxpayers to engage in the tax system in some way, whether the taxpayer is in a ‘vulnerable’ group, as identified above, or whether they prefer not to engage in a digital environment.
The Inspector-General of Taxation has received concerns from tax practitioners and taxpayers directly about digital delivery of ATO services. An example cited in the Inspector’s submission is that of a church’s inability to engage with the SuperStream system electronically ‘due to the remoteness of their location and their limited access to online services’.
Support services highlighted by the ATO include face-to-face assistance to engage in a digital manner, information sessions for groups, an inter-active voice response self-help phone lodgement service and the continuation of supports for people wishing to lodge their return in paper format—of which 420 866 lodgements comprised in 2016–17.
Support services for paper lodgement include what used to be referred to as ‘TaxPacks’, now somewhat patronisingly referred to as ‘Care packs’ being sent to those who are not ‘digitally included’. In 2017 there were only 231 people considered to be in this category in Australia, the remaining paper lodgers who obtained paper forms and self-prepared had mostly either downloaded forms or obtained them from phoning the ATO publication service (and this is where myGov Shopfronts will redirect such a request). Full details of non-digital support services are in the ATO’s supplementary submission under ‘Specific details of services offered to individuals’.
While the ATO is proud of its digital one-stop-shop, through myGov online, stating that ‘it is now possible for individuals to access a range of tax and superannuation services in one place, including lodging their tax return and activity statements…via ATO Online services’ the myGov Shopfront does not offer, as standard practice, the basic non-digital tax resources.
Despite the assumption that the majority of people demanding paper forms are mature age, with paper-based lodgement being from older age groups, the Committee heard the contrary from representatives of YourLifeChoices, an online retirement ‘magazine’ for digitally engaged readers 55 plus. A survey undertaken in mid-2017 of its subscribers revealed how digitally attuned their audience was. For example, 43 per cent were using the ATO online tax services, while 57 per cent were using tax agents. Of those who used the ATO online services, 87 per cent said they found it easy to use.
Additionally, the ATO offers services to account for visual, hearing or speech impairment and for those in low income brackets—30 400 individuals were assisted through Tax Help programs supported by trained volunteers. The Inspector-General of Taxation noted the positive feedback he had received through his Office’s complaints handling function about the way:‘ATO officers seek to assist taxpayers where they can by, for example, providing printed copies of sections of the website and other digital information’.
The Committee believes the ATO is providing robust self-help services for those who wish to engage online. Alternative mechanisms for engaging with the tax system are available for the smaller proportion of taxpayers who are unable or unwilling to use digital services. The Committee stresses, however, that the ATO should remain cognisant of the many impediments to digital engagement, including for those with low income or compromised circumstances, as well for those who have been the victims, or near victims, of cyber-crime.
It is the Committee’s view that people seeking to engage with the tax system should be welcomed and assisted in the most direct and appropriate manner. Citizens who make their way to an Australian Government Shopfront seeking a paper tax return form and/or accompanying completion information should not be redirected to ring an ATO publications service line or go to any other location to obtain basic tax forms or returns completion information. Australian Government ‘myGov’ Shopfronts are designed to be the one-stop physical public face of the Australian Government transfer, tax and support system. Forms and associated information for completing a simple tax return should be available at Shopfronts, if only by way of assisted self-download on site or inclusion on a dynamic ‘Care pack’ mailing list. A recommendation is made regarding this is in Chapter 6, along with a more general recommendation about enabling engagement according to taxpayer preferences.
The Committee also considers the new name for what is the closest replacement of the former TaxPack is discourteous and does not align with the ethos of the ATO reinvention.
Reliance on tax agents
As discussed elsewhere in this report, the proportion of taxpayers using tax agents is high by international standards, with Australia having one of the highest levels of reliance on tax practitioners of any OECD country. The ATO data shows that the use of tax agents is high even amongst those with simple tax affairs. The ATO submission notes that 68 per cent of individuals not in business use a tax professional—despite 59 per cent of tax agent prepared returns (from the ATO Sample File 2013–14) disclosing income only from employment, pensions and investments and, as such, are relatively straightforward returns.
The question arises as to the role tax agents will play in advising taxpayers on lodgement of simple tax affairs now that legislative changes supporting significantly increased sharing of information for pre-filling have commenced. The explanatory memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No. 5) Bill 2015, Chapter 4, ‘Third Party Reporting’ details the high level of data now at the ATO’s disposal for compliance and to prefill returns. These changes to the Tax Administration Act 1953 (TAA 1953) came into effect for some transactions from 1 July 2016 while all transactions specified were captured on or after 1 July 2017:
Payments of government grants;
Consideration provided for services to government entities;
transfers of real property;
transfers of units in unit trusts; and
business transactions made through payment systems.
The explanatory memorandum notes that:
The ATO now receives sufficient information so that in the majority of cases it is possible to completely pre-fill a simple tax return in relation to:
Wage and salary data from employers;
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.
