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TaxVibe Podcast

We love the vibe of tax and here at The Tax Institute, we do tax differently. We chat with some of the tax profession's great thought leaders each episode, who share valuable and practical insights you may not hear every day.

Latest episode

Release date: 11 April 2025

Robyn Jacobson, CTA, chats with Anthony Marvello, Assistant Commissioner, Client Engagement Group, ATO, about the enduring and evolving challenges of Division 7A. They unpack the ATO’s increased scrutiny, common fundamental errors being made and the importance of proactive advice. Learn about complying loans, the use of journal entries to make loan repayments, the Commissioner’s discretion to disregard a deemed dividend, and key tips for navigating Division 7A compliance.

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Division 7A under the ATO microscope

Release date: 11 April 2025

Robyn Jacobson, CTA, chats with Anthony Marvello, Assistant Commissioner, Client Engagement Group, ATO, about the enduring and evolving challenges of Division 7A.

They unpack the ATO’s increased scrutiny, common fundamental errors being made and the importance of proactive advice. Learn about complying loans, the use of journal entries to make loan repayments, the Commissioner’s discretion to disregard a deemed dividend, and key tips for navigating Division 7A compliance.

Recorded live at The Tax Summit 2024.

Host: Robyn Jacobson, CTA
Guest: Anthony Marvello, Assistant Commissioner, Client Engagement Group, ATO

Robyn Jacobson

Today I'm joined by Anthony Marvello, Assistant Commissioner, Client Engagement Group at the ATO. Anthony has significant experience across all markets, including the leadership of assurance, reviews, audits and the provision of rulings and guidance. Anthony, welcome to live and great to do this in person.

Anthony Marvello

Thank you Robyn. Very glad to be here.

Robyn Jacobson

Now you've already presented your session on division 7A.. And this is a great opportunity to look at where we're at with it. So I don't propose that we dive into all the provisions, but it's been part of the landscape for 27 years. And when we look at the significant amendments over that period, there’s been about 25 legislative amendments. And on my reckoning, there are about 25 different pieces of ATO public advice and guidance. And this is separate to any web guidance. I'm just talking proper official guidance. So when I got to background, it is an integrity measure, and it's designed to prevent shareholders of private companies and their associates taking money out of these companies in a tax free form. There has been an increased focus on Div7A, from the ATO, and I'd like to today try to unpack that with you and understand what is the focus. What are you seeing? What is concerning you, and what does this mean for practitioners and their clients moving forward? So in terms of Div7A and its inception, opening comments from you.

Anthony Marvello

You're right. It has been there for 27 years. It is meant to be an amber light, you know, some hazard lights if you work as long as there's always private companies, Div7A will always be an issue. The very nature of private companies, they are closely held, somewhat opaque. The owners may feel that the company is theirs, and it is theirs, but a company is a separate legal entity, and taxpayers and advisers need to make that point very clear. So invariably Div7A it's invariably going to be one of the top issues that we look at anyway is in this sort of market. I suppose the point that, and I probably don't agree with the characterisation of renewed focus, it’s always going to be a focus area. But what we discovered was we were doing a bit of a review of some of the rulings or some of the discretionary requests we were getting, we were also looking at some audit results. And we found that the vast majority, you know, there were fundamental errors or very basic errors being made and that's why it was these ordered adjustments. And that's why, there's been a lot of rulings or requests for Discretions being issued. And it was very much as a part of a consultative process, you know, like The Tax Institute, like the other professional bodies. We said, well, there's a real problem here. We need to up the ante in terms of about education piece and dare I say, we probably had to up the ante in some of our messaging because as I said, Div7A is, you know, targeted at private companies and the shareholders and those associated with them. But the reality of it is because of the nature of the private company and a little bit opaque. Advisors need to really step up because our feelings were that, and we get that being an advisor is tough and we get good advice, costs money, but we also get that Div7A is a fundamental issue, the fundamental set of hazard lights. And we felt that some advisers have been way too passive. Some advisers weren't asking the hard questions. And then that's where Div7A becomes a problem. So it's a little bit of, you know, we all need to up our game. Certainly taxpayers and their advisers can't, you know, have their head stuck in the sand. They've got to realise that we have concerns about it. We're very much taken the approach of this educating phase. It doesn't mean the audits have stopped and it doesn't mean the reviews have stopped. But we very much, you know, have raised the ante, in terms of how we’re approaching Div7A and the general implication across the board and messaging to reflect our level of concern. And that's what we have talked about yesterday.

Robyn Jacobson

Anthony, we'll get into the sorts of areas you're seeing and you talk about them in many cases being basic. Are you seeing any trends across the type of demographics, the geographical location, the type of business, the size?

Anthony Marvello

Yeah. Unfortunately, no. The mistakes are very basic, fundamental errors and even the, you know, the basics of Div7A hasn't really changed, notwithstanding all those, you know, well, there's lots of changes. Does it really matter the size of business, you know, small businesses. Yeah. First companies first. We're starting up or significant profit groups. The mistakes across the board. It doesn't matter what industry, don’t matter about the nature of it. So it's across the board. So there's nothing that would help us and help the profession help advisor to say, okay. We're going to target x y z because it’s not x y z. It's the entire alphabet if you like.

Robyn Jacobson

Do you even get a sense of the type of practitioner. And by that I mean, the rules have been around since December of 97 and the trust rule since February 98. Many practitioners have been around since day one and have seen the evolution and all the debates and all the progress and all the guidance that has been formulated over those years. And of course, there are a new generation of practitioners who may only been in practice for 5 or 10 years and weren't around back then. Is there even a sense that it's some of the more experienced practitioners who may have either forgotten or, as you suggest, maybe becoming too complacent? Or is it more a case of practitioners who maybe never got taught properly in the first place?

Anthony Marvello

Well, I certainly don't have a label. I can't categorise one, to be fair. And as we've heard in the conference over the last or two, it's a lot of those basic issues, you know, 100a, capital gains tax, family trust selections. You know, it's those basic things. They're not new, they're not fancy, they're not shiny. They're existing issues. So our concern is that advisors need to ask those questions of their clients, because if there's a private company involved and there must be a stream of questioning about what's actually happening in the company, you know, how are profits or benefits been taken out of that company. Now, that's a very appropriate question to be asking, because ideally, in a planning phase, to catch up with the client during the year, you need to you had a sense of, okay, well, how are you going to pay yourself? Cause invariably, the private company shareholder is the director as well, probably the employee as well. How are you going to remunerate yourself, so that in a rational sense, conscious sense, you've got a thriving business.

Robyn Jacobson

Because if you're a director or an employee, of course, you've got all of the employment cost for the withholding, and super and so on.

Anthony Marvello

Yet. So no matter what the capacity is and what we like to break down is, you know, there's always different hats that people are wearing. And so you need to be conscious of what those hats are. But there also needs to be some quite hard conversations about, well, what are you actually doing with the company? The company's not your event, notwithstanding the fact that you know, you are in fact, the company. The company is a separate and distinct legal identity. So there's a difference. You can't be raiding the company's piggy bank and not expect there to be tax consequences. And that's the reality.

Robyn Jacobson

I can recall the campaign many years ago for superannuation. Yeah. And the document in particular was titled It's Your Money, But Not Yet. I feel like this one should be this one. It's not your money.

Anthony Marvello

I think we may have discussed this Robyn, but I do want to have the cookie jar and have someone slapping the hand saying it's not yours. And that also if I can just like a liberty for a second. In reality that also applies to pay as you go withholding. Yes, it applies to super and it implies the GST. So I think it's a really important lesson for all those in business and all those that are advising those businesses that it's, dare I say you need to have those separate buckets and you need to be very conscious about those separate buckets, because it is important that we all lodge on time and we pay our debts on time.

Robyn Jacobson

So into the specifics, what is the ATO seeing when it comes to basic errors?

Anthony Marvello

So besides inability to distinguish between the company and the individual or the shareholder, there are some other elements. So we get down to the more basic things. So if you find that you know you have an outstanding loan or an outstanding benefit, you need to do a couple of things. So if there's a recognition that, okay, we're in Div7A territory, how do we avoid that. Yeah. You need to make sure that before the end of the year or before you lodge your tax return, that you have an agreement with the company about the terms. And if it's seven years unsecured with 25 years, how it's going to be repaid, typically there's a minimum yearly repayment, there's an interest rate that varies annually and over the last couple of years, it's almost doubled like it's an 8.77% at the moment. And that needs to be taken into account. So all that mechanical things that needs to be in agreement are what we call a complying loan needs to be put in place before you lodge a return. You've actually got to then satisfy and pay a combination of principal and interest back on that loan. And that needs to be all journaled, actually paid and done before 30th June, or whatever your tax time is, is to ensure that even though the complying one, by not complying with that complying loan, you've run up short on that. That can certainly lead to a deep Div7A deemed dividend. You know, there's a basic elements of it.

Robyn Jacobson

Just to make a particular point. You say before a lodgement day, it's got to be at least the day before lodgement day. So anyone who thinks that as long as I put it in place literally before I lodge could still have an issue, it's got to be done at least the day before, the day of lodgement.

Anthony Marvello

And the other elements, just to unpack it a little bit. And I know, is that the favorite topic of yours is that you can't just journal yourself out of it. Journal entries reflect the transaction. It's not the transaction. The other thing we see is, well, I'm going to call a round robin where there's the constant repayment of the Div7A loan, but then there's the constant withdrawing of the Div7A loan.

Robyn Jacobson

109r specifically deals with that. And it was built in as an integrity measure to stop people doing that.

Anthony Marvello

Again basic issues. So if we get nerdy for a second 109r does deal with that, basically it would have reasonable person would conceive. But constantly a problem because people think they know better and perhaps their agents, you know, aren't probably holding to the account that they need to be.

Robyn Jacobson

I do want to link back to the journal entries because..

Anthony Marvello

I know you love it.

Robyn Jacobson

...It is a topic that is of interest. There is a mechanism by which, of course, a minimum yearly repayments can be undertaken without cash, and that is by the declaration of a dividend. But to make it work properly, the dividend has to be properly declared by June 30th. And sometimes there may not be an understanding of why this is so important. And I think it's important for our listeners to understand this. So the minimum repayment, of course, is due by June 30th each year. If it is not paid, you have a shortfall and the shortlisting dividend for it. So what we need to do is create that mutual obligation. So a journal entry can be used as a payment. Now we know the shareholder owes the company the repayment. The company needs to pay the shareholder something. So that's therefore the obligation to pay the dividend. So the dividend must be declared by June 30th. That then puts in place a whole series of other obligations. Corporations act. And this is not my space, I work in tax law. But of course we do have obligations with directors minutes or resolutions to be in the corporate register within a month of a decision being made. You then have to issue a distribution statement to the shareholders by 31st October. For profit companies. Then you can get to your journal and record the transaction that's already happened. But it's so important to get that right because the failure to do that means it could have breached as a direct to the Corporations Act. You could have penalties under the Tax Admin Act for not issuing a distribution statement properly, you may have the deemed dividend under Division7A and then I to even go into the Taxation Services Act right now. But if there's been a backdating of documentation to purportedly declare a dividend, it could be an issue.

Anthony Marvello

So yeah, you're bang on attention to detail everything. And that's where the planning part goes to it. And even maybe to add to the mix, even the planning element goes towards what I call is a outstanding line hasn't been put on complying terms. Are we going to bring that to an end. Are we going to repay it or is it going to go in the form of a dividend? Or would it be reflected in salary wages. You know, very important element. Well Div7A is looming large before 30th June if you like. These steps could easily be put into place to mitigate the impact of Div7A.

Robyn Jacobson

And just to let members of The Tax Institute know, we ran a webinar in 2021 that specifically deals with the use of journal entries to make minimum yearly repayments, and that can be found on the member portal for Tax Institute members. Commissioners discretion. Let's move into this area. 109r is the provision that if there's been an honest mistake or an inadvertent omission by the taxpayer, by the company, or by someone else, such as the tax agent, then there can be the opportunity for the commissioner to disregard that deemed dividends. Now, the discretion has been there for many years. Can you talk us through what you're seeing in terms of the applications, and has anything changed? Because this seems to be a bit of anecdotal feedback that this discretion is harder to obtain than it used to be.

Anthony Marvello

It so probably just address that one first. So as a tax ruling said 2010/8 . And there's a practice statement which is an instruction to staff which is 2011/29 So they’ve been around for a while. So that's the ATO view. And that's how the commissioner advises his staff to approach the discretion. So the important thing to note is, first of all, there needs to be either an honest mistake or an inadvertent admission. So that's a tick. And as you said and as you mentioned, it relates to the company, the entity, the benefit from the dividend or the payment and the tax adviser, invariably. Yeah. So it's really a bit of a party. So we need to be conscious of what the various parties are doing. So as I said, this should be an honest mistake on inverted admission and then do the facts and circumstances warrant it. Now we need to consider that any time if there's an audit we make an adjustment. So as soon as we consider making the adjustment and the Div7A a poss. We need to go through that practice because that's what's required. And naturally, if an advisor in their review of going about their business notices that there's a potential Div7A issue or there is a Div7A issue, well, then if it is an honest mistake or an inadvertent admission and the facts and the circumstances warrant it, well, then commissioner can consider the exercise of the discretion. So after that run up, I think over time, advisers have felt that the discretion was almost automatic and it didn't necessarily need to result in there being an honest mistake or an inverted admission. So I thought it was just like a given. So I think the point that we've been making is that, no, that's not the case. That's a bit of a myth and that we have to bust that myth. So it's not a get out of jail free card, and we need to consider it. And taxpayers and shareholders and other associates need to consider that carefully. Now, has there been an honest mistake or an inverted admission? And what are the facts and circumstances. So very much I wouldn't I refocus, but yeah, we're very much conscious of what the TR and the PSOA say.

Robyn Jacobson

So that threshold has to be met first before the commissioners even empowered to be able to exercise that discretion.

Anthony Marvello

And this is where the advisor is fundamentally important because we would expect the advisor who's advising private companies. You would have a pretty good understanding of Div7A and certainly the working parts of Div7A, maybe not all the funky bits, but you know, the basic elements. And again, as I've mentioned before, most of the mistakes we see around the basic elements. So it's really up to the advisor to, dare I say, probe and push a little bit can't be passive. You know, they need to be asking their clients, you know, what are they up to. And there's some examples in the TR this as examples in the PSOA how the Commissioner will approach it. So for example, you know, if the agent is only being provided with a summary of the accounting records. So no detail other than that and they just blithely accept that. And it’s shown that, you know, later down the track, you know, via an audit that, you know, the director or the shareholders more precisely hasn't been doing the right thing and has been stripping money out of the company or being using the holiday house and not doing the right thing. Well, then it's highly unlikely we're going to exercise the discretion because the agent hasn't done enough to satisfy themselves of what's actually happening. Now, there will be cases where, you know, we certainly will. You know, for example, if somebody just maybe got the interest rate wrong. You know, I hope I forgot to adjust it so to the current year rate. And I should, you know, the ATO website, you know, gives that sort of helpful tools. So, you know, that's just a random thing. Well then yes. If you look at all the facts and circumstances where you say, okay, and you do have a discretion, or where a company and the shareholders have been, you know, they've been out and they thought they were buying something for the personal. But they just mistakenly had the company credit card and then down the ways they work it out and they correct it.

Robyn Jacobson

Yes

Anthony Marvello

Well then. Yes, you're going to take that into consideration and it's probably going to be, you know, a positive result.

Robyn Jacobson

Yeah. Anthony, a really common situation is where you take over a new client. And you find a division7A problem I think nearly every accountant could point to that. And that's in that no one's actually creating the problems. The ruling here is from somebody else. So is that an area that is open for the discretion? Well, and I don't tunes on whether there's honest mistake. Again.

Anthony Marvello

Yeah, obviously it depends on the facts and circumstances. But if the previous agent has been wilfully blind or wilfully ignorant and the client hasn't been open and transparent, yeah, that's going to be problematic. And I think there was this element in the past where an agent or an adviser has got a new client and it is a bit of a basket case, and they come to us thinking that we're going to fix it. And again, it's probably going to be a no. But I think people need to be and I suppose that's where expectations needed to manage. You know, the client's expecting the new agent, the fixer of a new adviser to fix it. It may not be fixed or might not be fixable. And that's problem. And I think that's where a lot of the misconceptions around 109rb come and come through. And I think, you know, we've made it pretty clear that, yes, it is available where there's been an honest mistake or inadvertence. However, it's not a get out of jail free card for any other misdemeanor

Robyn Jacobson

And do you think it's possible there are practitioners out there who could be trying to correct these situations without necessarily seeking the discretion?

Anthony Marvello

Well, possibly. And obviously it's a discretion for the commissioner. But again, they need to work with their clients to fix these things and draw these things out. So very much encourage people to sort of try to fix these things, and obviously communicate with the commissioner. But also, dare I say, start with a clean slate. like, yeah, this case, maybe.

Robyn Jacobson

With all that discussion, where to from here, what sort of awareness campaign is the ATO running in and where does this take us for the rest of this year and into next?

Anthony Marvello

And so, We've done a bunch of things already to be very proactive and I know I’ve spent a lot of time doing this. So we've got a couple of events planned, probably at least one other major event. I feel that this is going to be an ongoing thing, and we need to make sure that there are solid roots and solid understanding. And it is a lot of conversation with clients and there's a lot of management of expectations as well. So I think this will be an ongoing thing. I'm hoping over the next couple of years and we'll get some real traction. And then, you know, the the evidence will be, well, okay, less adjustments, less request the discretions and we can all focus on something else. And hopefully, you know, something that actually you can, you know, really help the business. As opposed to trying to deal with , dare I say, missteps.

Robyn Jacobson

So in closing, what are your key bits of advice or tips for practitioners? What's their role in this?

Anthony Marvello

Okay, probably if you are advising private clients, make sure you have a very good understanding of the provisions or advising them. You need to be proactive. You need to be planning with the client about how they are going to extract wealth and benefit out of the company appropriately. If there is a Div7A potential issue, well, then you need to make sure that there's a complying loan agreement. You need to make sure that when you're paying, that you're not trying to be a bit cheeky in terms of round robins or just using journal entries, ensure that the minimum yearly repayment is being met, including the interest, which is the combination of principal and interest. If you don't do that, that's a that's another Div7A issue. So if you can come a bit of a circle and a bit of a cycle initially to make sure that all the timings are right, the journal entries are right, you get the ordering right so that it doesn't become a problem, and then you just move on and actually can get on with your business.

Robyn Jacobson

Okay. Anthony, thank you for your session yesterday. Thank you also for joining us on TaxVibe

Anthony Marvello

Pleasure. Robyn.

Robyn Jacobson

So thanks for listening to this episode of TaxVibe I've been chatting with Anthony Marvello, Assistant Commissioner in the client engagement group at the ATO. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen to your podcast. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the center of the tax conversation, a membership of The Tax Institute could be just what you need. You can learn more at taxinstitute.com.au, will look forward to joining us next time.

Federal Budget 2025–26 Reflections & Insights

Release date: 28 March 2025

You won't want to miss this bonus webinar, where you'll get a sneak peek behind the closed doors of this week's member-only webinar: Federal Budget 2025–26 Reflections & Insights.

In the webinar, Robyn Jacobson, CTA, facilitates a panel of experts:

Tim Sandow, CTA, Tax Partner, BDO & President, The Tax Institute
Julie Abdalla, FTI, Head of Tax & Legal, The Tax Institute
Jonathon Ortner, FTI, Tax Partner, Arnold Bloch Leibler
Scott Treatt, CTA, CEO, The Tax Institute

You'll hear the first 20 minutes of the episode, plus a bonus snippet of the discussion where they summarise the issues covered in an earlier #Bendel webinar – nothing but the topical content you want to hear!

They discuss the commercial and practical implications and considerations of the Budget’s key tax and superannuation measures.

For a deeper dive into what the Budget means for you and your clients, and to access other member-only insights and resources, including the Federal Budget 2025-26 report, become a member of The Tax Institute. Learn more.

Facilitator: Robyn Jacobson, CTA

Panellists: Scott Treatt, CTA, Tim Sandow, CTA, Julie Abdalla, FTI, and Jonathan Ortner, FTI.

Robyn Jacobson, CTA

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson. We love the vibe of Tax and here at The Tax Institute, we do tax differently. In this bonus episode of TaxVibe, you'll get a special insight into our post-Federal Budget reflections. A sneak peek behind the closed doors of our member-only webinar. To see the full webinar and access other member only insights and resources, become a member of The Tax Institute. Head to our website to learn more. We hope you enjoy this episode of TaxVibe.

Welcome to The Tax Institute's webinar addressing the tax measures announced last night in the Federal Budget, 2025-26. I'm Robyn Jacobson, the senior advocate at The Tax Institute. And in this webinar today, I will be the chair and facilitator of the panel session. Thank you for joining us today. This webinar is live and interactive. Joining me on the panel today, we have Tim Sandow, CTA and president of The Tax Institute. We have Julie Abdalla, FTI, head of tax and legal at The Tax Institute, Jonathan Ortner, FTI and partner at Arnold Bloch Leibler. And last but not least, we have Scott Treatt, CTA, who is of course, the CEO of the Tax Institute. So, thank you all for joining me this morning. What I will be doing is drawing on this panel for their reflections, for their insights. It wasn't a what we would call a particularly big budget and certainly will unpack that in a lot more detail. But I first would like to turn to Scott and ask you what your overall reaction to the budget was.

Scott Treatt, CTA

It's an interesting one. The overall reaction, unsurprising. That was probably my comment, because that's got to be one of those. No, not one of it's got to be the lightest budget I've ever seen. I say seen deliberately as opposed to heard, etc., because it wasn't that 90 odd pages of, oh, I don't know how long exactly it was about what was it, about a third or less than a third of the papers that would normally see coming out of a budget, and that I find, that is unsurprising given the timing, like the election's imminent.

Robyn Jacobson, CTA

But even if it had been a small budget in length, we might have had a lot of tax measures, but we couldn't even have a lot of them.

Scott Treatt, CTA

So, but it was never expected. I don't think we expected anything in relation to major tax aspects. I think I was a bit surprised that we saw tax cuts come out. Now that I see how it's playing through. I'm not surprised, given the political move that sort of happened. As you look at where it's being introduced now, they're introducing it into Parliament. Those tax cuts alongside the Medicare changes, which are due to take effect from the beginning of this financial year. So, there is a you're already seeing a bit of a jostling around some of these key issues before we're coming into an election. Even being called. It's going to be called over the next few weeks. I think it's quite interesting to look at, still the broader economic context in which this sits. I think it's really changed from what we've seen over the past few years as no substantive changes to that. In my opinion, you've still got bucket loads of debt. We still got those underlying core issues within our system that we've got to address, that we've got to deal with. I think some of the front of mind issues that the budget's trying to address, you've still got the cost-of-living issues. You've still got the education issues. It's still got the structural issues within our system around housing and social support, etc. those structural issues haven't moved. I haven't gone away.

Robyn Jacobson, CTA

And Julie will talk about the tax cuts in more detail shortly. But the positioning of this bill, we've got what looks like to be parliamentary sitting days left, 5 to 7 weeks to the election, which is somewhere between the third and the 17th of May. It's going to be one of those three Saturdays. And there's even talk that they may be calling the election as soon as this Friday.

Scott Treatt, CTA

Sure.

Robyn Jacobson, CTA

So, positioning all of this and what's going to get through the current Parliament, what's not.

Scott Treatt, CTA

Yeah. But it's interesting. Before we went live, Julie made an observation around the political posturing of where certain measures are placed, etc. and maybe she kind of had her two cents to that. But it's fascinating that if it is only true, that is what actually happens around the Medicaid stuff, the stuff that's needed for this. She the certainty we need in the system. And that's probably the aspect as an institute, we were keen on what is the certainty we can draw out of this. And I know and when the team worked tirelessly through to pull the report together, we tried something different with our members to try to go, right, what is it that we talk of that certain in this environment, given the election as opposed to all these would be announcements because the announcements of the announcements.

Scott Treatt, CTA

But actually, what does it mean to be able to advise people? And that's the piece that, I guess now when I wake up this morning to see the combination of those matters in that one bill, I go, wow, are we in another difficult position here around certainty coming into year end?

Julie Abdalla, FTI

So, we wrote in the, report that we weren't expecting these Tax cuts to be introduced. For an election. Anyway, but we would have expected that for the Medicare threshold changes. And so we've actually seen this in recent times, where a measure is put in a bill that is completely unrelated for different reasons, and pushing things along in the process can be the objective, but it doesn't always work out that way. And so we had, for example, Division 296 measures that were taken out of a different bill. The instant asset right off was in the buy now, pay later, bill. And then that was taken out at the last minute. So, it makes certainty all the more difficult. And it's concerning when it comes to the Medicare levy changes. We want certainty on that as a priority.

Scott Treatt, CTA

Yeah. It's kind of like Robyn, I think I said to you this morning, it's the budget that we didn't need, but we had to have.

Robyn Jacobson, CTA

Because the optics of having a May election and not having a March budget.

Scott Treatt, CTA

Yeah.

Robyn Jacobson, CTA

The key headline figures, deficits as far as the eye can see. And 2025-26 is the first year forecast we’re going to tip over that gross debt of $1 trillion. Quite eye watering figures. So where was the focus of the budget at a macro level.

Scott Treatt, CTA

Well, I think as I said before it was the cost of living aspects. It's those similar, structural issues that we've had in the system for a while. And, you know, around the housing, around the education, the social support, etcetera. But it's fascinating. You already see in the press, like, how are we going to pay for that?

Robyn Jacobson, CTA

Yes.

Scott Treatt, CTA

That still remains the question. But you've got to look ahead a number of aspects within our system. And we keep harping on around the need for a holistic tax reform, tax reform, tax reform. And I'm happy to keep saying that until we go blue in the face because like I sit there and say we can throw all these measures out there, but how do we create a sustainable system? Is our system sustainable? And there are a number of questions in preparation for this and I was there going, if I had the opportunity again just to sit down with the treasurer, post this budget and say, right, what questions would I ask? And I put them down here, are we taxing income at the right level? Are we taxing capital and consumption at the right level? Is our tax mix right? And I think if you can't answer yes to those questions, then you don't actually have a sustainable system. And I don't know at the moment that any politician could genuinely answer yes to any of those. Which means then we'll we don't have sustainability. A lot of what we're doing within the budgets remain just tinkering as opposed to creating a sustainable future and having meaningful effect. And so what are we doing about it?

Robyn Jacobson, CTA

Before I throw to Jonathan and Tim, for their initial observations of the budget, two things which are always for front of mind when we talk about particularly homeowners and businesses. And I'm referring to interest rates and inflation. So, we have had that first reduction of 25 basis points for the first time since 2020. Given all the rises and the inflation is back within the Reserve Bank's range on paper, but it's still very much having an impact on cost of living for everyone.

Scott Treatt, CTA

Oh, I think that's right. But I don't know that I'd be comfortable being an economist at the moment. Like just so much global uncertainty going on. There's so many things happening in different jurisdictions at different levels and for different reasons, and there's likely to be an impact that flows on to Australia. What that it is exactly. My crystal ball is probably a little dustier than others, so it's going to be interesting to watch how that then plays out and how the overlay of those other issues come through as well.

Robyn Jacobson, CTA

Thank you. Tim, how are you reading the tea leaves?

Tim Sandow, CTA

Robyn. For me, it feels like it's a bit of a placeholder budget, as in, I had to do something, as Scott said a bit because of the optics, but it sort of feels like I'm wondering if we going to get a second budget later in the year. I mean, we obviously probably will win if there's a change in government, but I think even if there's a, if this government continues, albeit probably with a different mix going forward, are we going to see something later in the year? And as Scott said, there's so much global uncertainty. Maybe the world does look a little bit different in six months’ time. And some of the assumptions that are in it in this budget may change. So, I guess it's a bit of a watch, this space. I think good news out of the budget is, some of the assumptions. Robyn. We're all going to live longer. So, the assumption is that longevity is going up by year for men and women, 86 women and 82 men.

Robyn Jacobson, CTA

So more time for Holidays.

Tim Sandow, CTA

That's right. More time for super, and the birth rate has again increased in the next five years as well.

Robyn Jacobson, CTA

And this is without Peter Costello, who's encouraging everyone to have that third child.

Tim Sandow, CTA

Correct, its gone from 1.44 to 1.54.

Robyn Jacobson, CTA

Oh goodness. Significant. Jonathan, your take on the budget.

Jonathon Ortner, FTI

Well, I think to continue to lighten the mood, Australian brewers and beer drinkers can rejoice. Jim Chalmers has announced a freeze on the indexation for beers for two years. So that's good. Saint George Dragons, unfortunately, over my beloved storm also received funding. Why that was chosen, I don't know, but I think the reality is we haven't seen any major tax announcements in the last three budgets. Probably more. Yeah. So do we expect any announcement of substance in a budget like this was going to be, you know, very low on the probability scale. So I'm unsurprised by what has been announced other than for the fact that the tax cuts have been, you know, presented in a way that perhaps they could have designed it differently. So, we're not outlining $17 billion when we're ready, forecasting deficits over the next however many years.

Scott Treatt, CTA

But wouldn't it say the budgets over the past few years, Jonathon, really like where the compliance dollars were going to go and what the policy position was on integrity within our system was really called out loud and clear. And I don't know that those things were within his budget. Not in that same way.

Jonathon Ortner, FTI

Oh. Certainly. There's still I mean, in terms of compliance within the tax system, the spending going through the Tax Avoidance Task Force.

Scott Treatt, CTA

Not like the multinationals because of X, Y and Z should, those bigger theme aspects were absent here. And I do wonder if that's again a deliberate move around. Well, we've got time now for, before the election coming. And we know that those historically in elections it's like every week there's something new. And I do wonder, are we going to see something along those lines over the coming weeks?

Robyn Jacobson, CTA

Jonathan, also interesting to be mindful of where we are on the cycle, because traditionally, if a government wants to go harder or bring in a measure that may not be as popular, they are not going to do it weeks out from a federal election, they are much more likely to do it at the beginning of their term, or perhaps even halfway into. Right? Yeah. So, Julie, your reactions, we've talked briefly about the traditional tax cuts, but, the IBMs, this is our favourite expression, the announcement unelected measures. For those of you who are not familiar with the expression, did we see any movement on the IBMs?

Julie Abdalla, FTI

We saw movement on a few, but less than a handful. There is still a long list that weren't addressed, but one thing that is on, or I thought was interesting on this point in the budget paper. In budget paper number two, if you're interested in the payments and receipts tables, there are line items for decisions taken but not announced. And so these are amounts that are attributed to that are not actually announced measures within the budget. And so I'd be expecting to see post budget potentially pre-election announcements that might shed a bit of light on what those amounts are related to. Hopefully that would deal with some of the announcement on inactive measures. But again, we've mentioned certainty already. People want certainty whether they're proceeding with a or amending it or discarding it, abandoning it altogether. People just want to know where they stand as compared to the law.

Robyn Jacobson, CTA

And make decisions about where they invest and how they run their businesses and understanding where they stand. Scott, we have talked about what the budget means, but in particular, as we head into an election, if we think about the way we brought up our budget reports in non-election news, we always say the government has proposed that it will or the government is intending to do such and such. But given we are weeks out from an election, what does it really mean when the government says it will do this?

Scott Treatt, CTA

That's the hard thing to answer. Like what is going to eventuate in, let's call it seven weeks’ time, right? What? It is a maximum of seven weeks

Robyn Jacobson, CTA

Maximum 7 weeks could be five.

Scott Treatt, CTA

Thought so what is going to actually eventuate at that point? What's going to be the composition of Parliament.

Robyn Jacobson, CTA

Both houses nice houses not just the Senate, yeah.

Scott Treatt, CTA

At that point of time, therefore where do we stand? I think that overlay still sits there. So the difficulty is, yes, there's been some positions put forward. The positive is we've got some view on it which kind of aligns and I know will come to it around the regulation of the profession. That's I sit there and go, well actually there are elements where we can go with some level of certainty because of both sides of Parliament thing aligned on not doing something.

Robyn Jacobson, CTA

Yes.

Scott Treatt, CTA

So I think that's the one positive I'd take up the rest as it can go. Well, actually it's going to depend on what Parliament looks like post-election.

Robyn Jacobson, CTA

And that's really going to be interesting to watch. Listen, I just noting that we are not yet certain when Parliament is going to resume. There are certainly parliamentary sittings scheduled throughout the year, as we know, with sync by July, that have all certainly by a lot. The new senators have to take up their seats, whether we're going to see any sittings in June before they go into their winter recess in July. We really will depend on the counting of the votes and have the sworn in, the minister's internal housekeeping, and I talk about it, putting the new signs on the doors around Parliament House. So there's a little bit of administration that needs to be sorted. Tim, Where does this leave business sentiment? So when they're looking, yes, we're going the election year. Yes. We've got a whole lot of proposed measures. Again, that's as we move into caretaker mode. Would we see a potential slowdown in business decisions, or do you think it will just be business as usual?

Tim Sandow, CTA

Robyn, I think it depends on how much of an influence you think things like tax have on on business decisions. But I'm probably not best to, to speak about sort of that overall business confidence, but certainly I mean from my perspective, I mean I'm thinking in Adelaide, it does feel like there's still plenty happening around the place. And as I'm traveling around as part of the president role, I don't think any of it is just sitting around wondering what we're going to be doing tomorrow. So, because we do have clients that are doing things, whether that's they're investing, they're buying things, they're selling things. So I still have a fairly. Yeah. And I think comes down some of the numbers as well that, yeah, it does feel like the economy is doing reasonably well from what I've read so far, it doesn't feel like any of the Trump tariffs are going to have a big impact on the economy as a whole. They're not having impact on parts of the economy. I guess we're just waiting. Wait and see.

Robyn Jacobson, CTA

Scott, I just wanted your thoughts to. We've often talked about the impact of changes on the profession and compliance costs and regulation. We've still got labor shortages across the profession and that's really being felt by our members.

Scott Treatt, CTA

Absolutely. I think there's a couple of challenges around that one Robyn, them because we are seeing some firms having less graduaate intakes and that's not necessarily driven by demand. I think that's sometimes also driven by supply and quality of supply coming through. You look at the last ten years, student numbers coming through the social sciences and culture avenues and the management type spaces. Those that lead into accounting and law, etc., which drives tax as well. In terms of the student succession coming into the profession, it's dropping year on year. It continues to drop. And I think I've said previously in other webinars like, the impact of the regulation on the profession, right. And the perception that's there is also that impacting students decisions to go into that. And, you know, it's on us to to then try to keep tax sexy and ensure that students maximize the thought processes around coming through, because that supply is limited. That supplies is a key issue to be addressing.

Jonathon Ortner, FTI

I agree with that on. I think, you know, there's been reputational harm to the industry as a result of sort of past events and the regulatory burden that's been imposed is significant.

Robyn Jacobson, CTA

Yeah.

Jonathon Ortner, FTI

But then we've got the complexity of the tax regime. It is so hard at the moment.

Robyn Jacobson, CTA

Yes,

Jonathon Ortner, FTI

it it's acting as a disincentive for younger people to come into the industry. And it's a problem.

Robyn Jacobson, CTA

And Scott, we talk tongue in cheek about it being sexy. We just love tax so much. So we just can’t understand why no one would want to be part of this. But in all seriousness, when we're competing with other sectors where a young person can become an influencer and has that public social media profile, why would they want to come into the tax professionals?

Robyn Jacobson, CTA

All right. So let's now start to do a bit of a deeper dive into some of the tax measures that were announced. So Jonathon, I’ll kick off with you, What's happening in the SME space. What are you hearing on the ground and where is the noise coming from.

Jonathon Ortner, FTI

So I think we still have to correct me if I'm wrong. Over 60 billion in undisputed.

Robyn Jacobson, CTA

Excited it's over 50 billion. Yeah over 50.

Jonathon Ortner, FTI

So obviously that and since the commissioner has come in last year, you know, that's a key part of his agenda, which is to collect that debt. And so I think many in the profession are seeing that starting to happen. Yeah, certainly. Then as a result, you're seeing stronger enforcement of directive penalty notices. Garnishee notices. There's less appetite to, you know, remit GRC or ASIC. In certainly instances where perhaps the ATO would have in the past in light cases. And you know, we're seeing certainly more aggressive a more aggressive ATO in their approach in audits. And objections and, and so that's, you know, obviously becoming difficult for the SME population to manage because the compliance cost for taxpayers is going up considerably.

Robyn Jacobson, CTA

Yeah.

Jonathon Ortner, FTI

Other issues that we're seeing on the ground, and it's no secret it's on the its website as sort of tax issues to, watch out for in the 2025 years family trust elections. I've been presenting on that, recently over the last year at the profit business retreat on the tech summit last year, it's becoming, an ever increasing problem, partly due to the sort of common fact that we've got blended families now, we've got the death of the test individual, we've got really complex private groups, and it's going far beyond, I think, what the rules were set up to deal with and mistakes are happening as a result. So we're seeing that manifest and come out and, you know, reviews as a result. What's on the tip of everyone's tongue I think, is Division 7A and Bendel. And you know, we've got the 2023 UPE’s which need to be dealt with now for, for lodgement day. And, and you know, everyone is asking, what do we do with that now that the ATO sort, you know, special leave to the High Court and, you know, what do we do around tax planning time for, for this current financial year? So happy to open that up as a discussion if we want to.

Robyn Jacobson, CTA

Absolutely. And it is worth reminding our members that yesterday we ran a live webinar with Fiona Dillon, Paul Sokolowski and Tracy Dunn. Fiona, of course, being the chief tax counsel at the ATO called being, the solicitor representing bindle in the full federal court. And Tracy, with a great deal of experience in this space. We unpacked all of this and we talked about, firstly, what does the decision mean? What do you do with the pre 2009 ups? What do you do with those that were managed through that intervening period of 2010 to 2022, and what do you do most importantly with the ups that need to be dealt with by the lodgement day coming up? So we'd certainly encourage our members to access that webinar. You can contact the Tax Institute. We'll look at that through the member webinar series that we've been running. But it's a really interesting situation, and I'm just interested in your thoughts. And yes, I recognize you do work for the firm that represented the case in a different state.

Jonathon Ortner, FTI

Whatever Paul’s thought are, are my thoughts.

Robyn Jacobson, CTA

Very diplomatically put. But it's a really interesting situation where we have a position that was taken by the ATO back in 2009, which they have stuck with all through these years, despite being controversial and many practitioners disagreeing with it. We've now got unanimous two members in the tribunal and three judges now in the full federal court, all finding in favour of the taxpayer. The commissioner. Yes, we know, has sought special leave from the High Court, and we are waiting to see whether that will be granted. But in the meantime, the interim decision impact statement makes it very clear that the ATO will be sticking with its current position. So the main question everyone is asking is legally, how can the ATO do this effectively? It looks like the disregarding full federal court case law while they pursue their appeal. And so people are trying to understand how does that work?

Thanks for listening to this bonus episode of TaxVibe. If you want to hear the full webinar and join a collective voice of 10,000 practitioners at the heart of the tax profession, become a member of The Tax Institute. Head to our website to learn more. To keep up to date with TaxVibe, be sure to subscribe wherever you listen to your podcasts. Please join us on our socials and let us know your thoughts or of any topics you'd like to hear us discuss. We look forward to you joining us next time.

Beyond Bendel: decoding the decision

Release date: 14 March 2025

For the past 16 years, the question of whether an unpaid present entitlement (UPE) is a loan for Division 7A purposes has challenged the tax profession. Now, in a landmark ruling, the Full Federal Court has delivered its judgment in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel) – confirming that a corporate beneficiary’s UPE is not a loan for Division 7A purposes. This finding has significant implications for taxpayers, tax practitioners and the ATO.

Following the decision, this latest episode of TaxVibe delves into the details, exploring the implications. Robyn Jacobson and guest Neil Brydges, CTA, Principal at Sladen Legal, discuss the potential for further legal challenges and legislative changes, and how tax practitioners may navigate the resulting uncertainty.

And we'll continue the conversation with an expert panel at our member-only webinar on 25 March – members can register here!

Host: Robyn Jacobson, CTA

Guest: Neil Brydges, CTA, Sladen Legal

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute, where we peel back the layers of the Australian tax world. I'm Robyn Jacobson, your host, and the senior advocate at The Tax Institute. We bring you the sharpest minds in the tax profession, digging deep into their unique insights and sharing nuggets of wisdom you won't find elsewhere, always keeping it real and interesting. So sit back and relax, and let's dive into the world of tax one conversation at a time. We hope you enjoy this episode of TaxVibe.

I am joined by Neil Brydges, CTA, Principal in Sladen Legal's Tax group in Melbourne. Neil primarily practices in direct taxes, and GST with a focus on the taxation of trusts, deceased estates, property corporate tax, M&A and Division 7A. Neil is also advised extensively on cross-border taxation issues. Neil is an accredited specialist in taxation law. A member of the Tax and Revenue Law Committee with the Law Institute of Victoria.A member of the Tax Committee of the Law Council of Australia and a CTA with the Tax Institute, and a member of the Institute's National Dispute Resolution Technical Committee. Neil. Welcome to TaxVibe.

Neil Brydges

Thanks, Robyn, glad to be here.

Robyn Jacobson

So today, we're going to have a chat about the recent Bendel decision. And we will, of course, explain what all this is about ,and why it's so significant. But social media has been abuzz with the long-awaited release of this decision. And we're in particular talking about an appeal relating to the tax treatment of unpaid present entitlements. So, we'll break all this down. But, firstly, why is this such a significant decision? Why is everyone so excited about this, and that's before we even get into what the decision means for everyone.

Neil Brydges

It's a decision that's had quite a long history, not so much in this particular piece of litigation which we'll get to later on, but also what prompted this litigation was the Commissioner's views, which were released in a public form in a draft ruling in December 2009, but also had been expressed publicly a few months before it, and it started in February 2009. When the then Deputy Commissioner Mark Conser, at a talk on basically another topic confirmed his view that a UPE, in certain circumstances could be a 109D loan. and then over the next sort of 10 months. Between February 2009 and December 2009 was discussed at the NTLG meetings, and you can see comments around that in the minutes of those NTLG meetings before releasing a draft ruling in 2009, which became finalised in 2010, as we know, in TR2010/3, and practice statement. 2010/4. Those views. If you read the NTLG minutes and certainly consultation papers that are publicly available. They were controversial views, and that was controversial at time, and they remain controversial for 15 years or so, until ultimately they were tested before the tribunal in 2023 in the Bendel decision, and also the full Federal court more recently. So there's a lot of buzz because the Commissioner's views were controversial back in 2009/10 that probably died down a little bit because people were just like, well, we just have to live with those views until someone challenged them through the courts, and the Bendel decision is basically what has happened with that.

Robyn Jacobson

So let's wind it back. The very essence of the structure for people that may not be familiar with UPEs as we call them, the unpaid present entitlements. What are we fundamentally talking about in terms of a structure, or what the transactions are that's caused this dispute.

Neil Brydges

Fundamentally keeping it to the simplest possible structure. You've got a trust in this case. It's a discretionary trust, that confers a present entitlement to income, in layman's terms makes the distribution of income to a beneficiary, and the beneficiary is a private company. Now that distribution that present entitlement is not paid, it's not paid out in cash or bank transfer. It's just left as an amount owing from the discretionary trust to the private company, the corporate beneficiary. and against this name an unpaid present entitlement. The actual cash that would be used to pay that present entitlement, in the case of Bendel, but also in many cases, retained within the trust. So it's this unpaid amount, owing to a corporate beneficiary that's the unpaid present entitlement.

Robyn Jacobson

Okay. So we need to then put an overlay. We've got some rules called Division 7A. Which in essence talk about loans made by private companies, and if they're not genuine loans, then they can be treated as a deemed dividend, and then they get assessed to effectively the borrower who we're talking about shareholders or associates of those shareholders of the private companies. So again, at its essence, we've got a trust distributing to a company, it's not paid out. The company is therefore owed an amount, so in very simple terms, it's a receivable that the company has on its books. It's waiting to receive the amount of cash. And the whole question is whether that UPE is or is not a loan for Division 7A purposes. So you were saying that the Commissioner's position was controversial. Why was it controversial?

Neil Brydges

So, as you say, Robyn, Division 7A is looking to prevent distributions from private companies of profits to shareholders or associates other than in the form of dividends and Division 7A has a rule around a loan which says, if there's a loan from a private company to a shareholder or associate of that private company, then that loan needs to be paid back before the lodgement date, or put on terms complying with Section 109N, in simple terms, you know, people say complying Division 7A agreement's got to be in writing seven or 25 year term. Now, the definition of loan in Section 109D, includes what we think of as a loan. The Commissioner refers to that as an ordinary loan but also includes an extended definition that deems certain other things which may not be ordinary loans to be loans for the purposes of Division 7A and that extended definition includes the words, a provision of credit or other form of financial accommodation. So in December 2009, when the Commissioner released his then draft views, he said that an unpaid present entitlement with a corporate beneficiary is in effect a form of financial accommodation from that corporate beneficiary to the trust, and if it's not paid back within a certain time, it's going to be treated as a loan for division 7A purposes. So, what the Commissioner was saying was, well, the Trust is getting the benefit of the funds, but it's not a loan. It's an unpaid amount, and because the Section 109D includes this extended definition, including the provision of credit and any other form of financial accommodation. The Commissioner's view was that an unpaid present entitlement fitted within that part of the definition, and so was a loan for Division 7A purposes which, if it wasn't treated in certain ways, would become a deemed dividend under Division. 7A.

Robyn Jacobson

So the Commissioner has taken this view for 15,16 years, that a UPE is indeed a loan. We have got, of course, separate provisions, which were not the subject of this appeal, which we will call subdivision EA. And these deal with loans made by the Trust, where there is an unpaid entitlement with the company. Now that was not what was going on with these circumstances. So it's very important that we distinguish that and say that this case was not about those sorts of arrangements we're just talking about, if you like, the basic UPE between the company and the trust. So the Commission's taken this view. Some in the profession have not agreed with that view. What have you seen all these years? What have most people, therefore, done each year, when the trust has got its income. And it's working out who to distribute to. And we've still had distributions going down to corporate beneficiaries. How have people generally managed these UPE’s

Neil Brydges

So there's a number of ways that people can manage them. So I'll just talk about the ways people can manage them before you know what we've seen. The Commissioner at the same time 2010 released a practice statement which said, There is various ways you could, instead of paying out the UPE’s so that the Trust pays the company the money or putting it on a section 109N loan. Then complying Division 7A loan agreements. The amounts could be held simply on a subtrust investment agreement where there was an interest return paid, and the principal amount was payable after either 7 years or 10 years. Typically there was another option as well. So what people have done in practice when they've tried to comply with the Commissioner's views. Obviously some people haven't complied like Mr. Bendel and his entities in that case, which led to the litigation. But you get a mixture of ways people try to comply with it. Some may pay it out, but certainly sometimes part of the problem is that there is not the cash in the Trust to pay out the present entitlement, because that cash is tied up in working capital stock, etc. Particularly when the Trust carries on a trading business. so in terms of managing it, not falling foul of Division 7A, people have either put it on a complying loan agreement, or one of these subtrust arrangements under the practice statement. Now in 2022 the Commissioner released a taxation Determination withdrew the 2010 guidance, and he provided probably quite a good summary of the various options people have done with in the past, relating to dealing with these UPES putting aside, paying them out in full, or doing nothing but the three where people have tried to deal with them the most and those three are, one, you've made the UPE subject to a ection 109N loan agreement. Two, you've satisfied it, the UPE and replaced it with a 109N loan or three, you've put it under one of the subtrust arrangements. So, certainly those are the main methods in terms of one and two. It's variations on the we're going to make it compliant with 109N. Option one and the TD was, we’re trying to walk the fine line between we're making it subject to 109N but it still maybe is still a UPE and option two is, the UPE is paid out and replaced by a loan, certainly talking to different practitioners. You know there is a mixture of both of those. Some people are firmly in the second camp, where they're doing the repayment or satisfaction, then replacement and other ones are trying to walk that hybrid line. So it's as important as advisors moving forward to see which of those, if you're in the call it the 109N. Treatment, whether you're in the scenario one or scenario 2 because it may have different implications, and and what you do next.

Robyn Jacobson

All right. So without going back into detail to the tribunal decision, because really the focus is now on this full Federal court decision. Suffice to say that the taxpayer, Bendel, so we had a deemed dividend determined by the Commissioner being this UPE down to the corporate beneficiary that created additional taxable income in the trust that ultimately then was distributed for tax purposes down to an individual and that same company. So an amended assessment was raised. The objection was lodged. Commissioner made his decision on objection, and off we go to the tribunal and in that tribunal decision the tribunal found in favour of the taxpayer, which was very significant at the tbut also we all sat back and thought, well, it is just tribunal. It's an administrative decision. It's not law. So we we need to go to the next stage and thankfully, yes, there was an appeal by the Commissioner up to the full Federal court. It has what we call test case funding. So the ATO is paying, or the government is paying for the cost of this particular appeal. So what did the full Federal Court find, and why?

Neil Brydges

So the Full Federal court found, as I'm sure everyone knows, the Full Federal court found that the UPE in that particular case, the Bendel case was not alone under the extended definition in Section 109D. While they came to the same answer as the tribunal, they took a different approach, and they actually criticised the tribunal's reasoning in the Full Federal Court decision. But what the the full court did was they looked at the the context, and the purpose of section 109D. But also particularly the particular subsection within section 109D. That talks about this extended definition of loan. When they looked at that context, they said, while and call it a surface level, leaving an amount unpaid between a trust and a private company there is a form of financial benefit the trust is receiving because they've got the use of the funds, and they're not paying an interest cost on it. But they say, when you look at section 109D,a loan in that context, both starting with an ordinary loan, which is what we sort of, can envisage as a loan. There is an advance of funds by the private company in this case, and then there's obligation to repay. In some of the other extended part the extended definition in Section 109D. They talk about this advance of funds, or a payment of money by the private company, and then an obligation to repay that advance or that amount was paid first. So they said, what with the UPE, there is not this obligation to repay, because there was no advance, in the first place, by the private company to the trust and the example, what the UPE is an obligation to pay, and they said that the loan in Section 109D talks about an obligation to repay as opposed to an obligation to pay. Therefore the UPE was not alone under that definition, because, while there is an obligation to pay amount. It was not an obligation to repay amount. The taxpayer, and Bendel said, a loan requires a positive act by the private company, the positive act being advancing the funds, whereas what the company does is not a positive act, it just sits there. It doesn't call for the funds. The Full Court didn't say about the positive act, but they basically picked up that sort of approach of saying, well, there needs to be this advance of funds, as payment first by the private company, to enable an obligation to repay, not an obligation to pay.

Robyn Jacobson

So the Full Federal was found in favour of the taxpayer. We'll go through what that means for different arrangements in practice, but just for the moment. Let's stick with this appeal. What happens now?

Neil Brydges

Well, Robyn, that's the $64,000 question, as they say, but certainly the taxpayer was successful in the full court, or putting it the other way. The Commission was unsuccessful in their appeal to the full court. So there's various things that could happen now. Probably the most immediate thing is that the Commissioner, if he wants to apply for special leave to appeal to the High Court, must do so by the 19th of March. So that's in less than two weeks time. So, If that application is lodged well, then, a few months down the track, there would be a hearing to determine whether special leave to appeal is granted or not doesn't have to be a hearing. But typically there is. and if that was deniable, that would be would end with a Full Federal Court. if the application for special leave was accepted. Well, then, the substantive hearing, and once that's heard and decisions handed down, the High Court would either agree with the full Federal court or disagree with the Full Federal Court, but certainly in terms of the appeal process, the 19th of March is a very key date, because either the 19th of March is the end of this piece of litigation because the Commissioner doesn't apply for special leave or if he does there's a couple of sort of subsequent steps, irrespective of the outcome of those those steps from the Commissioner's point of view, but it may go on for a few more months.

Robyn Jacobson

So it's not quite choose your own adventure, but there are certainly different junctures or places that we could go down different pathways in terms of the outcome of this particular appeal.

Neil Brydges

That's right, Robyn, and certainly one of the things with applying for special leave, which is which is maybe not peculiar to this case. But as a feature of this case is that the Commissioner lost at the tribunal, there were two tribunal members in this case. They also lost in the Full Federal Court, and there was a unanimous three nil, three judge decision. So in terms of making an application for special leave, there's not a dissenting judgment somewhere in the journey that you can sort of base your special leave application of, going, you know the tribunal was right, the full court was wrong, or the dissenting judge in the full court was correct, and the other two were incorrect. So I imagine the ATO is very carefully going through the full court judgment and finding, sort of, you know, an avenue as opposed to just picking up on a dissenting judgment. The other thing also is the commission is a model litigant. So so in terms of whether they appeal, they are sort of bound by the model litigant rules in terms of you know they need to have, you know, a reasonable charge, you would think in terms of, applying for special leave due to the model litigant overlay as well.

Robyn Jacobson

But they can't just run a case because they're let's say, adamant that they want to win it. They would actually have to have a good legal argument and a good public interest argument for running the case and then ultimately depending where we land with the High Court, whether they grant special leave if they do, whether they find in favour of the Commissioner or not. Would you still expect that at the end of this we're probably going to have a law change that at some point the government might say, well, that might be what the courts found. But ultimately this is what we want, and we can't speculate at the moment what that policy response might be, but it seems that that's going to be likely at some point.

Neil Brydges

Yes, it certainly, it’s possibility, and I think, with a Federal election being on the horizon, that any legislative change, if there were to be a legislative change. There certainly wouldn't be any announcements of that until post the election and post the appeal process. So if the Commissioner does not apply for special leave. We'll know that on the 19th of March. Well, then, I think even on the legislative change it would be a wait until after the election. If the Commissioner does apply for special leave. Well, I think if there was any announcements of legislative change that would wait until you know until that appeal process is finalised one way or the other. In terms of whether there would be legislative change. There has been announcements by the Government in the past about amending Division 7A. I'm just looking now at the 2019 budget, and they said, the government will ensure that UPE’s come within the scope of Division 7A from one July 2019. This will apply where a related private company is made entitled to a share of trust income as a beneficiary, but has not been paid that amount known as an unpaid present entitlement. So certainly back then, That was the 2019 budget announcement, but it was actually flagged before that the Government had sort of indicated that they're looking to change Division 7A. To bring UPE’s into scope apart from what was already the case with subdivision EA. So there was no draft legislation at that time. They have flagged that. So if the Government did look to legislate any changes down the track. You know they have set the scene in the past. I suppose the things that are important to be considered, When would be the application date? Would it apply just prospectively, or would it be retrospectively? If so, what date? Obviously the budget announcements might give them a bit of a handle for doing a retrospective change because they have announced it in the past. But there are precedents also, as well as governments going back and doing retrospective changes many, many years earlier. Petroleum resource rent tax, not something to do with Division 7A but there have been long-term retrospective changes. With that, the other thing also, I think, with any legislative changes, is what is the change? One of the things in the Bendel case, the full court acknowledged, and the and the taxpayer actually submitted as well. was that if a UPE is a loan, under the extended definition of section 109D.

There can be certain fact patterns when the trust would be a deemed dividend to the Trust under 109D. But if money has actually left the trust, say a loan to a beneficiary well, then, under subdivision EA, that amount could also be accessible. So there's a potential, for I'll call it double tax. There might be two different taxpayers, but the same basic set of transactions that if the amendment to 109D. Or if there were an amendment to 109D. Bringing a UPE in, you hope that any legislative change will also have an anti-overlap compensating adjustment type rule that if on the facts subdivision, EA could also apply, there's not double tax. Now. I don't say anything about that in the Budget announcement, but certainly the full court acknowledged that there could be double tax in certain circumstances. not the case in Bendel, because the money never left the trust. There wasn't a subdivision EA issue, but in other fact patterns there could be.

Robyn Jacobson

So in terms of what Bendel did not say, or what it doesn't consider. Pre 2009 UPE’s, those created before 16 December 2009, which was the position the Commissioner took from that date that these were loans. So this was not a pre 2009 situation. So we still don't really have any judicial clarity around how they are to be treated. We've simply got the Commissioners assurance at this stage, based on current guidance that they will not go back and apply Division 7A. To those early UPE’s you've already established for this, that it did not cover subdivision, EA. Because the money stayed in the trust. It was not lent out to a shareholder of the company or one of their associates. but it also didn't consider 100A. Now I'm hesitant to even raise 100A, Neil because it's a whole separate conversation, and it there's a lot been said on it over the past few years, but it does seem that there could be some application here where a UPE does not become alone in so far, as the ATO has said. if a UPE becomes a loan we generally won't manage it under Section 100 A. We won't apply 10A to it because you're running it as a commercial loan.that if it doesn't become a loan, and Bendel confirms that a up doesn't become a loan. Could there still be a 100A issue here?

Neil Brydges

Certainly, as you, said Robyn, raising 100A is a thing that everyone in the tax profession knows. The last couple of years is, we're all probably sick to death of section 100A. But we're going to talk about again. But certainly I think there is a risk that in certain fact patterns that there could be a Section 100A risk that was flagged back as long ago as March 2009, when post the speech by Deputy Commissioner Mark Conzer at the time NTLG Meeting, minutes from March 2009, they talked about section 100A might apply. So this was sort of the very, very pre, the draft ruling in December 2009, when they talked about whether a UPE could be a loan by the NTLG process that they also raised the flag of Section 100A. So it's been acknowledged over the time. It wasn't an issue in the Bendel case. But certainly, if you've got fact patterns around where there's present entitlement, and to a corporate beneficiary, and the funds are left in the trust, say the Bendel fact pattern will then section 100A requires a reimbursement agreement. We know from case law that that agreement needs to be before the present entitlement. But the ATO tax ruling on Section 100A relying on the Raftland decision in comment and orbiter, says that you can infer a reimbursement agreement from prior events. So if there is a pattern of behaviour where they're having this present entitlement left unpaid for for many years. Well, there's certainly a risk that there could be a reimbursement agreement looking at the pattern of behaviour, not saying there would be. But there's certainly a possibility if you're looking at the Commissioner's view on reimbursement agreements. then you'd be in the the question around, Is it an ordinary family or commercial dealing? If there's a reimbursement agreement, then would it be ordinary family and commercial dealing? Now I know the way the rules work was. If there's ordinary family commercial dealings. It's not a reimbursement agreement, but sometimes people do it. That two-step process like I described. Have you got this agreement? And then, was it ordinary dealing, certainly around the ordinary dealing point. If you're looking at the once again the Commissioner's view and the taxation ruling on 100A he does talk about. If funds are retained in the trust to lower the overall tax rate of the group. So ie. There's you use a corporate beneficiary. But the funds are retained, so the overall tax rate is less than if it had been accumulated in the trust or paid to beneficiaries in higher rates, and lent back. The Commissioner says that he doesn't think that that's an ordinary family or commercial dealing. Now, that's not necessarily what the courts say, but the Commissioner says it in his 100A ruling. So if you look at the Guardian case, where Justice Logan at 1st instance made comments around a corporate beneficiary is not necessarily not an ordinary commericial dealing, but I think the Commissioner is flagged in this 100A ruling that some of these arrangements could run a risk of 100A buying to it.

Robyn Jacobson

So if we now look at what the decision means for clients arrangements across the country and I think we can broadly look at the old 2009 prior UPE’s, as we've discussed, not affected by this. If we look at those where they've been managed as a UPE and held on subtrust.

Then this decision would seem to suggest that they are not Division 7A loans. So you've always treated them as a UPE, and they don't become a loan, and the court has confirmed that. What about all those that have been managed as a Division 7A lloan all these years?

Neil Brydges

Yes. So that's, I think, just a useful sort of summary of those, call it three types of arrangements. If you look at paragraph, as I mentioned before. Paragraph 101 of TD2211 has the three types of arrangements. Scenario three is the subtrust arrangements, and then scenario one and two are the ones where scenario one is. It's made subject to a 109A loan agreement and scenario. two is when the UPE is satisfied and replaced by a 109N loan. So I think scenario two is probably the easiest one to deal with where there was a UPE, and it was satisfied, and then replaced by a loan. So now you're in the world of you've got a loan, while that satisfaction and replacement may have been driven by a view which the full Court says is incorrect. The UPE you had is no more, and it's been replaced by a loan. And now you actually have an actual loan, an ordinary loan from a private company to a trust. And so that loan is within Divison 7A And if you stop making minimum payments on it, it could be a 109E dividend, and if you forgive it, there could be a 109F Debt Forgiveness.

Now the 1st category, the ones where the UPE is made subject to a 119N loan agreement. So there's been no satisfaction and replacement of the of the UPE replacement with a loan. But you sort of trying to say it's a UPE, but it's on 119 terms. It gets very nuanced talk because the agreement does it say loan agreement at the top? Does it say talk about repayment of the amounts? and things like this. So it does become down. You know, who had drafted the agreement. How it's done. You know also how it's recorded in the financial statements, if it's put into liabilities as opposed to beneficiary amounts owing accounts that may be an influential factor. So the saying that it's still a UPE. But it was subject to a 119 n loan. And so today, you say, well, it's still a UPE, and it's not a loan you need to sort of scratch below the surface. Look at what the the agreement says, you know, if it says, Talk about loan agreement at the top and repayment, etc. You're probably treding dangerous ground, otherwise might be drafted differently, whereas it was a little bit more, saying, Well, we're just making it this, UPE .It's got to be paid back in 7 years, and it's got to be an interest cost on. And there's got to be minimum, minimum, not repayments. Minimum payments of it over 7 years. So there is sort of picking up the flavour of 109 N, and it's under a written agreement that might mean you're okay, whereas ones which have the more the flavor of an actual loan agreement, saying, calling it a loan agreement, and saying it must be repaid.then I think it may actually mean that the conduct of the parties could have resulted in what was a UPE being converted, not used in a technical sense, converted into an actual loan because of the way they went about it. Type thing.

Robyn Jacobson

Practitioners do now. Some of them are dealing with lodgments of the 24 returns. Still, of course, that'll continue for another few months into May, June this year they could be dealing with even earlier lodgement deadlines. They've got their 2025 distributions coming up for June 30th this year. So there are lots of milestones that need to be considered.

We don't know if we're going to have a resolution of this appeal process before all those particular dates come up. So what should practitioners be doing? And what's the Ata saying to practitioners by way of guidance.

Neil Brydges

So after the tribunal decision in late 2023, the the ATO put out an interim decision impact statement and they haven't updated it post the full court decision. But what that interim statement said was that until the appeal process is complete, we continue with our views. And but we won't apply compliance resources to people, you know, over this period.

I'm paraphrasing that. But basically, it's like until the appeal process is complete, so we will know on the 19th of March whether the appeal process is complete, or whether it has another few months to to run in terms of a high Court application.

So that's in terms of what the ATO is doing. in terms of what taxpayers do, particularly in the next few or advisors do in the next few months in terms of the lodgements of the 24 returns we're really looking at. In many cases the 2023, June 2023 present entitlements, which, on the Commissioner's view, would have become a loan in the 2024 year, under 109 d.

Under the extended definition loan, which means, by the time you get to lodgement date for the 24 year, which is the next few weeks, couple of months, those amounts treated as loans under 109 d. Need to be either paid out or put on 109 N terms.

So the decision, as you sort of said, in terms of what people do in the next few weeks, few months, as a result of the full court decision. As well do they continue to apply the Commissioner's view and say, Well, we'll make it 109 n compliance basis. And then do you, when you do that, do you do the satisfaction and replacement the scenario 2 and paragraph 101 of Td. 2211, or do you do the we're trying to Walk the fine line by saying it's subject to a 109 N. Loan. That's 1 approach. Tthe other extreme is to say, the full court's right, and we'll do nothing, and if ultimately this was what the law ends up. that will be fine. If the law, the Commissioner wins on appeal or the laws change. Well, then, it may mean that you've got a deemed dividend arising because the Commissioner's view, either through a court process or legislative change, is proven to be correct, assuming it applied retrospectively. What you do there, or your clients would do then would be, you know. Would they? Could they make a 109 rb. Application. And would that be successful? Because that requires an honest mistake or an aversion of mission? If you consciously followed the Federal Court decision? Is that an honest mistake? You know,I don't know. Between those 2 sorts of extremes, that do nothing approach and the follow the Commissioners approach. There's probably a middle ground, which is which is. you do something akin to the practice statement. The withdrawn practice statement. Where you say, well, what we'll do is we'll start. The Trust will start to make payments, effectively. 1/7th of the principal, plus an interest cost to the private company. They may not formally do the 109 N sort of loan agreement across the top, but there is an agreement which says, we will pay you 1 7th of the principle of the up plus an interest charge, so that you're sort of in a position where you're you're complying with, call it the cash flow underlying the How Division 7. A works in terms of 109 d. And 109 E. Payments. But you're not, you're leaving it as a UPE. So so then, in terms of you know, if the ultimately the Hr. Was successful. Well, there's, you know, there's probably an argument. There's been no real mischief, because you've been paying it back on the same basis of this as if you had put the the loan agreement in place. So I think those are the 3 approaches.and what's best for you will really come down a lot of it to one. The client's risk profile are they risk averse, you know, risk risk chases, etc. And also their facts. Because if if you have an Ea situation. we excuse me, money's actually left the trust, and, gone to us to to a shareholder associate. say, for a loan, you may be wanting to avoid an EA deemed dividend. putting it, putting either the the loan, the line between the trust and the company, for example, or the line between the the Trust and the shareholder associate onto complying terms, because, irrespective of Bendel and the 109 d. Position, you may have an Ea deemed dividend as well instead. Importantly, with EA the timeline is different as well, so like in terms of when the deemed dividend arises.

Robyn Jacobson

Really, we don't have certainty yet. We need to look and watch and wait. See whether the Commissioner does apply for special leave. What would you say to practitioners who are looking to lodge amended assessments or think that suddenly Bendel is going to give them access to buckets of cash at the end of the rainbow that suddenly we've got all these refunds that might come through.

Neil Brydges

My views on amended assessments, and also objections, are probably in a similar sort of vein, as well as what are you amending the assessment in relation too, one and and two, is there something else you should be looking at? So in terms of that first point, if the amended assessment is relation to. For example, the private company saying, I put this interest in my tax return, and did I actually derive it if these things weren't a loan under Commissioner's view, can I object to or take second amendment in relation to that interest income which I've paid tax on. The other side of the coin is, there may be an interest deduction in the trust, for example, so it may be a bit of a zeo sum game. But if you're just looking at that interest well, then the first thing was, if there was a legally binding agreement to pay interest, they may well have derived that interest anyway. The fact you entered into that agreement because based on the Commissioner's view, which the full court says was not correct. If there was an agreement to pay for a loan to pay interest well, the interest’s been derived, so that may be not the best thing to object against. If there has been a deemed dividend.

so that, division 7A was not complied with, perhaps a 109 RB submission was not successful, and the deemed dividends you could potentially look to object against that saying, well, that deemed dividend arose because of your view of the law and your view of the law, Full Federal Court said is incorrect. Before you do, I think the thing to look at is whether, if there was a subdivision EA problem or 100A problem before you lodge the objection or the amendment, thinking, well, there's a saying, you know ‘clean hands’. So your saying, well great, I can object against the deemed dividend under 109d but there would be an EA deemed, otherwise, you might find there's no benefit, or if 100a applied that could go back multiple years. So certainly. what are you objecting about, It was the first point, and also 2, making sure there's no sort of secondary sort of consequences which haven't been an issue at this point. But if you go for an amendment or rejection, the ATO reviews the client's affairs, they may say, hey, you've got an EA problem, you've got a 100A problem, and you might find that you know the benefits of the objection are lost, and worse.

Robyn Jacobson

So, whilst on the face of it, it seems Bendel is a win for the taxpayer, and indeed they were successful in respect of the Commissioner's appeal to the Full Federal Court which the Commissioner of course lost. It is rather complicated, and there are so many considerations, aside from whether or not the UPE is itself a division 7A loan.

Neil Brydges

Yes, exactly right, Robyn. I think it's one of the things that while all tax advisors will be, you know, celebrating the decision. There's still more to go in terms of the appeal process, maybe legislative change. But also, even if it stays where it is, it's working out what that means in terms of your arrangements some will be complicated. One thing we have not chatted about was what the full court did say. While it was not a loan, they said, in the particular facts under Bendel that there was a debtor creditor relationship that was created.

So they said, it was not a loan under the extended definition but there was a debt accreditor relationship. There's issues that remained unresolved because they weren't an issue in Bendel about it. If your facts there's a debt accreditor, relationship created. And part of that was the way it was recorded in the financial statements.

Would that mean that if that UPE which was a debt accreditor, relationship was forgiven, that there could be a deemed dividend under, for example, section 109F. Which is in Division7A, which deals with the forgiveness of debts. Section 109 F does not mention loans. It mentions debts, so there's certainly other things to consider before we sort of get, you know, rushing away and doing things about sort of, you know, forgiving amounts and lodging objections that there's a lot of sort of nuances to work through for us.

Robyn Jacobson

Neil. Thank you so much for your comments and for your insights. It's going to be really interesting to watch in particular, over the next few weeks, and the months ahead where this goes.

Neil Brydges

Thanks, very much.

Robyn Jacobson

I also want to let all of you know that The Tax Institute will be running a webinar on the Bendel decision, and that will be held on Tuesday, the 25th of March. More details will be available very soon, but we will continue to pick up this conversation with a star-studded panel. Thank you again, Neil. Appreciate your insights and thank you to you all for listening to this episode of TaxVibe.

I've been chatting with Neil Bridges, CTA, of Sladen Legal in Melbourne. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute, join us on Linkedin. Thanks again, and till next time on TaxVibe.

Spotting client risk before it bites

Release date: 21 February 2025

This episode of TaxVibe dives deep with Paul Banister, CTA, as we uncover the risks associated with new client relationships. Learn how to spot red flags, mitigate risks, and navigate the complexities of past tax blunders. This episode is a must-listen for any tax professional looking to protect their practice.

Robyn and Paul cover:

Taking on a new client
Practical examples of common risks
What should a practitioner do if they find an error?

Host: Robyn Jacobson, CTA

Guest: Paul Banister, CTA, Grant Thornton Australia

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. My name is Robyn Jacobson. I'm the senior advocate at the Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's greatest minds, drawing on each guest unique perspective to give you valuable and practical insights. You might hear every day. We hope you enjoyed this episode of TaxVibe, recorded live at the Tax Summit at the ICC in Sydney. Today I'm joined by Paul Bannister, CTA, partner at Grant Thornton in Brisbane. Paul is a chartered accountant and has more than 35 years experience helping clients navigate through complex and potentially risky tax and commercial issues. Paul has presented at many professional and business forums, both in Australia and internationally. Welcome to TaxVibe, Paul

Paul Banister

Thanks, Robyn. Nice to be here.

Robyn Jacobson

Now at the Tax Summit, you have been discussing what happens when you take on a client and you discover a whole host of problems. Now, it's interesting when you're working with clients, of course you want to look after them and service them to the best of your ability, but you don't really want to be opening up a balance sheet or a P&L and discovering a whole host of problems that you really wish weren't there. And probably the client didn't even know about.

Paul Banister

No, indeed, and especially where there are brand new client, you don't want to be the bringer of bad news. And, you know, when you're in particular trying to focus on making sure that you're vindicating their decision to come with you, it might not be ideal for you to be just highlighting what issues that they need to consider that, might ultimately cost the money, or at least some inconvenience.

Robyn Jacobson

A really quick question to kick off with. Have you ever taken on a brand new client, delivered that bad news and they’ve immediately left because they just weren't interested in hearing it.

Paul Banister

Well, the answer is depends on how you define immediately. But if you, define, about 30 days. Yes.

Robyn Jacobson

Soon after, I'll accept, yes.

Paul Banister

Yes, yes, yeah.

Robyn Jacobson

And, do you know, if they went back to the former practitioner or did they go to another.

Paul Banister

One, I I'm unaware. However, I believe it was to another.

Robyn Jacobson

Oh, gosh. And that's something I presume the TPB would also be looking at. Because if people are moving around agents regularly, to me, that would be a bit of a red flag.

Paul Banister

Indeed, in this day and age, that would be, I think we think about maybe some of the issues around that somewhat differently.

Robyn Jacobson

Yes. So you've seen it. You've got that sinking feeling when you open up the book. So you think, oh my goodness, there's something here. And you'll run through some examples of, what are the typical things you might say in practice, what sort of errors you are coming across. And of course, what do you do about it? So let's kick off with what are the common things you see?

Paul Banister

Yeah. Well, and we're not necessarily looking for problems past. We're looking at what are the things that might impact your current job that are carry forward from prior years. So but the first thing I look at is the balance sheet and the P&L. And I'm sure that if Division 7A has not been mentioned more often than any other term on your podcast, I'd be fairly surprised. So Division 7A is a is a stand out. So we're talking there about loan balances that aren't moving or aren't moving enough. We’re talking about interest income that might not be showing up, at least to the level that you expect. Any other sort of I suppose, enter into the loan account that might look like it has some potential Div 7A obligations.

Robyn Jacobson

So provide another example. Yeah, I many years ago hit about a firm they had taken over the clients of an older practitioner who was retiring. And the first thing I did was look through the balance sheet just to get a sense of what the company owned to where things were at. And there was a property sitting on the balance sheet. So they asked a few questions about always the property. And, you know, what's it worth now? And the response from the client was that property was sold years ago. Now, what had happened was it had been sold. The proceeds had gone to the company, the proceeds had been taken out by the shareholder. And that property on the balance sheet was actually a non-compliant division 7A loan. Completely missed. And to me, that was a great example of asking the right questions of the client.

Paul Banister

And, well, proof of the balance sheet if I use that terminology, which I've used for my career. But when you're finalising your your current year work and if, you're asking questions to the client to validate, then that would show that sort of thing out. And then, that takes you down a sort of a whole pathway, in relation to the past, some other examples. You, you talk about assets on the balance sheet might be the asset that might be, you know, on the bordering a private versus sort of investment, let's just say the Gold Coast apartment that happens to be a valuable, 11 months, a year rather than 12 months a year. So that might be something that you need to, dig down a bit deeper on.

Robyn Jacobson

Or even those situations where a holiday house and I heard about this one, too, on the South coast. And when you go to inquire about its availability, they are the most unreasonable terms. And so, yes, it's available, but, you know, most need to be a redhead. No offense against redheads. You'd need to be left handed. And you must have a dog that's a particular color in order to have that house at that time.

Paul Banister

So that I think that might be a little bit problematic and, might need a at least a serious conversation with your new client as to as what sort of, reasonable guidelines of, for availability might be.

Robyn Jacobson

Now, we could talk about Div 7A all day, but what are the topics? What things pop up? And as you say, it's not that you're looking for them, it's just that they kind of jump off the page with you.

Paul Banister

Yeah. Well, if you think about what do you need to be able to do a good job going forward? It's access to documentation and documentation be one thing. But obviously in the private space there's a lot of trust. So getting access to the the trust documentation, the trust date and all all of their various revisions, getting access to trust resolutions as to application of previous years income, just so that you can help build a profile, is to help you help the client administer each of their entities going forward, that you've got a reasonable amount of information and source documentation to to carry forward. In addition to that, you know, some of the basics. They might be prepayments on the balance sheet. And maybe, you know, I've seen it where the the balance doesn't change, or the trading stock valuation where the balance doesn't change, over a few years. So you might need to dig a bit deeper into those sort of issues to see whether or not they're the right approach in terms of sort of calculating those balance sheet set of items, valid, whether it's, external finance. So you've got interest expense.

Robyn Jacobson

Yes.

Paul Banister

You want to make sure that that's associated with an asset. And sometimes it's very hard to determine that because there might be a lot going on, on the P&L, but other times it might be a very simple P&L and it happens to have interest expense but no assessable income. So that should probably help inform a different conversation that you might have with a client.

Robyn Jacobson

Another example, and I think in both interest and division 7A I in the same sentence, there was a question that came in two years ago from a practitioner who said, if I don't have a desirable surplus at year end, do I have a division 7A problem if there's a loan? And I said no, and that was supposed to be a comma, not a full stop, and they went to their own and said, great, thanks. And I said, hold on a second, but look at why there's no discernible surplus, because if it's simply that losses were made, then that's fine. You might have had a desirable surplus, but by the end of the income year it's no longer there. But equally, it could have been that money has been borrowed on lent. How did they borrow if there is not a suitable surplus and maybe there's an interest tractability question here and date.

Paul Banister

And this is where I suppose the accountant's way of looking at the world is some can be very valuable to help identify and manage risks.

Robyn Jacobson

What do you do when you, a practitioner picks up a new client in, let's say, July or August? September. And you ask the client for the trustee resolution. So you can prepare the trust accounts and the beneficiary through channels, and they can't produce them. Or you have a very strong sense that they were not done by June 30.

Paul Banister

And this is, I suppose, where some of the more risky elements to a new appointment arise. And the first thing, and I suppose from a tax agent's perspective, one of our jobs is to inform clients of their rights and obligations. So if, the rules and they're pretty clear cut from the commissioner's policy about trust distributions, about they need to be in writing by 30 June, if that is not met, it's not necessarily the end of the world, but it might be something that you may decide will client. There's a shortfall of information that you've provided me here. Maybe that's something that we need to get some legal advice on to determine what the true position of that trust is, and whether or not it has provided present entitlement in that year. So that then that can brief you to handle that year's 30th June financials and tax returns, etc. if the client is balking and willing to cooperate in relation to that, then that does become problematic. And for instance, it might be that the client's risks become your risks if you don't handle it properly. And you know that at the sort of pointy end and work, you know, we'll forget about the code of conduct per say at the moment, at the pointy end. That means under our professional standard obligations is, we should consider withdrawing from the engagement.

Robyn Jacobson

I've heard stories over the years about practitioners who've been in the witness box for particular cases, and a question I've asked has had a very, very consistent response. And that is, how did you feel when you were in that witness box? And the same word was used to describe the experience? Daunting. It didn't matter how experienced they were or how strong they were in their own convictions about what they'd done. The experience of being cross-examined, interrogated by the other side was daunting. And my point is that if you're going to do something incorrectly for your client, the client is never going to lie to say to you. You shouldn't be. Similarly lying to cite your client.

Paul Banister

Well, this, comment is applicable across many areas and begin with the end in mind. And if you think about how these situations might play out favorably, unfavorably, points in between. Think about that and in the context that, you explain. Well, it it could play out very badly where, you know, using the vernacular, you're thrown under the bus. And you'll have serious questions to answer for professionally, aside from your responsibility on that particular engagement.

Robyn Jacobson

Absolutely…. Can you explain where the practitioner's responsibilities or obligations start and stop? Yes. You need to tell your client and explain to them their obligations or what will happen as a consequence if they don't take certain action that I, you obliged to report them will go to the regulator side of this.

Paul Banister

So this is where there has been changes with the, recent, changes to Tasso, to the code of conduct, and that is, you are required to dob in the client in relation to material matters. So if you do have concerns that you made to make sure that, they are, informed to the commission.

Robyn Jacobson

And we’re still working through because the government has recently announced that they are going to be, revising the wording. And this is a response to concerns from the official associations and the professional broadly. And we're yet to see that wording released publicly.

Paul Banister

Well some. Yeah. And I certainly a watch this space. And I think even if you just look at the last 2 to 3 months, it's sort of gone from quite a few different steps. So I think everybody needs to make sure that they follow that situation closely because some but initially it might mean that we approach things differently. And I understanding it will change. And then separately, one of the responses that we'll need to make will be to update our standard engagement letters so that it clearly sets out to the client as to what the issues are, so that, for instance, the client should then be under no misunderstanding when I appoint you that this is a consequence of appointing you as a tax.

Robyn Jacobson

Yes. Let's tend to the former agent. Now. The breach reporting rules started 1st July this year for breaches on or after that date. And there may be technically a breach of the code or a suspected breach of the code that took place before that date. So arguably would not fall within the provisions. But is there still a moral or an ethical obligation? If you see quite a courageous behaviour or you see returns that are just so blatantly, incorrectly prepared year after year, and maybe it's not the first time that you've taken over from this agent.

Paul Banister

Yeah, yeah. And that's a difficult one because it's, the obligations that you have, to inform your client of what you suspect is the case. And hopefully you'll get cooperation for the client to, have some expanded scope to explore it further. Or at least encourage them to appoint someone else. It might be a lawyer, for example, to give that, you know, a full consideration. And sometimes that might be addressed or it might be, explained and you can move on, but other times, yeah. If it if it looks like it's a great just behaving particular pattern, then you need to give consideration to what you do while we're still progressing into the new environment, there's no specific obligation upon you to inform, you know, the, regulator, but the legislative framework invites you to bring that to their attention.

Robyn Jacobson

What about the capacity of advisers? So we know that accountants are given the the ability, the power to advise on tax law because of the Taxation Services Act, we then go to state based taxes that are not covered by Tessa. We've got lawyers who are tax agents. We've got accountants who are also lawyers. So there's a lot of cross-pollination across the different disciplines. And so it's really important to understand the capacity in which you're advising. And also I'll just bring kind that as well.

Paul Banister

Yes. Well I suppose one of the things if you start with the proposition that if things might go wrong, they will go wrong, then that's where you need to make sure that you've got, engagement letter, that it well defines your scope of work and in particular what's not in your scope of work. You need to consider, especially that the things that are in your scope of work, you're qualified to do now, aside from the professional standards, you know that you should only take a, an appointment for which you, you know, you have competency and you're you're qualified to provide those services. There might be exceptions in your professional indemnity policy to say that certain things are not covered. Now, the example might be things like payroll tax and stamp duty, which are state based taxes. Yes. As you pointed out in your question, that they're not things that a tax agent is registered under a Tessa to provide services in that area. So the question is whether or not you are otherwise qualified to have the skills and competencies in that area to provide, and if not, then you need to have a colleague or, third party to assist with those obligations. Otherwise if it does go wrong, then you stand to have some compensation claim against you that might not be covered by insurance.

Robyn Jacobson

I'm also thinking through the situations that's more likely to go wrong are the situations where they're more likely to have text. It's for example, if you pick up a client and you see their, historical superannuation guarantee shortfalls, then we don't need to pull apart all the different components. But it turns into quite a hefty bill when all that adds up. And of course you've got your non deductibility. But on top of the text it they then have to arguably pay for your services to unpick it all. Putting the necessary history statements if they're going to be properly complied from here on in I'm thinking of those that have built up substantial text. It's through activity stipends, GST, withholding, whatever. And then we've got issues with director penalty notices and mogadishu's with trying to negotiate payment arrangements. All of this takes time, and your time is costing the client money to the extent you can pass it all. In other words, someone's got to pay for this or what? They drop out of the system altogether by not engaging an agent, and then they're not likely to manage all this on their own.

Paul Banister

Yeah. So this is, I suppose if you start from the practitioner and firstly and then go a bit wider, I think from the practitioner's perspective they need to undertake some proper due diligence, have some take on procedures that does explore what are the issues that are current, that are looking that you might need to deal with in the first year or so of the, relationship that might be sort of pressure points. They might ultimately, you want your clients to be able to afford to pay you for the services they want you to perform. Yes. Do you want the clients to work with you to achieve success generally? Right. So if they're not really positioned to be that because of the state they're in, then maybe you're not the right advisor for them. Yes. Maybe you should introduce them to someone else that, for instance, might be able to walk them through a sort of a, you know, stepping stones from something financial uncertainty to financial certainty. Yes. I look at from that perspective, individually, but then from a broader perspective, and this is, I suppose, a question, profession wide question. It's a little almost like an access to justice. Question is yes. People, they struggle with the tax system because it's so complex. So there needs to be some availability to get some advice to help them, go through that. So things like tax help and whatever it is that you can draw on the ATO to provide some assistance. But depending on the sort of nature of the the business or the client or the entity, it's often unsuitable. So you need to direct them to the right sort of person that might be able to provide help, and it might be multiple people that are required, to just sort of navigate them through a few sort of, you know, choppy series of choppy waters before they, get into some, wide open space.

Robyn Jacobson

So that was my next question at the start. How, in your experience, effective in play been or how helpful have they been or supportive when you go to them with a situation? You know, I've just inherited this situation, it turns out with, you know, I didn't some Pandora's boxes of we've turned some stones over and found a whole lot of miss here, and then you're trying to work through it with the ATO. Do you find that they're generally very open to, them approaching you and trying to resolve those problems?

Paul Banister

I think it depends on the issue. And like, for instance, one example might be problems that relate to family trust, elections and enterprise in the elections. And, and really the hands are largely tied. And it's just a problem that, doesn't go away easily. Yes. There might be some issues a lack of documentation where, you know, I like use the example before about the retired, person that maybe didn't approach things with the same degree of alacrity that you might. So, yeah, that can just help through a few sort of, yeah, uncertainties. But I think you need to look at each issue that's confronting you and determine, well, what's the best approach. And, and not every situation lend itself to just, going across and saying, here you go ATO, here's the whole situation. Help me out here.

Robyn Jacobson

And a week later, it'll look shiny again.

Paul Banister

Yeah, yeah. And especially because you've got a new client. A lot of this is coaching and managing expectations. Because as soon as you identify a problem, it's a bit like in business they will problem fix, move on. And where there is, a solution that needs ATO input, it's a prior issue, so it's only got limited resources. They're not going to prioritise resources urgently to solve this problem. And that might be something that affects 2 or 3 years ago. Yeah. And it just needs to take its time to work through. And that can be quite difficult for, clients that, sort of get anxious about this sort of thing because I might have come from a previous relationship where they, they might not be the same level of proactivity, of maybe dealing with regulators as you might have. And final point, I suppose, on that, is I think that the ATO is open to being approached on these things and, I think they've got a job to do. So you understand that. But, if you identify problems, take to them. We have a self-assessment system. Let's use it, including making voluntary disclosures, which at least helps the level of penalties and potentially interest that might be charged to your client to help them solve a problem rather than leaving it there so that they need to be, you know, it might blow up one day, you know, due to it review. Or maybe they want to sell their business and the entity goes with that and they need to deal with it all at once.

Robyn Jacobson

Problems don't just go away by themselves.

Paul Banister

Correct.

Robyn Jacobson

One of the very interesting issues that was raised in your session was about the amendment period. So if you discover an issue and let's say it is one month short of, let's assume it's a four year amendment period, ethically, do you sit on it and wait for that months to pass, or do you act on that and bring it to the attention? What's the answer?

Paul Banister

Yeah, I strongly think the answer is to make sure that you get it to if if the approach to the ATO is the right solution in that context, absent the question about amendment period, get it to the ATO as soon as you can on that, because if you are seen to be sitting on it and bearing in mind the time that this is examined is 2 to 3 years time when it's first discovered by a regulator, that can really reflect poorly on you and can reflect poorly on your client. If you discovered it at one month out and you've just conveniently missed, informing them, on time.

Robyn Jacobson

We could be running into problems with the honesty and integrity Code item 1.

Paul Banister

Yes. Well, and bearing in mind, of course, part of the answer to this might be your client, taking it in and saying that they're willing to, agree to extending the amendment window anyway in relation to the issue. I'd so. So it depends on how that plays out. But if that's not on the table, then, you know, I think you'd need to encourage that going to the ATO just to, to manage your risk and manage your client risk. Because the other thing as well as you've identified one issue here, there might be another three that you haven't discovered, so that if there is evasion alleged two years later, all issues are on the table.

Robyn Jacobson

And there’s no amendment period for fraud or evasion.

Paul Banister

Correct. So if you focus on that, you take it and try and resolve it. And and it may well be that they don't get to it and, so be it. But I think, you know, you've got to do your part.

Robyn Jacobson

Okay. Paul, thank you for your insights. It's been really interesting both listening to your session and also having a chat with you now.

Paul Banister

Thanks, Robyn. I've enjoyed the conversation.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Paul Banister, CTA, from Grant Thornton in Brisbane. If you've enjoyed this episode, we'd love for you to subscribe, rate and review wherever you listen to your podcasts. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership of The Tax Institute could be just what you need. Stay connected and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. We look forward to you joining us next time.

2024 hits and misses, and expectations for 2025

Release date: 24 January 2025

In this episode of TaxVibe, Robyn chats with Tim Sandow, CTA, Tax Partner, BDO, and Julie Abdalla, FTI, Head of Tax & Legal at The Tax Institute with their reflections on the hits and misses of 2024 and their expectations for 2025 on matters of tax policy and administration.

They cover:

Reflections of 2024, including TASA, IAWO, and more!
As The Tax Institute’s President for 2025, Tim’s focuses for the year
The Tax Institute’s Tax Policy and Advocacy priorities in 2025
ABUMs – announced but unenacted measures
Upcoming budget and election

Host: Robyn Jacobson, CTA

Guests: Tim Sandow, CTA, Tax Partner, BDO, and Julie Abdalla, FTI, Head of Tax & Legal, The Tax Institute

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute, where we peel back the layers of the Australian tax world.

I'm Robyn Jacobson, your host and the Senior Advocate at The Tax Institute. We bring you the sharpest minds in the text profession, digging deep into their unique insights and sharing nuggets of wisdom you won't find elsewhere. Always keeping it real and interesting.

So sit back and relax and let's dive into the world of tax, one conversation at a time. We hope you enjoyed this episode of TaxVibe.

I'm joined by Tim Sandow, tax partner at BDO in Adelaide, and Julie Abdalla. Tim has more than 30 years of experience as a tax professional, including 25 years in the Big four. He provides income tax related advice to a variety of private and large public companies, as well as multinationals. Tim is the partner leading BDO’s national tax risk and ethics group, and was a regular presenter for our TASA related webinars last year. Tim is also the national president of The Tax Institute for 2025, and is the South Australian representative on the National Board of The Tax Institute. Tim is a chartered tax advisor of The Tax Institute and a Chartered Accountant with CA, ANZ.

Julie is the head of Tax and Legal at The Tax Institute and is an FTI. Julie has practiced in the tax teams of the Big four and top tier law firms in Sydney and Melbourne, and in London. She has expertise in law and policy across a broad range of taxes and industry sectors. Julie represents The Tax Institute in several external forums, including the ATO’s National Tax Liaison Group and the Australian Treasury's Tax Treaty Advisory Panel, and has appeared as an expert witness in several Senate committee inquiries. Tim and Julie. Happy New Year and welcome back to both of you to TaxVibe.

Tim Sandow

Thank you Robyn. It's great to be here in 2025.

Julie Abdalla

Thanks for having us, Robyn.

Robyn Jacobson

Pleasure. So look, somehow the year has already come and gone. I'm talking about we're already well into January. There's so much ahead of us. So much to be excited about. Lots of work ahead of us all. So, can I ask you a personal question before we get into any of the tax talk? It's so important for people to relax over that summer break, to relax and recharge and mentally come back with a fresh mind.

How do you both relax over that period? So, Julie.

Julie Abdalla

Well, I spent some time away with my family over the break. We had a good two weeks off and we had great weather in that time, so I spent a lot of time at the beach just relaxing, switched off from my emails and it was really nice. We've had a real change in the weather since then, but it was a beautiful time over the break.

Robyn Jacobson

Yeah, there's something about the sand between the toes. It's good for the soul. And Tim.

Tim Sandow

Robyn, we spent two and a half weeks in Tasmania. We were seemingly we were by the beach, walking along the beach, doing some hiking and camping and relaxing and, I guess just trying to, you know, put 2024 behind us in a good way and sort of mentally getting ready for 2025. And also, we live in the Adelaide Hills and we have chickens. So, I spent part of my time building a mobile chicken coop, that we could, take around our place and, have the chickens do all the hard work in the garden for us.

Robyn Jacobson

Alright, while you're still in frame. You are the president for 2025 of The Tax Institute. So congratulations on your appointment. What are going to be the main drivers for you? What are you focusing on? What would you like to see as a legacy of your presidency?