Given the extent of the data that the ATO now receives to pre-fill tax returns, many of the 70‑plus per cent of individuals who employ tax professionals to prepare their return already have significantly pre‑populated return information. The continuing high use of tax agents in uncomplicated tax affairs is an important consideration when considering how taxpayers engage with the tax system and the associated compliance costs. A key question is whether such a high use of tax agents is appropriate and whether there should be a policy response to lower use.
A number of inquiry participants linked the high use of tax agents with the complexity of the tax system. The AFTS review report stated that:
For many people, the personal tax system is complex not only because of the rates scale and the lack of a coherent definition of taxable income, but also because they must deal with a large suite of complex deduction rules, numerous tax offsets and a variety of exempt forms of income.
Seventy-two per cent of taxfilers now seek advice from a tax agent, even though 86 per cent either claim no deductions at all or only claim work-related expenses, gifts and the costs of managing tax affairs. Australia’s use of tax agents is high by international standards; second only to Italy’s ... By contrast, the Nordic countries, which have pre-filling arrangements for tax returns, have low levels of tax agent use.
Some inquiry participants also argued that the ATO is inappropriately trying to reduce the reliance on tax agents by investing heavily in tools and services and that:
The ATO should not behave as a taxpayer-funded competitor against free‑market Australian businesses, including against tax agents.
The tax return process
Another approach that could be taken to address the engagement of taxpayers through tax agents is to remove the requirement for individuals with simple tax affairs to lodge tax returns. This is a mechanism seen in other countries, for example, in Sweden. This was considered by the AFTS review which found that:
an automatic standard deduction should be introduced to simplify people’s interactions with the tax system and facilitate much greater levels of pre-filling of tax returns… and…
In the longer term, opportunities exist to use 21st century technologies to make the system fairer, easier to comply with and more robust. Policy design should support greater automated reconciliation of tax affairs to reduce or remove the requirement for the taxpayer to collect their own information over the course of the tax year.
One submission highlighted a feature of modern tax systems, being that their administration is ‘built on the principle of “voluntary compliance”—taxpayers are expected to comply voluntarily with their tax obligations ‘with only limited intervention by tax officials’. As such, making interactions more streamlined and simple, especially if a large number of taxpayers can simply approve a statement of facts, would reduce duplicated efforts, time, cost and risk for all parties.
Mr Pawson, President of the Tax Institute supported this view, saying it was feasible and practical to not only remove the requirement to lodge but also the discrepancy of a tax bill or refund:
It ought to be entirely possible to have a tax system where the majority of PAYG wage and salary earners can set and forget their tax obligations through the withholding system. By bringing together much-talked-about concepts of standardised workplace deductions, data warehousing by the ATO, integration of the Medicare levy and other relevant issues, it ought to be possible for a large proportion of taxpayers to have neither a tax bill nor a tax refund at the end of the financial year because the right amount of tax has been paid evenly throughout the year. Those taxpayers ought to be able to opt-in to a set-and-forget type system that does not require the lodging of a tax return, unless circumstances permit.
‘Refund churn’, that is, where the tax collected during the year exceeds the tax assessed at year end thus triggering a tax refund after assessment of the lodged return, is a compliance burden to the tax system. It is also now an area ripe for refund fraud and with the expectation of faster refund turnarounds and high service standards, this maximises the chance of refund fraud being missed.
Much of these challenges would be eliminated through a better reconciled PAYG system which could be facilitated with greater simplification.
One option to enable such a system would be to remove the requirement of individuals with simple tax affairs (i.e. those without deductions) from being required to submit a tax return. This policy option could reduce the compliance cost to individuals from managing tax affairs and increase government revenue in the context of minimising the deductions for managing tax affairs. It would also bring forward any tax payments due (say for a PAYG taxpayer with a modest amount of interest income) who, with lodgement through a tax agent would enjoy an extended lodgement time and payment period. The extended timeframe for lodgement is an incentive to employ a tax agent over and above gaining tax expertise and the tax deductibility of the fee for service.
This approach would be consistent with the ATO digital strategy which could expand ‘to a “push” tax return for certain taxpayers, eliminating their need for lodgement’.
Communication and the compliance burden
The compliance burden of tax laws has been a key issue considered by most inquiries into the tax system. In 2015 Treasury estimated the compliance burden associated with tax laws for 12 million individuals at $7.3 billion, $18.7 billion for small business and $7.6 billion for medium businesses. For individuals this equates to an average annual compliance cost of approximately $608.
For individuals who engage a tax agent, there was a range of evidence presented to the inquiry as to cost of compliance via a tax agent. Using ATO data for individual returns, the average tax affairs deduction for individuals is approximately $370 per person, however, one tax agent submitted the average cost per individual taxpayer client as $108. Another inquiry participant postulated a reasonable compliance cost for individuals with simple tax affairs would be $400.