Tim Sandow

Thanks, Robyn, and thanks for, the congratulations. I was reflecting over the break, and as of, we're walking around Tasmania about how does it feel being a tax advisor in 2025 and it sort of feels like it's a bit of a frustrating time. It sort of feels like over 2023. In 2024, we had a lot of focus on the, conduct of tax practitioners, and we saw a lot of changes. We saw the, mandatory reporting, for breach reports. We saw, changes to the code of conduct, and it did feel like we were under a bit of a attack. But at the same time, we also are dealing with a very complex tax system, and most of us are trying to do our best at navigating our way through the tax system. So just before Christmas in the in tax, Rob, I was talking about, wanting to really focus on The Tax Institute being the voice of tax and constructively advocating on positions to help our members in the tax system more broadly. But I very much for that practical mindset. And I guess over the break, I was thinking about what does that actually mean? And for me, it's about how do we help tax practitioners have more certainty in the advice they're providing to their to their clients? So how do we hope our members in that certainty? And effectively, there was three things that I'm really keen to focus on this year. Three priorities. One was around tax reform.

The second one about dealing with announced but unenacted measures, or ABUMs, as we like to call them, and the last one was around providing more certainty in the way that the tax system is administered. And maybe if I can just touch briefly on each of those Robyn, and then we can sort of draw out a bit more as we go through. If I think about tax reform and, you know, over the break or not in Tasmania, but I did reread the parts of case the change, and it is interesting that it's as relevant now as it was when it was written back in 2021. And I guess while achieving holistic tax reform might be something that goes beyond my presidency in 2025, particularly if that involves changes to the GST, it does feel like there's a lot of areas that we can focus on where they can be more certainty, you know, and I'm thinking here about and particularly about measures that deal with small businesses, the number of different thresholds. And, you know, when you're applying the small business concessions, it's really hard to navigate your way through and really easy to make a mistake inadvertently. So you look at that every time I think about those rules is at a $2 million threshold. 5 million, 10 million, 20 million, 50 million. It would be wonderful to have one simple definition of what are small businesses? So that we can, apply them. I think this is lots of opportunities for looking at those sort of thresholds, rewriting Division seven. I probably even rewriting Division six, the, the trust provisions. You know, now that we've had some experience with 199 billion, if there's parts of that legislation that was written a long time ago that no longer works. I'm a big believer in simplicity. And if we look at those sort of rules and think these rules should be applied by small businesses in a really straightforward context, they shouldn't need to get very complex legal opinions about how those rules apply. So should little be rewritten. So it actually does what it says it's going to do. And I think there's just this real opportunity. Maybe if we can't tackle wholesale tax reform, we can at least tackle simplicity. And actually doing the law, doing what it says it should do.

Robyn Jacobson

Tim. You’ll remember the simplified tax system, as many of our listeners will. And that was a regime that was around from 2001 to about 2007, and most formed the view that it actually wasn't a simplified tax system. It was a rather complicated tax system for simpler businesses. So what you're saying has so much resonance for me, because you look at all the different definitions, and that's before you start bringing in ASIC definitions and fair work definitions outside the tax system.

Tim Sandow

I think it's such a complex area for what should be, you know, small businesses should be able to focus on running their businesses. They shouldn't have to spend huge amounts of money complying with the system. I mean, maybe I'm talking against some of our members interests here. But, you know, I think there is a great need for simplifying thresholds, simplifying rules so that the rules do what they say we're going to do. As I said, some of these, provisions 199 and so on. I've been around for many, many, many years. And the question I'd have is in 2025, are they still fit for purpose and are they still doing the things that they should be doing? The second thing that I was going to talk about was just around dealing with the announcement on the measures. So again, around, you know, it's really frustrating as a tax practitioner when a client says to you, and I'll use the instant asset write off as an example, a client says if I purchase this piece of plant equipment, it's going to cost me $10,000. Do I get a tax deduction for it? And I have to say it depends. Again, it's a frustration that some of the things when they get announced take months to get enacted. But I really see the point in having an instant asset write off threshold legislated on the 28th of June. Because if the purpose of the threshold is so, the rule is to encourage businesses to purchase equipment, then they've got no time to do it. So what you're doing is rewarding behaviour that's already happened.

Robyn Jacobson

Particularly when it's announced on budget night. It's designed to provide that incentive. It wasn't just months. I mean, that was turning into every year before it was enacted.

Tim Sandow

Yeah. And the one that came up really raised its head again at the end of last year for us was around, corporate tax residency. And particularly it got light again because of the changes overnight to the reporting for yeah, for financial reporting for some of the major companies and these rules, they announced the change in the 2020-21 budget. So in October 2020, that's four and a bit years ago, they, set to apply from 2017. Well, that's almost eight years ago and we're still waiting. And so as a practitioner, when I'm talking to my clients and I say, well, we've got a company overseas, why are you telling me that that's it's how you operates business overseas. Why are you telling me that's an Australian resident. You know, it's very difficult to provide advice with certainty and sometimes it doesn't even change amount of tax payable. But when you get into the, the detail of lots of the other rules about bringing dividends back, maybe even some of the integrity measures like the anti-terror new measures and tax consolidations and other things, they don't apply particularly well when they should. And it's this extra layer of complexity that just shouldn't exist. And it's been announced, but it just hasn't ever been enacted. And it's a really frustrating thing when you're a practitioner wanting to do the right thing, wanting to provide your advice with certainty to clients, but you just feel like you can't quite get there. And then the last thing is, I'd love to say I think the tax office does a great job, but there's a couple of things that I'd really like to see around having some more certainty in the way that, the law is administered. One is around consistency, and I understand that, when you've got so many employees in an organisation that different people can make different decisions. But, you know, we've seen instances where companies within a wholly owned group can ask for a lodgment extension. Same facts, even the same case officer. One company gets denied and the other one gets granted.

And there's no logical sense that it's so difficult to explain that to a client. And then lastly, I just, rather it was about getting access to the right people in the tax office and particularly in the private ruling system. I think there is still some improvements that can happen. There. Usually you requesting a private bonding ruling because you want certainty of the outcome. So a client sold their business, where administering a deceased estate. People want to know how much tax to pay. They have to pay so they can get on with life and reinvest or spend or whatever they want to do with that money. Sometimes those ruling requests take a very long time, and it's very difficult to get access to the right technical people to have the discussion, to keep the the ruling moving. So that's a very long answer. But if I just sort of break that down, the priorities for me this year are around what can we achieve in tax reform? How do we deal with the ABUMs? And then how do we get more certainty in the way the law is administered.

Robyn Jacobson

Yeah, thank you, Tim. And the issues you raised about getting responses to private rulings, getting objection decisions, getting deferral, certainty, GST, remission, these are all very common things at the moment.

Tim Sandow

Yeah.

Robyn Jacobson

Julie I know a lot of that will resonate with you too. We've talked often about the ABUMs and we've talked about challenges and with policy, with administration. What are your key priorities this year.

Julie Abdalla

Thanks, Robyn. So I think, you know, last year was such a big year. And if I'm, you know, gazing into my crystal ball, my prediction is that this year will be another big year for us. One of the key themes that was coming through, a lot of what Tim was saying is the uncertainty that people are dealing with, both as advisors and as taxpayers, and some of these things are really easy fixes. I think one of the key priorities for us is listening to and supporting our members. So we are trying to do this on very different levels. We are delivering content that is useful for them in their day to day practices, and that helps them to support their clients and navigate some of this uncertainty in what is seemingly a constantly changing legal and regulatory landscape. So we're trying to provide resources that assist them in what they do on a day to day basis, and so they can also understand and meet their own obligations as a practitioner. And then on a higher level, we're also advocating for them to the government. So that includes the government that we, when we're speaking on behalf of our members and the system in Parliament, when we're dealing with the ATO and other stakeholders in the system. And over time, we've built really strong relationships with stakeholders in the system. And we often say that positive changes result from our advocacy efforts, whether it's through our submissions or our role in consultations or otherwise. And that goes to our voices. Tim mentioned before. That goes to our role as the voice of tax in Australia. We're advocating for our members, and we're advocating for improvements to the system that will benefit the society as a whole. So I think that's our priorities in a nutshell.

Robyn Jacobson

Tim, let's return to 2024 for the next little while. We had some major changes to the regulation of the tax profession. And by that I mean registered tax agents and registered agents. Of course, lawyers will generally be sitting outside. What we know is the tax agent services Act, but there are certainly some lawyers who are registered as tax agents. And we have some new rules begin mid-year to do with break reporting and then some further changes, which, look, I've got to say from Julia, my perspective pretty much dominated that a year. I feel like I lived and breathed the last year with all the advocacy work that was done and engaging with government. Can you briefly talk us through where did we land? What does this mean for practitioners? What's the way forward for all these thousands of practitioners that are dealing with new rules?

Tim Sandow

Yeah. Thanks Robyn, look, I, I think there's two aspects to it. One of them is the breach reporting rules. And it's, with all these different dates, it's easy to forget what's applying and when. So the mandatory breach reporting rules applying from 1st July 2024. We probably haven't seen too many examples yet of when breaches have been reported. I'm aware that the Tax Practitioners Board has had some, but I think that given that the breach must relate to something that's happened after 1st July 2024, we'll probably see more of those sort of, issues that where we may need to make a decision about whether they're being reported or not. As 2025 progresses. So, the likelihood of us picking up a new client or doing something with a 30th June tax return, 30th June 2024 tax return has been lodged and we see an error in it. And then we have to make a decision about, well, does that make the test for is it a one off material era? Is it a systematic area. Do I need to be reporting. You know, and the unfortunate thing here is that it is a mandatory reporting hour for the yourself or of another practitioner. You don't have a choice to sit back and say, I don't feel like reporting that person. It is mandatory. So I think as we're coming to 2024, we're going to see more and more of our members having to turn their minds to whether or not they need to be undertaking a report. Of course, the other changes, to the code, you know, particularly around making false, misleading statements and, keeping clients informed. Some of those are some practices for the larger practices of more than 100 people. They're applying from 1st January. So they're already applying or other practices that apply from 1st July 2025. So I guess over the next five and a half months, there'll be, a number of our members who are looking at how they do comply with those new measures.

Robyn Jacobson

And more information and guidance to come on all of that.

Tim Sandow

Well, that's right. And of course, the TPP finalised their guidance, virtually on the on Christmas Eve, I think it was Julie or thereabouts. So, it'll be a little bit of a Christmas present when people come back to it. Yeah.

Robyn Jacobson

Julie, we also saw some new reporting requirements come in last year for the reporting of self assessing. So in other words, if you're a non charitable not for profit organisation you now need to work through a new process to basically establish that you are able to self-assess and that you are tax exempt. So what does this mean. We're still seeing this roll out in practice.

Julie Abdalla

Yeah. That's right. So for non charitable not for profits with an active ABN. Where they're seeking to be income tax exempt, they now need to self-assess against eligibility criteria in one of eight categories. And they need to do this by lodging an annual not for profit self review return. So an SRR, another acronym to add. Now the new annual reporting obligations came into effect from the 1st of July 2023. And since then, about more than 14,000 not for profits have lodged their first, self review return. The due dates were on the 31st of October for 2024 for the 2023-24 returns, but the ATO have provided extra time for not for profits to lodge their self from year returns until the 31st of March this year. Now, you don't need to do anything if you're, within the scope of these rules, the time extension is already there. But if a not for profit is taxable, it doesn't need to lodge a self review return. It must instead lodge a normal income tax return or notify the ATO if a return is not necessary. And it might need to consider applying the principle of mutuality. To their income. And that's a legal concept that an organisation can't derive income from itself.

Robyn Jacobson

One of the biggest issues Julie is that the ability to lodge this return, it's primarily done electronically or digitally, which means these organisations need to access online services for business. To do that, you need a myID, which is the brand new name for what was mygovID, finally removing hopefully that confusion that, emanated for years. But to do that, you need up to date data in the Australian Business Register and you might even need to engage the tech items, and only about something like 8% of not for profits that are not charitable previously had used a tax agent. So this could be a whole new line of work for tax agents. But more to the point, we’re going to see these not for profits engaging, having to engage in the tax system, perhaps in a way that they haven't previously.

Julie Abdalla

Yeah. That's right. So some of this will be quite foreign to a lot of these not for profits. And there will be an additional compliance burden, especially in the initial stages when they're first getting set up and making sure they have the right information to be able to complete these on an ongoing basis.

Robyn Jacobson

And why is that happening? Because the ATO found, through its work that too many of these, not for profits, were getting their status wrong. They were deeming themselves to be tax exempt when maybe they perhaps weren't. So we need to see where all this lands.

Tim, you've already spoken about the instant asset write off and you mentioned, the 28th of June being the date that the 20,000 threshold was finally enacted. And we got that certainty for the 23-24 year. But it seems that no sooner have we finally got certainty on one year that we've then got uncertainty for the next year. Can you talk us through where we're at with the 24-25 measure, which is proposed to, again maintain this 20,000 threshold till June 30th this year?

Tim Sandow

So, Robyn, my understanding is that the day we're talking that hasn't been legislated yet, I don't really understand why, it hasn't been legislated. I don’t understand what's so hard about it? It would be great to see a permanent threshold in the legislation. And I know that's something we've been advocating for for a while as The Tax Institute. Just the removal of uncertainty? Because, as I said, otherwise, it's just very difficult as a tax advisor, to be able to tell people whether they get tax deductions for things and it doesn't feel like this is a particularly complex or even contentious area of the law. So I don't really understand why it keeps getting deferred.

Robyn Jacobson

We are seeing the political football being kicked around a bit. So we know that the coalition are pushing for a permanent threshold of 30,000, and we've suggested 30,000 as a permanent threshold for many years now. So it's consistent with that. But we've also seen the government maintaining up to 20,000 for just one year. But this one year extension has been going on since 2015. So this would now be the seventh time we've seen a one year extension. So agree this uncertainty has to come to an end. But at the moment, was the relevant schedule removed entirely from the relevant bill? It seems that this will be perhaps not certain until after the election, which is not great either, because we're looking very much into May or June before we might find out what's happening this year.

Tim Sandow

And that's exactly right, Robyn. You know, particularly this year is an election year. It could be June again before we know. I mean, it could even be after June. And then as I said before, you know, if the policy is to encourage businesses to invest in new equipment, then all you're really doing is rewarding past behaviour. So which is not a bad thing. I certainly like getting tax deductions for our clients, but you don't have this alignment with policy and the tax law.

Robyn Jacobson

And it seems to me that squabbling over a $10,000 difference in thresholds, when all of this is a timing difference anyway, can't we just move on and debate the really big issues in tax rather?

Tim Sandow

Oh, I was going to say, it feels like there's bigger issues in the economy than 20 or $30,000 difference in the instant asset write off.

Robyn Jacobson

Julie, we've seen some very recent changes that kicked in 1st January this year to do with the foreign resident capital gains withholding regime, and that name's always been particularly confusing because it's not confined to capital gains and nor is it confined to foreign residents.

Julie Abdalla

No it's not. It is a bit misleading. So you're right. We had some legislative changes from the 1st of January this year. And what they've done is to increase the foreign resident capital gains withholding rate. There's you mouthful from 12.5% to 15%. And they've also removed the $750,000 threshold below which the withholding would not normally apply for transactions involving taxable Australian real property and certain indirect Australian bill property interests. So now the key change there is that Australian residents selling real property for less than 750,000, they'll be affected as well. And so they'll need to obtain a clearance certificate from the start of this year to avoid withholding on the sale of their homes or investment properties. So something to be really mindful of that it's not just about foreign residents.

Robyn Jacobson

And since the rules have been around since 2016, anyone with high value property should be reasonably accustomed with these rules by now. But as a vendor, you've got to provide the certificate so you don't have withholding taken out of your transaction proceeds. But similarly, the purchasers generally know now that they need to acquire one from, from the vendor so as they don't have a payment obligation, that if people have been dealing in property below that threshold, they may not have ever encountered these rules.So I feel like there's a whole new cohort of people that this will be unfamiliar, and they really need to be getting advice. I will be relying on conveyancers and real estate agents just to increase awareness that they can give advice, of course, but just to increase awareness.

Julie Abdalla

And it is something that the tax advisers will need to be aware of as well, to be giving advice to their clients on what needs to be done.

Robyn Jacobson

And Tim this is where advisors can be proactive, because there's no point saying to your client when they come in after year end. And so we sold a property during the year, whether their home or whether an investment property and the purchaser simply might come in and say, oh, we bought a property. Well, did you get a clearance certificate from the vendor or to the vendor if you wanted the purchaser? Oh, we didn't know about that. It's all too late to do something about it then.

Tim Sandow

Yeah. And I would hope, Robyn, that Conveyancers would, would be across it as well. So, hoping the risk of that happening is, is small, but, but you never know.

Robyn Jacobson

Yeah. This next one. I don't know who I should, direct it to you, because I know you both got, great interest in this space, corporate taxation. And maybe you can divvy it up between you. But we might start with you, Tim, because you've already mentioned the corporate tax residency rules. We're still in limbo, as you say. So any clarity on the horizon here.

Tim Sandow

Robyn, who knows. I mean, I guess that was, I said that I reread, some of the Case for Change, over the Christmas break, and I read it with mixed emotions because it was in one way it was, good to see that all that hard work that went in in 2021 is as relevant today as it was back then. But on the other hand, it's sort of disappointing that we haven't really made much progress. And there was a comment in the case for change to say it's really encouraging to see that, the government has accepted their Board of Tax’s recommendation, and, we'll be making the change to the corporate tax residency definition. And so to be sitting here three and a half years later and still waiting, it's quite frustrating. And as I said, it's it's just the the uncertainty and the extra work that it creates on something that shouldn't be complex. So in other words, you know, if, for example, you have an overseas company and you saw this, an Australian resident, you know, there's even a question, where is that company now? Join the tax and solidarity group. And if it does, then I have to go through the process of registering that company for an IPA. And it's just a lot of work, but no extra tax and no extra VAT for the client. So I really do hope that that change does get legislated quickly, because it's one of many things that are in there which just creates a lot of work for no value for anybody.

Julie Abdalla

And it's got a bigger picture implication to it as well in terms of foreign investment into Australia. I mean, I think the amendments themselves would provide a lot more certainty to foreign residents, looking to invest in Australia and that that has a bigger picture implication than in terms of supporting investment here. And so I think we have very much advocated for consultation to proceed with this. There's no real need for delays.

Tim Sandow

That's right. Well, I mean, a lot of the heavy thinking was done in the Board of Tax, paper, and none of that's changed. So it shouldn't be that difficult.

Robyn Jacobson

Julie, another aspect of the corporate taxation rules – we’ve seen some pretty big changes in what's called pillar two. And many may be familiar with that. Many may not be. Thin capitalisation, something called the deduction creation rules. And I think I am talking English there, and country by country reporting rules. That's all a big mouthful.

Julie Abdalla

There has been certainly a lot going on in the large corporate end of town. So you've got you mentioned pillar two first and that we've recently had this legislative package that has established a framework around the OECD's global anti base erosion rules. The globe rules. And so this is aimed at ensuring that multinationals are subject to a minimum level of tax on the income that arises in the jurisdictions in which they operate. And then from an Australian perspective, an Australian domestic minimum tax for certain very large multinationals. And they're the ones with an annual global revenue of at least €750 million. So it's not actually affecting quite so many Australian taxpayers. But where it does, the rules are very complicated. There's a lot of compliance to it. You also mentioned think cap. So we did have almost a complete overhaul of Division 820. And that has basically attempted to bring Australia more in line with the OECD's best practice approach in BEPs action item four. And so the reforms now limit the way that amounts of debt can be deducted by multinationals in an income year in a few different ways. You've had the safe harbor test replaced by a new fixed ratio test. The arm's length test has now been replaced by a third party debt test. And there's a worldwide gearing test that has replaced the group ratio test. Those amendments became law last year, but they actually apply retrospectively from the 1st of July of 2023. And then you mentioned the debt deduction creation rules, which is English. And that's a new measure that has applied from the 1st of July last year. Now the last one, I'll tick off before we continue on is the country by country reporting. And those changes have simply required certain multinationals to now publish selected tax information on a country by country basis. And there are some exceptions to that. But again, it's only affecting those very large multinationals.

Robyn Jacobson

It seems that there's not too much lemon juice left in that lemon, but they’ve squeeze just about everything they can out of this sector. Is that a fair statement?

Julie Abdalla

On the one hand, if you look at the tax gaps, for example, the large business tax gap is actually quite small in terms of percentage, and the dollar value is enormous, but it is actually quite small. So they have a very high compliance rate from an Australian tax perspective. And you actually do have much larger gaps in the smaller business space. But on the other hand, I mean, it is politically and socially a bit more palatable to pursue the multinationals. That is something that we say it's very common in the media to say, you know, multinationals are not paying any tax, and it doesn't really get into the reasons behind that. So part of the work that needs to be done is educating the public about why that might not be the case, why they might not be paying tax for perfectly legitimate reasons. And what goes on behind.

Robyn Jacobson

So very quickly, some other changes we've seen come in recently. We've got an increase in the penalty unit. So this underpins almost every penalty we've got in the federal system where if there's been some sort of misdemeanour or breach of something or a failure to do something, that's come from $313 to $330 per penalty unit from the 7th of November, we are seeing some proposed changes from 1st July this year to deny deductions for the general interest charge and shortfall interest charge, and that's going to make the cost of essentially borrowing from the ATO or not paying your debts on time, if more expensive. We've got some changes coming through for luxury car tax. I won't go through the detail of those. And then administratively we've got new ART. So the new Administrative Review Tribunal has now replaced the Administrative Appeals Tribunal. 14 October was that change. In a sense, I’ll ask you Julie, does this actually change anything or is it just a cosmetic name change?

Julie Abdalla

It's certainly not meant to be a cosmetic name change. So it's a new federal body. It is still conducting merit reviews of administrative decisions in the same way that the Administrative Appeals Tribunal did. And that includes tax matters. It has assumed all of the existing rate cases. And so it's dealing with a backlog. Now, since the October transition, there had been quite a lot of challenges with the A8 in, not just in the tax division, but in others and the way that it was managed. And so there is a lot of work was done. A lot of consultation took place. We were very much involved in that to create a new entity, a new tribunal that will be able to achieve some of the challenges or overcome the challenges that the AAT struggled with.

Robyn Jacobson

So Julie, turning to what we're now waiting on and what's ahead and what's on our radar for this year, let's kick off where we could go all day on these matters. But the first one is the Bendel appeal, which is all about unpaid and entitlements and trusts and corporate beneficiaries. Where are we at with this?

Julie Abdalla

So we are now awaiting the full federal court's decision on the commissioner's appeal from the earlier appeal case. Now, in that case, the tribunal found that the up arising from the entitlement to income or capital of a trust is not a loan for Division seven purposes. Now, this is in total contrast to the administrative position that the ATO has taken in its public guidance over the past 14 years or so. The ATO is issued an interim decision impact statement in. I think it was about November of 2023. So the commissioner's appeal has test case funding and the court's decision has been reserved. A decision either way is going to affect both, whether it's in favour of the commissioner or in favour of the taxpayer, is going to affect small businesses that commonly distribute from trusts to private companies. Special leave application, we might say that with the case potentially going to the High Court, but we'll have to wait and see the sitting time.

Robyn Jacobson

Got to look likely, doesn't it? Regardless of the outcome and the appeal.

Julie Abdalla

I would think so. Either way, it's going to have huge implications.

Robyn Jacobson

Absolutely. The next one is Division 296, otherwise known as the $3 million tax, on the proportionate earnings of super balances above $3 million, proposed to kick off for middle of this year. Yet the legislation's been very much stalled before the parliament.

Julie Abdalla

Yes. So the bill's been divided into two to enable the passage of the measures that aren't related to Division 296. But now it sort of hangs in the balance and we don't know whether we're going to see something moving forward. It's unlikely that it will be debated again before the election. But we don't know. We've got, you know, huge concerns about the taxation of unrealized gains and some of the other key issues in there, like the lack of indexation, for example, that will lead to a kind of creep with more and more taxpayers being within the scope of the measure. There are quite a lot of problems with that over time that we would hope would be resolved before it would progress further. But again, we wait and see.

Robyn Jacobson

And we're also seeing a political separation of positions on this, because we know the government clearly wants to progress that. And they've indicated that while they don't seem to have the numbers ahead of the election to pass it with the current Senate, that they would, still commit to doing this if reelected, whereas the coalition have said, we will not do this, we do not support taxing unrealized gains. So it is a point of differentiation between the parties. And again, it's almost like the election is going to help determine, where we land with this.

Julie Abdalla

Yeah, absolutely. I mean, it's very much a different approach to the policy. I mean, the measure we support generally, we would support clawing back some of the concessions in the superannuation system. You know, we do have a very concessional system in terms of super. But taxation of unrealised gains is not quite the best way to go about it, in our view.

Robyn Jacobson

And payday super, it was first announced in 2023. It was or is due to start. I shouldn't use past tense 1st July 2026 and three years lead time seemed appropriate and reasonable, but we're now sitting less than 18 months out. We still haven't even seen draft legislation yet. So what are your thoughts on where we're going with this over the next 12 months?

Julie Abdalla

I think the biggest development we had was the fact sheet that Treasury released in, I think, September last year, and that set out some of their further policy details. And while it was very good to see in that, a lot of our recommendations have been taken on board, and especially when we're looking at the reforms of the penalties regime. But this again, there hasn't been a lot of movement since then. Well, there hasn't been any movement since then and the start date is around the corner. The time will fly in for, you know, here and there's so much work that needs to be done to actually get this rolling. And this will affect every, you know, every employer, obviously every super anyone will be affected. But you also have the role of the DSPs.

Robyn Jacobson

So the digital service providers who have to build the systems to make it all work.

Julie Abdalla

Yeah. That's right. And they can't really get started without a bit of certainty from the legislation. So there's a quite a long road ahead. And it would be good to see things picking up again this year.

Robyn Jacobson

And then you've got the debate about the cash flow impost on employers who are not paying it more regularly than quarterly at the moment. But then we've got more than $3 billion a year of super. That is not being paid on behalf of employees, which is also a disgrace. So it's interesting going to look at how this is going to work in practice. Thousands upon thousands, if not millions, are going to be affected because we've got the employers, we've got the practitioners, we've got employees, all the intermediaries, payroll providers, clearinghouses. There's a lot of stakeholders involved.

Julie Abdalla

Absolutely. So many people are affected by this. And the best way to figure out how it's going to look in practice is through consultation.

Robyn Jacobson

Absolutely. Tim. Julie and I have been chatting a lot about budget and the election and all these things coming up on the horizon. Comment on the budget, because this is traditionally, of course, the second Tuesday in May, but we know that the federal election must be held no later than 17 May. So that kind of knocks out a May budget. Are we going to have presumably a March budget based on what the parliamentary sitting dates are telling us, or are we not even going to have the budget before the election?

Tim Sandow

Robyn, I think at the moment, if you are betting you, I don't know which way you'd go, it sort of feels like both leaders are certainly, ramping up their, discussions. They're traveling the country. I don't know where the. You sort of get the sense that it might be an election sooner rather than later. Whether it might be before May, maybe we won't have that much budget. I guess if we do have the March budget, it's very unlikely that anything that gets announced would actually be enacted. So really becomes, you know, an election platform for both the prime minister or treasurer, about what they're intending to do if they are reelected. And, and I guess for the opposition in his response to, to talk about, well, what would he do if he was elected in listening to numerous podcasts about, from different commentators about the political landscape? It's going to be a really interesting election. And, and there's certainly a lot of discussion about whether we end up with a minority government and, and what that looks like and who that could be and who would work with who. And it's, I think it's going to be quite an interesting election, this one.

Robyn Jacobson

And an observation because the election campaign has not formally begun whilst both leaders are traversing the country at the moment, they are doing that on taxpayer dollars. Whereas once the election campaign is fully underway, each party must fund its own electoral expenses. So at the moment it's all on us.

Tim Sandow

I won’t make any comments.

Robyn Jacobson

So Parliament is scheduled to resume in early February. We presume that will still be the case. So we're looking about roughly two, three weeks away from now. But it remains to be seen, as you say, Tim, whether anything that is potentially debated in Parliament or if we do have a budget, whether it is, you know, actually be enacted this side of the election. So lots to watch out for there. Now, of course, very briefly, Julie, once the election is called, we move into caretaker mode. What does that mean for any bills that might be sitting before Parliament there?

Julie Abdalla

So once they issue the election writs, the government assumes caretaker. And at that stage, all the bills, any legislation in the House of reps will lapse and the bills before the Senate will lapse immediately before the commencement of the new parliament. So it might be some time, some of these measures that we've been talking about, it might be quite some time before we know their budget and where they're going to land. But as Tim said, that list of announced but unconnected measures will continue to grow. And that's something that we really need to see being dealt with as a matter of system maintenance as well. We've already got a long list, and we need to know the government needs to clearly indicate whether it's proceeding or not.

Robyn Jacobson

Another observation there are 52 weeks in the year, and typically Parliament sits for about 19 of those. In an election year, you lose chunks of months out of that because the caretaker mode kicks in. The elections held, you then got to count all the votes. So the time between when Parliament last sits to when Parliament does sit again isn't just a matter of weeks we could be looking 3-4 months.

Julie Abdalla

That's right. And they're not just dealing with tax bills in there. That's the other thing. There are so many other bills that are going through the houses, and a lot of time is being spent on certain measures going like the instant asset write off, going back and forth between the houses that could be better spent elsewhere.

Robyn Jacobson

Tim, let's go back to tax reform. It seems every year we have another budget. Every three years we have another election. Hopes are raised, and then it seems that hopes are dashed as we move in and out of this cycle of will they or won't they progress with holistic tax reform? Is this going to be another missed opportunity this year, or do you think there's actually some hope?

Tim Sandow

Robyn, I think that both parties are probably a bit gun shy about tax. When it comes to making big promises in elections. I know that when the Labor Party was talking about, changes to franking credits and so on, a few years ago, that didn't go well. So I don't think. Are we going to see any brave, announcements around tax reform as part of the election? But even if there is not, I mean, you still the underlying reasons why you would, regularly review the system, look at the policy, look at fairness. That's not changing. The cost of living is not changing. The, young people being able to afford houses is not changing the issues we've got with them. You know, people, having children coming back to work and, you know, extraordinarily high effective tax rates when you take into account loss of rebates and so on. None of that stuff has changed the underlying reasons why tax reform should be considered is not going away. At some point. It has to be addressed. And so I, I'm really interested in exploring just what that trigger point is, because it does feel like we're getting closer and closer. And, we have a lot of good discussions there. We have the Ken Henry report from 2010, but from memory. Yeah, there's a lot of good stuff in there. We've got Case for Change. We've got the Board of Tax that does regular reviews. There's a lot of really great thinking that happens, but not a lot of action. And at some point I just feel like it's just going to come to a head.

Robyn Jacobson

And it's becoming very obvious that more and more people are engaging in the conversation. And that's a really good place for momentum to progress.

Tim Sandow

Yes, that's exactly right, Robyn. I think it's going to be really difficult. I don't think we're going to see whole scale tax reform, unless we can put GST into the agenda and have a really serious discussion about what that looks like and what that could achieve in a very educated discussion. But you really have to take the politics out of that, because any side that is going to to start talking about that in an environment where we're still dealing with inflation and cost of living and housing and so on, they become a very big target for the other side. So it needs to be a very mature discussion about what, can be achieved for the broader good of the economy.

Robyn Jacobson

So, Julie, to wrap up, what do you expect to see in the year ahead? So whether in a policy level or a business confidence level, what's the ATO going to be doing? How do you see things?

Julie Abdalla

What the ATO's doing? I think we'll see firmer action on the outstanding tax it, that's for sure. The ATO has made its position very clear that it will be pursuing. It's much more proactive, I think, than it had been, especially during the pandemic period. That is putting pressure we're already seeing on businesses and vulnerable taxpayers. I think in terms of business confidence, some of these measures and some of these kind of debt recovery activity, this will impact business confidence, for sure. People feeling the challenges. And if we think about our own practitioners, their own businesses and the pressure that they're under, not only to keep up to date with all of these changes, but to support their clients and in managing their own businesses. So there's a lot of pressure out there. The economic climate is challenging, to say the least, and I don't think that will necessarily ease in a way that will be significant enough to provide relief on its own any time soon, which is all the more reason why our tax system is not sustainable and work needs to be done to alleviate those sort of constraints and get businesses going and support Australian taxpayers. I think there's going to be a focus on some of these regulatory changes. I think will continue to be a focus in policy areas, clawing back some of the concessions available in the system. You'll also see, I mean, at a state tax level, there will be, I think, further work around payroll tax and payroll tax exemptions, changes in the property tax base. We've seen so much going on in Victoria alone for the past year or so, and that the implications of those we will see more and more over the years to come.

Robyn Jacobson

Be interesting to see whether any other state governments, start adopting some of the measures that we've seen down here in Victoria. Tim, to wrap up, what do you see for the year ahead, apart from a very busy year for you personally?

Tim Sandow

It is going to be a busy year. Robyn. I think it's going to be a really interesting year, as it often is. I think that from a tax practitioner's perspective, I'd like to hope that, the bulk of the changes, the bulk of the spotlight that's been put on to the profession over the last few years, rests for a little while, and we can't get on with that with our day jobs of providing great advice to our clients. I do hope that, we do get some more certainty in the way that we can provide that advice, whether it's through tax reforms, dealing with ABUMs, dealing with the way the law is being administered. But of course, there's also it's going to be things to look at the impact of, what's happening in the world. It's the 16th of January. Today. We're four days away from, Donald Trump, becoming president again. We've got an election happening soon. It it's going to be a really interesting year for world politics.

Robyn Jacobson

It sure will. And, just a reminder to all of our members, welcome to the year. We are here to support you, and we encourage you to reach out to us throughout the year as you need to, whether in person events or, drop us a line. And for the non-members out there, always time to take another look at us and see whether membership might be right for you.

Tim Sandow

Robyn, if I could just add one more thing. I think if I look at 2025 and everything that's happening in our own world, as practitioners, that there's never been a more important time to have a really strong network around you. And so that's something which, you know, that's what's so special about The Tax Institute. It's why I've been volunteering for 27 years. And while I was really keen to, to take on the presidency role because it is really special about the collegiality that we have, and people share their thoughts and ideas and insight willingly and it's just such an important time as we try and navigate where we are in the tax system that we have that kind of support around us. So The Tax Institute has never been more relevant than it is in 2025.

Robyn Jacobson

Well said and thank you for your time, Tim, and all the best for the year.

Tim Sandow

Thanks, Robyn.

Robyn Jacobson

And Julie. Thank you to you. We will continue to work away at, all the, challenges and particular issues that come our way. But I look forward to working with you throughout the year.

Julie Abdalla

Likewise. Thank you for having me on the podcast.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Tim Sandow, CTA and Julia Abdalla, FTI.

If you enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership at The Tax Institute could be just what you need. Stay current and connected with tangible real world benefits. Learn more at taxinstitute.com.au. Thanks again. Until next time on TaxVibe.

Tax Wars: the tax reform story

Release date: 10 December 2024

In this episode of TaxVibe, Robyn chats with David Montani, CTA, National Tax Director, about the exciting release of his upcoming book, Tax Wars – an insightful look at the need for, and the challenges facing, holistic tax reform in Australia.

They cover:

• The reason for the title of the book, Tax Wars

• The approach of using pop culture references to explain complex tax concepts

• The timing of the book's release relative to the upcoming Federal election

• Whether or not the book will challenge long-term thinking around tax reform

No spoilers included!

Host: Robyn Jacobson, CTA

Guest: David Montani, CTA, National Tax Director

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and you're host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by David Montani, CTA, who is the national tax director. Admitted firm. David provides tax, technical, strategic and training support and has more than 30 years experience in specialist taxation advisory. He's also a lifelong observer of politics, having lived and breathed the political battles over tax reform across more than three decades. Now, David has combined his two great passions, a tax and politics, into a book called Tax Wars, which looks at the gridlock in reforming our tax system over many decades and where a solution might be found. David, welcome to TaxVibes.

David Montani

Thanks, Robyn. Thanks for having me.

Robyn Jacobson

So the title Tax Wars is intriguing. So how did you come up with the title? Why are you writing this book?

David Montani

I came up with the title because the gridlock on reforming our tax system feels like a bit of a, a stalemate in war. And I use the comparison in the book. It's a bit like the old mutually assured destruction concept in the Cold War era, where we have a situation where both sides of politics, have, over time, you know, developed their arsenals of essentially dishonest scare campaigns, and they're just ready to launch, at a moment's notice. And as a result, looking the side will really propose anything, meaningful. And that's, that's built up over, you know, more than 30 years. So, you know, writing this book, hopefully what you will get from it is that people will sort of see the wood for the trees and what's been happening over this time. And that's really what we need to look to, to figuring out a way to break the gridlock.

Robyn Jacobson

What is the book about? Is someone going to sit down and read this and it's going to be wall to wall text concepts?

David Montani

It's not, I mean, for a book about tax, it's surprisingly not technical. It's more storytelling. It's telling the stories of events over the last 30 plus years. And that, I think, will give the insight that's necessary. It'll allow people to see the wood for the trees on what's been going on for 30 years, and how that has led to the the gridlock of where we are today. So yeah, it's silly. It's my my interpretation. It's my take on those events. But, a large part of it is, you see, it's telling stories of those events over those years.

Robyn Jacobson

Why now? because you've been in practice for many years now, you've seen this come and go, all set back and watched elections and reviews and budgets and changes of governments and lots of promises and lots of tinkering. And we'll talk about that shortly. Why now?

David Montani

You know, this book could have been written any time in the last ten years, but it was about two years ago that the idea popped into my head. But certainly, in the lead up to the next federal election, which could be any time in the next five months. Certainly we want people be having these conversations in the lead up to an election. People will certainly, I think, focus their attention more on these issues. And so we want to get this out there while people, you know, will be turning their minds to these sorts of policy issues.

Robyn Jacobson

Does it strikes me that either the government or the community or base doesn't want to have those conversations, or is there, in fact, someone who does want to have these conversations, but it's a particular cohort that might be holding things back. In other words, what's the stalemate been caused by?

David Montani

We certainly want to have these conversations, and yeah, amongst ourselves and in the, in the text community, of course, we have these conversations, a lot I find. Why are the the kinds of conversations in this book, you know, you don't really see so much out there. And I think it's because a lot of the discourse out there is off the mark. People and the media go to politicians and essentially tell them what to change. And you might have noticed that that's not achieving anything or all that alone is not, I mean, like The Tax Institute does good advocacy work, and that's very important. We need something more. And there's something more. I think is rather than tell politicians what to change. It's also about understanding why they refuse to make any meaningful change. That is where I think the solution is to be found.

Robyn Jacobson

Is there potentially also a how, how should go about changing it?

David Montani

Yes, it is very much a how. So in terms of who can do what to actually achieve ultimately reforms and obviously changes of laws to our tax system. At looking at the books, not just telling those stories, it gives those perspective because that's then a basis to then say, right, well, let's put some meat on the skeleton here. I'll actually suggest like a starting package of changes. That's the the what to charge. But then what comes after that is okay. Well how how could we go about actually making this a reality? And what that comes down to is getting politicians to change laws. And I do set out a plan for how we might actually get that to happen.

Robyn Jacobson

Now, throughout the book, you refer to quite a number of pop culture references. If I can call them those. And this is being used, to my mind, to explain some of the very, very complex fold of texts trying to break down those concepts. What was the thinking behind using that approach of referring to pop culture?

David Montani

Well, I had a lot of fun with that. I find that it does make it easier to understand the concept for people. If you can relate it to something that they can identify with, and then it's easier to, to understand. And I'll give one example. In the book, I talk about the changing attitudes towards the GST from the 1980s to today. Look back in the 1980s, or consumption tax as it was referred to then. It was an unknown and it was quite scary. Whereas today, you know, we're used to it and it's not quite the same thing. So I do use a comparison. With those changing attitudes to, I used the movie A Nightmare on Elm Street. Now, Nightmare on Elm Street was a 1980s horror film introduced us to the slasher killer Freddy Krueger. I watched The Nightmare on Elm Street in the 80s when I was a teenager, and it was scary. It was scary. And so then, you know, years later when, kids were old enough for life and I thought, let's have some fun. Let's perhaps terrorize our kids a bit. Let's watch A Nightmare on Elm Street. But you know what? It wasn't scary. Things are change. Times are past. We watched it and. Oh, you know. What this is actually This is not scary anymore. And so that's the parallel with the GST. Gary, in the 1980s, but not today.

Robyn Jacobson

So the idea of perhaps the seed being planted, the idea being accepted and even getting used to what it would look like.

David Montani

Yes. And experiencing it, I believe.

Robyn Jacobson

Now, in terms of the book, what do you hope that its release will achieve, and is it a coincidence? If you look at the timing of when the book is looking to be published and this is going to be, early next year, we know we have got a federal pulp now to get really technical for a moment, the Senate has to go to the polls by late May. The House of reps itself can go through to September, but I'm not familiar with governments that like to go to the polls twice in one year. And the cost of running to election site. We seen there is a normal general election no later than the 24th of May, but there are murmurings that could even be earlier about a march election. So the timing of this book in relation to what would likely be, right in the middle of a federal election campaign, pure coincidence.

David Montani

Not so much a coincidence in that, I, I just wish I had the idea had popped into my head six months earlier than than when it did. But look, certainly we looking to have the book out before an election is called. And again, the election could be called, for example, in late January, you know, for an early March, poll. So that's entirely possible. So, look, we do want to get this out there. So to give people time to, to absorb it. And in terms of like, you know, what are we trying to achieve? Certainly lead up to an election. There's probably been a focus on these sorts of issues. But, you know, my hope is that what the book will do is a few things. One, you know, change conversations. As I mentioned before, I think a lot of the public discourse is is off the mark as to what the issues are that we are dealing with. So I'd like to change those conversations. I would like to give, journalists ideas for asking different questions of politicians. I find when politicians get interviewed and say they're asked question and they give an answer, and I think, you know, that answer is not actually really what needs to be explored here. And then you want the journalist to ask this question. So hopefully I can, inspire that. And look, and ultimately, the goal of the book is to enlighten a pathway that will end the tax wars and actually result in those changing through Parliament, for a better tax system. That's the ultimate goal.

Robyn Jacobson

Do you challenge long term thinking about tax reform and everyone? It's interesting. Perhaps it's like falling in love, but everyone has a different definition of what, tax reform should look like or what form it should take. So whatever perspective people have taken on tax reform, are you challenging the way people are thinking about it or how it should be approached?

David Montani

I think I am for the reason that, is another one of those pop culture references. I draw upon, the movie Raiders of the Lost Ark, where the villain, although we're not villains, is digging in the wrong place. So I like to think that I've come across I've conveyed information that, helps us. Now. Now we're digging in the right place, to find a solution. And the thing is that the our unreformed tax system, it's leaving us less productive, less competitive. It pushes all the wrong incentive buttons, leads us less incentivize, and it undermines the funding for a decent social safety net that makes us a less wealthy country. And again, it's getting worse. In terms of the inter-generational theme that runs right through the book, the intergenerational theme in terms of, well, why do we need reform? But like, like most parents, I think ahead to the years ahead and ponder the kind of world we are leaving for our children. And in terms of our tax system, we are leaving a very lopsided system that will place a greater and really quite objectively unfair tax imposed on, on younger people. And so in terms of challenging your long term reform, often with any kind of reform, you know, the notion of winners and losers comes about. And the thing is that any reform endeavor has short term winners and losers. Now, the emphasis there is on short term because people do adjust their behavior. But with a lack of reform. And by reform I mean genuine reform. The lack of reform is what produces long term losers. And for the most part, I'm sorry to say, people on the 40, that's who one of the interviews I did for the book was with Ken Henry, former Treasury secretary and chair of the Henry Tax Review, released in 2010. Now, he has some very fascinating observations and comments about, you know, his experiences through that review and even back working for Treasury in the 80s. And, of course, you know, he's very big on that intergenerational thing that Treasury told government off the government over many years. Look, this is coming. You have to deal with this. But they haven't yet.

Robyn Jacobson

If we start to pursue layers over this. So we've got a tax system that is often described as creaking under its own weight. And if we look at the three pillars of what a good tax system should be simplicity, equity and efficiency. Now, it could be argued that you can never in nirvana achieve all three of those. Because if it's really, really simple, it's probably not going to be as equitable and certain amount of equity needs to be built in. And that in itself will create a little bit more complexity. But I think everyone would agree that we haven't got the balance right. So if we've got a tax system that's not as efficient as it could be, and we start putting in aging population housing process, and I'm talking the long term issues, not just the next year or two. Then we start to have a much greater dependency on the government and pensions and, and how those people are going to be supported in all age, particularly if they don't have, say, equity in their homes that they can draw on in the future. And then we've got potential lack of superannuation. With the growing gig economy. There are just so many dynamics to this.

David Montani

There are and I, one thing I, I talk about in the book is what's called, you know, get your big rock sorted first. It's a essentially a parable about prioritizing issues where, big rocks, you know, the very important things might have second order issues, and then you've got, what you call grains of, of of sand and, if you put big rocks in a jar, this is the analogy. Get them sorted first, then you can put in smaller rocks, they'll fumble and bumble bad into the gaps, and then you can tip sand in the, you know, the lower priority issues. They'll fill in all the gaps. Then you go to full jar. Whereas if you start by just dealing with the the lower priorities, if you just tip grains of sand into a jar, you deal with those first, okay? And then you try and deal with the big rocks. The spice in the jar is going to be used inefficiently. Yeah. And you're going to have big and small rocks left on the table. You cannot get into the jar. So what I find is that for many years now, across both sides of the political spectrum, we're not dealing with the big rocks and more. So we're just scraping grains of sand into a jar. And then that's not dealing with those long term serious implications.

Robyn Jacobson

This is, I think, more a rhetorical question, but do we need more than tinkering? It's us and my answer itself. We often talk at The Tax Institute about addressing the very lengthy list of bumps. And for those who are not familiar with this acronym, it's the announced bit on enacted measures. And throughout the year, we've got our reviews and budgets. As I mentioned before. And these will add to the list of measures that they're announcing, which they're going to legislate. And yet the number they actually do legislate, or the time it takes to legislate is resulting in this list either remaining very, very long or it just stays there for a long time. And again, it seems to be tinkering. We're not fundamentally dealing with what you describe as genuine reform.

David Montani

Those who are old enough who remember sort of 20 plus years ago, which that includes May, of course. There were many times when again, from both sides of politics, a government would announce a policy change. The, you know, the legislation would be within Parliament. Obviously, it was all prepared beforehand. It would be debated, legislated and implemented really over a matter of months. And that that was the norm for a long time. And then this changed. We had these announcements. The clearly the the work behind that to actually legislate those announcements hadn't been done. And as you said, you've got the week with this increasing list of, you know, announcement, unconnected measures. And I do comment on that in the book, in that I get the sense that others would be more qualified to comment on this than me, but I get the sense that the professional advice from the public service has been hollowed out over the years, and I referred to a report by the Grattan Institute that talks about not just tax reform, but but gridlock on reform in general, and the comment about how nowadays the, you know, the expertise used to reside in the public service. And in our case, we're talking particularly Treasury data and so forth, whereas nowadays that's also been shifted to, you know, what we call, ministerial advisers. And they seem to have taken the place or largely displaced that those ranks of expertise in the public service. So I can only speculate that, you know, the minister's going to the spin master in the next office rather than going to the public sector expertise in the next building. More and more of that nowadays, I get a sense is contributing to this inability to, announce something, have the legislation in Parliament because you've already had that prepared and, and it's debated and, and, and the arguments prosecuted and implemented so that this is clearly, something has changed in the last 20 plus years. I think that is a part of it. It might not be the only thing. But, you know, I do think that, ministers have perhaps a more nowadays, a shallower pool of expertise to rely on, because of the way they've changed who they go to for advice.

Robyn Jacobson

In July 2021, The Tax Institute published its own report into tax reform. And we called it case for change. And this wasn't the silver bullet. Was it going to solve all the problems overnight? It's a bit like a blueprint, and it set out lots of challenges and issues and pathways and options for reform. Does advancing tax reform need political courage, and have we got that across anyone in the spectrum of government? You're looking right or left or in the middle. Is that what we need and have we got the ability to progress this one day?

David Montani

I find that, pyrite is not the word that comes to mind because that implies, like defeating an adversary. That's not so much what I think is going to win the day. And I make that point in the book, I think, what we need of this is not a word I use in the book, but, I think what we need is statesmanship and look, and that involves a number of attributes. In a politician, you know, the ability to, to have a chance of successfully prosecuting reform being what it is. Still looking at a minister who has a personal store of knowledge on the subject himself. The the minister needs to be able to test a that they are receiving and where that's lacking. I think you are less likely to have reform because I minister either is less able to prosecute the case for reform, the perhaps less able or less likely to take up a very worthwhile suggestion from the departmental advisers, because if they themselves not that they would admit it, that I feel that they really couldn't carry the day prosecuting the argument, and I'll possibly shy away from it. And I do comment about the the, you know, the increasing professionalization of politics. You know, we have more and more politicians today who basically have no experience outside of politics. Look, and I think that has an impact on the the ability to articulate, prosecute and implement, reform.

Robyn Jacobson

As a reader, what insights could someone gain by reading the book?

David Montani

I'm looking for readers to gain insights, in terms of, you know, oh, no, I'm it's it's like, oh, that's why so-and-so opposes this tax. Oh, that's why the government back then did that or didn't do that. Oh, I understand now why and why why and wherefore. So that's the kind of insight I'm hoping readers will get. It's those oh, moments about these, these unexplainable reasons, public why governments and politicians have done things, not done things. What are they? Take certain decisions. Oh, that's why now I understand. So that's the kind of insight I'm hoping readers will get.

Robyn Jacobson

Maybe no one's explained it to them before. Maybe they haven't had access to the right people who understood this to be able to explain it. So it's a great perspective.

David Montani

Yes. And I think part of that is that, you know, this is not so much a technical issue. You get a group of tax experts and economists in a room. What should we change in our tax system? They'll come to a fairly broad consensus on what we should change. It's not the technical issue. It's the political gridlock. And and that's what the that's what the tax laws reflects. It's a political gridlock. And so when, again, when you have that insight as to how it is that we have come to this gridlock, you understand that. But it's not about what we should change. It's about why the politicians won't change anything. And so that means that the solution is not going to be found in a technical discussion of what we should change. The solution is to be found in how can we get politicians to act when presently and for a long time they refuse to act. That's where the solution lies.

Robyn Jacobson

What is one thing that you learned while writing the book?

David Montani

I learned that, I think, you know, the deep cognitive process of writing a book. It helps you figure out what you think on a subject, having to explore a subject. I mean, I, I had some fairly well formed opinions, but the point of that is that is that if you write with an open mind, then, I mean, you're open to changing your mind. And again, that's the thing I talk about in the book where, you know, there are views I've held in the past on certain subjects, but I don't close my mind to those subjects. And this book has helped with a number of things where you we're having to write about it. You have to think about it and you actually discover some things about what it is you actually think, of a subject. So that's, you know, it's it's a very I mean, I like that intellectual process.

Robyn Jacobson

And finally, no spoilers regarding the last chapter, but its title is the one person who could end the text falls. What can you tell us about that?

David Montani

Well, it's all good. Well, to talk about the political gridlock and how we got here and so forth. But then it's a case of, well, now what? So I do put forward a, a starting package of reforms to give an anchor point. Here's a package of things I think would be we would do well to do. But then I go on from that and say, right, how could we actually make this happen again? It's about resolving a political impasse, not a technical impasse. And so it's about what incentivizes politicians to act. And through that, yes, I have brought it down to one lone individual whom I believe is the one who could end the tax wars.

Robyn Jacobson

So out of this entire population of Australia, readers will have to make their way to the last chapter to find out who that is. David, we look forward to this hitting the bookshelves or the e-books. Congratulations on writing it. It's a very necessary conversation to have and we wish you well with it.

David Montani

Thank you very much, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with David Montani, CTA and author of the upcoming book Tax Wars. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn if you're interested in being at the centre of the tax conversation. A membership with The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at taxinstitue.com.au. Thanks again. Until next time on TaxVibe.

Supporting clients amid firmer action on ATO debt collection

Release date: 8 November 2024

In this episode of TaxVibe, Robyn chats with Andy Milidoni, CTA, Partner, Johnson Winter Slattery, about how to support clients amid firmer action on ATO debt collection.

They cover:

Recent changes and the current environment
The Commissioner’s powers to collect debts
ATO Support
Advice for practitioners supporting clients with tax debts

Host: Robyn Jacobson, CTA

Guest: Andy Milidoni, CTA, Partner, Johnson Winter Slattery

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest unique perspective to give you valuable and practical insights you may not hear every day. We hope you enjoyed this episode of TaxVibe. Recorded live at The Tax Summit at the ICC in Sydney. Today I'm joined by Andy Milidoni, CTA, partner at Johnson Winter Slattery, and he specialises in all aspects of taxation, revenue law and trust law, and some aspects of superannuation law. He advises both public and private corporate groups, SMEs, high wealth individuals across industry sectors and he also works closely with a range of intermediaries such as accountants, business and corporate advisors, liquidators, financial planners and court appointed trustees and guardians. Thank you for joining us at The Tax Summit, Andy.

Andy Milidoni

Thanks, Robyn. Thanks for having me.

Robyn Jacobson

And your session was talking about the changed position, the firmer action that the ATO is taking in relation to texts and what sort of support that practitioners can provide their clients. So I wanted to unpack that a bit more with you. It is a changed environment and when we look at historically, the ATO’s has of course had very wide ranging powers and there are actions they can take when it comes to debt. But we know during the pandemic, the was a directive to say take it easy. We don't want businesses going under, we want to keep them afloat. So we did see very generous remissions of penalties, general interest charge, shortfall interest charge, generous payment arrangements and the firm direction of things like direct penalty notices. And we'll talk about all the different types of things they can do. Also, the foot came off the accelerator. Whether that went too far, people can, talk about that and make their own surmises as to whether that was appropriate or not. But it does seem that some businesses have perhaps taken that and expected that some new normal, which it's not. You know, and I want to talk through the levels of text it that we're now seeing. We are hearing anecdotally through our membership that the ATO is taking stronger action. And they've effectively said this themselves in their public statements. So can you talk us through what does the current landscape look like? What is the amount of debt that is now owing? Who owns it, and is this ATO action appropriate?

Andy Milidoni

Well, I think that's right. I think since Covid and probably since, early 2022, we've seen enormous increases in it collection activity. I think just recently in a speech made by various ATO officials, I think the approach of the ATO moving forward from this point on is to go back to being an old school tax collector. The point I think to make here is, is that, you know, Uncollectible debt stands at 50 bill. And the has taken the view of, well, there's a risk management aspect here in that, this historical debt which is very high and in fact much, I think doubled since before Covid. And there'll be more debt to collect. So they're buying the bullet and, they're putting their foot down on collection. And we've seen that through, the legal recovery actions. We've seen so many thousands of DPNs being issued, garnishee orders, lot more, engagement in it or at least enforcement. But, ATO officers chasing debts, chasing agreements is a big thing as well. A lot of what I'm sort of saying is there's a bit of an attitude which, I know that accountants and other advisors are trying to get on top of, and that is some taxpayers are saying, look, I won't lodge because that means I won't have the debt. But that's only really compounding, their own, their own personal circumstances when it comes to debt. But the reality is, is that the ATO are being told to collect the debt, and that, I think the, sort of the generous approach is, I think, well and truly over.

Robyn Jacobson

Well, they couldn't keep handing up money forever. So the role of handing out all that support, which, again, people have their own views as to whether that was or wasn't appropriate, but it still did its job. They're now at a point where they've got to go back to being a revenue collector. And the figures are quite astounding. If you look at the representation by the SME sector in that collectible debt. It's about two thirds of it. It's disproportionate.

Andy Milidoni

Yes, it is a lot.

Robyn Jacobson

Yeah. So why is that? Because there's always this focus on big end of town and whether they're doing the right thing. But in fact the problem seems to be more at the SME end.

Andy Milidoni

I think that's right. And a lot of that debt is carried over from the pandemic. I think we're in a pretty tough economic climate at the moment as well. And in some sectors of the economy, there's a sort of the double whammy of costs going up and revenues dropping, and they're being squeezed and that's hitting cash flow.

Robyn Jacobson

Yes.

Andy Milidoni

And unfortunately, sometimes the first things that aren't being paid are the, the tax, the tax collections and where it's pay out withholding, for example, it's opening up directors to personal liability through the issue of DPNs. And so unfortunately, it's mainly in the SMB sector, private groups. And they're saying most of that debt is as a result of the nonpayment of activity statements, which broken down is pay withholding and GST liabilities.

Robyn Jacobson

Yes. Both of which are now part of the DPA regime. So historically, of course, it was just withholding. And then SGC came into it and then we added more recently GST and perhaps less of an issue, but luxury car tax and one equalization.

Andy Milidoni

Do the other, you know, the other indirect taxes.

Robyn Jacobson

So could you explain this three month rule that exists because people are often a bit confused about this having to do with the reporting and the nonpayment of when directive penalty notices can actually kick in?

Andy Milidoni

Yes. The important thing about, responding to a DPN is that what you should be doing even before a DPN is issued is getting your lodgment seen. So in relation to pay a wage, withholding and GST and the others, except for superannuation guarantee, you must lodge within three months of the due date of the lodgment. If you don't do that, then any DPN that you get is what we refer to as a lockdown. And what that means is that, in the event you haven't paid, you haven't lodged within a three month period when you get your DPN. The only options you have, to pay it because with the, an option under DPN includes putting the company into some form of external administration, and you don't get that option if you haven't lodged within the within the, the three month period. So that's what the three month means. And unfortunately, a lot of people I think when things are going southwards, they sort of going back to what I'd said earlier, we won't lodge because the debt's not there and we'll deal with that later. But the take home message is, is that even if you don't have the funds to make the payment, make sure that your lodgment are up to date. So if things don't turn around in a reasonable period of time, and you can address the debt through payment arrangements and other engagements with the ATO, if it gets to the point that the ATO issued you the DPN, you have the option of putting the company into liquidation and removing the personal liability. DPNs are used as sort of the first step towards, if it gets to it, putting the putting the company into liquidation. It's one of the first steps that the ATO, takes in the in, in the journey towards, putting the company into liquidation.

Robyn Jacobson

So leaving aside for a moment the three month rule and direct penalty notices, is an an unrealistic and perhaps foolish move. To think the ATO is not going to find you are not going to be interested that if I don't lodge and don't pay, they'll somehow forget about me.

Andy Milidoni

I think it's look, in some cases, you may be able to fly under the radar, but only for a period of time. It really all comes to a head. And what we've found, we've had experiences where there's sometimes, Look, the systems are so more, so much more sophisticated. There's a lot more talking between systems, etc.. But what we've found is that, taxpayers might be on the tax officer's radar for something else, and then they pull a thread and then they, they see what else is going on in terms of non lodgment, debt that's piling up. And as I said, often times it might be something else that they're looking at. And then it opens up to everything else. And then that's where I think taxpayers really are in a world of pain.

Robyn Jacobson

Andy, can you run us through the powers the commissioner has to collect it? What is this firmer action that we're referring to?

Andy Milidoni

Yeah, Look, powers include, issuing garnishee notices, issuing DPNs, freezing orders. There's the offsetting. Obviously, which is where, a credits owed in relation to one part of, a lodgment, but is then withheld where there's another debt. There's the general insolvency regime and bankruptcy regime that's available to the commissioner. And the starting point there would be, the issue of statutory demands and other things. So they're all the more formal legal recovery, actions that the commissioner can take. Now, whether he takes those or not, is really as a result of everything else failing.

Robyn Jacobson

Yes.

Andy Milidoni

And we've, we've seen examples where and it's not with or not with everyone, but through examples where you've got the taxpayer that literally puts their head in the sand and pretends that this is not happening and then let a year go by another year the notices are coming in all the other.

Robyn Jacobson

And then when engage with advice.

Andy Milidoni

Just won't engage because I think, there's a it's like a slippery slope. There's sort of so far to falling off the edge of a cliff. There's obviously other things going on with the business, and maybe in the personal life it is a world of pain, but people get to the point where they put their heads in the sand. I don't want to, deal with it. And then you say the much more formal recovery action. We had a client that, got to the point of a statutory demand. It wasn't a huge amount of money. A lot of other things were going on. There were other debts within the group, but they let it get that far down where, they actually could have paid it, but they were the head they had so far in the sand that they just were. We're not getting on top of these things. They actually end up paying the statutory amount because that really that was the first point before the ATO was going to apply for a winding up order. So, we're very much in these formal legal, legal recovery powers really come about where the ATO has, has really at the end of their tether as well.

Robyn Jacobson

Yes.

Andy Milidoni

And, and oftentimes they'll resort to those powers, sure, for outstanding debt. But they say other risks.

Robyn Jacobson

Would you also throw a departure prohibition order into this?

Andy Milidoni

Oh, if there's a risk of the, taxpayer leaving the country. So there's the DPOs. So, yes. Certainly.

Robyn Jacobson

Yes.

Andy Milidoni

And, yeah. So that those all make up, legal recovery, actions that, that, that the ATO can take.

Robyn Jacobson

Is it fair to say that when a matter hits your desk, it's already escalated to a pretty serious point? In other words, you're the lawyer, not the accountant. And are they the ways or approaches that accounting practitioners can take to try and deal with these well before everything elevates or escalates to such a point that if they go to bring the lawyers in to fix everything..because I would have thought the cases you see are going to be the much more heightened ones.

Andy Milidoni

Yeah. And that's, that's right. Robyn, as a tax lawyer, we get involved towards the very end when, when all the alarms are going off and the red flags are being, should I look at that? I have enormous respect for the accounting profession that I do wonderful work there. They're the trusted advisors to to to their clients and taxpayers. I work a lot with accountants, and I see the very good work that they do. I think, the good practices I'm saying with accountants is that, they encourage their clients to keep lodgment up to date. Even despite this idea, we won't lodge because the date won't be. They don't know lodge because they understand that it gives options when it comes to DPNs. Closely, I saw them with the tax office and negotiating payment plans as soon as possible, but also keeping in touch with the tax office when circumstances change. So there's an ongoing liaison with the tax office. And I think, look, we all have our sort of views about, tax office behaviour. But overall, I think if you continue that engagement, keep them informed. Then I think together the debts can be managed. Now, if it gets to the point that the company is going looking at going to some form of external administration, that might be that that might be the case. But by keeping the tax office informed and, keeping that engagement going, I think stays the tax office away from a lot of the more formal like recovery action. So take, for example, Garnishee notices we often call because a client might have been have received a Garnishee knows always in the most, unexpected circumstances. It creates a lot of turmoil.

Robyn Jacobson

And when they can least afford it.

Andy Milidoni

When they can least afford it, one minute they think there's money in the account, next minute it's not there.

Robyn Jacobson

Yes.

Andy Milidoni

So and that's an example where, I see that often happens where there's been very minimal engagement. Or if there has been, there hasn't been compliance or there hasn't been follow up. So I think the take home message is keep your lodgment all up to date. Talk to the tax office. Have the, accountants are talking to their clients. The clients are open with the accountants. Really try and keep engagement to the highest possible level as possible. And also where money does become available, make payments and, encourage, additional payments on the repayment plan or to chip away at the date to demonstrate to the ATO so that, there is a history in relation that particular payments being made, I think, with a debt collector, whether it be the ATO or someone else, if they see that there is a willingness to get on top of the debt and to make payments, it's really not in their interest to push the more formal buttons, because that costs money as well.

Robyn Jacobson

Of course it does.

Andy Milidoni

It cost money and time, But the opposite is no engagement. Gone. I will head in the sand.

Robyn Jacobson

They don't like it when you go silent.

Andy Milidoni

You're pushing the the collector to to stop pushing other buttons to get the reaction. So yeah. So I think the short of it is liaison and engagement.

Robyn Jacobson

An anecdote I heard many years ago. I remember the program Wheel of Fortune.

Andy Milidoni

Oh yeah.

Robyn Jacobson

Now, apparently there was a taxpayer who owed some money. I don't know how much. Obviously the ATO had been trying for some period of time to try and collect this debt, and I think you spelt it for 30 the afternoon or something. And this particular ATO officer was home that day. Was this a well before Covid? I was watching the show when this taxpayer appeared on the show.

Andy Milidoni

Yeah.

Robyn Jacobson

And he immediately rang the station's producers and said, you know, I want to issue a notice that fellow who's on your show because he owes us some money.

Andy Milidoni

Yeah.

Robyn Jacobson

And the station said, don't you know that we pre-record this.

Andy Milidoni

Was already on the money to go out the door, so I could see the taxpayer……..

Robyn Jacobson

So what are you seeing and hearing out there with the the escalated action? Do you see that the ATO is cooperating because we are hearing increased feedback, and I don't know whether anything has changed as such at the ATO said about payment arrangements not being quite as forthcoming as they might have been. Now, we do know that there's firmer action in back in Covid days, but is it getting more difficult to get a payment arrangement?

Andy Milidoni

I'll say it is. I think there's a number of, if you've got a taxpayer that's just fallen on some hard times, has a very good compliance history. My experience is that you could get a payment arrangement between 6 and 12 months with that too much fanfare and without too much grief. I think with this sort of the repetitive, the taxpayer that's gone through the ups and downs over the last few years has put a few payment arrangements, and there's been a few, some noncompliance around that, but eventually got through it. It's it is for though for those taxpayers, it has become much harder. Anything beyond 12 months is much more difficult. More information, more submissions, more trying to demonstrate that, the taxpayer can go to third parties to get funds before the ATO, entertain much longer arrangements. I've seen, some taxpayers having to give security over the date. It is certainly much tougher. What I'm hearing from accountants is, is that, it's, the it's certainly is much harder to negotiate and the ATO are taking, a little bit more of a, a tougher position on how generous payment arrangements will be.

Robyn Jacobson

What advice you've got for practitioners, particularly the accounting practitioners, who might be perhaps a little closer to the coalface than you are in terms of the the direct dealing with the client and that taxpayer.

Andy Milidoni

Look, I think the advice is, it's sometimes it's the difference between is the business going to survive or if it's not, if there's a genuine belief that a longer arrangement is needed and that that's going to help the business, because really the differences, we either, step on the business and have the ATO sort of take more formal action, and it basically is wound up or trying to put forward a pathway where, the business can survive, but the ATO can get their money back, perhaps in a much, a much longer time frame, I think for accountants, I think they know a lot of those issues. But to work on pathways with the tax office, but also with the clients to demonstrate that it is worth entering into that longer payment arrangement, that everyone's risks are being sorted in that the ATO obviously want to collect the data, but they want to be able to say that the money is going to be can't be forthcoming. So I think we just need to get a little bit more creative in the way we approach payment plans with being able to juggle a number of these things. So, I think the advice is to probably, provide more comprehensive submissions, actually demonstrate to the idea that there is that pathway, that there is some and unusual circumstances affecting the business that can be traded through. And to really go in and advocate for the tax taxpayer, but also to understand the position as well.

Robyn Jacobson

It is such a tough question to ask though, you've got a business owner. They might have set up the business 40 years ago, five years ago. Whatever their heart, their soul has gone into this to confront the idea that they may need to shut down the business, give up the business, that it's not been financially, economically successful. It's not just about the financial aspect. There's all that pride and all that sentiment caught up in it and trying to get the client to acknowledge that and face it and deal with it. Very difficult.

Andy Milidoni

It is. And I mean huge financial and personal investment. The other thing that we find, Robyn, is sometimes you've got, you know, it's a it's quite a great it's a great business. And then what happens is an audit comes along and I go back five years and, it's not because there's been some sort of, deliberate attempt to avoid the payment of tax or the assessment of liabilities or whatever, but something's gone wrong. They've gone back and now they're confronted with, the payment of back taxes.

Robyn Jacobson

Yes.

Andy Milidoni

So you're in a tough economic environment looking forward. You're barely paying your, meeting your liabilities. And then you have this audit and then you've got taxes going back for years with interest and penalty. That can be quite a shock. And, having to negotiate payment plans around that historical date can be, very challenging. And this is where I think, you know, I'd like to think the state would step up and recognize that he's a situation where no one sort of saw this liability. Or maybe. Yeah, sure, they maybe should have sort of seen it, but for whatever reasons and I've seen it, in some circumstances where it was just very unfortunate that the businesses got themselves into that position. And he comes in audit. And you'd like to think that in that scenario, there would be, more understanding in their negotiating of those payment plans because not only do you have your debts moving forward and those liabilities, you also have to then find the money to try to, to fill those back taxes.

Robyn Jacobson

I've said for years that things can go undetected for a long, long time until and unless you get an audit or this death Or this divorce.

Andy Milidoni

Yeah.

Robyn Jacobson

And if you're unlucky, you have all three happen at the same time.

Andy Milidoni

As I say, when it rains, it pours.

Robyn Jacobson

Yeah. And it can unravel things that you did not expect. So, Andy, as we close off our discussion, any final tips or ideas or suggestions as to how you can help you navigate through this?

Andy Milidoni

So we're in a, I guess, a bit of an economically volatile environment, particularly for some sectors. There's a lot of new tax law coming through. We've heard the ATO is focusing on the the collection of that $50 billion of outstanding liabilities. I think a tip I would give is, if there is, if a business can find the time to engage with their accountant and tax lawyer to undertake just to review. So everything's going well, maybe submit to a, have a review of the business, look at what the the risks are from a tax, perspective. Try to, get ahead of any particular liabilities that might be on the horizon. That might not be sort of expected. Now, do it in a time where there's no distress, because if changes, need to be made, they should be made at a time when there's no date on the horizon, no one's chasing anything. And if there can be some changes to, put the business into a better structure or something that's more fit for purpose. I would encourage that because there could be some really good stuff that comes out of the review, and it at least gives, business owners, a bit of a snapshot as to what the next two, three, 4 or 5 years looks like. And as much as possible mean. If we had the benefit of a crystal ball, and we could look into that and see what's on the horizon, obviously we don't have that. But if we can just get ahead of ourselves and, see what things might look like and what changes that can be made, because oftentimes when we do hit distress, there's an appetite there. So let's change this. Let's change that. But often times it's just too late.

Robyn Jacobson

Yes. So this is the equivalent really of going to your dentist for a health check, going to the doctor once a year for a health check, or taking a card and salute the mechanic to get it checked out.

Andy Milidoni

Yeah. And, we do we've worked with accountants to do these reviews. And often times when we can sit back and go through these things, business owners, it's a very good opportunity for them to sort of do a bit of navel gazing. Yes. And to oftentimes the process identifies other issues that no one really expected. And people are very grateful for. Yes. Because, when we're all busy trying to sort of make money and run the business and do everything else, we're not these things aren't on our radar. And it's a really good opportunity to do that.

Robyn Jacobson

Andy, thank you for your insights. Thank you for your session. And, there's a lot for people to think about that. I think the key message is if you've got to text it, engage, seek advice, talk to your accountant, talk to your lawyer. Yeah, talk to the ATO.

Andy Milidoni

Absolutely. And thank you. And thank you, Robyn. And thank you to The Tax Institute.

Robyn Jacobson

You're very welcome. Thank you. Thanks for listening to this episode of TaxVibe. I've been chatting with Andy Milidoni, CTA, partner at Johnson Winter Slattery. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen to your podcasts. We welcome any suggestions and feedback to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership with The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. Thanks again and we look forward to joining you next time.

Can AI replace tax professionals?

Release date: 18 October 2024

In this episode of TaxVibe, Robyn chats with Adrian Cartland, Principal Solicitor of Cartland Law. Adrian is also the creator of Ailira, the Artificially Intelligent Legal Information Research Assistant, which automates legal research and advice.

Robyn and Adrian chat about the increasing impact of Artificial Intelligence (AI) and technology on the tax profession, going back to the basics of the evolution of technology in tax, what AI actually is, and how it can be used. They also gaze into their crystal balls to discuss AI's role as another tool in the toolbox for practitioners and how it may shape the provision of tax advice in the future.

Host: Robyn Jacobson, CTA

Guest: Adrian Cartland

Robyn Jacobson

Hello and welcome to TaxVibe, a Podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax professionals, brightest minds, drawing on each guest unique perspective to give you valuable and practical insights, you may not hear every day. We hope you enjoyed this episode of TaxVibe, recorded live at The Tax Summit at the ICC in Sydney.

Today I'm joined by Adrian Cartland, principal solicitor of Cartland Law, based in Adelaide. Adrian is practice for nearly 20 years in a number of tax roles in top tier firms, as well as boutique tax practices. About ten years ago, he founded his own on Cartland law and thinking about the future of law, developed an interest in artificial intelligence. Adrian specialises in and only accepts instruction in tax, trusts and technology. He's also created Ailira, the Artificially Intelligent Legal Information Research Assistant, which beat a paralegal on ABC's I race past the Adelaide University tax law exam and powered the world's first law firm without lawyers. Adrian is the chair of the Society of Trust and Estate Practitioners, South Australia, and also is a member of The Tax Institute's State Taxes committee. So Adrian, welcome to TaxVibe

Adrian Cartland

Thank you very much. That was very good. The polite and sanitised version of my intro. So and so, You speak much too highly of me. And you say that you have many clever people on here. Hopefully I can live up to that.

Robyn Jacobson

I'm sure you will.

Adrian Cartland

So, we're going to talk about some AI today.

Robyn Jacobson

Yeah. Let's unpack this because it's, it’s an emerging technology. And our listeners will be on a spectrum. Some will be very regular users of some of the products, such as ChatGPT, and others will have very little understanding of what it involves.

Adrian Cartland

So first of all, the thing we need to deal with is the conceptualization of AI. So the largest part of the human brain works towards understanding other humans. So when we look at the moon, we see a face in there. When we think of a robot, we think of it in a human way. We anthropomorphise it. So that's why we are scared of the Terminator. What? Hal 9000. We think of C-3PO. However, those are not accurate descriptions of what AI is. AI is should actually be, called alien intelligence. It's entirely unlike human. A better example of what AI is like is like Tony Stark's Iron Man suit, which takes Tony Stark from being a human to being like Superman but still requires Tony Stark. So we are symbiotic with machines. If you put a human in the jungle naked and alone, they will die a terrible death. Without technology, 99.99% of the human race will die. And this scares us. And because we don't like the idea that we are not the masters, but we actually symbiotic, technology without humans is useless in a junk. And we can't do anything without technology. Even our stomachs have evolved over hundreds of thousands of years to require cooked food. We can't just eat grass. So, we require technology. And every time we are reminded that we are symbiotic with some new technology, that's scares us. But once we become used to it, just like we've become used to podcasts we're comfortable with.

Robyn Jacobson

Well, let's go back 20/30 years when email or internet was all born. It was unfamiliar technology to everyone at that point, and yet we all accept it as day to day technology now.

Adrian Cartland

That's correct. So it's absolutely terrifying when we are confronted with something new. But once we get familiar with it, then we become comfortable with it and it no longer scares us. So if you were thinking of AI as something scary, it just means you need to familiarise yourself with. Now, I've done something fun at The Tax Summit, and I wanted to show this as an example of how AI can work. And at The Tax Summit, I have produced the first paper for The Tax Institute that openly at least, is entirely written by a large language Model, by AI

Robyn Jacobson

What I now what is a large language model for those of you have never heard the expression?

Adrian Cartland

Sure. So if we go back 50 years or 20 years, and when we see the things that a computer forecast, we familiar with, they will often be built on a bunch of if this then that statements. And I'm back from the 80s. In the 90s there was expert systems where we plug in specific pieces of questions and answers, and we can therefore write out knowledge that way. That's not the type of AI that it was commonly used now or rather, is in the public consciousness. Instead, what happens is a bunch of fancy Maths. And I'm going to try and explain this in a simple way. You take all the words that there are and we convert them into tokens. And so there was a token for the and and and and so on. And then what happens is these tokens is we create relationships between those tokens mathematical relationships. And those relationships are called vectors. And what happens then is they, a company like OpenAI or Google or many others will feed large amounts of text or other data into those. And and those vectors will be trained to create a relationship between them. And then based on that statistical relationship, based on that fancy maths, it will generate. We're talking about generative AI. It will generate answers. So they're not stored in there. You can't open up the hood and and see them. There's not a bunch of rules.

Robyn Jacobson

And it's not insisting content.

Adrian Cartland

No. So some potentially do save it in there. But the the general way of doing this, there is something that is created a fresh which is also interesting from a copyright perspective. So just just don't make the copyright law. One thing that is really problematic, particularly in Australia, is people say there's been copyright theft. Now that's more of actually an Americanism. Theft requires taking something. I take something from someone else with, with the intention to deprive them of it. You can't steal intellectual property in Australia. Now you can breach copyright. Totally different thing. But, there is a question of whether reading over something is a breach of copyright. I don't think so. If you generate something that looks like something else, again, if it's generated fresh, it's not a breach of copyright. So what I've got is I got copilots, which is one of which is Microsoft's, large language model to generate a paper. Now, I've written a number of papers. They take a lot of time. They're very difficult. And what I did is I said, I'd like you to explain the relationship between, you know, the tax profession and artificial intelligence. And I forgot to spit it out. Paper.

Robyn Jacobson

Do you specify the premises? Do you say I want a page or I want a 20 page paper?

Adrian Cartland

So if I wanted to make a better paper, yes, I would. And in fact, at the end of the process, I asked copilot for some feedback and what I could have done better. I knew things that I could've done better, but I asked for some feedback, and the feedback it said is you should have specified these parameters more. Now I just said, write me a paper on this and, and off you go. And so the one thing that I did include that is my text in this paper was I said, this is a paper written by copilot, not me. And then I said, and here are the exact prompts. Now if you copied and pasted those prompts, you would get a similar paper to mine. You would not get the exact same paper because it's generated afresh. Now, something that's interesting about this is because it's it's generator fresh. It can create things wrong when it creates something that is wrong. We call that a hallucination. So for example, if I asked, copilot to explain some tax laws, it might generate them correctly. It might make some up. Now I can't actually control that. So that is something that's problematic. And in fact this is something that's been that there have been a number of tax cases in the UK. There have been, where people have, have done this. There's been some solicitors who have got, in big trouble in the US, and our courts here have, regularly saidt submissions, particularly by unrepresented litigants, that they have just gone into ChatGPT and written and said, yeah, explain this case for me or write, write out some submissions for me. I will make up some cases.

Robyn Jacobson

So the person in question at this point is AI that to replace the profession, or is it simply not going to be the case because you're saying it can generate all this report and files, article, whatever content it is we want to write for us? But you're saying it might be correct or it might not be correct. So therefore isn't there, of course, a professional obligation to check what is there before it is used for professional service or a commercial purpose, or for a device purpose or for publishing purposes?

Adrian Cartland

So that's that's an excellent question. So technology doesn't replace humans and no technology ever makes another technology obsolete. So if I go into the Sears Robot catalogue of 100 years ago, I can buy every item in the new today. I own an edaphon because I love vintage, office accessories. I've got some typewriters and old telephones and, and an edaphon and an edaphon is a wax dictating machine. The one I've got from is from 1912. This is. And there's a wax cylinder on there, and I can buy new wax cylinders for that today. So technology doesn't get rid of old technology. So I have a pen, I have I sometimes send written letters sometimes, you know, I've sent handwritten notes just to people from time to time. I send emails, still send faxes to the tax office. Yeah, I know, I send text messages and in whatsapps and so on, and each of them becomes more niche. So first of all, generative AI is not going to replace some of the other technologies though, like the more niche. The other thing is just professions don't get replaced, say in law. The biggest change we've seen over the last 40 years has been the invention of copy and paste and Microsoft Word, and so and going from people who have typewriters and having to, to text out any, any changes and send things to the typing pool. And instead now what happens is they if they want to change, they go to copy paste or delete. And if I want to take a precedent, instead of having to stick it through a Xerox machine or some kind of ink copying, I just go to copy paste. Now that hasn't replaced lawyers, and in fact it creates more work because then people work longer and longer contracts. People make more and more legislation. Again, looking back a hundred years ago, every profession that was 100 years ago, it still exists today. There are blacksmiths. There's not that many, but they still exist. So they never replaced. The only professions that I've totally replaced are ones that have a Specific technology they work with, for example, elevator operators.

Robyn Jacobson

Yes.

Adrian Cartland

100 years ago, an elevator was terrifying. Death defying adventure to go up in an elevator. And, you know, maybe you go up, maybe you career down to your death that you need to. Someone needs to operate this correctly. Another one is computers. A computer originally, just like in the 1950s, was a lady who sits and almost all women who sits there and turns on various switches and punch cards and and connects wires in a machine in the overall, mainframe computer.

Robyn Jacobson

They used to take up entire rooms.

Adrian Cartland

Correct. And there'd be a team of 20, 20 computers, like, ladies who are programming those in. Now we have disk drives, and, and solid state memory and so on. To those very technology specific things have been replaced. Maybe in the future, TikTok influencer will be replaced. I really hope for the good of humanity that they are, but those things, will be replaced. But otherwise, no, what might happen is that parts of the job can be automated. Now, the things that can be automated is, so robots do things at, at scale. They do things they can they can do boring, laborious tasks. They do them much better. And, and so I, I just want to go, does it back. Even if robots are better than humans at something, it doesn't mean they are replaced. Since Gary Kasparov was beaten by, Deep Blue in 1997. People still play chess. And in fact, people play central chess. Central chess, are the best chess players. The human plus machine, beats a pure machine or a pure human. Now, in fact, the best centers pilots of chess programs are actually not the best chess players. Because the best, solo chess players will, overthink what the machine does and second guess it. And so you actually, again, coming back to Tony Stark's Iron Man suit, you know, like, if Tony Stark was Superman. Superman wearing alignment suit. Probably not a great idea, but maybe Tony Stark, who's a clever you know, human. Great idea. So another thing is, so humans have been bested by machines at a number of tasks for hundreds of years. The best hand-to-hand fighter has been a machine for, I know, at least Leonardo da Vinci's time. Maybe it maybe a year earlier we could create, machines that will beat a human. Yet people still have boxing and cage fighting, and they get in their underwear and into a cage and slug each other out. If you put a robot on there, 100% of the time will win. If you have a a good robot. So people still want humans with things, and humans have a purpose even if they are not the best. But there are things that humans will always be better at. One, contextual reasoning. This is two creativity. Three charisma four. Empathy five. Judgment six lateral thinking. So these these things humans will always do better. If you want to stand up in court and convince somebody of your case, a robot is not going to be convincing. They're not going to get that empathy. If I want to make a judgment as to what is the best thing to do, what is the best law to to use a human will always be better than a machine, but will be augmented by machines. And just as we are augmented by machines now, so will we be replaced by generative AI? Now the level of generative AI at the moment it's actually pretty good. I would say a reasonable approximation of what the level of general AI’s ability is is probably a university student or a university graduate who has gone to all of the lectures, but who hasn't done the reading. So now they're sitting in their exam and you're asking them questions. Now they might make some of them up. But they're pretty good. Now what could you get a graduate to do? You get them to do a lot. And especially if you have an unlimited amount of them. Now anyone who has worked with, with junior professionals before immediately knows the things that you're going to need to put in place to work with generative AI. So you don't just get a junior to write something for you and then send it off to the clients.

Robyn Jacobson

Yes.

Adrian Cartland

You read things, you might get them to write something for you and then use it as inspiration. They might write many, many words, but they just sort of a word salad.

Robyn Jacobson

Are there some examples of where professionals have used AI, and perhaps not been sufficiently looking over the contents, and therefore have passed it off as being correct, and it's turned out to be incorrect?

Adrian Cartland

Well, there was a great example in the US, Mata, Mata, V avianca and a solicitor or attorney had to prepare as case submissions and, didn't have access to a research tool. And so instead went onto ChatGPT and said, I want you to generate me some cases that say this. And it did exactly as it was told to, which is, yeah, which is fantastic, except that it hallucinated the cases it made up, a case about Southwest Airlines that answered and helped his case exactly like he told it to. And again, think of this like a university graduate. And he said, go and do this thing you haven't said. Don't make it up. If you do say don't make it up. Yeah. It that improves it. Now then what happened is he submitted to the other side and they did. The first thing that they would do is looked up the reference and go, well, this seems to be a case that would win you the case when you you matter. Why can't we find it? Now I just want to stop and say I don't understand how someone could have relied on a case without actually reading it. Like. I mean, who does that?

Robyn Jacobson

Did he think it to be a valid case?

Adrian Cartland

Yes. He said, you know, I want a case that supports the thing that I'm doing and it's and it listed off and it looks like a properly cited case. And I gave a summary of the case. Okay. Yeah. I mean I would have thought that you would have checked it like that was that was what I understood. Everyone was taught in in legal research and writing when I was at university. But anyway, so the other side then comes back to him and says, we can't find this case. And then he continues to, to cause a problem. So instead of going, you know, maybe they're right, maybe I should, you know, get someone else's help on this, lookup a proper research service. But then he went back to ChatGPT and says, is this case real? And then ChatGPT says, yes.

Robyn Jacobson

Is it like saying to someone, are you lying?

Adrian Cartland

Are you lying?

Robyn Jacobson

And they say, no

Adrian Cartland

No, Is that a lie? No. It’s just, It's ridiculous. But then he said, okay, show me the case. And then it generated the case, which is totally a made up text. And if you look at it carefully, you will not even carefully, you know, if you half decently look at it, you can see that it looks like legal text, but it isn't particularly coherent. Again, like there's a uni student who's sitting in their exam and they've written many words and they've used lots of legal words, and you go, but you just made this up. So he got in trouble, he got fined. And I think he got struck off and, and rightfully so.

Robyn Jacobson

So do we look at that as an isolated case. And yes, we can have a laugh about it or doesn't represent or present a serious risk in terms of what professionals are passing off as work to their clients.

Adrian Cartland

Well, let's again, consider the alternative is what if he had given this to a junior? And he gives this to this junior who goes off and finds a case who, you know, doesn't read it. And maybe the junior is not going to expressly make it up. But if you've gone, if the junior finds a case for you you don't read it.

Robyn Jacobson

It could be the wrong.

Adrian Cartland

It could be the wrong case. That's it. And then then his. It still would have made the same problems with the processes that he had. Whether he used ChatGPT or a junior, he would have run into problems. So, you know, the problem is not generative AI. The problem is the processes that he had. So if you were following good professional practices, you shouldn't have a problem with this. Although although of course, another part of this is that he didn't quite understand what it was doing. He genuinely thought that this was an accurate research service. And so you you need to understand the tools that you're, that you're using. So it's like if you get in your car when you come to the wharf and you go, well, I just got to drive off of this wharf because I expect that it's also a boat. No, it's not a boat. You need to get out of the car. Get on the boat. So here he thought that this was an accurate research service, and it wasn't. So you need to understand the technology that you're using. And again, that's a fundamental problem, not a generative AI problem.

Robyn Jacobson

If you're AI practitioners using it and there are now, are they going to be streets ahead from those who don't. And I think of this a comparison cloud accounting and cloud computing. We know that there are many advantages. There are efficiencies. They've got the ability to share a file directly with your client. You can work from anywhere on it. There are lots of commercial advantages and efficiencies that come from that. And to some extent, they've moved ahead. And they might still be those using, say, desktop programs. Is this an example where those that adopt us engage, that are going to have commercial advantages and those who don't are going to have disadvantages, or is it just a different way of working?

Adrian Cartland

So if I was trying to sell a book or an article or a consultancy report, I would say yes. If I was trying to sell some software, I would. I would say yes, but I'm going to say it kind of depends on what you're doing. So let me give you some simple examples. If you're trying to do a first draft or something or like generative AI is fantastic. Now we joke about lawyers not being good with maths. And then the the flip side of that is that we joked about accountants not being good at writing. I know a number of accountants who use generative AI all the time to write emails and so on, because they write them in, let's say, accountant words.

Robyn Jacobson

Yes.

Adrian Cartland

And then I turn this into polished words, and you can tell that it's from the generative AI, but it's a much, much nicer email. So again you're stepping up and it's another thing is are you trying to generate lots of words. So let's just say if you did a job that you did was generating consultancy reports that talked about the future of artificial intelligence. Now at the moment, there are some consulting firms that get 22 year olds to generate a lot of text. And then charge six figures for that to large corporations who say, great, you know, we're learning about new technologies. Can that be replaced by I'll call could. Could someone be much more efficient in doing that? Absolutely. As you can see from my paper, I've written something like that. The the futurist, Richard Sass guide. He's written lots of papers and books and articles and so on. I look at what copilot, drafted for my paper, and I. You know what? I think it's better than a fair amount of his writing. So certainly, if that was what you're doing, then. Yes, if your job is to think, you know, have contextual reasoning with your client, you sit down there and go, I understand this one thing that you're saying, but I also need to understand all the problems that you that you're dealing with, that you need to empathize with the client. If you're understanding, if you're trying to make judgment for the client, that doesn't help. Now, I might do some of the back office work. You know, like, again, watching your emails, writing some nice blog posts, said ten things about FBT. Do do a listicle. It will absolutely smash that. I use generative AI on all of my, website blog post images because they're much better than, much better than stock images. And I write a lot about artificial intelligence in the law. There's only like five stock images for AI and ML, and they're all used by every news outlet. And so I'll look at my blog post and I'll see it on 50 other websites. But now I've got a whole bunch of really specific intricate pictures on there, and they're fantastic. Now so that stuff is replaced again. Has that made my core business better? Not really, but it has improved things.

Robyn Jacobson

It makes it less generic.

Adrian Cartland

Yeah, it makes it less generic. The other thing is the biggest change that we've had in, say, more is the ability to copy and paste.

Robyn Jacobson

Yes.

Adrian Cartland

And 40 years ago there were typing tools. And since we had WordPerfect, the ability to delete and copy and paste, that's changed all the typing tools of God. Now, has that impacted the core part of wall? Not really. Obviously the people who could copy and paste and they've become a more efficient. So yes, there is absolutely competitive advantage there. And it really just depends on particularly what you're doing. So I don't like making broad statements. And so that's why I've got a really long answer to that. And and so the answer is it kind of depends for some things you can for some things you think that you can't, you know, when you see someone who says 49% of, you know, more jobs or your professional jobs are going to be replaced by artificial intelligence? Yeah, well, that's not it's not true. Can things become much more efficient? Yes. But also the job of the positional is not actually about cutting down work. See, our incentive structure as a professional, the most overriding thing that we have is not to screw up that. So over a career of, say, 40 years could be 60 years for many people, but say 40 years if you make one large critical mistake that could end it. So the like the most important thing in your job is not to ever be negligent, not to ever screw up. So you don't have unlimited time. You have a constraints on this. You can't look at every piece of legislation, every every law. And so you need to do some triage on that. Now if suddenly you can do that triage faster, your incentive is not to do more work, but is to go deeper and remove mistakes. If you're, say, a, returning to law and with the ability to copy and paste, legal contracts have doubled, tripled in size because lawyer will go now I can add in this clause. This goes, this goes. I don't have to dictate it out. I can just go copy and paste. And so the more research we can do, the faster the research we can do, the more we will do. And so it will just expand the nature of work. And it works the other way around. The ability of AI to automate things will mean that the government says, let's find new things to review. Like, you can easily set a generative AI to review a whole bunch of text. You don't need to specifically data match. You can say reveal this text, okay. That means now there's a whole bunch of other things that can be audited. There is more work. This comes back to basic economics, to bond and supply curve. We have shifted the supply curve. When you shift the supply curve out, what that means is that you will produce more things for lower price. So there will be a greater quantity of goods. You move along the demand curve. And so now you might say does that mean we're all going to charge less. No. Maybe you can do this one job cheaper but you charge by the hour like you. You just do more jobs and there will be more jobs created. So I think that what will happen over the next ten years and again, I hate making these big predictions, but over the next ten years, there will be a massive explosion in the amount of tax work.

Robyn Jacobson

Adrian. Thank you. You've taken us on quite a journey, and it's really interesting to see where this is now and where this is going to take us in the future. So I'm sure you'll keep us informed of the period ahead.

Adrian Cartland

Fantastic. Thank you very much. Thanks. Excited.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Adrian Cartland, principal solicitor at Cartland Law. If you've enjoyed this episode, we'd love for you to subscribe, rate and review. Wherever you listen, we'd welcome any feedback and suggestions to catch all from TaxVibe and The Tax Institute. You can join us on LinkedIn if you're interested in being at the center of the tax conversation. Membership of The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at Taxinstitute.com.au. Thanks again and we look forward to joining you next time.