The compliance burden for individuals with simple tax affairs is likely to be in the range of $200 to $400 annually. The compliance burden is likely to increase with complexity such as by including investment income, deductions, foreign income, rental properties. For these individuals the compliance burden is likely to be within the Treasury range of $600 or above.
The Committee has examined the tax return form and instructions for individuals of a select group of other comparable countries—New Zealand, Canada, United States and the United Kingdom, as an indication of tax complexity and related compliance burden in these countries.
The analysis indicates that the annual tax return form in hard copy form is similar in detail and length and number of questions and fields among these countries. However, it was found that the instructions or guidance for completing the form varied in length and complexity (Table 4.1).
Table 4.1: Individual Tax Return Instructions: word count
Source: Secretariat analysis of country tax return instructions
The word count for the instructions accompanying the tax return form would not be a perfect indicator as to actual time that individuals would need to spend completing the tax return form. The Committee has sought actual compliance times when these are published, which was only available for the United States. The US IRS has published that for individuals the time to comply with taxation is approximately 13 hours annually.
In considering the compliance burden it is important to also take into account the number of individuals who are required to complete an individual return. In the United Kingdom the proportion of individuals required to complete a tax return is significantly lower than in Australia with only approximately 11 million of the population of 65 million required to complete a tax return in the United Kingdom.
In this chapter the Committee has made recommendations in support of the review and refinement of the ATO’s use of behavioural economic insights techniques, and supported considerations for a regulatory philosophy. As noted earlier in the chapter, ‘The purpose of such a philosophy would be about taxpayer engagement with the tax system and tax administrator—and fair administration of tax law’, rather than as a basis for tax law reform. The underpinning logic is to communicate more clearly to the taxpayer the nature of his or her ‘best interests’ in compliance and for the ATO to better understand the needs of each taxpaying sector.
The chapter has also considered issues of fairness and access related to the ATO’s current communication methods and mechanisms for taxpayers, including small business, for disadvantaged groups and older people, and those who cannot or do not choose to access information online.
The Committee has discussed the impacts of the compliance burden in the context of making tax simpler to understand and in making the process easier, two integrated elements of improving voluntary engagement.
In relation to tax administration, the Committee notes that greater use of pre-filling in other nations has supported a shift to away from lodgement-based tax systems, and perhaps a lower level of reliance on tax agents for advice for those with simple tax affairs.
However, in Australia improvements in pre-filling have to date coincided with an increase in the use of tax agents. Perhaps there are other factors at play which the choice of lodgement by a taxpayer does not fully reveal. For example, tax agent preference may be driven by the desire not to interact with alternative mechanisms, rather than by any particular added value or benefit from the choice made.
The Committee envisages that the proportion of individual taxpayers with simple tax affairs who continue to use tax agents will reduce as pre-filling reaches a ‘push return’ situation for many taxpayers. The Committee believes that a taxpayer has a choice in how they complete their return and does not discourage the engagement of tax professionals even for those with standard returns. There is a case, however, for streamlining processes and tax policy so that people do not feel they are obliged to do so.
The Committee considers that, overall, the use of tax agents is a rational decision of individual taxpayers given the current complex tax system, including the deductions for managing tax affairs, and reducing the use of tax agents should not be an objective of governments or the ATO.
However, the Committee does support the view that if the tax system were to be simplified without compromising other objectives, reduced complexity is expected to reduce the high reliance of taxpayers on tax agents, in particular for those with simple tax affairs.
While policy actions to reduce complexity are beyond the scope of this inquiry and are covered by other inquiries/publications, the Committee notes that reducing complexity is not easily done without consequences for fairness, revenue, or breaking from historical practice, such as allowing claims for workplace related expense deductions. The preceding chapter recommended that a review of the current tax system be undertaken to consider these matters in light of contemporary circumstances.
In support of this measure, and in view of the analysis set out in the final sections of this chapter, the Committee considers that the Australian tax compliance burden could be benchmarked against that in other comparable nations, in order to address the question of what is a reasonable burden and whether policy action should be taken to lower that burden. Any such benchmarking would need to consider tax system complexity as an independent variable.
The Committee ‘s review suggests that the compliance burden on those individuals who are required to complete a return in Australia is otherwise commensurate with that in many comparable nations, and may be superior to some countries such as the US. However, the comparison does highlight where the Australian compliance burden for tax engagement is high, or could be reduced, based on the number of individuals required to lodge a return.
In this regard, the Committee commends ATO technical initiatives, discussed in Chapter 3, which aim to consolidate Australia’s shift to a ‘push return’ system, allowing taxpayers with consistent tax affairs to approve a prefilled lodgement form.
The Committee recommends that the ATO should continue to expand availability of technical initiatives such as pre-filling, simplified electronic lodgement systems for business and individuals, and online assessment tools to facilitate Australia’s transition to a ‘push return’ tax system.
While supporting these developments, the Committee upholds the individual’s choice to manage their own tax affairs, using ATO or commercial products, and to seek professional advice from tax professionals enabled by efficient online lodgement services.