Financial abuse – What’s tax got to do with it?

Release date: 25 September 2024

Domestic violence is a national problem and has been labelled a crisis in recent times. But did you know that most cases of domestic violence have an element of financial/economic abuse? The Australian Bureau of Statistics estimates that 2.4m Australians have experienced intimate partner financial abuse. And it is often financial instability that can lead someone back into or to remain in an abusive relationship – highlighting the importance of the systems supporting victim-survivors.

In this episode of TaxVibe, Robyn chats with Dr Ann Kayis-Kumar, Associate Professor of Taxation Law at the UNSW Business School, about financial abuse perpetrated through the tax system and what tax practitioners can do to respond to this form of domestic violence to support their clients.

Host: Robyn Jacobson, CTA

Guest: Dr Ann Kayis-Kumar, Associate Professor, UNSW Business School

Need help?

1800 Respect (1800 737 732) — provides free crisis support, counselling, safety planning and information 24/7
NSW: Redfern Legal Centre’s Financial Abuse Service NSW provides free legal advice to people across NSW who have experienced financial abuse (no equivalent in other States)
National Debt Helpline: 1800 007 007

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest's unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by Dr Ann Kayis-Kumar, Associate Professor of Taxation Law at the University of New South Wales Business School. Ann specialises in tax law and policy at a domestic and an international level. She's the founding director of the UNSW Tax and Business Advisory Clinic, an international award-winning platform for experimental work integrating learning, innovative grassroots research and catalysing social impact across Australia. Her research has appeared in the media, including Channel Ten's The Project, ABC Radio National, and The Guardian. Ann also serves on the Tax Institute's National SME Technical Committee, the ATO's Small Business and National Tax Clinic Stewardship groups and the Law Council of Australia's Taxation Committee. Ann, welcome to TaxVibe.

Dr Ann Kayis-Kumar

Thank you so much for having me, Robyn.

Robyn Jacobson

Look, this is a really important conversation that we're going to be having today. And I just wanted to firstly, thank you for the time and your commitment to this space. As we talk about economic and financial abuse in relation to, in particular, intimate partnerships. You wrote an article for us in our TaxVine, our member newsletter, that was titled Domestic Violence – What's tax got to do with it? Now, leaving aside the really catchy title, I think this is such an important social conversation to have, and I thought as we take a more serious path away from more regular tax conversations, and we delve into how the tax profession can take a role in identifying and disrupting financial and economic abuse. Can you just set the scene for us as to on the national landscape – where's this sitting? How's the conversation going? What's the narrative like? Because we've seen a lot of increased media coverage in this space.

Dr Ann Kayis-Kumar

Yes, absolutely. Robyn. So we know that domestic violence is a national problem. We've had people as senior as the prime minister talk about it as a crisis. We also know that most cases of domestic violence also have an element of financial and economic abuse. And we know the numbers are really staggering. So the ABS most recently estimates that 16% of Australian women and around 8% of Australian men have experienced intimate partner financial abuse. So we're talking 2.4 million Australians. And that's likely an underestimate because tax so far hasn't really been as deeply understood.

Robyn Jacobson

Yes, staggering figures and we'll get more into the stats and the data and the trends. But for our listeners can you explain or define what is economic abuse or financial abuse. Perhaps those terms are interchangeable, and does it relate to domestic violence?

Dr Ann Kayis-Kumar

Yes. Yes, absolutely. So what is financial and economic abuse? There's a lot of literature around defining it and unpacking it, but at its broadest, it's about a perpetrator in an intimate partner relationship using money as one of the tools at their disposal to control the victim survivor. So that just adds to the pain and the dynamics of power and control and coercion. And money is a really powerful one. You wouldn't think that it would be so profound, but it actually, is one of the most problematic and insidious elements because, for starters, it continues after the victim survivor has escaped the abusive relationship. And also it can be used in ways that are less visible. And so there might be less help seeking behavior by victim survivors because they might not even realize that what they're experiencing is financial abuse. So coupled with that plus relatively low awareness of what it even is as a community, it makes it really important that we have programs like yours to raise awareness and lift the lid on it so that we can have more of a conversation about what it is, what the red flags are, and more optimistically, what we can do about it.

Robyn Jacobson

One of the key points I take from what you just said was that even after any immediate physical threat has passed, there is still, if not an ongoing or potentially even an increased risk of this financial or economic abuse.

Dr Ann Kayis-Kumar

Yes, yes. And to add to that as well, often, and this is what we know from the domestic violence literature, often it's financial instability and economic instability that can lead someone back into an abusive relationship, even after they've left. So that really highlights the importance of the systems supporting victim survivors.

Robyn Jacobson

And whether that's returning to that initial abusive relationship or whether it's seeking some sort of alleged refuge, or apparent refuge in a new relationship which might turn out to be equally as damaging.

Dr Ann Kayis-Kumar

That's such a good point.

Robyn Jacobson

Yeah. So we know that financial abuse almost always occurs alongside other forms of domestic violence. And this could be physical threats sexual, psychological and emotional abuse, threats, intimidation, controlling behaviors, duress. The list is endless. What sort of trends are we seeing? What's the prevalence of this in our community? And I might even suggest your community, your population that you particularly look after might be a little more exaggerated than perhaps the general population.

Dr Ann Kayis-Kumar

We definitely see the people that we help are in the most extreme of crises. So the clinic that I'm the director of, we partner with community organizations to identify people who are in serious hardship. And since we've started, we've always seen an overt representation of particularly women who are experiencing domestic violence and financial abuse that manifests in really unexpected ways. When you layer on the tax taxpayers. That goes back to your question, what's tax got to do with it? And ultimately, it boils down to business structures and joint and civil liability. Once you have any sort of mechanism and this applies beyond tax as well to other facets and other areas of law. Once you have some sort of joint liability at play, it is vulnerable to abuse by a perpetrator who can, as a tactic of control and revenge, allocate, sometimes without the victim survivors knowing, even allocate tax debts into that person's name. And that might not even come to light until, for example, that person receives a direct penalty notice. So, for example, one of our clients had that happen to her. She came to us in tears with the direct penalty notice for a company that she didn't even know existed, let alone that she was the director of.

Robyn Jacobson

And that's where my mind was going. You've got obviously, the case of multiple directors. So let's assume that we've got, two people in a relationship who are both directors of the same company. In the ideal world, they are, of course, appointed formally. And they know when they signing off that they have been appointed. But we've heard of store directors where unscrupulous directors might deliberately approach homeless people or people who are down and out and very desperate for some money, and they'll take it on in order to become a director of the company. But that understanding the implications, that's slightly different. This is where perhaps that director doesn't even know they've been appointed. But the other place that my mind went was cross partnerships. And there are a lot of small business partnerships which are in a domestic relations sense, set up. And so you could immediately have that joint and civil liability where one of them just walks away from all the commitments and obligations and leaves the other partner to carry the mess?

Dr Ann Kayis-Kumar

Precisely, yes. And we have had situations just like what you're describing, Robyn.

Robyn Jacobson

Yeah. What do you think is driving this? So we've seen a lot of increased discussion. Is it because there's greater awareness of the issue and the communities talking about this more a little bit like other things that years ago were taboo and now we are talking about it, or is it a case of an increased rate of incidents of this happening, or is it, in fact both?

Dr Ann Kayis-Kumar

That's a really good question. And while I don't have the the concrete numbers because it's something that is still relatively new as an area, I imagine, I suspect it is a bit of both. So on one hand, there is this increased awareness really catapulted to, a national conscience since the royal banking Commission led to the big banks doing work on financial abuse and identifying things like $1 transactions being a marker of financial abuse, that's then really shifted the national conversation around financial abuse specifically. So there's heightened awareness of it, but also, we do know that from the literature, increased levels of financial distress are significantly associated with financial abuse. Unfortunate. In a post-pandemic environment, we've seen a cost of living crisis that is not easing up and people are really struggling. We know that there are millions of Australians who are living below the poverty line. We know that of people who are homeowners, around half of them are experiencing some sort of financial distress. So there is a lot of pressure financially across the community more broadly, and that can manifest in these issues being triggered and exacerbated.

Robyn Jacobson

Do you have any numbers around the the people who are going through this financial distress, either in what we call official severe financial hardship or those that are feeling pressure but may not actually be seeking assistance?

Dr Ann Kayis-Kumar

Yeah, that's such a good question. We know from the Financial Counseling Australia data that it's roughly only 300,000 people per year who approach a financial counselor. So that's people who are in such deep money problems, and they really need someone to help them navigate those many problems. And we know from research that my team and I did, this is pre-pandemic, so the numbers are probably higher. We know that over a third of people who approach a financial counselor have an unmet tax need. And of that third, roughly 90% need a registered tax agent because they are unable to manage the long term overdue tax returns and best returns, and also tax debt discussions with the ATO. And really, like you say, once you layer in a small business angle, you really need a professional to help you navigate it. It's pretty much otherwise impossible.

Robyn Jacobson

And yet, ironically, in most cases, there's a cost associated with seeking that professional tax advice unless they're going to something like a tax clinic.

Dr Ann Kayis-Kumar

Exactly. Yeah.

Robyn Jacobson

Do you think also we've got a bit of a cocktail going on where we are some years out of the pandemic, and yet it feels that some people are still coping with that or dealing with that. There seem to be a lot of short tempers. We know their mental health issues across the community, and it just seems a lot of this is fusing together with that cost of living pressure as well. And there may be people who have never experienced this before, who haven't been in mortgage stress, who haven't had the familiarity of being around financial distress and are now facing it. So this is not to exclude in any way, but it helps to understand why, some of this perhaps does occur.

Dr Ann Kayis-Kumar

Yeah, I absolutely agree with you, Robyn. I think one of the things that we were really, surprised to find when we started collecting client data six years ago is that severe mental health issues were one of the most striking trend. About 80% of our clients self-report severe mental health issues. That was no surprise to colleagues in the mental health space, though, because they've established for decades that financial distress and mental health illness go hand in hand. They are significantly associated. So for us and then in the tax literature, it was new but not new from a mental health literature perspective, which is informative for us because it adds an extra dimension, like you're saying of these are all interrelated issues.

Robyn Jacobson

I understand that ASIC has published some figures around the people who are reporting distress. In other words, they're trying to keep up with their loan repayments but actually struggling. Have you got to figure around that?

Dr Ann Kayis-Kumar

Yeah, I think the last time I checked, it was about 5.8 million Australians have some sort of financial distress, which is really troubling. Absolutely. And those are people who, I guess the literature is, is silent when it comes to people in poverty. For the most part. And so that there's a bit of a policy blind spot at that level, too. And that's the focus of what we're doing with the clinic and finding really surprisingly, that, for example, most about clients have a tax debt that is quite significant. And that's up to, in some cases, $300,000 of tax debt. But they're on Centrelink. So it gets to a point where we really need to unpick what's happening. The difference between, once you overlay the financial abuse angle, what the solution should be, because it's not right that if someone is not even responsible for creating a tax debt, that they are deemed responsible for paying it off. So our clients will be in, transitional housing, reliant on Centrelink. So they've got income of the significantly less than the national average. But on average the tax debt that they hold is about $90,000. It's simply impossible for them to pay that off with a payment plan. And what I worry about and what my team is concerned about, is the next steps that can then lead to bankruptcy. And that then fades into what you're saying before about the mental health piece. Because if someone is made bankrupt, then what are the consequences of flow from their.

Robyn Jacobson

And we'll chat about that in a moment. So does any of this get into the sphere of elder abuse or is that a different conversation?

Dr Ann Kayis-Kumar

That is a whole other conversation and one that we really need more work being done. In my research, focus has been on intimate partner financial abuse, but there is absolutely a whole other unexplored unknown when it comes to that and its interaction with the tax.

Robyn Jacobson

Okay. What about whether this is getting into what can be described as gendered violence?

Dr Ann Kayis-Kumar

Yeah. So unfortunately there is an overrepresentation of women when we talk about financial abuse. The statistics, it's you know, it's 16% versus 8% women to men experiencing financial abuse. So statistically, much more likely to be women experiencing financial abuse.

Robyn Jacobson

And that's a national average. You're referring to the 16% of women.

Dr Ann Kayis-Kumar

Of all Australian women, according to the ABS data.

Robyn Jacobson

On what would be the proportion that you're seeing in your clinic.

Dr Ann Kayis-Kumar

We've got much, much higher rates of financial abuse. Unfortunately, when I first started the clinic six years ago, it was about 60%. And that then prompted collaboration with the Gender Violence Research Network. And they've just been invaluable because they've already been working in this space and have significant strides in the financial services industry. However, what's even more troubling is in the last year and a half, that number has skyrocketed to over 80% of our female clients. So reporting financial abuse.

Robyn Jacobson

Recently, there was a report delivered from the Independent Rapid Review of Prevention Approaches to help stop gender based violence. A lot of words in that. There were some recommendations made across six key areas. My question is, is this just another report? Another review with more recommendations. Does this report progress the conversation or more importantly, progress action and solutions to actually make a difference to those who are in these very, very difficult circumstances?

Dr Ann Kayis-Kumar

Thank you, Robyn. I think what's really special about the Rapid Review is it's we already knew from the national plan that tax was part of the landscape, but the national plan didn't have any concrete policy solutions. And what's really promising about the rapid Review is that the expert panel has identified tax as one of the significant systems that can cause harm. And so that in and of itself is breakthrough. That is the first time that a federal government level report has recognized the interaction of tax and financial abuse. And so I'm really optimistic that with the report coming out and then in October next month, the Parliamentary Joint Committee on Financial Abuse will deliver its recommendations to government. I am an optimist, and I'm hopeful that we will see some real policy recommendations being made, that the government will be able to act on the things that are practical and meaningful, because that is really what we need in this space. We need law reform so that the regulatory environment and the administrative levers are modernised and appropriate to deal with this.

Robyn Jacobson

So let's unpack the tax side of it a bit more. With your background as founding director of the UNSW Tax and Business Advisory Clinic, what do you see and how does tax play a role in all of this? And I'll add to that, you have in your previous research and papers and, and other publications referred to sexually transmitted tax debts. So can you also explain what that means?

Dr Ann Kayis-Kumar

Absolutely. So sexually transmitted debts are a term that financial counsellors coined a little while back to highlight how a victim survivor can be saddled with debt. What we're seeing is that playing out via business structures in the tax system, and that's really problematic, because then it means that the ATO is pursuing victim survivors, sometimes without the victim survivor even knowing about the debt to begin with. And it's, unfair on the ATO as well, because they don't have the legal mechanisms that make it really clear that, for example, with that DPN affected clients. That that is a defence. If we were to legislate for those sorts of defences or to have a mechanism, an exit valve, it would be beneficial for the ATO and beneficial for the community.

Robyn Jacobson

So you've talked about Director Penalty Notices being issued to people who are directors but didn't even know they were. And of course, the DPN makes you liable for unpaid PAYG withholding superannuation guarantee charge, but also GST, luxury car tax and wine equalisation tax. You've also talked about bankruptcy. So let's delve into that further. What are the implications if someone is declared a bankruptcy, what sort of impact does that have on the victim survivor.

Dr Ann Kayis-Kumar

Absolutely. And particularly keeping in mind, the piece around the lack of social justice that is achieved by bankrupting someone for a debt that they weren't even responsible for creating and oftentimes didn't even know existed. So in addition to that, then it is part of the broader tactic of control and revenge and abuse. So what we then see is the system effect kicks in, and the system is often deliberately used by perpetrators as a further tactic of control and abuse. So the system effects of things like once someone is made bankrupt, it impacts their ability across short, medium and long term to attain economic security. It can affect housing, it can affect employment. It can affect ability to get finance. So it can affect ability to travel overseas. But more profoundly when it's done in really sinister ways. And we have seen clients who have told us that their former partner has said to them, I am going to financially ruin you, and that is a deliberate thing that they're doing. It's loading up with revenge tax debts as a result. Once you overlay and family law and bankruptcy, things can get really problematic in ways that are really unexpected. For example, being made bankrupt can affect someone's standing in a family court matter, which can in turn affect their ability to secure child custody. So there are very profound ripple effects.

Robyn Jacobson

These words, and I'm going to reel off a bunch of them for you, are these apt descriptions of what you see with your clients: power imbalance. You've talked about someone deliberately setting out to ruin the victim, intentional behaviour, revenge, calculated behaviour, vendettas, and energy put into destroying the victim.

Dr Ann Kayis-Kumar

Yes, yes to all of the above. Unfortunately, it's chilling.

Robyn Jacobson

Yeah, it really is. What role does the tax system and maybe this is a paradox. Does it actually enable or facilitate this inappropriate behaviour? Or can it be used to harness good out of it? It there a way of using the tax system to identify and prevent financial abuse.

Dr Ann Kayis-Kumar

Yes.

Robyn Jacobson

And I feel that you’re more likely going to be leading on the bad list rather than the good list. But let's see how we go.

Dr Ann Kayis-Kumar

I think the present state is bad just because we've had such poor awareness and understanding of it. And often when I talk to people, they are surprised at how the tax system is weaponised. It's something that we don't expect to see. But unfortunately at frontline level it is commonplace. What we could do is turn this whole ship around and empower the ATO to identify and support victim survivors by bringing in legal solutions that give them the discretion to release victim survivors from tax debts created by the perpetrator. Also other administrative solutions, too. And that's often things that we can see international examples of in the way that debt is managed, for example, in the United States, which really is the shining light when it comes to serious hardship in the context of innocent spouse relief is that they have the legislation that means the IRS is poised to be able to grant these sorts of discretions, but they also have administrative mechanisms, like a victim of domestic violence indicator that while not perfect, we could learn the lessons from and cherry pick elements of to design something that's really going to make the ATO positioned in a way that it can disrupt perpetrators rather than the situation that we have today.

Robyn Jacobson

How does the indicator in the US work?

Dr Ann Kayis-Kumar

That one's a little bit complicated, but it goes to previous behaviour in screening, and then the IRS is able to keep a record of that. Another thing that we could be doing here, which I understand is forming part of the broader conversation around the national response, is sharing data across agencies. So for example, ASIO, Centrelink and the ATO, we know from previous work in this space being led by academics like Kay Cook, that there is also the weaponisation of the child support system. So by not lodging a tax return or by lodging a tax return, but understating income that has a knock on effect, the child support payment amounts. And we've also seen situations where perpetrators have deliberately understated and subsequently amended their tax returns, which then creates Centrelink debts, which then the ATO needs to pursue. And it gets to a really messy state because you can't get relief from your tax debts on grounds of serious hardship if you have other tax debts, and Centrelink debts are one of those other tax debts.

Robyn Jacobson

Is it the case that if you don't lodge a tax return for two years, then you don't need to pay child support?

Dr Ann Kayis-Kumar

Yes, that is something that has been uncovered as well. And I absolutely agree with you in the way that you're saying it. It is absurd even just saying it. And that's one of the deficiencies in the system that I'm hopeful that we see corrected as a result of the government work in this space.

Robyn Jacobson

What other red flags do you see, or, I guess more importantly, for our members who are practitioners and they're sitting there with their clients, what sort of things should they be looking out for? And I want to emphasise, this is not about an expectation that the tax profession should be running to the rescue and solving all the problems, intervening, because they're not trained to do so. They're not trained psychologists, they're not trained in domestic violence issues, but there must be signs or red flags that would make a practitioner sit back and think, gee, I wonder if there's an issue here, and if there is, what could and should they do about it? So perhaps we break it down and look at what are some of the red flags you're seeing.

Dr Ann Kayis-Kumar

Absolutely. So in situations where decisions are being made, transactions are being made, organisations being set up. And that's happening as a couple, but without the written or, evidence consent of the client's spouse. That is a red flag. Identification checks. So we've seen again, really chilling ways that perpetrators can, you know, through charisma and other tactics, put accountants in positions that are compromising. For example, one client came to us and their abusive former partner had masqueraded as them by setting up a fake email account, pretending to be them, and telling the accountant that she couldn't attend meetings. She was too busy at work and everything just needed to be done via email. There was no client verification. Now, that's not to say that solving that would solve all the problems, because you still could have situations where there is coercion. And so the client's spouse may be physically, there may be giving consent that may actually be in a situation of coercive control. And we know that a couple of states, including New South Wales, have enacted legislation against that. But going to your point about what can we do as a profession? I absolutely agree with you. We are not trained mental health practitioners or domestic violence support services. It's more about where it is safe for both the client's spouse and for the individual who's identified a potential red flag, where it is safe to pull them aside and say this might be a red flag. Are you getting support? Do you need support? Something as simple as raising an awareness of it could have, a trajectory changing effect, but any further action? I think it's imperative that that individual, that particular person, is empowered to do the next steps of reaching out. It's certainly an area where I wouldn't recommend any further action from a professional's perspective, but things like raising awareness around the need to get consent, the need to make sure that the individual has an awareness of what the implications are from a tax and liability and personal liability perspective are really important. So it's about, an education piece rather than a crisis support, imperative.

Robyn Jacobson

Yeah. So in a similar way, if I was a practitioner and someone I didn't know approached me and asked me to set up an entity, change a bank account, amend a prior lodged return, and then that generates a refund either from an activity statement or a tax return. I think my little antenna would be going up thinking, okay, is this all legitimate? Is this a potential fraud on the ATO? So in a similar fashion, it's not to say that anyone who sets up a new entity or changes a bank account is engaged in in fraudulent or inappropriate behavior, but it's perhaps a red flag to look out for. What are some of the other red flags you would suggest accountants should be alert to?

Dr Ann Kayis-Kumar

Yeah, absolutely. And that pays around bank accounts is really interesting. So where an individual, the client's spouse is assigned income, but then the funds don't go to that account or they go to a different account. The tax liability will still be triggered, but they may not have access to funds. So there's only so much that we can do as a profession. But just having some guardrails around awareness, I think is a really important first step in identifying and supporting, people in these situations. One really interesting piece that I often hear domestic violence advocates talk about is the need for, the victim survivors to have their own bank accounts, but that is set in a way that assumes that that is achievable. Often one of the really unfortunate elements is that that's not the case. We shouldn't take for granted that people have independent access to their own bank account. And the knock on effects of that is also something that it's still early days, but does make you wonder when it comes to lodging things, whether or not you use an accountant via myGov, for example, with director IDs, what potential issues there are that we're still, you know, just scratching the surface of.

Robyn Jacobson

So would you also be looking at for say changes in patterns of distributions from trusts or changing office bearers? So whether it be directors, trustees, appointors, shareholders, beneficiaries of trust, there's a whole swag of things there, perhaps looking out for amendments of returns or activity statements.

Dr Ann Kayis-Kumar

Yes, yes, absolutely yes to all of those things. Yes. And unusual patterns of really large numbers that can, create large tax liabilities that are outside the norm of that particular operation. While that might just be a really good boon for that business, it could also be an indicator of other things. And we've seen that in areas that are adjacent, like with protego. But it's just about I think from our perspective as a profession, the first step is raising awareness amongst the profession of what financial abuse, even is and what those signs could be, and the pace around consent and coercion and how they interact. Sometimes the victims will have knowledge, sometimes they won't. But in the US, it's really interesting because they don't require evidence of anything but the abuse to then be able to relieve the tax debt, which I think is really interesting because it goes that piece around, even if you had knowledge and so called consent, there's coercive control. So as long as you can evidence that abuse was occurring, that is the legal threshold.

Robyn Jacobson

We know in Australia about two thirds of individuals use a tax agent. And this might be a difficult question to answer, but do you have any insight as to whether it's more likely to occur where a new client works, walks through the door, or whether it's existing clients that you might have been looking out of for the last 10 or 20 years.

Dr Ann Kayis-Kumar

That is such a brilliant question, Robyn. And I think because this area is still so new, we're literally in the infancy. It's only really been unpacked in the last two or so years in terms of the literature base from an Australian tax and financial abuse perspective. I would love to know what that number is. And it's something that would be really instructive to have the data around. We simply don't have as rich an understanding from an empirical research perspective. So potentially, if any of your listeners, interested in doing research in this space, that would be really, really interesting to to have that data and would inform government and policymakers.

Robyn Jacobson

That's actually an interesting approach, because if the data shows that, I don't know, let's say 80% of this was happening where it is a new client, that it means agents and practitioners more broadly should be that much more attuned to when someone walks through the door to make sure the radar is off on all the range of issues, not just, whether there's financial or economic abuse, but of course, if there's any fraud that's potentially being planned. Whereas if the data showing that it's more the longer term clients, the ones that have got fixed, existing relationships with their agents, then that brings in a different dynamic.

Dr Ann Kayis-Kumar

It does indeed. And what we have seen with a number of our clients is that, often if they do have an accountant, it's the perpetrators mate or contact. Who has brought that account into the fray to begin with. So once there is a separation, the client spouse is on the out and that can have knock on effects as well. One thing that we unfortunately have seen occasionally is our frontline team not being able to get the records for the period that they were with that particular professional, and that could be for a myriad of reasons, including just simply the client not paying for the work that it can be a red flag if there is a withholding of that sort of data. And so that would be really interesting to get a sense to, of how prevalent that is, because like we've talked about the clients that we say are really at the pointy end, they're the most extreme. But we do have situations like that. And that's echoed in what the evidence has been presented to the parliamentary joint committee around the role of various professions and silence and subjugation across a myriad of different professions, and how that works as well.

Robyn Jacobson

Where my mind is going is the code of professional conduct and the Tax Practitioners Board and the regulation of the tax profession. And there are two things that jump out at me that one is about managing conflicts of interest. And of course, if you are then in the situation where the client, as in two people have separated, you then need to manage that conflict. There's nothing that says you must only act for one of them. But in a situation where it's quite acrimonious, then that could be a situation where you do need to pick one over the other so that you're not conflicted in that way. And the other is about the agents making sure they comply with the proof of identity requirements. So we know there are standards expected by the Tax Practitioners Board. They've got that in there, the guidance notes or practice notes. And so checking the identity and verifying who the client actually is is a really important piece of this. And that's needed for so many reasons to safeguard against inappropriate behavior. Absolutely no tax clinic. I just want to heighten this for a moment. Understand there are now 15 tax clinics across the country. You're getting Commonwealth funding, which is fantastic. And this is a really important piece of work. And I look at the stories, the reports and of course LinkedIn posts about people who work on the tax clinics going to remote parts of Australia and providing tax and superannuation services to those who probably haven't heard too much about it. How's the work going, and is there anything the profession can do to support the clinics?

Dr Ann Kayis-Kumar

Thank you so much. I really appreciate that, Robyn. I think one of the amazing things is our ability to collaborate. And also credit to the ATO for giving each of the clinics the discretion to formulate a clinic that best suits our geographical areas and serves our communities in the way that we were able to craft as we saw fit and where the demand was. When it comes to demand, obviously demand will far outstrip any supply in terms of frontline service provision, but I would definitely encourage anyone who's interested in contributing, whether it's in a in a pro-bono basis or in the case of my clinic, as an employee, albeit compared to what you'd be getting in practice, we'd only be offering you a peppercorn, but very much encourage anyone who's interested to reach out to your local clinic. And we are always really keen and welcoming of people who want to be at the frontlines and help people who need it the most.

Robyn Jacobson

Yeah, yeah, it's very, very, honourable work and very much needed. Some of the resources available to practitioners. Now reiterating that it's not about putting yourselves or your clients at risk. Of course, the key message here is leave it to the experts. That said, there are some resources, and it would be useful if you could just run through some of these. I am aware, in particular of the Redfern Legal Centre’s. Financial Abuse Service in New South Wales. Is there an equivalent in other states?

Dr Ann Kayis-Kumar

That's the pace that I think really highlights the deficiencies and the lack of awareness more broadly. For funding when it comes to this. So like you say, Redfern Legal Centre’s financial abuse service is a terrific service. And they're a strong partner organisation that we've been working with from an advocacy perspective as well as a client work perspective. And there's also some brilliant organisations like CWES’s money clinics, and they do some amazing work when it comes to economic empowerment and security. Unfortunately, though, that is quite unique to New South Wales. And we don't have across every state or territory, a financial abuse specialist statewide service. So that is a gap and it is something that would be really great to see, you know, a change in the funding model of the policymaking framework so that every state and territory can have its own specialist service.

Robyn Jacobson

What are some other services that are available to practitioners or to their clients?

Dr Ann Kayis-Kumar

Broadly, there's 1800 RESPECT. And so that's a really good first port of call. I wish we had a number for every state and territory that was financial abuse specialist and specific. But each state will have its own services. But at a top level 1800 RESPECT is a really good first port of call for people. If they're also experiencing financial distress and hardship, then the National Debt Helpline is really useful, as is the Small Business Debt helpline, and they will be able to patch in other supports that are specific to the client's needs and the geographic area. Once they are made, the referral out, those are the primary ones. We were talking about the interaction of mental health, domestic violence and financial stress, so mental health supports as well, would be potentially something where a practitioner would be able to, encourage particularly small business in the current economic climate to get support. But of course, it's hard because it adds to the burden of needing to go and reach out to get help. And that help seeking can be really powerful, but also it can be quite overwhelming for people. So that's one of the things of, you know, it's one of the challenges of it's one thing to give a number to someone. It's another thing for that person to actually go and take the step of calling that number. But there's only so much that we can do as professionals and I think the most critical thing is not necessarily the technical depth and the what is done, but it's the how. So if you have a client who discloses something that is financial abuse, or mental health, it's about not just glossing over that, but instead holding in that discomfort and saying, thank you for sharing that with me, believing them, and asking if there is a way that you can support and that can have a really profound impact on that individual, and it can even change the way that that person then chooses to disclose or not in the future. So that's really important to keep in mind as well.

Robyn Jacobson

And of course, the practitioner needs to be mindful of the confidentiality rules around this because they can't be disclosing their clients information to anyone without the client's consent. Alright: policy. So just in a minute or so to wrap up, what would you like to see change? How do we embark on this journey to make a difference to these people who need assistance?

Dr Ann Kayis-Kumar

Policy is such, this is the so what? Isn't it? So what I would love to see is, law reform that can give the ATO the right tools to be able to screen and support victim survivors. So we know from the US that they have multiple mechanisms for different under different grounds. You've got instant spouse relief that is specific to financial abuse. You've got, discretion to grant relief for tax debts on grounds of public policy, which we don't have here either. And you've got serious hardship relief provisions that are much more robust than what we have here in Australia, too. So the pointy end is the piece where the taxpayer is facing bankruptcy. And that would be the starting point for law reform here, enacting rules that can give the ATO the discretion to release a tax debt on grounds of financial abuse, and instead enable the ATO to retarget the perpetrator for the tax debt would go a long way in in profoundly changing lives.

Robyn Jacobson

And I can see you beavering away to make that happen. Ann, your key messages. What's the takeaway for practitioners? What are some things you would like them to reflect on after listening to this conversation?

Dr Ann Kayis-Kumar

Yeah, I think the top two things, one, the collective efforts around financial abuse have really been coming to a head, particularly over the last 12 months or so. And so I hope there is a ‘watch this space’ piece around policy changes when it comes to financial abuse and a tax lens overlaid on that. The other piece would be it is quite eye opening to know that it's 16% of Australian women. So it's about one in every six Australian women, and 8% of Australian men. So that's a lot of people across the community. Chances are that forms a small part at least of client bases. And so to have a heightened awareness that this is a national problem and being aware of that and watching out for red flags of that can hopefully help to disrupt the abuse to the extent that it's within our control as professionals.

Robyn Jacobson

Thank you. And I would add perhaps also the lack of awareness. There's no shame in still getting to grips with all this. It's going to be, for most people, firstly unfamiliar territory and secondly probably very awkward or difficult territory. So there is no shame in putting up your hand and saying, look, I don't understand this or I need some assistance to get my head around this so that I can better be there to support the client.

Dr Ann Kayis-Kumar

Yes, absolutely.

Robyn Jacobson

The other thing I would add is make sure as a practitioner, that you're not being used by the perpetrator to in fact, perpetrate more financial abuse. So keep that antenna up. Look at some of those red flags that Ann has identified and hopefully the whole profession can work as it always does together to make this a better system for everyone. So, Ann, thank you so much for your time and your insights. And your work is so important and so commendable.

Dr Ann Kayis-Kumar

Thank you so much, Robyn, and I really appreciate your support as well. It has been phenomenal. Thank you.

Robyn Jacobson

You're very welcome.

Thanks for listening to this episode of TaxVibe. I've been chatting with Dr Ann Kayis-Kumar, Associate Professor of Taxation Law at the UNSW Business School.

If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership with The Tax Institute could be just what you need to stay current and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. Thanks again and till next time on TaxVibe.

Talking TASA with the TPB

Release date: 9 August 2024

In this very topical episode, Robyn chats with Peter de Cure, Chair of the Tax Practitioners Board, about the latest changes to the regulation of the tax profession. They discuss the key issues affecting practitioners and how the TPB will implement and administer the significant changes.

More on this topic will be available in Session 13.3: The TPB and professional obligations at The Tax Summit 2024. We hope to see you there!

Host: Robyn Jacobson, CTA

Guest: Peter de Cure, Chair, Tax Practitioners Board

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute. And your host of today's podcast. On the show, I chat with some of the tax professions brightest minds during on each guest unique perspective to give you valuable and practical insights you might hear every day. We hope you enjoyed this episode of TaxVibe. I'm presenting to this today from the Barossa convention. So Peter is up in Adelaide and I'm down the Barossa. So this is a South Australian experience today. I’m here with Peter de Cure, chair of the Tax Practitioners Board, and we're very pleased to be able to speak with Peter today and unpack some of the developments of light regarding the changes to the Taxation Services Act. Peter is a professional non-executive director. His experience in tax matters has developed over 25 year career as a tax partner with KPMG, and is a registered tax agent for 16 years. Peter is a fellow of the Australian Institute of Company Directors and a Fellow of Chartered Accountants Australia and New Zealand. It is also a chairman and on the board of a number of other organizations, including the Royal Flying Doctor Service, S.A. and Inti, and the South Australian Fire and Emergency Commission, as well as Variety, the children's charity. Peter, a very warm welcome to TaxVibe

Peter de Cure

Thanks, Robyn. It's good to be here. And I think from a South Australian perspective, you’re a bit upside down. So we'd say you're up in the Barossa and we're down in Adelaide.

Robyn Jacobson

Yes, I am north of you, good correction.

Peter de Cure

That's all right.

Robyn Jacobson

Now. All good. Look, lovely to be here. But obviously here with the South Australian members predominantly and certainly I know they love showing off their valley.

So we are here to talk about the changes to the Tax Agent Services Act. We've had quite a journey over the past couple of years. And of course, this all started with the review of the TPB and TASA, as it's referred to back in 2019. And this has led to some very significant developments. So I just want to set the scene and and understand why we've got to this point. Obviously, integrity is a central point of any good tax system and the tax profession, and there's no question that the community must have trust in the system. And of course, they must be an integrity in the way that the tax profession and the practitioners conduct themselves. It's got to be free from any reproach. We acknowledge that most practitioners are doing the right thing, and we've got an few that have shone a light on the profession, which has led to setting a lot of political focus, media focus and even media articles this week continue to talk about these issues. So putting aside the revelations of 2023, there was momentum to reform. TASA, well before we found out about the misconduct of a few. So this review was in place that there were 28 recommendations in total, and 20 of those have been accepted by the government. So we're now into a space of working our way through the implementation of some of those. And this has come in a couple of tranches. Now, also tonight, Peter, as a statutory body is a government agency. You're there, of course, to lead the administration and the implementation of new laws regarding TASA. But of course, anything of a policy matter is beyond the scope of the TPB and is a matter for the government. So I acknowledge that upfront. And of course, our discussion will be confined to the things that are within your realm and what you can administer. So are you able to walk us through briefly how we've got to where we are? Because it has been a quite a journey. There've been lots of stages, lots of developments, and would be good to understand what's law and what's still to come.

Peter de Cure

Yeah. Thanks, Robyn. And I think it really is very important to acknowledge the The James review in 2019 was a pre planned and scheduled post implementation review of the TASA and the effectiveness of the TPB so that you know, really business as usual thing from a from a government perspective. And as you said, there was a range of recommendations in that large number of which were accepted by government, including one of them, which was to allow the, the minister in this, in our case, the assistant treasurer, a legislative power mike, a legislative instrument that becomes a code determination to add to the code of conduct. That does a couple of things. One is that allows the minister to respond if there is, you know, a major issue or some form of process. And we know that, you know, there's been both significant public and political comment around, you know, the misbehavior of, of a small number of tax professionals. So the minister's made the most recent code determination as his first term. And I said under the the revised legislation, one of the things I'd like to stress to practitioners about the ability for the minister to make a legislative instrument code determination is it also creates a capacity for the minister to do something in response to issues that agents might raise in terms of changing how the profession is going to work in the future. And I think, you know, the minister's capacity to be agile has been demonstrated by the fact that there's been a pretty quick response to add to the the termination, the transitional provisions. And that's been very much based around discussion with the profession. and the way that we've been speaking publicly about how the TPB intends to implement transition, so that that gave the minister an opportunity to respond very quickly and very directly to practitioner's concerns. The other part of these recommendations that, as you've seen, there's been several tranches of legislative change, including the introduction of the grants reporting requirements, including the expansion of whistleblower protection, so people who are eligible whistleblowers, I can now make whistleblower protected disclosures to the TPB as well as the ATO. Their consultation type is out there at the moment in relation to the appropriate accreditation and qualification requirements. To be a registered tax agent, there's a number of detail consultations in progress at the moment about guidance in relation to some of the changes in the law, and happy to talk about those as we go through today. And I think it's important to understand, for your members, that this started out as ordinary course of business. It's been pushed and followed around, perhaps by a little bit of farce in Parliament and the media around some specific issues. And government has worked with Treasury, ourselves and the professional bodies through the tax practitioners, governance and standards Forum to try and make sure that the legislation that comes out is practical and implementable. And by way of comment, I one of the things I really want to say that I think over the journey, the TPB is probably established, a reputation of practitioners. Yeah, we're a regulator and I think we're a robust regulator. But I think we've established a track record of playing a pretty fair lot. And we're going to stick to a risk based, management of compliance activity. first thing I'll tell you is that I'm not about to send out to our investigative team an eight point checklist of the new determination. And so I get out there and trip somebody up with this. What we're going to do is continue to focus on the high risk cases. The people that are really exposing the profession to reputational damage and deal with those. The new eight point code determination is consistent with the existing code. It's just a bit more specific.

Robyn Jacobson

And look, that's a comfort. What I would say, and this is a policy question. So I don't expect a comment from you on this. But I would like our listeners to understand is our position would always be that the law is articulate, free from ambiguity and clear about what it wants to achieve and what the policy intent is. And one of the overarching concerns we've got through a lot of the provisions that have been introduced is that there are very vague terms, we've got things like reasonable grounds and material and otherwise significant and ought to have. These are terms which are subjective and which require interpretation. So we as a professional class, relying very heavily on the TPB at the moment. And it's not just about trust, but it's about understanding practically how you can decipher the terms that are given to you in the law and then be able to be able to explain that to practitioners as to how they comply. So we would always prefer better drafted law. So less reliance needs to be placed on the regulator to interpret that and then provide the necessary guidance. But it is necessary, particularly in this case.

Peter de Cure

Yeah. And that you know what I'll say to you is we're working pretty hard on guidance at the moment. And, a number of those issues are going to be subjects aware of our guidance documents coming in.

Robyn Jacobson

So let's start getting into some of the detail. And I'm going to kick off with the breach reporting rules. So in order that everyone is clear this is law. We're not waiting on bills to be approved or any legislative instruments. This applies to breaches on or after 1st July this year. And very broadly, if, let's say I'm a registered tax agent or a best agent, if I have reasonable grounds to believe that I have breached the Code of Professional conduct or another agent has breached the code, and that code is significant, then I have a positive obligation to report that to the TPB. So in terms of the triggers for reporting, you really need to have reasonable grounds to believe and there needs to be significant breach. If you haven't got both of those things, then there's no obligation to report. Now, you've had, some of the feedback, Peter, or if not all the feedback, you understand, this particular set of rules is concerning from our perspective.It was introduced into Parliament without any direct consultation with the professional association. So the first we saw with these rules was when they'd already hit Parliament. And there is an explanatory memorandum that accompanies these particular changes. So again we're relying on TPA guidance. It has been issued in draft and we've had input with the board and working with you to refine that and make sure it's as, effective as it can be. And we're now waiting for that final guidance to be issued. So how will you administer this? How will you provide the guidance that's necessary so practitioners can navigate these rules?

Peter de Cure

Well thanks, Robyn. I think in the first instance, draft guidance is out for public consultation as we speak. And so I really encourage practitioners and, unusually familiar engaged in a LinkedIn discussion this morning. just encouraging people that have genuine concern and want to make representations to do it through the consultation process. And we will certainly consider that. I think, as you've mentioned, key things are about, first and foremost, a breach has to be a significant breach. And we're going to be giving some guidance on what what will you say is significant. And it's got a line up, I think quite conveniently with some of the stuff around informing your plants and significant matters about whether they should or shouldn't report. But in the first instance, you know, significant breaches of, matters that are clearly the sort of thing that the TPB regulates. So a significant breach of the code that would get you a sanction is something that that you should be thinking about. Yeah. We're we're saying in relation to the self disclosure pieces, that you wouldn't have to advise a client if you've been given a caution on the TPB, but you clearly have to advise them if you've been sanctioned, you clearly should be self declaring if you become a bankrupt, you should be self disclosing. If you have committed a taxation offense or been convicted of an offense involving dishonesty. So those things I think are relatively clear. There's going to be a need for people to use some professional judgment around breach reporting for technical matters or competence matters. And I think the, you know, the clear example that people are concerned about is circumstances where they're taking over a new client from other practitioners, especially with disseminated problems. What I'm encouraging people to think about is, well, first and foremost, if you're in that position, one thing I'd like to see there was talk to the client about how they got themselves into this position, because you know as well as I do sometimes the the practitioner leads the the client to a position. Sometimes the client insists on leading the practitioner to a certain way of thinking. So I think that's an important piece of context. If you've got a client that's got a significant deep seven eye problem and wants to take you down a certain road, you should be thinking clearly about whether you want to engage with that person. Is this a sort of client I want to be engaged with? And I'll use that example again when we start talking about the requirement to correct false or misleading statements. So, or to notify the TPB in the ATO about false or misleading statements, if, for instance, you had a client that might have false and misleading statements in their return or, another communication with the ATO, if you become aware of that, the first thing you need to do is to decline about if they're not prepared to notify the ATO, I would say that the statement is false or misleading. And I think you've got a real question to ask yourself about. I've got a client making a deliberate material, false or misleading statement, and they're refusing to correct it. Is it really in my best interest in my practice to be dealing with people like that, to be advocating for people like that? I don't think so. So, you know, I want to clear things I want to talk to our practitioners about is these sort of provisions. They're not that far removed from the sort of business practices you should be thinking about in your practice, in your relationship with the patient, professional indemnity insurer, and to protect yourself from negligence claims. So, you know, if you're representing a client that's making false or misleading statements and you get caught for that, do you think you pay? I insurers kind of want to defend that. I think it might be time to kiss goodbye to the odd client and stick to the ones that are prepared to play within the system.

Robyn Jacobson

That's for sure. A question of whether it's significant and whether you've got reasonable grounds.

Peter de Cure

Yeah.

Robyn Jacobson

Because the definition and we do have a definition of significance. So it's about whether you've got an indictable offense, an offense involving dishonesty, material loss or damage to an entity otherwise significant. How does a practitioner who, let's say, has no knowledge or skill in criminal law or indictable offenses or dishonesty, how can ascertain whether or not any of those have been triggered?

Peter de Cure

You know, if if you're a practitioner and you've been to court for a, for a speeding fine or something, you can probably Google whether that's, an indictable offense. If you've been charged with something more serious, you need defending yourself. You can probably ask the lawyer working to defend you. You know, doctor, Google's a powerful weapon these days. You know, there are relatively easy ways to to get at least a feeling for what territory. If you if you're in doubt, you probably close to in trouble. So get some help. I think is a great way to do it. And I think as we're we're trying to focus on significant and make that clear. And you also raised reasonable grounds or, you know, ought to have now and I don't know whether you remember Hogan's Heroes on the telly, but when I was a kid, I saw some churches debating and remember he knew nothing and he saw nothing. And for a practitioner, you need to be awake at the wheel. And you should have known if your clients were, you know, you've got a positive obligation under the code to make reasonable inquiries, if you can, to understand the circumstances and to be able to detect work properly. So you should be doing PR well, I think you should be inquiring about how they business runs or what their family circumstances are. And if you don't make those sort of inquiries and don't do the normal professional things, if they found yourself tripping over something, well, I think you should have known and could reasonably be expected to have known. So it's about being, awake in the circumstances that you do need. If you get a new client, they've got a series of problems, make be inquiries to figure out how they got to where they were. And that's going to be a lot of guidance.

Robyn Jacobson

You mentioned whistleblower protection before and in one respect I agree with you. We have got an extension of the whistleblower protection in that the TPB is now an eligible recipient of that information, which is appropriate. We still have concerns about the scope of the definition of eligible whistleblower. Now, again, this is a policy question. So I'm not asking for your, comment on this, but I do think it's important to point out to our listeners. So let's say you and I, Peter, are partners in the same firm. We, by definition, are what would call a section 318 associate. And because we are associates of each other, that would mean I am an eligible whistleblower. So I can then get to the relevant protection if I need to report you. But if you happen to be a practitioner down the road, unrelated, and we're not associates as defined in the 36 tax set, then I actually don't have whistleblower protection. And I just think that's something that practitioners need to be mindful of. We yet to see all this play out, and I don't want to overstate things, and I don't want to suggest these things will happen. But we have had concerns raised by practitioners about defamation proceedings, malicious claims. And I know you've already made comment about vexatious claims, where you might actually turn it around and focus some attention on the reporting practitioner as to whether they might actually be a fit and proper person if they're making such a claim.

Peter de Cure

Yeah. And I think, you know, the problem. There are those points, understood and acknowledged. I guess the things I'll say is that if a practitioner makes a complaint to us or a notification to us about another practitioner to the best of our ability, we'll protect them from disclosure, even if they if they're not in a whistleblower, if they're not an eligible whistleblower. But I can only do what I can to satisfy. So we, are subject to the normal laws of the land as well. Now, equally speaking, in relation to those matters, I think it's really important to note that there is protection for you so long as you're not frivolous, malicious, vexatious. and I'm not trying to make that as a threat, but I'm just trying to say to people just, you know, don't use it for commercial advantage because you don't like Bob or Jane down the road just because you're having a bit of a personal spat with a practitioner in, in your regional town or suburb or whatever, don't use it for that. Because the funny thing about those sort of things is when we look into the facts or when any, any investigator looks into the facts, the truth comes out pretty easily. And if if you don't have a serious cause to report somebody, don't do it. It doesn't get anybody anywhere.

Robyn Jacobson

What do practitioners do in this situation? I'm going to describe a few different scenarios, but it's all the same issue. Text discussion groups conferring with another practitioner. our profession has for decades relied upon referring to each other. We've said, I've got a client who what do I do in this situation? What would you do if you were me? And sometimes it's seeking formal advice. We certainly do have practitioners who formally advise other agents. We've got those who informally assist their colleagues or their friends in support networks. And then you've got more casual conversations. So this idea that you've now potentially putting yourself at risk by sharing an issue with a practitioner in good faith to try and resolve the issue, but for fear now that they might have to report you.

Peter de Cure

Yeah. And I've I've been involved in discussion groups and I've, in my professional career advise the range of other accounts and advisers in the profession, at the more specialist level. So I get where you're coming from. I'd say a couple of things. Firstly, I think a legitimate discussion group has nothing to fear when you come to the table when you talk about how to interpret the law, how to implement the law, you talk about client scenarios. I don't think there's anything in what I do think there is something new. If somebody comes to a discussion group and you're having a good generic discussion about those sort of things, the professional issues, how to interpret section 100 II or D7 or whatever it might be, and somebody says to you in that discussion group, are you a lot? That's a lot of bunkum. What we're going to do in our practice is we're going to implement this scheme to go around, or I'm sure you would have seen this. The odd practitioners at City Hall, we don't do it. That way. Where I come from, we just ignore. Yep. I think that's a completely different perspective. If somebody comes to you and says, I'm going to implement a scheme to get around that, or I've just we just always don't do that. And if you know that it's serious and it's not just better, then I think there's an issue there. but I think, you know, I wouldn't I wouldn't be going to stress about a bit of pub talk when, you know, I'm participating in a bit of pub talk, having TVs, and I wouldn't think that it would be a common issue for a tax discussion group, that there would be a problem that you would need to write to report, look for those serious ones, use those sort of examples of deliberate evasion, avoidance or, you know, implementation of tax schemes.

Robyn Jacobson

We still have issues where there is an issue with the clients and leave aside the discussion group, it's no longer pub talk, but I've actually gone to another practitioner and said, look, I think I've got a problem here. What do you think I should do? Or this is getting out of my scope. Is there someone you can refer me to? So in these situations, again, I might have inadvertently shared with that practitioner that I've done something incorrectly. From a competence perspective.

Peter de Cure

I would be simply sitting there saying, if it's at that level and you're saying, I'm not sure what I should do here, I need some help with this work. And I go to, I think, in a discussion where the person might you genuine attempts to get things so that you should probably side of them will listen. Are you aware of the breach reporting rules. Do you need to use the breach reporting rules? should you think about that? You know, perhaps don't put yourself in a position where you actually, you know, if you're engaged to give them advice and you get to the bottom of the fact, you say, well, might I really think given in trouble, you should advise on the breach report. And you probably need to say to them, you know, you've put me in a position where I think I need to do this time. So why don't we do it together practically?

Robyn Jacobson

In that situation, we expect both a self-report and a breach of another practitioner. Where is it sufficient if someone, say, does a breach report that the other agent doesn't need to report?

Peter de Cure

I think it's the if the agent who's made the breach does the reporting on the advice of another agent really, if push comes to shove, I'd probably say that's sufficient. What I think is the easiest thing to do is to get, you know, to the agent who's made the breach to report and the other one for breakfast, I understand so and so from down the road as self-reported. Yeah. You know, and we're not trying to create a wall between practitioners, but we are trying to have that set of circumstances where if you go to a more experienced practitioner for help and they tell you that you breached reporter Bob, put them in the soap as well. Yeah. Understand that makes sense.

Robyn Jacobson

Yes it does. So Peter, with now into early August it's a month on from in the role started. Have you in fact received any breach reports yet either self-reporting or reporting another agent.

Peter de Cure

Robyn, there's been a handful of breach reports my already and I can't really go into the detail of them, but what I can tell you is that they're going through a, a triage process so that we can get to understand the the nature and level of seriousness of the issues. And I think, you know, that allows me an opportunity to blow the whole up from the tape a little bit. We understand and empathize with the amount of work that's going on in, in England as we speak. But the other side of the coin is our team, working really hard on a real time pressure in the same time frame as you are. So I, we, you know, we're we're getting new law, we're trying to issue guidance, we're running consultation processes, we're doing our BAU registrations and compliance work, trying to issue tax time updates, and all of those sort of things. So the hamster's giving the wheel a pretty hard spin at the TPB at the moment.

Robyn Jacobson

It's a lot to do. But we could keep going on about breach reporting. And certainly there's more to say, more conversations to be had when your final guidance does issue and look incidentally or mentioned that, you will be making an appearance, you will be on hand and available to members and practitioners at The Tax Summit in Sydney. So that's 11 to 13 September and we'll be continuing this conversation as part of a panel session, also with Tim Sandow. So look forward to perhaps having more to talk about. Hopefully by the time we get to that Summit session.

Peter de Cure

I'll polish my shoes and be ready.

Robyn Jacobson

All right, so let's turn to the other major development, which is a little more recently, though we did have noticed back in December that this was on its way. So as you indicated from the outset, the law has been changed to give the relevant minister in this case the Assistant Treasurer and Minister for Financial Services, the I'll call it intellectual power is a legislative instrument, so it still needs to be tabled before both houses of Parliament. And this is a window for a motion to disallow to be put forward. But that's in the political hands. So we'll leave that to one side. But this determination has now been registered after being issued in draft last December, registered on the 2nd of July. There are eight additional code obligations which broadly we were aware of back when the draft was released and we come into them. But there are certainly some additional obligations built into sub provisions which were not in the draft. So we can't say hand on heart that in all cases where across every single new obligation before it came out on the 2nd of July. So can you walk us through the eight new obligations? Some of them, I would have thought, are fairly benign or to be expected. In fact, I would suggest shouldn't even be necessary. So if we're talking, for example, about managing conflicts of interest in dealings with government and maintaining confidentiality in your dealings with the government, you would hope that a confidentiality agreement would be sufficient. But we've obviously not got a legislated code in respect of those, so I don't think we need to delve into those in too much detail today.

Peter de Cure

And I think, Robyn, you're right with that. It's not going to impact the majority of your, practitioner constituency. It's really for those larger firms that are engaged with the government on consultation processes. You cannot apply unless you are engaged by a government to work for them.

Robyn Jacobson

And most of us are.

Peter de Cure

Not nice, most practitioners.

Robyn Jacobson

So all right. So let's put those to one side. Can you walk us through some of these other new obligations. And then we'll have a chat about when does all this kick in. So let's understand physically what the instrument does.

Peter de Cure

Yeah okay. So the instrument applies from the 1st of August 2024. And we've got also, an addition to the instrument to bring in a transitional provision. So the transitional provision will apply such that any firm with 100 or less employees has, until the 1st of July, 2025, to be fully implemented against things any firm with more than 100 employees or 101 or more, has until 31st December to have implemented these new points. Now, from there, I think the critical thing is, and I'll say again, there is an an eight point checklist going to where investigators to go out there and trip people up. What will happen is that if a practitioner finds themselves investigated by the TPB for other serious misconduct, and we go through an investigation, we will go and then, you know, be part of that investigation. We'll look at these eight points. Have they been keeping proper client records? Do they have a decent quality management system in place? by upholding the standards of professional and ethical behavior that we expect them to. So we'd have a look at that and see how that goes. And that's going to contribute to the whole picture of whether or not the sanction needs to be at the lower end or the heavy rain, if we might, you know, if we make a finding of code breaches. So we're not going out to enforce these specifically, but it might come up if you're doing other things that are wrong, I guess. Couple of things I'd really like to talk about. And we mentioned false and misleading statements earlier, but they are and have been a cornerstone of the tax business for as long as I've been around. You're not allowed to make a false or misleading statement of the commissioner. And now it's clear that you're not allowed to make one of the TPB, but it needs to be clearly understood. You can make a false, misleading, or inaccurate statement by omission. So if you are filling out a form and you don't put all the information in it, that can be as false or misleading as a positive state.

Robyn Jacobson

I want a system with the tax law currently. So we know that if we don't comply, the liable on a tax return, that's still a false statement.

Peter de Cure

Absolutely. And one tax return could contain 20 false or misleading statements. Okay. Let's agree that that's the same. So one of the things I really want to talk about is for practitioners who have existing code obligations to supervise and control their staff. If you get your staff to fill out your registration application for the TPB or renewal application, and you don't tell us about your significant unpaid tax liabilities, or you don't tell us that you're not discharged, bankrupt, or you don't tell us you've been convicted of a tax from their false or misleading statements. So if you're getting your I or Eugenie's to fill out a renewal application, make sure you check it because you're the agent responsible for supervision and control applies to that as much as anything else. So I think that that's a really critical thing. The other thing I'll go back to yep, I insurance if you're making false and misleading statements, positively evil by omission, I think you pay I insurers kind of drop you like a hot sign. you know if if you're getting sued by a client for something else and you and your insurer can say, well, you haven't, done the right thing in terms of false or misleading statements, you're going to be on your own. So I know it seems like an onerous additional recon, but it's consistent. We've had a run, a good practice in reality in.

Robyn Jacobson

Respect of those statements you've made. I agree, but I do want to hone in on 15 two, see which is a new requirement that we did not see in draft until the 2nd of July. And in the view of so many in the profession and the professional associations, this is a step into new territory. So it's one thing where you shouldn't be making false or misleading statements and you make efforts to correct them when you've made them. But this new requirement to report a client to the commissioner, where let's say you've prepared a statement which might be a tax return activity statement, could be an election, could be a private ruling, whatever. And then they have somehow identified or you've identified that it's erroneous. You have a chat with them and then they don't fix it up within a reasonable period of time. You're under an obligation to report them. And we've not seen this before.

Peter de Cure

Yeah. And I guess, Robyn, I'm going to go back to one of my early comments. If we're talking significant, false or misleading style, you've worked with the client. You've found out that whether you know, deliberately or unintentionally, that the statement is false or misleading and it's significant and it's in relation to their own personal tax phrase, you go back to them and say, well, look, Mr. or Mrs. Client, you made this statement in your returns. I'm pretty sure it's false and misleading of the view that is significant. And the client says to you, I don't want you to do anything about it. I'm sticking with it. You might then have a, you know, a significant discussion about explaining to them the implications of a false or misleading statement, both on them and on you. And I think you would have a discussion says, well, you know, I'm really sorry about this, but I have a positive legal obligation to disclose this. And I'm happy to give you some information about what I'm going to do, and I'm happy to tell your lawyer or whoever, but I've got a positive legal obligation to do it and impacts my livelihood and my ability to practice. I cannot do this, so I can't be involved with this. So if you're telling me that you're not going to correct it within a reasonable time frame, I'm just saying that I don't have another option. Now, what's a reasonable client going to say to a person that you want to be representing? They're going to get it. If it's the sort of person that says, look, I'm afraid the law doesn't apply to me, I'm instructing you. I want to make a false and misleading style. Is that the sort of client that makes the the priority requirements of your practice? I don't think.

Robyn Jacobson

So. Try to be so many questions of trust. And yeah, we're worried about what the community, the business community and the individual community might do. Yeah. Once they come to understand this new requirement imposed on practitioners.

Peter de Cure

And Robyn, I don't I don't want to undermine the the legitimate concerns that the profession has. And I think this is a new piece of law and we've all got to work to understand it together. I don't want to say that there are no new situations, but I have thought about and I sit there and say, well, if your client is telling you that you're wrong and that they have citing is what they got, and Mike and you're convinced that it's false and misleading and it's material significant, then you just tell me you got an obligation to disclose if you're wrong. Disclosure wanted.

Robyn Jacobson

I guess, to fully understand what information may be shared or not shared with the ATO as well. So what implications it could have for the client.

Peter de Cure

Well, you know, and it just depends on the matter. But there will be new situations. There will be situations where a client's position is reasonably arguable. If it's reasonably arguable, it's probably not going to satisfy that. The threshold for false and misleading is.

Robyn Jacobson

It's still something that obviously concerns the profession greatly.

Peter de Cure

Yeah, I genuinely acknowledge that is working through these things at price as I.

Robyn Jacobson

All right. Can we tend to keeping proper client records.

Peter de Cure

Yeah.

Robyn Jacobson

Yes. New requirements. Sounds fine in theory. Back in real world. Is this the end of verbal advice? Does that mean for clients just have to get that much better?

Peter de Cure

I think again, I'm going to go back to good practice. How to how do you run a good practice. How do you satisfy your obligations to your insurer? How do you make sure that the advice you give is professionally competent and not negligent? What's enough to protect you from negligence is probably enough to demonstrate maintenance of proper client records. So, you know, to verbal advice over the phone for a quick thing like what's the cents per kilometer ride for my V8 Maserati or whatever it is? You know, all you gotta do is a quick note to the file that says, you know, Bill rang us this, to that reference, Mark the tax car. What we're talking about is a tax return file should have enough information on it to evidence the tax return that's been lodged. So that's probably a set of accounts. It's a tax reconciliation. It's probably a couple of nights at the depreciation schedule or a logbook or those sort of things. And it's if there was a contentious issue, what did you do about it. What rolling. Did you look at those. Sort of not it clearly doesn't mean you've got a copy of every invoice and a copy of every journal entry that makes up the general ledger. What it does mean is that you can demonstrate professionally how you reached the position of rights in a written or a best statement, and why you dealt with an issue a particular way. What's the cheapest car park within one kilometer radius? What did you do to establish that doctor? Google was going to help you. Then print off the page from a Google search.

Robyn Jacobson

Would be really helpful when the guidance does come out, or because the more examples that you can give and I know you understand as a practitioner yourself how the professional. Right. So under studying how this is applied in practice it's going to be crucial.

Peter de Cure

And again you know the through the consultation processes please tell us the things that you want examples of. It's it's a pretty tough, gig for our time at the office of trying invent examples that that hit the threshold for the high jump hurdle of being practical and interesting. That's one of the tough jobs.

Robyn Jacobson

All right. We'll help you out with some examples. one more particular requirement. It's, section 45. In the determination, keeping clients informed of all relevant matters is how it's described. Now, the wording in the law talks about you need to notify all your current and prospective clients of any measure that might influence their decision to engage or continue to engage you. There's been a lot of concern noise. There have been lots of suggestions as to how far this extends. And again, we know there'll be guidance from the TPB. The biggest concern we've got is the scope of this. And if it goes before a federal court judge one day and they look at the wording in the law which says any measure, it's difficult to break that down, but practically, isn't that going to be necessary?

Peter de Cure

It won't. I'm not going to go into the writing down arguments because I don't write down the law on, administer, with my team. We administer and give our interpretations. But the, the determination is going to require you to advise and prospective clients of any matter that could significantly influence their decision to engage. You will continue to engage you to provide text services. So that's one obligation. The other is, is to advise that the TPB maintains a register of agents and how you can access that. And the other is to advise your clients and effect that they can and how they can go about making compliance. Now, this is about not your sexual preference, your religious beliefs, or whether you're back from Hawthorn or come. It's about matters that relate to the business of being a tax practitioner. So some examples that we will be putting in the guard. Have you been convicted of an offense involving dishonesty? Have you been subject to promote a penalty font. Have you been subject of an investigation by the TPB and given a material or significant sanction? So one crystal clear message if you've had a, a suspension or a termination, that's a significant sanction. If we give you a caution that's not disclosed to your client like that, that's like a speeding ticket, you know, it's you've gone off road, we get you back on track. That's not a significant matter that needs to be disclosed. I want to be really careful about personal health issues. It's not an issue for your clients. If you if you're suffering from some health issues, that's not their business. What is their business? As if your health issue is going to prevent you from providing them with tax services. So if you've been advised by your doctor or your mental health practitioner that you're not fit to work, that might be disclosed. And I'd like to use the example, if you're approached by a new client to take on a significant job and you know you're not physically up to it, and you know you want to take the job because you want to have to work for when you get better. But you know, you can't make the requirements. I think you should be saying, no, I can't do that. But you don't have to tell them the personal issues to why.

Robyn Jacobson

I've been asked even about pregnancy, and I think most would agree that in many cases, my mind would be taken off work.

Peter de Cure

That's not a disclosure issue. This is a this is about your legal, ethical, professional obligations to your clients. Can you make them or is there a reason for them to believe that you shouldn't? Have you been suspended as a, as a, from a professional association? Have you been banned by ASIC? Has the ATO said you can't be a trustee to self-managed super fund? They are professional issues. Whether you're banks, accountant or horse or whether you support soccer or basketball. Their personal issues, political religious beliefs are personal issues. If you're a member of the kind of a liberal party not disclosed.

Robyn Jacobson

Okay. Thank you. And we do look forward to further guidance on this issue. Since the start date, you've, referred to this deferral until July or January next year.

Peter de Cure

Yeah.

Robyn Jacobson

And look, this followed extensive advocacy efforts by not just the professional associations, but we know that members of a practitioners are writing to their local MPs, etc.. So whatever ultimately led to the decision, the minister announced on the 1st of August, following an open letter that was sent to the joint bodies that confirms that there will be this deferral, but it does contain the words, so long as they continue to take genuine steps towards compliance during this period. Otherwise, it would seem that the start date would still be the 1st of August. Yeah. So how again, are you going to apply this or interpret this and is the TPB going to provide guidance on what genuine steps is?

Peter de Cure

I'm not 100% sure whether that is in a Gunns plan yet, but I'll tell you how I think it will work and how I intend to get it to work. And it goes back to our compliance normal compliance activities again. So you're not going to see a TPB investigator asking you whether you've got genuine steps to implement these things as a specific order. The only way this is going to come up is if you're under investigation for another matter. I you know, you're a high risk practitioner, you're pushing tax games, you're, you're stealing refunds, you're not paying your own personal tax obligations and not lodging your returns. All of those normal things that are out and normal compliance activity applies to if we do an investigation of one of those and we might, and it's clear that you cannot compliant, we might also come and ask, well, what have you done about implementing these new things? If you say nothing, well then you haven't. My genuine steps. If you can demonstrate to us in your practice administration that perhaps you've been to a court to what do I have to do to quality management system? Talk to another consultant to help you get a quality management system. bought something off the shelf that you're in the process of implementing all of those sort of things are reasonable steps. But the answer oh, I haven't gotten around to it yet. That's not a reasonable step, is it? Okay. Like, you know, I think the the genuine thing here is think about our track record as a regulator and a compliance activity. If people are looking at the cases where we make significant sanctions, you are saying people, you know, practitioners who haven't lost their own returns for 3 to 5 years, who have hundreds of thousands of dollars worth of tax debt, often are hundreds of thousands of dollars and SGC debt in relation to their staff and, not paying refunds through to their own font. we have, you know, practitioners. I've seen a practitioner that's run $10 million of their clients money through to the same clients who, you know, are in trouble with drug debts to, you know, to the drug rings and using clients that that's high risk behavior. You know, the the normal practitioner, the people we're talking to today that's taking care of their own tax obligations, getting their clients work done, giving them their refunds, and applying the law in a sensible fashion is not going to come up against a problem with this, and they'll have to have the opportunity and the transitional provisions to meet those challenges. When it comes to things like quality management systems, you know, as well as audit, there's plenty of guidance out there from various professional associations on what it look like, how you can get one. And it's certainly, a set of circumstances where we will be proportionate. So quality management system for a big 4 or a second tier accounting firm is really sophisticated, probably computer generated type of system that works. For a small practitioner, a sole practitioner. It's going to be a much more simpler series of checklists might be, you know, making sure there's a training program within their office for their staff. And it's a little bit like, you know, competence is, is a standard that applies to all practices. But a small practice doesn't need to be competent in every aspect of tax. THey need to be competent in the aspects of tax they're providing services in, you know, so a Parramatta Rd practice that's doing small business and personal returns probably doesn't need a lot of competence in transfer pricing. They need to be smart enough to go and get some help when they need it.

Robyn Jacobson

Which is always been the case.

Peter de Cure

Absolutely. Yeah.

Robyn Jacobson

Yeah. Peter. Thank you. I feel like we could keep up talking about these issues infinitum, but we will continue the conversation next month in Sydney. So thank you very much for your time.

Peter de Cure

Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Peter de Cure, chair of the Tax Practitioners Board. If you'd like to join us at the Tax Summit from 11 to 13 September, there is more information on our website at taxinstitue.com.au. Peter will be part of a panel discussion among a whole host of speakers and a wide range of topics for you to enjoy and savour in the tax world.

If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen to your podcasts. We welcome any suggestions and feedback to catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you interested in being at the center of the tax conversation, a membership of The Tax Institute could be just what you need. Stay current and connected with tangible real world benefits. Learn more at our website. Thanks again and until next time on TaxVibe.

Top Tax Time Tips for 2024

Release date: 19 July 2024

Tax time is here again!

In this episode of TaxVibe, Robyn Jacobson, CTA, chats with Robert Thomson, Assistant Commissioner and Tax Time Spokesperson at the Australian Taxation Office in the Individuals and Intermediaries space, about Tax Time 2024.

They discuss the top issues for 2023–24, including:

The ATO’s focus on undisclosed income
Work-related expenses
Rental properties
Record keeping
Top tips for getting tax returns right the first time

Host: Robyn Jacobson, CTA

Guest: Robert Thomson

Robyn Jacobson
Hello and welcome to TaxVibe, a podcast by the Tax Institute.
I'm Robyn Jacobson, the Senior Advocate at the Tax Institute, and your host of today's podcast.

On the show, I chat with some of the tax profession's brightest minds, drawing on each guests, unique perspective to give you valuable and practical insights you won't hear everyday.

We hope you enjoy this episode of TaxVibe.

Today I'm joined by Robert Thompson, the assistant Commissioner for Experience, government and case leadership, individuals and intermediaries, and the official tax time spokesperson at the ATO.

Rob is an experienced tax professional with more than 10 years experience and has recently returned from his role as Minister, Council taxation at Australia's permit delegation to the Organization for Economic Cooperation and Development, the OECD in Paris. Rob has extensive experience across several diverse roles in the ATO, starting as a postgrad in high wealth individuals, Rob progressed to a compliance officer role.

He then worked his way into specialist task forces, policy implementation and strategic programs.

Rob also holds a Masters of International Taxation and the Bachelor of Commerce Prior to joining the ATO, Rob worked in the managerial role for a not for profit foundation in New York.

Rob, welcome to TaxVibe

Robert Thomson
Thanks Robyn.
Thanks for having me.

Robyn Jacobson
Pleasure and look, first thing we need to acknowledge is that we have a new face as the ATO tax time spokesperson.
So our listeners would be familiar with Tim Loh, who held those reins for some years and you've taken over that particular role. So you're doing the media circuit.

Robert Thomson
That's right.
That's right.
Obviously so some big shoes to feel given Tim's role, but yeah, excited to step into the role.

Robyn Jacobson
Yeah, very good to have you here.
So I wanna kick off with tax time.
Why is it important?
It's obviously the start of a new financial year.
It's when we start lodging returns for the year just ended.
Why is the messaging so important?
Why do we need to get it right?

Robert Thomson
Yeah.
So obviously tax time for a lot of individuals is that one time of the year where they actually just engage with the ATO as well.
So, you know, there might not be thinking about tax the whole year around.
We'd like them to, especially when it comes to record keeping Robyn.
But so we're really out there just trying to make sure that people understand their tax obligations and that people have, what they need to when they got to lodge, whether that's online or through an agent and really just help them to make sure that they're in the best position when it comes to lodging their tax return.
Obviously a lot of our messaging is around, you know around the tax basics, but just around reminding people around some other things like record keeping and and areas where kind of focused on.

Robyn Jacobson
So we're talking about millions of Australians who will be lodging their returns in the days, weeks and months ahead and we'll get into more detail about when they need to be lodging by.
But really, it's so important that they get it right the first time.
What are the best ways they can do this?
And we often hear about this rushing to lodge in the first few days.
What sort of numbers have you seen in on the day three so far of the tax time season?

Robert Thomson
Yeah.
Look, Robyn, it's it's too early to make any predictions around what numbers looking like compared to last year or previous years.
You know, last year also we started on a weekend and we traditionally know weekend lodgments are a little lower.
But no, we definitely are just reminding people some of the things we're focused on is just reminding them actually if they can, to wait for prefill in late July to kick in.
We know people.
Some people want to rush to get their lodgments in, but you're actually twice as likely to have your good to have your return stopped, if you launch either through an agent or obviously online it twice as likely to have it stopped if you do it before all that pre fill information is in, so you know that's one of the main things we're just trying to communicate to people is wait for all that prefill, and that includes where you're logding through an agent.
Obviously that helps agents as well, because then they can see those messages or see those income amounts and remind people of perhaps things they've forgotten about during the year, but also as they lodge, obviously you get the reminders around crypto assets et cetera, share sales and so also helpful for agents once all that's there because it can remind their clients to remind them that they've had that sale and there's some capital gains consequences and they need to have the records.
So we think we think waiting for people to lodge until the end of July is both beneficial for individuals that are lodging, but it's also beneficial for the tax agent because it can then it can stop and having to like go back later on and fix something or deal with the request from the ATO or an amendment.

Robyn Jacobson
We also know that, of course, employees don't need to finalise through single touch payroll until mid July.
So anyone who's logging in the first couple of weeks is really working off data that hasn't yet been finalised by the employer.

Robert Thomson
That's right.
And you know, and it's not just employer data.
You know, it's bank information.
It's information we get from other government agencies.
You know, it's your private health insurance information, which obviously can impact the amount of rebate that you should or should not claim, which can impact your tax return.
So it's just about making sure that people wait for all of that information to come through, make sure that you know the income statement is marked as Tax ready for employers which are talked about us then and that just really allows people to be in the best position to obviously make sure that they're including everything in the tax return that they should, you know, and getting it right the first time.
And then the agent doesn't have to worry about any reverse workflow later on as well.

Robyn Jacobson
Banks are pretty good at getting the data to you each year, as are the listed companies with their dividends paid, but we've all heard stories about other data taking many months to come through, and whether that be managed funds or other types of data.
So what can taxpayers do?
It's one thing to wait a few weeks until the end of July, but it's quite another to potentially wait some months in order for that data to be prefilled.

Robert Thomson
That is correct, Robyn.
I mean and for some of those, some of those, some of those obviously reporters, they do have legislative requirements around when they need to provide that to us and that can be a few months after the income year.
But we think waiting is just a good reminder, but it's also just a reminder that people still need to check the prefill information is correct, You know, if there is a discrepancy with the prefill information, then the client and agent need to work that out with the provider.
So for example, your employer, unless it's the bank information that you don't need to kind of work out with the bank.
But it's also just a reminder that it may not include all the income sources.
You know, we'll probably talk a little bit later about, you know, some side hustles and some of the income that people get from sharing economy, et cetera.
So it is a good reminder that it won't include all of your income, potentially for some for yourself or some of your clients, and they still need to think about asking, you know, agents still need thing about asking their clients about any other income sources that they may have had during the year or any other assets that maybe they've disposed of or that might generate income during the year.

Robyn Jacobson
Just one more point before we move off this particular topic.
I've heard that there are people who literally stay up till midnight on the 30th of June just so they can then tick over midnight and lodge their return and be the first one.
Is there any prize offered to the person who lodges their return first?

Robert Thomson
No, there is no prize Robyn and you are correct.
There are some people that do that.
You know it is an Olympic year.
Maybe they're inspired and wanna go for gold, but you know, like what we're saying to people is, you know, actually wait, you know, it's better.
Better to get it right the first time and that be a few weeks longer than be the first person to lodge.
No, there is no prize.
Obviously people can lodge before all that prefill information is there, they just need to make sure.
Obviously they've got all their records in order, but as I said before, you know.
We just find people, make more mistakes and they do double their chances of having the of they're having their tax return flagged by the ATO as being incorrect and now obviously holding it up while we have to go and ask questions.

Robyn Jacobson
So revisiting the deadlines self lodgers have until the end of October.

Robert Thomson
That's correct.
So if you're logging yourself, one July starts to one, you're saying hold off to mid July, but Deadline is 31st of October, if you're logging yourself, obviously.
Otherwise, individuals need to be on the books of a registered tax agent by the 31st of October and that registered tax agent needs to inform us that they're doing that.
If you are logging through a tax agent, obviously you may have up until the 15th of May to lodge a tax return through the tax agent and we obviously have the lodgement support and the lodgement program for tax agents which is designed it just a recognition of the important role that taxations play in the system and design to help them manage their lodgements through the year.
Now we've just published the 24/25 Lodgement program dates, Robyn.
So they're on the website for everyone, and also anyone that gets our tax professionals newsletter will also be informed of those dates.
I think in the next week or so, so also good plug for the tax professional newsletter and why you might want to sign up for that because it does have lots of helpful information in terms of you running your practice.

Robyn Jacobson
Yeah, that's great.
And it does have valuable information. Something that I'd like to call out, is while those are extended lodgment dates for agents so they can spread their workload over the year.
There are so many agents who often talk about the clients working to those same dates, so it's a really good reminder to the clients of agents that don't take your work to your agent a week before the 15th of May and expect that you're going to be prioritised because there are so many other clients they need to look after.
So I’d be saying to the clients also get your work in as early as you can let the agent manage their workload over that 11 months period and don't just dump it on them in the days before.
And then expect it to be lodged on time.

Robert Thomson
No, that's that's definitely right, Robyn.
You know, like it's not a, you know, it's not a, you know, handing their assignment in, you know, 2 minutes before it's due, you know, this is definitely making sure you have all your records in order and providing those to the tax agent as early as you can, even if you are lodging, if you've got that extension.
And one of the reasons for that is because obviously your tax agent might look at those records, have some questions or identify some other information that you need to provide.
And if you're leaving that to the last minute, you're really putting yourself at risk.
Kind of not being in a good place to lodge, so definitely talk to your tax agent about when they need the information from you.
If you are gonna lodge through a registered tax agent.

Robyn Jacobson
We could talk about how the ATO gets ready for tax time each year, and obviously that's about awareness and it's education.
It's updating resources on the website.
The tax time toolkits, the occupation guides rolling systems over giving instructions to the digital service providers who update all the software that the agents use.
That's all stock standard.
Is there anything different this year?
Is there anything in terms of how the ATO is prepared for tax time?
That is a little unusual or something that is new.

Robert Thomson
So there are one or two new programs obviously this year for tax time and which I I'll talk to in terms of lodgment requirements.
But one of the thing also we're just also highlighting to agents in terms of preparing for tax time this year is around proof of identity.
So just to reminder to tax agents to make sure that there's obviously the tax practitioner board know around the minimum requirements when you're on boarding a new client.
But we're saying it's important where you still have concerns about the identity of that client.
So even go beyond those minimum requirements and also to even check the check the POI of your existing clients.
You know, we do see criminals actually take over people's kind of identity and lodge through their existing agents.
So just to reminder around POI at this time of the year as well.
But in terms of changes, there's probably there's one or two changes, one that probably is being conflated with tax time, but won't impact tax time.
And that's the change to the rates and thresholds, income tax rates and thresholds that have come in this year. So obviously they apply from 1 July 2024 and so there we're just reminding people that and reminding agents that it's just a good time to have a discussion with those clients that are employers, that they've updated their payroll software to reflect those new rates or they've looked at the ATO’s new tax with holding tax tables which we've published, if they're not using a software provider.
But for individuals, you'll see the change in the tax rate and how much tax you pay for salary and wage earners in their take home pay from one July.
It's not going to impact the size of their tax return this year, and you don't need to contact the Ato or do anything for those tax cuts to kick in.
We know there's been a little bit of conflation of the two, so that's it's it's not new for tax time, but you know it is something that we have seen a little bit of questioning around the one of the main changes is around the non for profit return.
So obviously from for the 23/24 income year and from one July non charitable non for profits with an ABN need to lodge an annual non for profit self review return with the ATO
And so we think there's about 155,000 of these types of norm for profits that all need to lodge with the ATO.
So just to reminder for those that they need to lodge.
And obviously this came in as part of the 21/22 budget and it's just meant to increase the transparency in the integrity and the taxation system.
But there are a few things that non for profits can do.
Now so one is to set up my Gov ID and and obviously link that to RAM in online services for business is the 2nd is to just review their documents and their constitution around what their purpose is.
Umm, the third is, to look at our look at online.
We have a guide around eligibility, so checking the eligibility guidelines to see if you do need to lodge and the last one is just to make sure you update your details as soon as possible.
We've put the change of registration details form actually seeking.
Download it on the ATO website, but we are gonna be sending out more information in July and August to all these entities.
So it's really important they kind of update their details now so that we can make sure that communication goes to the right people that may be representing that non charitable non for profit with an ABN.

Robyn Jacobson
A few points on that new regime Rob not for profits in a sense, have always had to look at whether their tax exempt or not.
But this requirement to lodge a self review return is new and this is one that starts 1 July 24, but it actually does apply for the 23/24 years.
So that's one way we do have to look back at the year that's just ended and you've identified there are going to be many, many 10s of thousands of not for profits that are gonna be going through this for the first time.
What is of great concern is that the data on the ABI in some cases will not have been updated for a very long time and so the person who was named as the Treasurer or the Secretary or the public officer or whatever on the business register is probably long out of date for many of these.
So I can see some challenges when they try to get a my Gov ID and then linked through the relationship access manager that it's not going to be a straightforward process.
So in that case, should they be reaching out to a tax agent for assistance?
Should they be reaching out to the ATO?

Robert Thomson
So either Robyn, obviously tax agents have a lot of experience in terms of being able to help people update their registration details etcetera, but they can also reach out to the ATO.
So we have a lot of good information on our website.
We know this is going to be an issue for some and we so we have already done some letter campaigns out earlier in the year to try and make sure that people's details are up to date, but we know there will be somewhere they're not.
We know we're not so new regime.
We know it's the first year we also appreciate that a lot of non for profits are run by volunteers.
We have very much in these first few years about supporting people to make sure they get right, can get their lodgment obligations right.
This is really, I think, this first years about a lot of support and a lot of education for those that do have a new lodgment requirements.
So just with that message, obviously talk to your taxation or give the ATO a call, if you're having any issues updating your data files.

Robyn Jacobson
And of course, just to mention that it to engage a tax agent now they have to go through what's called client agent linking.
To do that, they need to have a my Gov ID, so it becomes a very circular process and we've seen some challenges and difficulties with taxpayers navigating their way through client agent linking.
So just to make mention, there might be quite a few tax agents who are called upon to assist those who may not have gone through the process before.

Robert Thomson
Yes.
And you know and, you know, I think we're continuing to obviously engage with the tax agent community around client agent linking and after every kind of every deployment of client agent linking, we have sort feedback around how we can improve the process.
So that is an ongoing kind of process for us with respect to client agent linking.

Robyn Jacobson
Alright, so in terms of some common areas that people often either claim or tend to get wrong, they're working from home expenses.
So part of work related expenses, it's interesting because there isn't a separate working from home claim in the tax return.
It just falls into other work related expenses and in fact it's not even specified in the law itself.

Robert Thomson
That's right.

Robyn Jacobson
So the ATO’s approach of this fixed rate method now $0.67 an hour, is an administrative approach, and that's essentially because the law is deficient.
Uh, it doesn't address this properly in, so the ATO’s come up with this approach in terms of where it will direct its compliance resources.
So what are the key points people need to understand if they're going to be using this fixed rate method $0.67 an hour as opposed to claiming using the actual cost method?

Robert Thomson
So Robyn, as you noted, there's two methods and it's obviously up to an individual as to which method that they would like to use.
So there's the fixed rate method which you've just talked about and that allows someone to claim $0.67 per hour for every hour that they work from home.
And that's an all inclusive method.
And so that's one method that people can use, and that method is also designed that we appreciate that under the actual cost method, some of those costs can be a little bit more tricky to apportion.
So if people don't want to go through the process of working out how to apportion those, they can, they can just use the fixed rate method.
So to be able to use the fixed rate method, there are some record keeping requirements which come into effect for the income year that you'll be logging 23/24 and that is you need to have kept a record of the hours you've worked at home for the full year.
Now that can be a diary, that can be a spreadsheet that can be whatever works in terms of either a physical or digital record that allows you to identify the hours you've actually worked from home for the whole year.
So that's one thing you need to have.
The second is just need to have copies some copies of some bills that show that you have incurred a little bit of expense, additional expense from working from home.
So for example, your electricity bill, you know your Internet bill, etcetera.
So that's the fixed rate method.
There's then obviously the actual cost method that people can use as well.
Now if you are using that method, you do need to be able to show for each cost that you're claiming the apportionment between the work related element and then the personal related element.
So a little bit more work on that.
There's a lot of information on our website around examples around how to apportion some of those, and obviously it also need to keep.
There are some time.
There are some time record requirements around that, not as extensive as needing to keep it for the whole year.
You know, to get the rest of the whole year, do need a give an indicative sample.
But what we're saying to people is if you actually keep the record for the whole year, then you've got the flexibility at the end of the year or your clients have the flexibility to choose whichever method they want and whichever method may actually give them the best result.

Robyn Jacobson
And that record of actual hours worked from home should be run contemporaneously.
It's really not something that should be put together retrospectively once the year has ended.

Robert Thomson
That's right, rather than that is definitely right.
You know, I don't sit down on 30 June and try and remember all the hours you went at home.
It does need to be a contemporaneous record of the hours you've worked.

Robyn Jacobson
All right.
I also note that there should be an inverse relationship between travel expenses and working from home expenses.
Now, unless you're working 120 hours a week, in other words, you're doing an awful lot of travel and you're doing an awful lot of hours from home, there shouldn't be a high claim for each of these.
Is that fair to say?

Robert Thomson
You know, I think rather than you know, like we've had some changes to those methods over the last few years.
You know, people still do need to travel for work.
I think it's remembering what exactly what trips you can claim as a work related travel.
You know, we continue to still think people still think it is.
Some people still make mistakes and think they can claim you know their from their home to their work Travel.
So you know, it's just that reminder about if people are looking to claim work travel, obviously reminding them around what trips they can claim, then obviously in terms of the car expenses, if you're using a motor vehicle, there are the two methods that you can use.
So there's the cents per kilometre method that someone can use.
Now that doesn't require you to keep a log book.
It's the other method, but it does allow you to claim up to 5000 kilometres per vehicle without any receipts, but you still do need to be able to have a record to show you how you've calculated the five.
Yeah.
The up to 5000 kilometres, we see some myths out there that people just think, oh, I just need to have a number.
No, you still, if the ATO asks and before you lodge your tax return, obviously, you need to be able to show your agent how you've calculated, you know, the kilometres that you'll be using under the cents per kilometre method, which has gone up to $0.85 this year.
Then there's obviously the log book method.
Now the logbook method obviously does require you to keep a log book, not for the whole year.
For 12 weeks and obviously then, if you're that's, you know consistent year on year you can use that same logbook as evidence over a number of years, but you then do need to keep there are more receipts that you need to keep with respect to that method and the logbook method, you do need to keep receipts of all the types of expenses that you are going to claim.
Now one thing we do see here, one common mistake we are seeing people make is people think they can use their credit card statement or their bank statement as a receipt.
Just a reminder, obviously that normally for most claims, a credit card or a bank statement on its own won’t suffice as substantiation for those expenses.

Robyn Jacobson
Because that only tells you you've spent money.
It doesn't tell you what you've spent it on, even if it lists the retailer.

Robert Thomson
That's right.
That's right, Robyn.
I was at an event recently and someone, a tax agent, came up to me, and said but Rob, what else would my tradie client be buying from the servo you know other than fuel?
And I was like, I don't know. A sausage roll, a coffee? Like there's a range of other things.
You know the Tax Administration Act does identify some of the things that need to be included for, for to be a valid kind of receipt and substantiation of the expense.

Robyn Jacobson
I've also heard over the years people who are still enough to try and claim whether it be a car expense or a travel expense or somewhere collated expense when passport records indicate they were not even in the country at the time or their mobile phone records indicate that they were in some lovely wine region as opposed to where they say they were or the E tag on their car places them in a particular location.
Now it could be that they lent their phone or their passport or their E tag to someone else, but chances are that wasn't the case.

Robert Thomson
Yeah.
Look, Robyn, unfortunately, every year we do see, you know, the minority of some people that do try and, make some claims they're not entitled to.
I think recently we had a social worker that tried to claim about 12 cars as it as motor vehicle expenses for the year when they only owned one.
So you know we do see the occasional crazy claim that, you know, we think the majority of areas where we see non-compliance or people making with around motor vehicle expenses is really around record keeping and just not understanding the records that they need to keep.
So just a good reminder there for tax agents around just making sure that their clients have all those records in place before they kind of come and see them to do their return.

Robyn Jacobson
And a quick one also, we've got guidance on electric cars where they can claim at the rate of 4.2 cents a kilometre.

Robert Thomson
That's right, Robyn.
And look on that guidance.
Obviously we've put out some guidance there.
There are some limits around that.
Guidance around that's only for charging at home.
Unless you know your car specifically, does have the ability to track where your charging from that commercial versus home.
So if you are, if you are using.
If you do have electric vehicle, do you have a look at our guidance there and rounding what circumstances you be able to claim?
What costs?

Robyn Jacobson
Moving to another area – rental properties.
Now these have long been challenging and I consider that it's become even more challenging the last five to 10 years, we've had a lot of legislative change and if we think about the rules around claiming travel expenses for residential rental properties, depreciation on plant and equipment that's already been used.
When we look at the way that we've got interest deductibility issues and having to apportion, we've got vacant land rules, they've got rules around GST withholding its settlement, we've got foreign resident capital gains withholding rules and you got to get clearance certificates.
So you don't lose part of your settlement proceeds.
There's been a lot of law change, so I get why people are finding a lot of hurdles when they're trying to navigate their way through this particular mine in terms of all the problems they face.
But at the same time, we are hearing stories about some people who seem to be wilfully double dipping or are not apportioning or are claiming for holiday houses when they should not be, so this is a really big focus area for the ATO this tax time.
What are some of the things you are seeing and what are the key messages to those who are claiming rental properties?
And I know it also, it's often been quoted, 9 out of 10 returns have errors in them and that is being challenged the profession's saying "really?".
So how do you respond to that?

Robert Thomson
Or Robyn, you know, we do continue to see mistakes being made and/ and I might talk about genuine mistakes being made before we talk about those that maybe trying to inflate their claims artificially.
But as you've noted, there has been a lot of changes.
And then there's complexity in the law.
And so we think that actually a lot of those mistakes are due to the complexity or due to record keeping.
And so that's why it continues to be 1 area that we're focused on.
Obviously, you've talked about interest income, interest expense apportionment that continues to be an area that we do continue to remind people about the need to apportion.
But one area we've been focused on this year is about the difference between repairs and maintenance and capital works. Now you know spend money on the property.
It can be a repair, it can be an initial repair, it can be capital works or you could have spent money on a depreciating asset.
So you know, it’s not like an A or B choice.
It's ABC or D choice, so we're just reminding people there, you know about ensuring that they are spending money on the property that they do understand which of those kind of expenses it does fall into. Obviously, repairs themselves are immediately deductible.
Why initial repairs?
So we've bought a property and it needs some repair, and that damage was there prior to you buying it irrespective of when you discover it.
Anyway, that's actually not immediately deductible.
Needs to be, you know, needs to be deducted over a number of years.
Kind of in line with the capital works provisions generally.
So it's just about reminding people about that and ensuring that they're correctly characterising it, obviously perhaps being depreciating assets, another area where we see people that think it's an instant, you know, bought a new air conditioner for a few 1000 bucks, installed it in the rental, think it's an immediate deduction instead of deducting that over the effect of life of the property.

So were reminding people around the complexity and making sure that they're identifying the right deduction and claiming at the right time.
But we're also reminding people around record keeping and what I record keeping is really important because it can help you understand what you can claim this year.
But it sets you up to maximise the deduction.
You're entitled to claim every year by having good records at the start, and also then when you go to dispose of the property, as most rental property owners you know, investors don't hold it for 40 years.
It does help you to get your capital gain or loss correct, when you go to dispose the property.

Robyn Jacobson
Some thoughts on repairs – we often talk about initial repairs and of course that is capital in nature and you can't just claim an outright deduction for that.
And that's something that's inherent in the property at the time you bought it.
But I think taxpayers also get confused with a genuine repair.
But it's to the entirety.
So for example, if you have a pothole in your concrete or paved driveway, and you repair the pothole, then that's a repair and it's deductible.
But if you can't replace the entire driveway, even with the same material because you've replaced the entirety, that's considered to be capital.
Replacing one tile on the roof as a repair, replacing all the tiles on the roof is capital, so it does bear going back to look at the ATO guidance and there is a ruling that talks about this and I think from memory it's something like 92.3 but don't quote me on that one and that does talk about when you've got these things in their entirety being replaced. I think the other thing that confuses people is this distinction.
As you say, between what's capital, even if it is capital, is it cost base, is it depreciable or is it climbable over the 14 year period?
So there's a lot to navigate through there.

Robert Thomson
That there is Robyn and your point around, you know, the pothole versus the driveways are really good example around, you know about a repair being improving something back to its basic functionality versus an improvement.
So replacing the whole driveway and so we have we have put out a lot of information in this in our investor toolkit to help people understand the difference.
But this is also why, you know, we have been saying in our messaging to people.
If you are thinking about investing, you might actually want to go and talk to registered tax agent so you understand.
Actually, you know, if you are going to make this investment, what your tax outcomes might look like, what records you need to keep from the start, so you've got good record keeping from the start because obviously that impacts just not every year tax return.
But obviously when you go to dispose of the investment as well.

Robyn Jacobson
And of course, with interest rates that continued to rise throughout last year, we've seen them pause this year.
The claims that people are making for interest on their rental properties are now much more significant than they were some years ago, so the importance of allocating between the private use and taxable's was always there.
But now I'm gonna say it's even more important because of the more substantial figures that are involved.

Robert Thomson
Yes, I I don't have the latest figures, Robyn.
In terms of the trend over the last few years and how that's played out, but you are correct.
What we continue to see is that people just fail or make mistakes in terms of apportioning their interest between, you know, where they've taken out a mixed use loan.
So they've bought a property, but they may have used some of that for a personal personal expense or a non income generating expense might be the more technical way to put it and.
And so there's 2 kind of mistakes we see there.
Umm one is well actually the same thing is really about people understanding.
They need to apportion that for the whole life of the loan.
And so, you know, if you've taken out a loan for, say, 750,000 and the you've used 50,000 for another purpose, you know some people think they can pay the 1st, 50,000 off and then everything else is deductible for the interest they don't need to apportion anymore. And so that's one mistake we're saying.
No, you're actually need to apportion for the entirety of the loan and obviously that becomes complex.
You know that needs to keep good records around how they're doing that year on year, but it is one area we do see people make mistakes

Robyn Jacobson
The ATO has a top 10 tips for residential rental property owners.
It's a really good guide and and are doing encourage people to have a look at that.
Alright, let's look at side hustles.
Call it gig economy.
Call it what you will.
These are people who may not fully appreciate the extent of their tax obligations.
They may need to be registered for GST.
They certainly have income tax implications.
They do need to get an ABN, they have got record at keeping obligations and of course they may be kicked into depending on the size of their activity, the PAYG instalments system.
So there's quite a bit to get across.

Robert Thomson
There is, there is Robyn.
You know, I think it's like side hustles and like, start again, a new income stream or any new business you need do need to think about the tax consequences.
But we definitely have seen with the rise of online, social media, gig economy that more people are doing Content creation, side hustles, you know, might be working rideshare, on the side and it's just really a reminder for those people that they do need to do need to include that in their income tax return as income.
Now obviously they can claim the deductions that are entitled to in generating that income.
So, you know, don't just remember the income.
Remember the deductions, but this is 1 area where just reminding people you're doing a little bit of side hustle work.
While you might just think it's a little bit of side hustle, it could have tax implications.
So you do need to make sure that you've reported that income in your tax return, and that's just not income that can be whether you've received that income through online services, but also if you've also got cash as well.
So it's just about reminding people about their what income needs to go on their tax return.
And obviously another one in that kind of same space is around crypto.
So obviously we continue to see people are investing in crypto and we're just trying to remind them of their tax consequences there.
And we think about 30, I think 30% of people don't think they need to keep records for crypto, but obviously at a basic level, they do need to create keep you know the transaction dates, how much they bought it for, how much they sold it for etcetera.
So just a reminder and this will pop up, you know there is a pop-up alert when people go to file their tax returns to remind them that they might have had a crypto event or a crypto transaction during the year.
So it's just a reminder as well around crypto needing to being included in a gain or loss. If for individuals this year, if they've invested in crypto and one reminder is they were just under people, you know like every quarter download your transaction wallets, you've got that information there and before you close out your account, definitely make sure you've got you've downloaded your account.
Activity and information.
So you can give that to your tax agent at tax time and kind of work out your capital gain or loss on any crypto assets you've had.

Robyn Jacobson
And do not lose your password.
I had a fellow who had his crypto pathway to his wallet password on the hard disk of an old laptop and inadvertently through the laptop out.
This was, I believe, in the UK and then spent vast amounts of money trying to convince the local council to dig up the tip to try and locate this missing laptop.

Robert Thomson
They should’ve bought BitCoin early on Robyn.

Robyn Jacobson
Absolutely.
Just sounds like he might because you're storing it on the head to.

Robert Thomson
You know, a good reminder about why it's good to keep contemporaneous records, right?
So if you're downloading your transaction account every few months, you know your clients get into a good practice that doing that.

Robyn Jacobson
Yeah, we're focused a lot on tax time.
Looking back at the 23/24 income year, but just perhaps some quick highlights of what's changing from one July, the rate of superannuation guarantee has gone up again by another half a percent.
So 11.5%.
So for employers, this is for payments made on or after one July of salaries and wages.
It's not based on when the work was done, so you might be making a payment today in respect of work done in June, but it will attract the higher rate of SG.
So that's really important.
The amount of a penalty unit goes up, so for those who are on the wrong side of the law, we've now got $330 for one penalty unit and penalties throughout the tax admin system and essentially based on penalty unit.
So you might have 10 penalty units or 50 or 100 or whatever it is based on the particular misdemeanour.
So that makes of course noncompliance, late, lodgment that sort of thing become even more expensive.

Robert Thomson
What we'd say on the penalty units for late lodgments?
Umm is you know if you think you're gonna have an issue lodging by time, then get in contact with us early and we can help you work through that.
So you don't have to.
You know, need to worry about the penalty unit.
We do appreciate and we can probably talk about tax agents, support and a little while, but you know, we do appreciate other things come up in people's lives where perhaps they are intending to lodge by certain date, but they've got something that's outside of their control.
And So what we're saying to people is if you do find yourself in that situation make sure you in contact and discuss your circumstances or speak to your registered tax agent.

Robyn Jacobson
That’s a nice segway into talking about what support is available.
So if people are having trouble lodging or paying, what can they do?
And then separately as a second part to that question, what support is available to agents?

Robert Thomson
So if people are having issues lodging or paying.
You can go online.
There are some you can go online.
So for example, you can request some payment services online, so you can actually go to the ATO website online or your tax agent can help you with those.
So I think our main messaging is getting contact with us early to discuss your situation or speak to your registered tax agent early on.
Don't leave it to the last minute.
The earlier can get in contact with us, obviously, the easier it is for us to be able to address your situation and obviously we are busy at tax time as well, right?
So we have a lot of people trying to call us.
It's also leaving it to the last minute, you know, isn't the best idea.
So just engage with us early.
Also have a look on our website.
You'll also, depending on your circumstances, might be entitled to other support options like tax help.
So there is a lot of support on the website around how you can see support if you need it, how you can go on our online services to perhaps request a deferral or to request a payment plan but then who to contact if you need.

Robyn Jacobson
Agents have something called the supported lodgment program.
So how does that work?

Robert Thomson
So the supported lodgment program is a program that allows agents to acquire to request additional time, to defer some of their lodgments, and this can actually be done through online services for agents.
Now if you things about that, the agents do need to be aware of, it needs to be that the the deferral needs to kind of be because of exceptional or unforeseen circumstances, being your client or your practice and that those circumstances are actually affecting your ability to lodge.
So our reminder there and why I made that reminder is because we're seeing a significant number of these lodgment requests that deferral requests that come through where the the agent hasn't provided that information in the enough detail for us to be able to grant that lodgment requests. So really important for you to be able to provide detail to us, to explain what the unforeseen circumstance is, why that's impacting on your ability to lodge because otherwise we're just gonna come back to you on, it creates a lot of reverse workflow for both tax agents and us.

Robyn Jacobson
Certainly in the last week alone
I've spoken with two agents who have lost Staff and this is really challenging.
We've talked often about the shortage of Labor across the accounting and tax profession, particularly post COVID.
But it's still biting and I know the governments are aware of this, but it's something that is a real issue for practitioners where they're trying to keep up with lodgements, whether it be dealing with last years, we've now got a brand new compliance season kicking off and when they lose Staff, it just depletes their resources and they can only work so many hours a week.
They can only do many so many six or seven day weeks without leading that break and and needing a bit of reprieve.
So to what extent is the ATO aware of this and mindful of this?

Robert Thomson
Obviously we engage with the tax agent community quite often.
We have the tax practitioner stewardship group and we do understand the pressures facing tax agents.
So you know, we do have.
I've talked about the Lodgment program.
We also have other programs available, such as our tax Practitioner Assistance Service, which can help provide advice on an even administrative matters around your practice and the programs we've talked about, including that tax practitioner support program.
There are obviously available to all size of agents and we also have other programs.
So I guess the main messaging is if you are having issues and you're an agent, just out getting contact with us early, that's the best idea and then we can work out what's the best support.

Robyn Jacobson
OK, look, this next issue is one that we could speak for hours and hours on, but with just a moment left: scams.
Try to identify what is genuine contact from the ATO.
We're all so suspicious, myself included, of phone calls, emails and text messages, and trying to work out.
Is it in fact the genuine supplier or provider?
Or is there someone scamming me and we've all been a victim of some form of scam or text message that is not genuine?
What does the ATO do and not do?
And if you're not clear on whether something is genuinely from the ATO, how can you check?

Robert Thomson
Yeah, so, so good question, Robyn,
I had someone the other day calling me telling me that the tax office and they're gonna throw me in jail for a tax debt, which I kind of found funny.
And when I told them that I knew the deputy Commissioner of fraud and criminal behaviours, they hung up very quickly.
But no, it's it's something we're facing, right.
You’ve gotta you've got an unpaid toll account.
You've got an unpaid, you know, TV streaming account.
We do see it at Tax Time obviously though, because people are expecting to engage with the ATO that there is scammers use that to their advantage.
And what you know, I say scams all year round, but we see new scams at this time of the year and what most of them are trying to do is harvest people's mygov ID credentials, typically through either a fake email or a fake text message.
So a few red flags, one is that we're never gonna text you or send you an unsolicited email that asks you to click onto a hyperlink and enter your mygov ID or details or any other personal information.
Well, that's one way that you can identify something is probably not from the ATO the other.

Robyn Jacobson
If there's a link, it's not from the ATO.

Robert Thomson
Not from the ATO.
What I do when I get those, even when I get I, you know, it's just you always just going to to your my Gov you know in your browser and check your activity that's the easiest way. So that's the first thing you can do.
That’s the first flag, the second flag is.
We're never gonna ask for personal information via email via text message over social media.
That's another red flag.
The other one is when the ATO calls you, it actually comes up as no caller ID.
So if you're getting a mobile number coming up and they telling you the ATO, they’re not. and the last thing is we're never gonna make you stay on the line and threaten you with jail until you've made a payment.
So any of those things Red flag if you don't think it's genuine, you don't know, hang up, you can call us on 1800 008 540 and speak to someone and they'll be able to help you to understand whether it is you're generally talking to an ATO officer or not.

Robyn Jacobson
Can you repeat that number again Rob?

Robert Thomson
1800 008 540, Robyn.
There’s also a few things practices can do at this time of the year you know, so one is making sure that they've updated their obviously their IT security software.
The second is making sure that they're obviously gone through POI for all their clients, which we talked about earlier.
And the third one is to have a discussion about who has access within your practice, to what information and do they need it?
So that question around access to information.
So they're obviously things you can do as an individual, but there's also things that can be done for practices and the same information on our website for tax agents around what they can do to kind of make sure that they're protecting themselves as well.

Robyn Jacobson
And I think it's also important to mention that there have been a number of changes in recent years involving the ATO’s approach and security procedures and so on.
And ultimately this is done to protect agents, to protect the community and to protect the ATO itself.
So sometimes they're inconvenient, but sometimes these steps are unfortunately necessary.

Robert Thomson
That's right rather than we definitely want to protect taxpayers, we also wanna protect tax agents as well.
I mean, there's nothing worse for a tax agent than having their kind of their ID taken over as well.
You know that can impact their whole practice and their livelihood as well.
So this is very much about making sure we're keeping both the community and tax agent safe.

Robyn Jacobson
Rob, I really appreciate you taking time out.
I know you've been doing a big circuit and this is one of just many, many discussions you are having, so we've gratefully appreciate your time.

Robert Thomson
Thanks Robyn.
Thanks very much.

Robyn Jacobson
Thanks for listening to this episode of TaxVibe.
I've been chatting with Rob Thomson, assistant commissioner at the ATO and the tax time spokesperson.
If you enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen, we welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the center of the tax conversation, a membership with The Tax Institute could be just what you need. Stay current and connected with tangible real world benefits. Learn more at taxinstitute.com.au.
Thanks again. Till next time on TaxVibe

End of Year Tax Issues 2024

Release date: 17 June 2024

In this bonus episode of TaxVibe, a snippet of our member-only webinar, you'll hear Robyn Jacobson, CTA, cover some of the hot tax topics to be aware of as we near the end of the financial year.

This episode covers insights into:

• Personal income tax cuts

• Student loans

• Work-related expenses

• Rental properties

To see the full webinar, and access other member-only insights and resources, become a member of The Tax Institute. Learn more here.

Robyn Jacobson, CTA

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson. We love the vibe of Tax and here at The Tax Institute we do tax differently. In this bonus episode of TaxVibe, you'll get a special insight into our member-only webinar. To see the full webinar and access other member-only insights and resources. Become a member of The Tax Institute. Head to our website to learn more. We hope you enjoy this episode of TaxVibe.

Chris Wookey, CTA

Hello everyone, and welcome to The Tax Institute's End of Year Tax Issues Member Benefit Webinar. My name is Chris Wookey and I'm a member of the National SME Technical Committee here at The Tax Institute and a life member of the Institute. And before I introduce our Speaker, I'd like to remind you to take advantage of the advanced rate and register for The Tax Summit being held in Sydney in September, later on this year. Now I'd like to introduce our presenter, Robyn Jacobson. Robyn is going to be well known to everybody here. She's the senior advocate at The Tax Institute. She's been around in tax for more than three decades in the profession. We started working together last century and so over to your Robyn.

Robyn Jacobson, CTA

Thank you, Chris. And yes, I look back on those days of how simple tax was in the mid-nineties and even early nineties and it's come a long way since then. So thank you for chairing today and good afternoon everyone. It's a pleasure to have you join us today right across the country.

This is obviously a very busy time for you all, but the purpose of today's webinar is to consider the issues you need to think about for both your own practice and the affairs of your clients as we lead up to June 30.

Alright, so let's get into it. Starting with what we know when it comes to the taxation of individuals. Now you're of course across the stage three revised tax cuts and these kick in on the 1st of July this year. Now just the completeness, this slide [member-only] shows you stage one and stage two, which of course have been in place for some years now. I'm not going to go through every threshold and rate with you, it is obvious by what's indicated in red. But I did want to make some observations about what this means for your clients and what their expectations are over the next year. So if I move now to this insight slide, firstly, I know there are going to be some clients and certainly the community more broadly, particularly those who don't use tax agents, who may confuse the start date of the tax cuts being 1st July 2024 with the tax position for 23/24. So of course this does not alter their income tax position for the current financial year, and nor does lodgement of the '24 tax returns have any impact. So '24 cut it off. Make sure you explain to your clients that this is all to the 24-25 year onwards.

Secondly, I haven't seen much narrative on this, and it's something that you may wish to raise with your clients, but the government has been broadly saying in all its messaging: every taxpayer receives the tax cut from 1 July this year. Well, firstly, it's only income tax. So of course if you're paying GST, then that doesn't make you a taxpayer for this purpose. Secondly, there are people who may pay tax, but they may be, in terms of the final tax position, below the tax free threshold. Now, of course, they would get a refund of any tax they've paid, but ultimately, if they're below the tax free threshold and whether that's increased by way of other offsets, apart from the low income tax offset, they may not have a net tax position, which means they're not going to benefit from this. But moving to those who are on the withholding system, anybody who's on a PAYG withholding arrangement as an employee will see an immediate benefit from their first payroll from the 1st of July this year. But anybody who's on the PAYG installment system only and I'm talking about sole traders, certain businesses, of course, and your investors, they pay their tax by way of installments. And these aren't going to be adjusted because of the tax cuts. So they will pay their installments, as usual, varying, if that is appropriate, and they won't effectively see the benefit of the tax cuts until they lodge their '25 tax return, work out whether any tax has been overpaid, and then, of course, that would be adjusted upon assessment. So it's just a distinction I think is important because those who are not on withholding are not going to see that immediate benefit. Of course, a reminder to employers they need to make sure that they adjust their PAYG withholding tables effective the first payroll from 1 July this year and we are expecting that the ATO will be updating those witholding tables in mid-June. Now that obviously would be around this week, perhaps into next.

Student loans. For those of you who have clients with the old HECS debts or HELP debts as they're now known, the Higher Education Loan Program in the budget it was announced that the indexation factor applied to increase the loan effectively as a pseudo interest calculation is going to be adjusted. And this is in response to the particularly high indexation last year when it was 7.1%, I think the highest it's ever been, or perhaps the second highest. But certainly typical increases over recent years have been around say 2 or 3%. So, effective from loans that were outstanding on the 1st of June 2023, instead of just applying the CPI indexation rate, which as you can see in that second bullet point was 7.1%, the law will instead apply the lower of the CPI or what's called the wage price index, and that would drop that indexation rate down to 3.2%. For the indexation on 1 June this year, instead of 4.7, it means it would only be 4%. Now about $3 billion of student loans is going to be improved, if you like, benefiting from this. But please note also if a student repaid their debt in full before the 1st of June 2023, they will have the indexation applied using only the CPI. They won't benefit from the lower of the two indexation factors. So something that I've said in a bit of social media where they've realised they've missed out on this particular measure,

Moving on to work related expenses. Now you can run a whole webinar on this alone, but some key considerations are listed in the next couple of slides. Now, starting with of course car expenses, there's your cents per kilometre. The $0.85 is in a registered instrument, so that is already, if you like, in the legislation. And the rate for 24-25., the ATO has issued a draft legislative instrument yet to be registered and it's proposing the rates will be $0.88. I've not particularly seen changes in the draft to the final over the years so I would expect that to go through as is. And then of course we've got the relatively new approach for electric vehicles at 4.2 cents per kilometer and that can be applied for either FBT or for income tax purposes. Now, notably D1 is only where you own or lease the car. If you're borrowing someone else's car then it becomes a travel expense at D2, not a car expense at D1. D2 – I'm going to skim over this.

You've got lots of guidance on the relevant reasonable travel and overtime meal allowance expense amounts for the 23-24 year linked there. There's information on FBT, accommodation, food, drink, itinerant workers. There is so much that goes into this but have regard of course to itinerant workers, bulky tools and equipment, home to work travel, whether it is legitimate travel or whether it's just someone who is choosing to stay somewhere else for the convenience of being closer to work. That doesn't automatically make it travel. So it's very important to look at the character of the expenditure that's being incurred and make sure it's being classified correctly. Also, the ATO will of course be looking at a correlation between working from home expense claims and travel expenses, and you would think that somebody who's working from home should have minimal travel expenses and vice versa, unless they're working particularly ridiculous hours and they're traveling as well as doing significant hours working from home. But a typical worker who does travel or is working from home, there shouldn't be high claims for each of those in the same return.

Moving onto clothing expenses at D3, a reminder about all the rules regarding compulsory uniforms, the non-compulsory uniforms which must be registered in order to make a claim for those, protective clothing is okay and occupation-specific clothing is okay. But anything that is required to be worn by the employer but isn't occupation-specific (and we go back to our chef's pants and our barrister's robes and the like), or is some type of compulsory or non-compulsory registered uniform, is simply not deductible and that includes the waiters who are required to wear black, that's still conventional clothing. Same with typically gym wear and similar. Now don't forget about your $150 worth of laundry. There needs to be a calculation of the various loads of washing. Also, if you're going to be relying on the $0.50 on the dollar per load and I will leave it with you as to whether you'll make the appropriate inquiries as to whether the, let's say, underwear is also being washed along with the trade clothing as to determine whether it's a $0.50 claim or a dollar claim per wash. I'll leave those personal and private questions to you and your clients, you can work through that one.

Now. Self-education expenses. A reminder that the expenditure must either improve your skills or knowledge that you currently require in your employment duties, or is likely to result in an income in your employment activities. So in those other income that comes from those activities. So we've seen so many cases over the years and time doesn't permit us going down all those rabbit holes, that you're well familiar with, the necessary nexus between claiming that and of course deriving the necessary assessable income. A reminder that the old $250 rule has been gone for a couple of years, so you don't need to worry about taking off that non-deductible threshold first.

All right, let's spend a little bit more time on the working from home expenses. For the 23-24 year, we're into the full year of the fixed rate method that was revised about 18 months ago. So we're talking here about the $0.67 an hour, the $0.80 an hour shortcut method finished up. That's long gone up post-COVID. Secondly, the $0.52 an hour no longer exists. So the taxpayer has a choice of $0.67 an hour under the fixed rate method or the actual cost method. If they use actual cost, they do have to keep receipts for everything and they will need to determine an appropriate allocation for challenging expenses like internet, telephone, power and your heating, cooling, etc.. Now that includes gas. So if you're going to go with the $0.67 an hour, that covers your electricity, your gas, telephone, your internet stationery, and computer expenses and consumables. So if you feel your client is going to be better off not using the fixed rate method, then you'll need to work out really essentially by setting out two sets of calculations that I'll share with you, that when I did my last tax return, I needed to work through this. I looked at the fixed rate and I compared my actuals and you've got to determine which one works better for you. But unfortunately it does increase, as a result, the amount of compliance work involved. Also, you do not need to have a separate office in order for the working from home expense fixed rate method. It is sufficient that it's simply working from home. You do need to keep a copy of the relevant bill that supports the electricity, the gas or the internet. Not every one, just at least one bill. And. also bear in mind that the $0.67 an hour doesn't include depreciation. So you are able to claim that separately, but you won't be able to claim certain other expenses because of the double dip. The other point to mention is that you have to keep a record of the actual hours worked if you're going to use the fixed rate method. You can't use a four week diary. You must keep a record in the spreadsheet or some sort of log book or whatever that records every single hour that you work from home during the year.

Right. Moving on to rental properties. Now the ATO continues to share data with us and I am the co-chair of the Tax Practitioner Stewardship Group. And whenever we meet this is often discussed and that is the fact that the ATO data is showing nine out of ten tax returns that include rental property claims have errors in them. This also includes Agent lodged returns. So there's no suggestion that the nine out of ten that are wrong are all self lodged returns. There are errors being made in returns lodged by agents. Now the ATO has released the top ten tips to help rental property owners avoid these common mistakes. And I do recommend you have a look at that document. You may run through it and think, yeah, yeah, we know this, but it is a good reminder and it's also useful to send your clients so they are aware of all the tips and traps that need to be considered when you're looking at rental property claims. Now we are looking at running a number only webinar on rental properties in the next few months. So keep your eyes out for that. But some common areas that are an issue. Make sure that the gross rent is being declared. The ATO are seeing instances where the net rent per the agent's statement is being included in the tax return, and then the expenses in that statement are being claimed against the net rent. So in other words, it's a double dip of the same expenses. Now obviously net rent is what gets deposited into your client's bank accounts, but they need to make sure that they're giving you the full information and that you're grossing that back up to include the gross rent, claim the expenses and of course, anything else that they incur outside the agent arrangement. I think it's also incumbent upon agents to ask the right questions of clients. So make sure when you're getting that figure, query them and say, is this the net rental or the gross rental figure from the agent. When it comes to mate's rates, if you're going to reduce the rental income rate for a friend, for family member, then you're not going to get a full deduction for the outgoings. So make sure that if non market rates are being charged, you appropriately adjust the expenses. There are still issues with clients who are not correctly apportioning their interest where the property is not generally available for rent, but they're still claiming the interest or they're failing to apportion where there is mixed use of the funds. Now another occasion we can run through the difference between a redraw of a mortgage and offset facilities. But it's very important to understand the nature of a loan. And when you've got all these different features, how you should treat the interest deduction accordingly. Borrowing expenses – remember the claim is over five years or the term of the loan if that is less than five years. It is not a straight line – in other words, you don't just take the amount and divide by five. Technically the claim runs for the number of days, but it runs over six income years. So four full years and then two part years. Check your repairs. Make sure there's no capital amounts in there. Check for something that could be constituted as an initial repair and instead should be treated as capital. Watch out for entirety. So if you fix a pothole on a driveway or a fence paling, that's a repair. Replace the whole fence, or replace the whole driveway, even if it's a repair, it is considered a capital amount because you've replaced the entirety of it. And it is worth looking at the ATO ruling on this, which from memory is something like 92/3, but you'll be able to find it with a quick search. Of course, don't forget about the changes with residential rental properties. So from 1 July 2017, you've got your rules for second hand assets in these properties and you'll need to consider whether the depreciation is limited. In these cases, you can't claim depreciation, but you would then calculate a capital loss under CGT event case seven when the property is sold. So in that case you'd have an A1, typically a capital gain on the sale of the property, plus a K7 capital loss on the sale of the relevant depreciating assets where they are second hand and they've been acquired after that date. You also need to consider no deduction for travel expenses where it's a residential rental property. The $300 rule is still available for rental property owners to claim minor depreciating assets, but it's not on a per asset basis. So anything that is identical or substantially identical or is part of a set, you need to look at that in the context of the $300 limit.

Thanks for listening to this bonus episode of TaxVibe. If you want to hear the full webinar and join a collective voice of 10,000 practitioner as the heart of the tax profession, become a member of The Tax Institute. Head to our website to learn more. To keep up to date with TaxVibe, be sure to subscribe wherever you listen to your podcasts. Please join us on our socials and let us know your thoughts or any topics you'd like to hear us discuss. We look forward to your joining us next time.

Federal Budget 2024-25

Release date: 17 May 2024

You won't want to miss this bonus episode of TaxVibe, where you'll get a sneak peek behind the closed doors of our member-only Federal Budget 2024-25 webinar.

In this facilitated panel discussion, our CEO, Scott Treatt CTA, facilitates a panel of experts:

Annemarie Wilmore, ATI, Partner, Tax, Johnson Winter Slattery
Clare Mazzetti, ATI, Chair, The Tax Institute
Todd Want, CTA, Head of Tax Services, William Buck & President, The Tax Institute
Robyn Jacobson, CTA, Senior Advocate. The Tax Institute

They unpack the commercial and practical implications and considerations of the Budget’s key tax and superannuation measures.

To hear the full webinar and access other member-only insights and resources, become a member of The Tax Institute. You can learn more here.

Robyn Jacobson, CTA

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson. We love the vibe of Tax and here at The Tax Institute we do tax differently. In this bonus episode of TaxVibe you'll get a special insight into our post-Federal Budget reflection. A sneak peek behind the closed doors of our member-only only webinar.

You'll hear the highlights of key tax measures and their commercial and practical implications. You'll hear from our panellists, Annemarie Wilmore, Partner (Tax) at Johnson Winter Slattery, Clare Mazzetti, Chair at The Tax Institute and Todd Want, CTA, President of The Tax Institute. You'll also hear Scott Treatt CTA, CEO of The Tax Institute, facilitating the discussion.

To see the full webinar and access other member-only insights and resources, become a member of The Tax Institute. Head to our website to learn more.

We hope you enjoy this episode of TaxVibe.

Scott Treatt, CTA

Good afternoon and welcome to The Tax Institute's webinar, addressing last night's federal Budget, Federal Budget 24-25. My immediate reaction was in my professional career to date and I dare not say how many years that is, but I've never recalled a budget that was so light in tax measures. As a bit of an anecdote, because there were so many tax measures, I probably was up at midnight last night trying to find something interesting out of the papers, and I tried to find how many times tax was actually mentioned in the budget papers this year compared to prior years, and it's around half, half as many times last night as in prior years. And they weren't really on substantive matters. But anyway, let's start, and Clare if I may start with you, immediate reactions then to last night's budget.

Clare Mazzetti, ATI

Well, look, I had a very similar reaction to you, albeit not necessarily just focused on tax given I have a more commercial background and I'm not a tax specialist. But one of the really insightful comments I heard from one commentator last night was to reflect that once upon a time budget night used to be something of an event like listening to a political speeches and leader’s debates in a in an election year, people used to tune in and get quite excited and have a sense of anticipation of what the government would say and what agenda was being set as they would when the right of reply comes a couple of nights later. But the overwhelming sense in this commentary was that actually nobody is listening and there's really not a lot to say. And I think that that's really reflective of what we saw last night, and that's a great shame because it's such a missed opportunity. But if we contextualize it, we are coming into an election year while an election probably could be held as late as September next year, it's likely to be within the next 12 months, possibly much sooner into the new year. And so I think what was announced is really reflects on the government not wanting to expend any political capital and trying to sprinkle as many sort of breadcrumbs as possible to keep as many people happy, albeit there's not a lot of substance in that. Certainly the cost of living measures that were announced were largely already pre-announced, so there wasn't very much new in there. And look, just as a broader comment to close off this before we hear from our other colleagues, you know, I'm not really convinced that there's too much in the budget that will potentially stop the RBA from needing to increase rates again. So while there was talk of bringing inflation down, I'm not sure that some of the economic data globally will support that. So they were my initial thoughts.

Scott Treatt, CTA

Yeah, perfect, Thanks Clare. Todd, I might pass to you next if I may, and again your initial reaction but I'd also like to explore if I could – could they have done anything different?

Todd Want, CTA

I think, Scott, that the the budget was a missed opportunity to at least talk about tax. It wasn't implementing measures. Certainly substantial measures can take time. But from the tax system needing to be overhauled, not even putting on the table any real comments about that at all or tying them in to the the broader policies in any major way was really the thing that just seemed to slip away. The stage three tax cuts or revised stage three tax cuts that kick in from 1st July 2024, that was sort of seen to be our centrepiece, but a major part of the budget of the tax measures, and that was locked in quite some time ago.

Scott Treatt, CTA

It was, it was really just the budget was really just pricing in the impact now of those announced and re-announced and re-announced til the cows come home. These stage three tax cuts.

Todd Want, CTA

I was pleased as an avid enjoyer of sweet potato fries to see that the levies on sweet potatoes are coming down a little bit so I assume that will pass through to the costs when I'm go and buy those when dining out, but that type of thing when you're looking for those sorts of measures and saying well that's a bit of a highlight from the budget, not taking away from our sweet potato farming colleagues, that's disappointing with taxes. We've missed that. So I think for the business landscape, for our members and the types of issues that we have to deal with, the budget really didn't didn't hit on anything. It didn't give us any real growth.

Scott Treatt, CTA

Yeah thanks, Todd. Anne-Marie, your, your reactions to the budget.

Annemarie Wilmore, ATI

Yeah, similar to Todd and Clare's. There was not really much news for large corporates in here. There's some tinkering around the edges. We've seen a lot of legislation introduced in recent years, so there's some adjustments to some of those, but it's very much consistent with that theme of making multinationals pay their fair share of tax. That's a constant theme that seems to be coming through and I think one sweetener in the deal is that some of these measures that have been announced appear to be prospective and perhaps we're seeing an end to retrospective legislation, one can hope.

Scott Treatt, CTA

One can hope but I'm probably not going to be one that's holding my breath for that. But that out of this one glaring admission, Robyn, last night really wasn't there. This government's been in power now for two years, and a lot of work that we did when they came to power, we did have an incoming government brief at the time. And in that brief I think there was some 84 or so announced but unenacted measures, where are we at now? How many ABUMs, as they colloquially known, how many announced but enacted measures are sitting there today and where do we stand?

Robyn Jacobson, CTA

Yeah, ABUMs. These are a rolling figure. In other words, they always creep up every budget, they creep up every review, they creep up every election. And through the course of a term of government, we might knock a few off. What's been concerning is the longevity of some of those items, but they have been around for so long and for example, there are three in particular that we continue to focus on and continue to advocate for some progress.

The first is the corporate tax residency rules. There seems to be consensus across the profession and even in broader industry that what was previously announced is a good thing. So let's just get on with that. The individual residency proposals, you can't say the same. There are concerns about what they would mean if brought in in their proposed form. And then we've got the perennial Div7A measures which, look, we're up to 12 years if we can go back that far. It was May 2012 when the then Assistant Treasurer David Bradbury, commissioned the review by the Board of Taxation to review the rules to see if they were still fit for purpose. The conclusion was they're not. Changes need to be made and I'm not going to go back through all the history of those announcements, but we still wait for reform. Now. Scott, we often talk about, particularly in our Tax Policy and Advocacy team, about be careful what you wish for. So we don't necessarily want change for the sake of it. We don't necessarily want change just to reduce the length of the list of items. But we do want certainty. And when you've got measures that go on for years and years and years, we haven't got certainty, particularly when they have retrospective application. Now we say there was virtually no movement on the ABUMs. There was one. And this was that very odd announcement back in the 2019-20 budget, which is about ABNs and how if you had an ABN, you had to lodge a tax return, which is a current requirement anyway. So that's always been a perplexing one. If we look more broadly, there was a proposal in the budget to abolish 457 nuisance tariffs. Now Todd, I'm not suggesting that the marketing levy on the sweet potatoes is a nuisance tax and we give that one full credit for abolition. But the point is, Scott, that we've got a proposal to get rid of some nuisance tariffs because they are cluttering up the system. So productivity, they're not serving the system very well. Why aren't we having the same conversations about other taxes that are in the system? Why is the focus on, for example, these tariffs and not on many dozens of the taxes that were identified by Ken Henry in his review back in 2010? So we continue to advocate for some clarity and certainty on these items. There just doesn't seem to be an appetite. They just get pushed into the too hard basket.

Scott Treatt, CTA

I think that's right. And I am challenged by the fact that they don't take the budget as an opportunity to then improve what certainty we talk of confidence and certainty in the system, but it just leaves it as a really uncertain environment where you've got those measures as announced that untouched for so long in evidence. What do we do then? How do we deal with this? And so so Claire, coming back to you, if I could, like, where do we stand up off the back of last night's budget? Then from a business confidence perspective, the impact on the outlook, do you think that means for businesses as we are moving forward then?

Clare Mazzetti, ATI

Well, look, I think we're in a very precarious sort of inflection point and your monetary policy and fiscal policy continue to work at cross-purposes. And that is absolutely not useful. And it's been a structural problem for quite some time. And obviously, the institute has been through its advocacy work and talking about broader tax reform, you know, a very vocal voice around that. So I think that remains an important issue. But without bringing those two things into alignment, productivity is really the only way for the Australian economy to grow its way out of this particular challenge is the tax system is not going to be at least tinkered with or, you know, some pathway for broader reform is not going to be undertaken. So look, where does Australia sort of stand? I think we're very, very lucky that commodity prices again have been strong and obviously that was noted last night. You know, Treasury had probably on the budgeted by sort of quite some substantive amounts for four key, key resources. And that's really, I guess a key piece about why surplus was announced last night. So they've been strong and resilient, households have been resilient, and that's in large part because those Kogan buffers and cash surpluses that people built up are still there, albeit they're dwindling and they are dwindling fast. And our banking data shows that quite clearly. But unemployment stays very, very low at the moment, and that's also helping us remain quite resilient, even though we're seeing spikes in wage rises. But, you know, these pressures of global inflation, geopolitics, uneven growth throughout our economy, in a global economy are going to put significant pressure on us. And that is weighing on the broader business environment for sure. Doesn't really matter what business you're in. You know, this uneven or patchy growth and some of these patchy results are showing up in lots of different industries and more worryingly, at the moment, we do see that banks are starting to provision much more stringently for bad debt and insolvency fees are on the rise. And I guess how we would see that through the tax provision as well. But they are at decade highs. So what does it mean? I think that you know, there's a bumpy road ahead, a very bumpy road ahead and back to where I started around that misalignment between some fiscal and monetary policy. The longer that remains and the longer that all of this sort of structural work, particularly around things like tax reform, the can down the road, the harder it becomes for whether it's a large enterprise or small enterprise or a mum and dad business to be operating in that environment.

Scott Treatt, CTA

Absolutely. So, Todd, I'll come to you then if I could. SME’S It's the most touched part of tax provisions. I'd say over the last seven years would be instant asset write offs. And again last night.

Todd Want, CTA

It’s, it’s fascinating Scott. We obviously had the COVID related measures where it got bumped up for a broader range of businesses with the instant write offs and temporarily expensing. But this is something that I think all, you know, all parts of politics are guilty of because this is if it's a lost decade, it's been happening. And I think it's something real. And like the seventh change in the last decade where we get to budget night and we're just wondering whether what the number is for the instant write off and it both the threshold for the dollar value of the assets bought and for the size of business. But it's literally a rinse and repeat of last year's budget of $20,000 for, for small business through the $10 million turnover aggregated turnover.

Scott Treatt, CTA

But this is still just an announcement.

Todd Want, CTA

this this is the this is one of the real problems that yesterday before the budget was handed down, the Senate had back in March proposed some changes to last year's measures because last year's measures still haven't come to legislation. As it stands, a small business has $1,000 instead of threshold. So last year's measures, yeah, we're obviously nearly finished this particular financial year and our legislation passed. The Senate had proposed a 30,000 limit. So businesses with an aggregate or turnover in the group of 50 million or less. So that passed the House of Reps yesterday to consider, they kicked that down the road to today and it would appear as though the tennis game is going to continue.

Scott Treatt, CTA

It's going to be fascinating, isn't it? So yes, last year's measure was $20,000 deduction for a 10 million cap. As you say, Senate then has pushed it back 30000 to 50 million right now. Where are we going to learn how to our members advise their clients around what to ask? Six weeks out for me and we've now going, Will, what is it for this year, let alone how will that impact the Senate's view of what it should be for next year?

Todd Want, CTA

This is where I think the tax policy and broader economic issues. This is a classic of it being one that businesses who are looking to upgrade, say, computer systems or other bits and pieces and spend money to improve their systems and processes and efficiencies, they just want some certainty. You cannot claim the deduction upfront for that. Actually be able to factor in an after tax cost. But what I need to be able to help grow the business in the economy yet this seems to be over many years now a political issue to get this point scoring on depreciation rates. Ultimately, for the most part, it's a timing issue. It's not a permanent thing. The most instances, most of these small businesses, they would have claimed that depreciation over three or four years sort of time period, a large chunk of it ordinarily. So it's only a timing thing. But for but it seems to be something that just makes an adviser's life so tough and clients, you know, when you're telling them, oh, look, we don't actually know for this year what you can claim. It's still not sorted out by the government They now what does that what are you doing? We are and so are we glad that there's not too many measures. Now. We'd actually like something like this just locked in as a permanent thing in the legislation. Let's forget about it being the number one smart business thing in the budget each year. Let's just lock it into 20,037, whatever the appropriate thresholds are, and get it locked in there and keeping certainty to just go out there. I mean, the the threshold of 20,000, a proposed threshold, most businesses are not going to be able to buy a car or a vehicle and walk that off instantly. At that level, we're talking more desks and computer equipment and things like that, maybe some shelving and racking and the like. Very, very practical for a small business. But let's give them some certainty.

Scott Treatt, CTA

Absolutely. Robyn, I can see you wanting to say something. It's one of your pet peeves like this is a sugar hit to the government though, isn't it? Like this becomes like a it's a new sugar hit and.

Robyn Jacobson, CTA

Poor old instant asset write off. It's become this political ping pong. Well, clearly the government likes it and government of either persuasion because we've seen it change and altered increased under both sides. Clearly, business likes it and it's a no brainer because as you say, it's a timing difference. So we're having these enormous squabbles, the energy that is put into drafting legislation and debating it in Parliament to work out whether or not we're going to write something off now or in two or three years time. And the difficulty, Scott, is that at a policy level, it undermines the purpose for which it's being introduced, which is to provide an incentive, generate productivity, get businesses investing in these sorts of depreciable assets is six weeks out from your end and you've got no idea where the what you've already spent this year is eligible for a write off this year or not. And I don't feel that many practitioners don't fully appreciate that without any of these legislative changes, it has reverted already to $1,000. So what we're looking for is a transitional provision to supersede that and make this a 20,000 write off for this year or in the same case for next year. But as we've been advocating for in many of our pre-budget submissions and similar over recent years, we want this to be a permanent measure and take it off the table, give businesses certainty, and wherever you place those settings, look, we would like it under 50 million just confined to the small business entities I look with. You said it at 2025, 30, 50,000. At this point I cannot I can't. I just want to permanently in the law.

Scott Treatt, CTA

Absolutely, now Anne-Marie, so turning to capital gains tax.

Annemarie Wilmore, ATI

Yes. For foreigners. Yes. So will be some changes in this space. There'll be an expansion of the scope in terms of the assets that might be caught. There's a new concept to deal with. So in terms of the current rules, we focus on a test of evaluating the indirect interests, whether they the the value is greater than 50% of Australian real property. That perhaps will change. It's unclear. Maybe there's an additional layer of integrity rules to be introduced.

Scott Treatt, CTA

Yeah, there's a lot of detail that's not quite.

Annemarie Wilmore, ATI

It's not quite it's not quite there. But there is this new concept of assets with a close economic connection with Australia, with Australian land in particular. There's also a change around the testing time. So at the moment you're quite to test at a particular time there's an averaging of 12 months and there's a notification requirements that is going to be it.

Scott Treatt, CTA

Which is fascinating, is maybe touch on the testing over time. So pragmatically for advisors, for their clients, what it's going to mean from a record keeping perspective and that can be challenging when you're talking to clients and you know only saw it on this day, why do you need all these other data?

Annemarie Wilmore, ATI

And it's a bit speculative at this stage, but I think it's it's going to require a bit of thinking through and planning for organizations that are looking to divest of their assets. You know, the valuation aspects will need to be worked through in terms of how a value a might approach this question over a period of time. And you run the record, there's going to be record paying implications for sure.

Scott Treatt, CTA

And so that notification piece, though, who's that applying to.

Annemarie Wilmore, ATI

Say, the the foreign residents who have who are considering to dispose of their shares in land that's worth more than 20 million? I think that they'll be required to notify the ATO that the announced measure actually says before the transaction is executed we should see some really early isn't really, really early. And it would be interesting to see if any attempts are made to strike a balance between that need and desire. So transparency on one part of the government and the ATO and the real practicalities of getting a deal done. And what we also don't know at this stage is what that might mean in terms of there's a notification requirement. I think that's clear. But what sort of powers will the idea have around this? Can they hold up a deal? Will they look to investigate it post post implementation? So these are sort of the unknowns in some ways, this is not a new issue for foreign investors into Australian assets. It's been around for so many years. I think there may have been a similar announced measure some years ago after the ACA litigation. So it's sort of a bit of a back to the future type vibe to it.

Scott Treatt, CTA

Look at it. I think we've covered off matters on fact that there is so little in last night's budget from a tax perspective and what have you. So maybe just to wrap this up, maybe from each of you. Well, on we've heard what we've heard. Yes, there's little in there is aside from a text perspective. So what's different then? If I'm an adviser, I've now got to sit in front of clients who don't get that some joys and thrills of sitting down at budget night and listening to Jim Chalmers wading through the papers. They've got questions that they want to I want to know what is it that I'm talking to my clients about? What is it that I need to do differently in the future, plan differently, etc.? What's your takeaway? And I'll go one by one if I might play starting with you.

Clare Mazzetti, ATI

Well, look, given my roles a little bit different, I might answer the question slightly differently because I'm not sitting in front of clients giving tax advice. But look, I think a broader macroeconomic comment is is just to reiterate what I've said before, that clearly productivity is needed in the Australian economy in lieu of governments of any persuasion addressing some of these structural challenges that we face into and obviously taxation reform and broader reform would need to be a part of that conversation. And we bang the drum very, very well and passionately and will continue to do so. But really not much is sort of different and not much will change. And in some ways, you know, I'm not that I sort of want to wish sort of crisis upon the economy, but Australia does respond well in a crisis and people pull together. And I think that COVID showed us that. And in many ways we almost need some kind of big crisis in order to have the will and desire to to address some of these structural changes where it can then be, you know, on a bipartisan approach.

Scott Treatt, CTA

Understood. Todd, You're a practitioner.

Todd Want, CTA

I think what what's clear from, you know, Robyn, talking about ABUMS and the depreciation measures, they're not being enacted. Uncertainty, even though things are announced, is just a given in this in this climate. But what does have more certainty out of these budget measures is the amount of money that the government keeps throwing in the ATO to conduct reviews, audits, task forces, etc. So those taxpayers who are either wealthier individuals, larger private groups, individuals that are pushing the boundaries on deductions, whatever it is, the cross section they expect and expect to review, that's that's what I take out of these papers, because dollar wise, if you dug into the amount of money thrown the way over the coming years for those types of things relative to the total pot of measures, it was a huge proportion of all. And so it's certainly giving a message that's and I think quite rightly, Robyn has thoughts on whether they go far enough in what the ATO should be allocated money for. But as far as taxpayers and as an advisor for clients, don't expect that reviews and audits are going to go away. Did they're part and parcel of the environment now having your records, your processes, procedures, your documentation in place and being prepared to to go through that and not, you know, I think some people perhaps if you went back a number of years, would consider themselves unlucky to have been picked for a review or audits. Well, I think now you just got to accept that's part and parcel of being a taxpayer and certainly in a lot of pockets of of taxpayers.It's just how it is now. So I don't see it as being unlucky. It's now the process you just got to roll with it. And the ATO are going to continue to be funded to deal with this stuff.

Scott Treatt, CTA

Absolutely. So I might then step out of line and then move down to Robyn just to comment or add to some of those comments and your thoughts on what this means to the future. I'll come back to you, Annemarie.

Robyn Jacobson, CTA

For many years we have advocated for a more permanent and certain source of funding for government agencies and whether we're talking the TPP, the ICAO or the dozens of others, there was significant expanded funding announcements or extensions of current funding programs that were new ones that were announced. The sense I get, it's like the teenager whose constantly putting their hand out for more money from the parents. And if they had either a steady allowance or maybe they're just not trusting the teenagers with the cash. Yeah, we'll give you a drip feed amount, so we're not going to give you a big sum of money. And when we talk about but can I have some money to go to the proverbial cinema, which is code for we want to do another review or we want to build some more infrastructure or we want to upgrade our systems. It's constantly having to be sought as a separate bit of funding, sometimes allocated on an existing pool, sometimes not. Now, over the last year we have seen the recommendation from the James Review with the TPP, where they've now got a special account and they don't need to seek an appropriation from the ATO's funding. They've got it directly from Treasury and that's a good thing. But it seems that they haven't noticed our members contacting the ATO 60 days for objections is kind of that's a bonus if you can get it within that period. We're hearing increasing of six months where people are not getting feedback from the ATO on those sorts of matters. They challenged by labor markets as much as any other business. So how the funding works long term but certainly would like to see something that's a little bit more permanent and gives them more certainty.

Scott Treatt, CTA

Anything else from a future perspective, then you'd like to close out on.

Robyn Jacobson, CTA

Look, I'm going to circle back to where I started. The ABUMS

We need to move on is we need to know what the government's position on a range of measures is. Now, I can remember many years ago, and I think it was under Tony Abbott where formed government and there was a cleanout and of the I think it was on like 75 or 77 odd items, they were classified into three categories. We will proceed. We will proceed with amendments, in other words, will change the policy, but tweak it and go ahead or we will abandon it. And it's almost at the point where I won't say people don't care, which is the three we end up with, but we just need to know where we're headed.

Scott Treat, CTA

Where the client is. Absolutely. Absolutely. All right. Annemarie last but not least by any means.

Annemarie Wilmore, ATI

Thanks, Scott. I think what's if we take a step back, what's promising and it goes back to my my opening comment is that a lot of the announcements seem to be prospective. And I hope that really foreshadow is the opportunity for meaningful consultation with businesses about some of these measures so that they're not caught by surprise and that the policy intent, particularly around some of the incentives that are offered, has that opportunity to have that full effect, because these are, I imagine, not decisions that are made lightly and need to be thought through. And I think taxpayers want to get a bit more certainty and clarity around what the what the detail of these measures might actually involve.

Scott Treatt, CTA

No, that's okay. Well, with that, greatly appreciate at the time of the panel. In short notice, obviously even in preparation for these immediately after the federal budget. So again, thank you for your time and we look forward to joining you again next time.

Robyn Jacobson, CTA

Thanks for listening to this bonus episode of TaxVibe. You've heard the highlights of our member only post-Budget webinar. If you want to hear the full webinar and join a collective voice of 10,000 practitioners at the heart of the tax profession, become a member of The Tax Institute, head to our website to learn more. To keep up to date with TaxVibe, be sure to subscribe wherever you listen to your podcasts. Please join us on our socials and let us know your thoughts or any topics you'd like to hear us discuss. We look forward to joining us next time.

The tangled web of tax ethics

Release date: 26 April 2024

Recorded live at our SA Tax Forum, in this episode, Robyn Jacobson, CTA, chats with Tim Sandow, CTA, current Vice President of The Tax Institute and Tax Partner at BDO.

With tax ethics in the spotlight, they cover a range of ethical issues and responsibilities to consider when advising clients on their tax affairs, including the latest on the TASA reforms.

You’ll also find:

The importance of acting within the letter of the law and the spirit of the law
Relying on information provided by a client
What to do if clients do not take your advice
Duties when you pick up a new client
Tax professionals providing services competently.

Host: Robyn Jacobson, CTA

Guest: Tim Sandow, CTA

Robyn Jacobson

Hi and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and the host of TaxVibe. On the show, I chat with some of the tax profession's greatest minds during each of the guest unique perspectives to give you valuable and practical insights. You may not hear every day. We hope you enjoy this episode of TaxVibe. Today I'm joined live in person at the South Australian Tax Forum by Tim Sandow, CTA, Tax Partner at BDO in Adelaide. Tim has more than 30 years of experience as a tax professional, including 25 years at the Big four. He provides income tax related advice to a wide variety of private and large public companies, as well as multinationals. He has advised on mergers and acquisitions, tax governance, corporate tax, international tax and employment tax issues. Tim is the partner leading BDO is national tax risk and Ethics group. Tim is also the national vice president of the Tax Institute for 2024, and is the South Australian representative on the National Board of the Tax Institute. Tim is a chat, a tax advisor with the Tax Institute and a Chartered Accountant with Chartered Accountants Australia and New Zealand. Tim, welcome to TaxVibe.

Tim Sandow

Thank you Robyn. It's lovely to be it and looking forward to the discussion today around risk and ethics. And I will say the opinions I shared today are my opinions, not necessarily those of the Tax Institute and not necessarily those of BDO.

Robyn Jacobson

So we are speaking, I'll just make this comment, from the Sir Donald Bradman Pavilion. So this is quite an esteemed place we're sitting in today.

Tim Sandow

Exactly. We're on holiday.

Robyn Jacobson

Yeah. All right. So a bit of scene setting. We've had a lot of attention squarely focused on the tax profession for the last 12, 20 months. And it's been in the media. It's been in political circles. Governance has come under the spotlight. And of course, professional or unprofessional conduct of particular practitioners. So we're not going to go into the specifics of that today. But in terms of where this has taken us and the journey we've been on at the last 12, 20 months, you've got a lot of background in managing risk and ethics of practitioners, and I'm really keen to explore that with you and unpack that further. But if we look at the reforms that are coming through the legislative landscape now, I think it's important we acknowledge that some of this was well in play before the revelations during 2023. So if we go back to 2019, there was a review of the TPB, the Tax Practitioners Board. There were 28 recommendations made and five of those made their way. And others are still to come into what I'm calling tranche one. So this is the Treasury Laws Amendment 2023 measures number one bills, a bit of a mouthful. And that bill has a number of measures in it.I’m not going to go through all those particular measures, but things like disqualified entities and not being able to take people on without getting approval from the board who are disqualified. But what we also saw last year, because of the revelations during the year is some amendments made to that bill in November, and there's amendments to that Bill. Number one were made by Bob Peacock, Senator Peacock and they deal with what we call the dubbing provisions. Now, that's the vernacular. And they fall term is they breach reporting rules. And I just want to mention all this as we get underway, because I think it does set the scene for where the rest of this conversation is going to go. Yep. Those rules were introduced into that bill without any warning and without consultation. And the main concern that we've got is around the breach reporting rules. We're still to receive guidance from the TPP as to what those rules are going to look like and how they're going to be played out in practice and what sort of guidance we got to get. But in terms of the administration, I know that it's something a lot of practitioners are concerned about. And then we've got the whole second tranche of measures which did come out of the revelations of last year. And that's what I'm calling the second tranche. And this is all the promoter penalties and the information sharing, etc. powers of the TPB and greater sanctions. So there's been a lot of movement. Some of it's enacted as law, some of it has already started on the 1st of January. Some of it starts 1st July this year, and some of it is still to come. So your initial reaction to all of this progression of legislation.

Tim Sandow

Robyn, I think you're right. I think that the events of last year really sort of was almost like that lightning bolt out of the storm cloud that brought it all to a head. I think the community's expectations around tax practitioners has probably gone up a step. I think it's pretty interesting. I think that's, nobody likes paying more tax than they should, and I expect their accounts to tell them about, well, what are the opportunities? I've got to save some tax, but I think there is a line there. And is it that where do you actually cross that line? I guess the other comment on how just about what we saw towards the last end of last year was there there were a couple of changes which I thought were a little bit reactionary and maybe not really addressing what the real issue was. And for example, the changes to the community representations on our tax practitioners border and limiting that to one firms of under 100 people. I just thought if the issue here is about managing conflicts of interest, there's actually not addressing what the issue is. And so it's very hard to see how you have community representatives when you're excluding a portion of the community that I should be representing.

Robyn Jacobson

And there would be an outcry if there was, let's say a TP board that was completely represented by Big Four or even second tier firms and no one from the assembly sector. But conversely, they shouldn't be a board made up of only SMB practitioners and no one from the big four.

Tim Sandow

That's right. And I and I think that's where it's about really understanding what's the core issue that we're worried about. And here's the remedy addressing what that core issue is. And I just wonder with some of the things we're seeing coming through now, particularly when there's very little time to make a submission in consultation with, it's just been a little bit rushed and reaction. Right.

Robyn Jacobson

Is it fair to say that what happened to that last year or the revelations last year? I should say, because the events obviously go back many years before that highlighted some drawbacks in the system. There were some areas where it was clear that the TPP was not able to share certain information and sign with the ACR. So has the pendulum swung too far in trying to respond to some of those deficiencies in the current framework?

Tim Sandow

Yeah. Look, I think it is. I mean, I think the average person on the street would probably be surprised by some of that sort of thing. But, you don't have this sort of communication channel between Treasury, the ATO in TPP. So in some ways that sort of information sharing doesn't feel like it's a surprise. So like it'll be interesting to see how that does evolve. Well, I think and obviously we're seeing an enormous number of resources now being allocated to the TPP guys in terms of the fair, the number of fan employees they have, but then also the technology that will be investing in we are going to feel like we are being monitored.

Robyn Jacobson

So talk to me about loopholes. That's an expression that is tossed around from time to time. Yeah. They can be defined in many different ways, but what is the responsibility of practitioners when it comes to either actual or perceived loopholes?

Tim Sandow

Yeah. And I thought, I guess that there's a lot of emotion in some of these words because usually they talk about exploiting loopholes. And it's the large companies and the multinationals and the big tax advisors. So all that exploiting loopholes. I think what I would say is there's very few really genuine loopholes, and they tend to exist for a short period of time, and then they get shut down the site. My caution to someone who feels like they have found a loophole is to really examine it very carefully, because what I often find is I'll come up with a really brilliant idea, or someone else will come to me with a really brilliant idea and then will say, have you thought of? And there'll be an integrity measure which I could apply. And, and I think I'm going to talk a bit about as we go through today about the power of the network having a really good, strong network, because what I find is that it's very hard to have all the knowledge in your own head. And so often when you're talking to somebody else, you can actually draw out, what is it that I'm missing here? So I think my first caution with day, is it really a loophole or is this something already in the law that sky to counter it, I think the next thing I'd be looking at would be to say, okay, well, look, maybe it is a gray area, a genuinely gray area. My next question is, is there a reasonably arguable position and is it just a reasonably arguable position or is it a very solid position. I think by then this is the next question about the discussion with that clients to say, look, this is genuinely a gray area, and I always like to talk to clients about having an eye to the bigger picture too often of saying tax planning and loopholes and stuff being exploited. When I save a small amount of tax now. But the long term consequences are quite large. And particularly if were waking the client who might have a terrific business, they want to sell it, or they want to do an IP, and we come in and we say, look, if you want to sell your business, the tax that comes from selling the shares in this company are significantly better than selling the assets. But if you want to sell the shares, that company needs to be squeaky clean. And so if there's something in there that looks like a tax dodge or at a position that someone's taken, even if the current adviser says that's erasing the arguable position, the purchaser is going to look at it and go, you know what? I'm either going to hold back some money or the deal doesn't go ahead. So saving that small amount of tax in the short term can have some really big long term consequences. So I think that we just need to be really careful at that, exploiting tax loopholes a bit. I think really genuinely there. And maybe a test for that isn't a rabbit hole for him. If I went to the tax office to ask for a private ruling that the it, I would agree and sometimes I did. I mean, you look back in time now for instance, from the rights the future income provision came out in 2010. In tax consolidations, there was billions of dollars of tax deductions were claimed at that time because the law didn't apply in the way that it was intended, and then it was shut down. So from time to time, as loopholes exist, I just tried really carefully.

Robyn Jacobson

So you make the point to about having a network around you that you can draw on. And that's so important because as experienced practitioners, we know that classic tax law, there'll be a rule, there'll be an exception to that rule, and then there'll be an exception to the exception. Correct. And if you really lucky, you'll find a fourth one.

Tim Sandow

That's right.

Robyn Jacobson

Younger practitioners or those who are perhaps not as technically proficient or don't spend their lives buried in the law itself, may not have the visibility over some of those deeper provisions that provide the exceptions or exceptions to exceptions. Yeah. So that's why reaching out to networks that look, has anyone encountered this or is there anything I've missed? It's such an important question to ask.

Tim Sandow

It really is. And I guess what I find is, I'm becoming more experienced is that I don't need to know everything. But if something feels a bit too good to be true, like if someone comes to me and says, I don't think this is taxable, I think we get a deduction for that. you know, whatever might be like, I remember that law coming out. I don't think that's the way it was supposed to apply. So if it feels too good to be true, I think that's the we need to really start asking some deep questions.

Robyn Jacobson

And look, let's link it back to obligations. Here. We have an item, as I referred to in the Code of Professional Conduct in the Tax Agent Services Act, and it requires you to act lawfully in the best interests of your client.

Tim Sandow

Yeah.

Robyn Jacobson

So it's not just act in the best interests of your client. It's act lawfully in the best interests of your client.

Tim Sandow

Yeah, yeah. And I think the lawfully thing is the really important bit. And way I kind of look at that is I think if I've gone through that process that I talked to that before and it is something that exists and it is lawful, then I think to act lawfully in the best interests of my client would suggest that I should talk to the client about it. But I think this is where that communication with the client becomes really important, because that's when we can talk to the client and say, look, lawfully, I think this exists, but there is a risk. And then we can talk about what that risk might be. And, you know, whether that's something that we want to pursue. And it is interesting. And yeah, if if I look at what's happening globally because this is not an Australian only issue, the International Ethics Standards Board for accountants has been looking at some tax planning and, whether there should be this overriding public interest test. The discussion paper that I put out, it's very hard to articulate what in the public interest rates. So a and I'm sort of conscious as well that. Yeah, if you look at for instance, for example, in that case, and about reading the legislation assets as it's written and how you introduce other materials, including rulings, you know, that sort of statutory interpretation, part of it becomes critical. I mean, I've had instances where, you know, I've gone to the ATO to say, look, in my tax situation, I don't think the law was applied properly and quite rightly, they've said, Tim, I understand it's a bit unfair in your situation, but we have to interpret the law as its written. Yeah, but I think that goes both ways as well. So if the law is clear, then I think that, while there may not be an overriding public interest test, I think that the way they're articulating and just to say you need to talk to your client and explain what the risks are.

Robyn Jacobson

Something else that you talked about lawfully, we discussed that particular word. We're not thinking of tax evasion. I may that's acting outside the letter of the law.

Tim Sandow

Yes.

Robyn Jacobson

Part IVA and the general anti-avoidance rules and other anti-avoidance rules or equity measures to me is where you're acting within the letter of the law but outside the spirit of the law.

Tim Sandow

Yes.

Robyn Jacobson

So when we're talking acting lawfully in the best interests of your clients, are we talking the letter of the law or also the spirit of the law?

Tim Sandow

look, I think we have to be mindful to both. Yeah. and I think if we're acting outside of the the spirit of the law, I think we just really need to be very mindful of, we are 100% confident that this is what we want to do it.

Robyn Jacobson

I'm a client, I come in, I give you a whole bunch of information that could be in written form. I might be conveying things verbally to you. Can you believe what I'm telling you?

Tim Sandow

Okay, look, this is a really interesting one. And again, and under the code of conduct, we require to take reasonable care. So, what is reasonable care? if you look through the guidance, it talks about exercising professional judgment. Again, what's exercising professional judgment. So if a clime brings in a whole stack of information, I'm not required to do an audit. I don't have to verify every piece of information in that building. But I am expected to look at that with professional judgment and skepticism and say, what do I know about this person? What do I know about the industry that I operating? And I think for me, professional judgment is about standing back and saying, before that client walks in, what am I expecting to see? And if what they give me will be law, and then I can probably largely accept what they're telling me if something looks unusual, I think that's when this professional judgment skepticism steps aside. yes. I think you can accept what people tell you, providing there's nothing this really flagging. There's no red flag that thinks that doesn't quite sound right.

Robyn Jacobson

And tax agents are not auditors. Correct. So they're not required to go through an audit and sign off and certify that everything is true and correct in that respect. But in what circumstances is further investigation warranted when you supposed to dive deeper or ask further questions?

Tim Sandow

Yeah. Look, it's a good question, Robyn. I think that, as I said before, when something doesn't look and feel right, so and look an example for this might be, I mean, if I'm preparing the accounts and I'm not absolutely everything that's in there, then I probably know I'm not just accepting it. if, for example, I've got a client who's got their own bookkeeper or I've got their own accounting team, and they present me with a trial balance or a draft set of accounts, they might say, look, we don't want you to have a look at legal fees, for instance.

Tim Sandow

And I might say, oh, okay. Well, let's just have a look. Oh, that's I'm like, oh, that's I need $3,000 or whatever. That's probably to do with leases or something. Yeah, I'm I can accept that. If that number was $3,000 last year is $500,000 this year. Yeah. I don't think I can just accept that. Yeah. So I think that, in fact, talking to an accountant recently and I had that situation that actually found out that the owner of the business had put it through all of their, family law expenses that after the divorce they were going through, they'd put through their company. So, and he said, well, I was protecting my, my mum, my company for my spouse. So it should be deductible. Oh, do. Yeah. No, I know I do.

Robyn Jacobson

I can think of another anecdote. I heard of a firm that took over another small practice. and in doing so, they picked up the balance sheets of lots of their new clients. I'm having a look. And there was a property sitting on the books, and so I just asked to read normal due diligence. what's this property and what do you use it for with, like I said, etc.? Well, it turns out that property had been sold some years prior and for whatever reason had not been correctly accounted for. And it meant that the property that was showing as the debit on the balance sheet was in fact a debit loan, because the proceeds on sale had been taken up by the shareholders. So it was a Division seven problem. Yep. And without asking the right questions, you don't unveil these things now.

Tim Sandow

That's right. And I think that's where there is. There is a real role for experience. And again, a role for talking to other people and to saying now sometimes the professional judgment is also talking to somebody else and saying, does this feel right to you? And it's amazing how many times we talk to a colleague or even another member and just say, can you experience difficulty? This is right in my mind silently. And and I know that often happens in this industry or whatever month, but a conversation you can have with someone, it's just got old.

Robyn Jacobson

Tim, next scenario. I'm your client. You give me some advice and I don't like it. I don't want you to lodge my return on that basis, or I'm insisting that you do claim something that you know shouldn't be client. What do you do now?

Tim Sandow

Yeah, this is a really tricky one, Robyn, because, the correct answer is to say I'm going to refuse to lie to retain. And I think that's sort of, you know, even more important, we saw last the end of last year the, exposure draft on the code of conduct that came out, but really reinforced that a tax agent must not make a false and misleading statement to the commissioner, which includes lodging a tax return. So if that number, but it starts talking their bad material amounts as well. there's that expectation that we're always absolutely perfect. But I think that if the client's refusing to follow our advice and wants us to approach that retail, then the why? I like to look at this. I've got a colleague who describes this really well. She says, how we feel in three years time, looking back at what you did. And I think that making that taste like cake. Will the future team feel like looking back is a really good way of looking at it? Because if I'm going to lodge that, retain and feel sick in my stomach that I've done it, I think that's telling me I shouldn't do it. If I'm looking at it and thinking, well, it's only a very small amount, there isn't an argument. I can sort of almost get the I'll talk to somebody and see what they say. maybe I can get there. But, I do like this idea of the future self test, you know, how do I feel looking back about what I've done and if I'm going to feel sick that you know the item up, review it, then I think that's a really a really big test. And the other thing I'd say, of course, that client could go to another accounting and anyway, and that other accountant picks it up, maybe they're going to tell me none of these new domain rules. So I think that's, doing something now which you're not comfortable with, that you don't just have the risk of the tax office picking it up. You've got the risk of somebody else, a fellow tax agent, picking it up a name, feeling compelled to you out and doing all right.

Robyn Jacobson

So you've slept on it. It doesn't sit well with you because you've decided to claim it anyway. Then there's clearly a problem with your conduct as well as me as a taxpayer. If, however, you say, no, Robyn, you're not allowed to climb out. And that's my advice. Does it change anything? If I represent a really big chunk of your face? I'm a long term client. We've had a great relationship. You've looked after my affairs and that of my family, all my business interests, for 30 years.

Tim Sandow

That's right. And you referred me off to your friends and your friends in airports as well. And. Yeah, look, I mean, and this is where that's sort of, when we know the right answer is not to lodge the tax return becomes so much more difficult. the comment I'd have about that is, I still think you have to sit back and think about what does this do to my reputation? Do I want to be known as the person that can be walked over and lodge the tax return? Anyway, we'll talk a little bit later about reputation, but for me personally, I kind of fake. I've spent 30 years building a reputation. Am I prepared to let that go for the sake of lodging a tax return with an extra deduction? It and I try and weigh that up against the fees from the client and whatever. It's really going to be the case that it's worth it.

Robyn Jacobson

Well, weighing up on one hand, trying to look after one client supposedly this is putting at risk your entire practice.

Tim Sandow

Your entire practice, your entire career. And I doubt that client way there to support you when it all goes to pot. Yeah. Agreed.

Robyn Jacobson

All right. So moving on to the next bits. What duties do you have as a practitioner when you pick up a new client?

Tim Sandow

Yeah. Look, and I think this is getting a little bit interesting at the moment because the it's put out their best practice principles, which were aimed at the big four and the big four was signed up to them about 18 months ago. And now the it's having come and side with the mid tier firms. And so firms like ours and others about whether we would also like to adopt these and make a statement on our website that we've adopted the best practice principles. In some ways, the best practice principles are really restating a lot of the stuff we know already. There's very consistent with five. The tax agents code of conduct and also with the accounting body's ethical standards. So they're very consistent with that. One of the things I do talk about though is effectively you should not be doing, taking a position unless there's a reasonably arguable position. They also talk about if you're picking up a new client, you should be looking at what they've done in the past to see if they've all side paying, adopting, raising positions or what they've done in the past. So to me, that puts it an extra layer on top of what we probably already would have done. And I think that, often we might have just picked up a new client and, accepted what they've done in the past and focused on the future. So this is sort of suggesting there's an extra obligation to go back and have a look. that, of course, becomes even more so if the, for instance, there's been a position that's taken in the past which has an on going implications for tax returns that I might watch. Now, I will say.

Robyn Jacobson

E.g. Divison 7A. So let's assume again, I've walked through the door and the first thing you do is look at my company's balance sheet and you find there's a Division seven I learned from three years ago that has not been placed on complying terms, and there's no evidence that that amount was included as a team dividend in that year. Tax. So we got a problem. Or look at most graduates. We've got an issue with that not being declared a dividend in the year the loan was made. Let's assume there was a complying loan agreement. But then none of the repayments have been made. So that's where it becomes an ongoing issue for you. What do you do in that case.

Tim Sandow

So look, Robyn, I think we'd be looking for the commission's discretion and, he can't ignore that sort of thing. And, I'll be very interested to see the TV base guidelines when they come out about dob-in provision yet. Because is this something that is serious enough, substantial that that would obligate me to dob in a practitioner and I feel really glad about that. You know, particularly if it's more of a mistake as opposed to a systematic exploitation of tax loopholes.

Robyn Jacobson

But interesting with these new breach reporting rules, am I yet to see some guidance from the TPB, so at the moment all we've got a literally the provisions themselves. There was no explanatory statement or memorandum accompanying the amendments been put through the Senate. So we've literally got the letter of the law only. There's nothing there about intent. So it doesn't talk about why you might have breached the rules or whether it was inadvertent. It questions whether there has been a significant breach and whether you have a reasonable belief that that has occurred. So what obligation are you under? And a practitioner may not want to do it. But the problem is you've got a positive obligation to report them, to dob them in. Otherwise you face penalties yourself one day.

Tim Sandow

There is that there is a time period for when I have to make that decision.

Robyn Jacobson

30 days.

Tim Sandow

It's not a long time.

Robyn Jacobson

It is not.

Tim Sandow

So I'm really looking forward to seeing what these guidelines say. but I do worry about it. And I do worry about the positive obligation it's putting on the tax profession to self-regulate.

Robyn Jacobson

Yeah.

Tim Sandow

And, and whether that's there.

Robyn Jacobson

Is interesting in the review of the TPB, so this was the James review. There was a comment that it is for the government agency. I.e. the TPD to regulate the profession and the conduct of agents. And it's not for the profession to self regulate.

Tim Sandow

Now, I and I look, I'm very busy and I think all of our members are extremely busy to expect us to also be stopping thinking and worrying about whether or not I should be dubbing in somebody else. We'll face some breach myself if I don't. well, on top of a very busy workload. Is that really the best use of our time?

Robyn Jacobson

But we can see where the system from. Now, competence.

Tim Sandow

Yes.

Robyn Jacobson

So obviously we have an obligation under the code as tax agents we need to provide our services competent like me. What happens when you act outside your sphere of competence?

Tim Sandow

I think more and more, Robyn, it is dangerous to do that. I think it's very important to understand what you know and what you die by. For instance, for me, we sat through this morning a session on GST and the GST margin scheme. I would not touch advice on GST and margin schemes, but I'm not here to call and I think that's really important. I think that's when we talk about the power of a network. I think it's really important to understand what you mean, know, not venturing far away from that, because I just think it's fraught with danger in term. You know, when you practice in an area and you know that area, you know, where all of the integrity measures, you know, where the exceptions and the exceptions to the exceptions and exceptions to the exceptions and the exceptions, all set. And so you're less likely to trip up and make a mistake when you're dabbling in an area that you're not quite familiar with. The risk is just getting too high. And hindsight's a perfect thing. So, you know, it's very easy in three years time for the future self to look back and say, why didn't I do that? Yeah. And for the client to say, why did you give me that advice? You were negligent because you didn't know about this.

Robyn Jacobson

So I actually got I can think of four implications here. We've got the possibility of being sued for negligence, although it has to be said that over the years they haven't been too many successful claims against accountants. We've got the risk of breaching the code, which requires you to provide your services competently. Yeah. There is the risk of breaching relevant bylaws of the professional association of which you are not. Yeah. And then we've got the other issue being the professional indemnity insurance policy.

Tim Sandow

Yes.

Robyn Jacobson

Which does tied to the negligence I accept. But there's a number of matters that come up there, whether or indeed covered and whether you're going to be going through litigation and whether there are sanctions.

Tim Sandow

And that's right, Robyn. What's interesting is over the years, from my understanding, is a lot of the claims of negligence against accountants have been in relation to small business CGT provisions, which are often extraordinary because those provisions are supposed to, you know, be there for ACMA companies and practitioners and they are some of the most difficult to understand.

Robyn Jacobson

Best fail in terms of also providing services as an accountant versus a lawyer. And this gets really important when it comes to state tax issues.

Tim Sandow

It's important when it comes to state tax issues because obviously, you know, as a tax agent, we provide advice on the federal law about income tax and JSA, FBT and so on. So stamp duty, payroll tax and so on. one standing, not, covered by tax agent services. So we have to be very careful as accounts about how far we strike into those state taxes. I think we have to be very careful also about the documents we draw for clients. particularly if they look like an illegal agreement. now I'm saying trust deeds being drafted by accountants. And I think, you know, I don't think I would do that.

Robyn Jacobson

And I think it's important just to strip this back and come back to some core principles here. Accountants are not lawyers. Accountants cannot advise on the law. And that is why we have the Taxation Services Act, because if not for that, then no accountant would be allowed to give advice on tax law.

Tim Sandow

That's right.

Robyn Jacobson

So tests are exists to allow accountants to be able to advise others on the preparation of tax returns and relevant statements, but also more broadly on transactions and arrangements. but TSA is federal law and governs federal tax laws, whether that be FBT, GST, income tax. But as you say, when we're talking about payroll tax, land tax and stamp duty, those are state taxes. Yeah. And losses would be a potential one across the federal. But some and I call it a class because you cannot expense at a state level. But they have levies and things like that. All sorts also apply the Texas taxes that we're all going to disappear. Yeah. And so advancing on those is getting into very thin ice. When it gets to the ability of an accountant to lawfully provide these services.

Tim Sandow

Yes. And where that becomes interesting is that clients, I expect us to be talking about, I particularly if a client comes up to us and says, can you look after my affairs? That normally means can you also make sure I'm paying payroll tax? Yeah. So again, having somebody in your network, good law lawyer in your network, who you can talk to about these things is is also very important.

Robyn Jacobson

Does it fair to say the more we all learn about tax, the less we feel we know about it?

Tim Sandow

look, it's it's really just. I've said that forever. The older I get, the more I see it. I in fact, I was talking to a very senior tax partner just recently. He was a doyen of the industry. And he said, Tim, the more I know about tax, the less I know. And I said, that's exactly how I feel. my other thing I say is I, I need to know everything. I just need to know who to call. Yeah, yeah.

Robyn Jacobson

So quickly, to wrap up, in terms of being accountable for advice to others in your practice might be providing.

Tim Sandow

Yeah. So if is something you can take out of the events of last year, is that, when you're in business with other people, you spend a lot of time building a reputation and which can be tainted by what other people do within that, within the same. And so I think you have to be very careful about knowing a bit about what your fellow partners, directors, business owners are doing and whether that is consistent with your own risk profile. Yeah. So because I think that reputations take a long time to build and a second to destroy. So we just need to be very careful and very mindful about what others in our practice doing.

Robyn Jacobson

Advice to practitioners, if they have an ethical issue, what should they do?

Tim Sandow

Talk to someone that it's amazing. When you talk to someone, you start to voice it. Sometimes as you're voicing it, the answer comes to you. The mere act of actually saying it out loud, rather than having a rattling around in your head, can often resolve the issue for you, but it's surprising how many times you can talk to someone and else have another opinion or another approach. And, have some words of advice about how you might approach so that in a day that network where you can ask those questions, it's just really critical.

Robyn Jacobson

Thank you. Look, Tim, I've really appreciated the discussion. We've covered quite a lot of ground. And I actually it's been there's some venues practitioners who are wondering how they best place the next.

Tim Sandow

Yeah. No, thank you, I rather enjoyed it. Thank you.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe, I've been chatting with Tim Sandow, CTA and Tax Partner at BDO. If you enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute. Please join us on LinkedIn. If you're interested in being at the centre of the tax conversation. A membership with The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. Thanks again and till next time on TaxVibe.

SMSF shift: gear up for the latest changes

Release date: 15 March 2024

In this episode, Robyn takes a deep dive into all things self-managed superannuation funds with Liz Westover, FTI, Partner and National SMSF Leader, Deloitte.

They cover what’s hot in the land of SMSFs, including:

Caps, limits and thresholds
Illegal early access and the SG gap
Everything you need to know about Division 296
Changing SG rates
Payday super
SMSF stats
The Tax Institute's upcoming online event, Superannuation Intensive

Host: Robyn Jacobson, CTA

Guest: Liz Westover, FTI

Robyn Jacobson

I'm joined by Liz Westover, FTI, a partner and national SMSF leader at Deloitte. Liz is responsible for the firm's SMSF Service offering, providing compliance and advisory services to the firm's clients. She has extensive experience in superannuation and has strong capabilities in the technical and practical application of superannuation and associated tax laws. Liz is a regular commentator on superannuation and SMSFs and has been involved in superannuation policy, development and advocacy, regularly liaising and consulting with government regulators and stakeholders on technical, legislative and policy matters for many years. Liz is a fellow of The Tax Institute, a fellow Chartered Accountant, a CA SMSF specialist, and holds a Bachelor of Business from the University of South Australia, as well as a master of legal studies from the University of New South Wales. She's also the chair of The Tax Institute's Superannuation intensive organising committee, with the online intensive coming up offering 8 hours of CPD on the 26th and 27th of March. Liz, welcome to TaxVibe.

Liz Westover

Thanks Robyn, lovely to be here.

Robyn Jacobson

Well, superannuation is always a moving area. It's always subject to so much regulation, constant changes and it's always good to focus particularly on their SMSF sector, which does represent a large chunk of the market. So we're going to cover quite a few topics in this discussion today, but let's kick off with the caps limits and thresholds. Now there are so many of them, and in our recent submission to Treasury, the pre-budget submission, we note a number of things such as inconsistent indexation or the number of different caps and rates and thresholds across the superannuation sector, in fact more broadly across the whole system. And really look at tax and superannuation there are so many caps and thresholds to be mindful of. We've also got challenges with certain caps being indexed and certain caps not. So can you read through some of the recent changes and what we're going to see coming up?

Liz Westover

Absolutely. And we do have quite a significant change coming up around indexation has been an increase in the concessional contributions from 1 July 2024. Broadly, your comments around change is our constant in the superannuation industry and it is frustrating. This particular cap, the concessional contributions cap is indexed via AWOTE and our transfer balance caps, for example, is indexed against CPI. So we have this sort of mismatch. In some years we get indexation on one and not the other. Sometimes it's both and sometimes it's none. For this year, it's the concessional contributions caps churn to get indexed. So we're seeing an increase in the cap from 27 and a half. $30,000 always goes up in those $2,500 increments. So $30,000 per annum from the 1st of July 2024. And because the concessional contributions cap is coming up, the non-concessional contributions cap is always four times the concessional cap. So we now have a non-concessional cap of $120,000 from the 1st July 2024. So no indexation on the transfer balance, couple of general transfer balance cap. So that's going to stay at $1.9 million and what does that mean, that threshold for which people's total super balance is for their ability to make non-concessional contributions caps? So I'll keep going on that one. I want to move all the gap. So your ability to use the bring forward provisions for non-concessional contributions caps is always starts with the general transfer balance cap. So anything above that balance on the 30th of June or the previous financial year dictates your ability to make non-concessional, period over that threshold. No concessional contributions for you. If you are under that, then we start to see these thresholds around your ability to use the bring forward in three years, two years or not at all, and that is set by the general transfer balance cap lets the non-concessional contributions capped for the year. So notwithstanding the $1.9 million isn't changing, those thresholds are changing. So it's now going to be less than $1.66 million. You can use the full three year bring forward provision. So $360,000 in that year. If the next cap is 1.66 million to 1.78, you can do two years bring forward to do $240,000 worth of non-concessional contributions, 1.78 to 1.9. No. Bring forward. So just the annual non-concessional cap at 120 and then of course, over 1.9. No non-concessional contributions. So no wonder it gets confusing. I'm sort of set looking at all these sort of thresholds and so on, but a renewed opportunity for people to make contributions.

Robyn Jacobson

So when you look at the different ways of indexation, you're fed to everybody, which is the or I was depending on your pronunciation, the average weekly ordinary time earnings versus CPI. Yeah, liquid need to unpack all the policy decisions made many decades ago as to why some use one basis of indexation and other caps and thresholds use another. But if we look across superannuation for example, the $500,000 retirement exemption limit has never been indexed. We have legislative changes to increase the ESG rate, which we're going to come to shortly. And then we've got these other modes of indexation for these particular caps and transfer balance of course, and concessional and non-concessional. It does make it very confusing. And while there is a limited amount of discretion where people do get it wrong, particularly in the case of concessional non-concessional caps, it's not easy to navigate this. No, it's really not. And you've got to stay close to your advisors. The ICRC website is actually very good, as is the money Smart website is very good for information and updates and so forth. I guess the other comment I want to make about indexation as well, because we know it's a big issue with respect to Division 296 tax and I'm going to be talking a little bit about that I think because we saw CPI on sort of inflation really increase quite significantly, which mean we had that increase in the transfer balance cap two years in one year effectively and no one really anticipated that that would ever happen.

Liz Westover

So I believe that there's a bit of a fear around automatic indexation because you do lose that control about when those thresholds actually increase, especially with due to nine six, it's actually not a deal breaker for me. I know the industry is pushing very hard for some sort of automatic indexation and there is a lot of merit in that. But so long as there is an ability to index at future times, which there will be and it might be every budget submission the Tax Institute does from here on in, there'll be a call for an indication of that cap, but I don't say they all and end all with respect to Div two on six I believe will be indexed over time anyway.

Robyn Jacobson

One area in particular complexity is the transfer balance cap and now it's designed to of course limit how much you can hold in this tax free earnings environment, in pension funds. But with the personal transfer balance cap, you don't automatically get the benefit of all the indexation when it does go from 1.7 up to 1.9 million as it did last year. You have to then work out your personal or proportionate amount of that increase based on how much you've already utilised. And the more times this gets indexed, the more complicated this is going to be.

Liz Westover

Yeah, that's exactly right. So whilst the general transfer balance cap gets indexed, you're right, personal doesn't necessarily. And once you commence an income stream you now have a personal transfer balance cap. So for someone who is fortunate enough to start an income stream in 2017 with $1.6 million, that's it for them. They will never be able to start anymore income stream subject to commutations and so forth. But they will not be able to start new income streams because they have already met 100% of the cap as it was then. So then means, depending on what your proportion of the cap that applied. So if I had only is 50% of the cap at the time, I would be able to use the remaining remaining cap plus 50% of the indexed amount. So you're absolutely right. The more indexation we have, the more complicated it gets and the more likely it is we're going to create a spreadsheet around it to make sure that we actually get it right.

Robyn Jacobson

Where would we be without Excel spreadsheets.

Liz Westover

Exactly.

Robyn Jacobson

Moving on to some release of data. Now, there are two aspects to my question to you on this. We've seen for many years data on what they called the tax gaps and in particular the superannuation guarantee tax. I mean can unpack that. But recently on the 22nd of February, for the first time, the share release data around illegal early access estimates. So in other words, they're estimating the extent to which they think people have access their superannuation illegally and early. So this is interesting to draw some insights and I'm interested in your thoughts on this.

Liz Westover

Yeah, look, it's an interesting piece of work and I think it was delivered quite well by the tax Office in a bit of a call to arms by the industry to try and put this out. It wasn't a criticism, personal thought. It was just, you know, really did come across as we've all got a role to play in making sure that we have a secure superannuation system. So that was quite welcome. One of the interesting factors I thought about it was that the main body of work was around the 2021 year and I think the numbers were $256 million they believe was illegally early released, which was actually a decline from the prior financial year of about $380 million. But you might recall 2021 was the year of COVID, and we had a lot of people applying for release of their $10,000, in fact, twice over applying for. I believe there might be some numbers in there. There are actually people who were reported as illegally in early release, but it may have been that they just withdrew their $10,000 without waiting for the release authority from the tax office. So there's an element of that. So I'm actually very interested to see subsequent years results. But also the Tax Office is doing a lot of work to try and stop illegal early release. As you can imagine, there's a range of activities including review of registrants. So if they believe there's any risk factors around it, they'll pick up the phone, potentially talk to the trustees, make sure they actually understand what it is they're doing and why they're doing it, that type of thing. And they believe in the 2021 year they've stopped about $168 million from coming out of a system that might otherwise have not intervened in that way. So that's a really good thing. I see that as as a real positive. But the interesting to see some trends in future years and just make sure we're all doing our part, doing the right checks and so forth to stop any of this illegal early release.

Robyn Jacobson

There's support for the proposition that many of the funds that were involved in this early release were in fact newly established funds.

Liz Westover

Yeah, that's often the case. And in fact the ATO sees light on non lodgment of a first year fund as a significant red flag around illegal early release. So, you know, they are very keen to make sure that the right people are actually registering for these funds. And there is a concern that a lot of these first year funds are actually as a result of promotions and scams and so forth. So they are using other means to be able to crack down on some of those promoters as well, to make sure that they're not encouraging people to sit up in a submissive role over there. They're after regulated funds. Money's into a dismissive and then take a very nice cut for the privilege of assisting and so I'm no fan of providers and scammers. So anything that they can do to shut that down and it's probably worth a plug for tax office and have dedicated pages for people to be able to report these promoters and any scams that they actually see. You can do it anonymously if you if you would like to what email, phone, whatever means you need to. And in fact, if you are in a tax adviser or an accountant, I imagine that the the Tax Institute would help facilitate some of those reports as well if there was really sort of any significant issues around that. But personally seeing the result of it where people have been encouraged to set up this massive promised property with lobbies and so forth, and the money's gone, it's just gone. And in a lot of cases it's with people who didn't have money to lose in the first place. So a lot of money to lose in the first place. Nor do they have the resources to try and fix it or get the advice that they need or know how to engage with the tax office. It is a big problem.

Robyn Jacobson

And regulation aside, these are heartbreaking stories because it's people's financial future. The analysis also found that around $200 million of prohibited loans have been made by self-managed funds, but then around three quarters of this have been repaid. So what are you seeing out there when it comes to making loans to members?

Liz Westover

Look, I think there's a bit of a misunderstanding. And again, this is sort of where the law just you know, you've sort of got to have this a bit of a knowledge and trust your advisers and get in touch with your advisers before you actually go and do these things. But there's a general prohibition on dismissive or super lending to members or relatives.But of course, it's called an in-house asset and there is restrictions on the amount of these in house assets you can have. So Fund can have no more than 5% of the total market value of this asset in an in-house asset. So we believe that that number reported by the office include people who would have gone over the 5% limit. So often when that happens you've got a breach of the 5% limit. It is reported as a disqualified by order. It's reported to the Tax Office, but part of that process is actually putting a plan in place to repay it. So it's good to see that those plans are actually in place and those amounts are being paid back as they're required to do so, to continue to comply with that with relevant law about the funds.

Robyn Jacobson

So we know that this illegal early access estimate will be done on an annual basis from now on. But for many years we've always had this ESG tax gap analysis. So what is this telling us about the difference between the amount of ESG that the expects should be paid and what is actually being collected by the funds?

Liz Westover

Yeah, look, the numbers are still quite staggering. It really is a little bit frightening. And I think that's why there is broad support for the new payday super. I write down the mechanics behind that once we get it right. And the latest numbers is that we've still got a 2021. The ATO figures with a gap of 5.1%, which means that people are still not getting the super guarantee that they're actually entitled to be paid from their employers.And that is that's a staggering figure really, and it's for a variety of reasons. I've seen in my own family where employers think they can call someone a contractor, and so long as they issue an invoice, it doesn't matter that they're actually for every other purpose or every other, you know, look and feel they're an employee. But I think because I'm a contractor, they don't have to pay extra for them. And in my family's particular case is, please don't do anything about it. Don't say anything. I like my job so people get away with it simply by calling them a contractor. So there's a lot of that and there's people who miscalculate amounts, and then there is a cohort of other employers who simply do not remit but are employed. And they're the ones I think we really need to focus on. I believe the law needs to be better for people who make mistakes. And it's not this sort of catastrophic outcome for people who make a mistake. And the way the law is written at the moment is it it's quite impactful from minor error can be quite significant. But by all means, anyone who's not paying the rate for their employees should absolutely have the book thrown at them that those deliberate nonpayment should be dealt with appropriately.

Robyn Jacobson

So all the figures when we talk about a gap of 5.1%, the positive spin could be that nearly 95% are actually meeting their obligations. So 5% doesn't sound like a lot, but the problem is when you translate into actual dollars, it's three and a half billion dollars in 2021 that wasn't paid in super staggering figure, isn't it?

Liz Westover

It's an unbelievable number. And when you think about that money that's not going in and the earnings that it could be doing in the way it could be invested in meantime. And, you know, what's been opportunities have been missed by people who are having that money invested for them. So, yeah, we have a problem. We need to deal with that. And I believe there are things being done to do that.

Robyn Jacobson

Yes, there are, and we'll get to that shortly. I also add that this isn't a one off fee or an anomaly. If we look at the last six years for 15, 16 through to 2021, which is the year that we have the gap analysis available for the net gap was more than 3 billion in five, six years. So this is absolutely a trend. It's not a one-off.

Liz Westover

Yeah, that's exactly what we need to do. We need to do more. But I think, you know, it will probably take time, I guess, for all of these measures to really take effect. But the impact that it does have on people's retirement savings is is huge. So if we get that money in there, it's less people in the age pension.

Liz Westover

Eventually it's more invested, it's better retirement outcomes, it's a win-win.

Robyn Jacobson

So let's move on to Division 296 and for the we vote all those that haven't yet and the legislation references Division 296 is a proposed new division in the Income Tax Assistant at 97 which is going to tax the earnings that relate to superannuation balances above $3 million, add an additional 15%, it's expected to affect around 80,000 people. Initially from when it kicks in 1st July 2025. But let's unpack this a bit more because whilst it looks like a fairly small proportion of the population around, I think they're talking point .5% in total. We've got obviously concerns about what happens in the future and the really big concern around this taxation of unrealised gains. So yes, motivations from you on, is this something to be concerned about of where we at with this proposed measure?

Liz Westover

It's a very hard one to articulate, particularly in the media. And the first thing I'll say is that my observation is that for the most part, people do not have a problem with an additional tax on earnings for people with high superannuation balances. That is not the trend. Most people are very much on board with this. The problem that people have with it is the manner in which they are going to be taxed and this division 296 actually has very little bearing on an additional tax on earnings for those relevant people. It's a brand new tax and that's the way that people have to think about it. And it is quite literally a tax on people who have had $3 million at the end of a financial year. And that'll that'll start from the 26 financial year. So we put balances on the first July 25. The report balances again on the 30th of June 2026. And if you got more than $3 million on 30th June 2026, we work out what your earnings is in that period and if you do have positive earnings, then you're going to be up for this division 296 tax. So by virtue of the fact that it's assessed against total super balance means it incorporates everything including unearned income or growth in assets, which is just not a feature of our tax system and the inequity around that and the possible. Where does it stop? What else are we going to tax that we previously haven't taxed on? Unearned income is a lot of concern, not just in super but across the tax industry. So there are other proposals that are going through at the moment. That Division ten on six legislation has gone to the House of Representatives, that it has not passed the House yet, but it has been referred to a Senate economics committee. They were due to report in April and that has now been pushed back to the 10th of May for them to report back. And whilst we believe that the law is going to get across the line, there is still hope on two fronts. One, that we see automatic indexation. And on the second one is that we see a different means by which the earnings is calculated because on this unearned income we have this inequity around it, but there's also some very strange outcomes as a result that seem to be inconsistent with what we were going, you know, government was proposing in the first place. So hopefully we'll see something different. I believe the proposal is for application of the 90 day bank bill rate that would be used instead of this change in total super balance to to calculate earnings. I have to say that's probably more broadly reflective of earnings. They'll still be some winners and losers out of it, but it's probably more equitable than this change in title super balance calculation.

Robyn Jacobson

Essentially using a balance sheet approach instead of a profit and loss. So sort of looking at the actual earnings of the fund allocated to the members account and that could be spread across multiple accounts, of course, multiple super funds proposing to use this moment in the balance sheet amounts and then assuming that any movement is attributable to earnings. But you could have movements in balances due to recovery of previously lost market value. One of the ways I'm describing this is it's agnostic. It doesn't care. The movement between those two balances is due to a revenue gain or a capital gain or a discount gain or a non discount gain or a realised gain or an unrealised gain. It just says the movement with a couple of adjustments for benefits and also pension payments. And any contributions is taken to be this earnings figure.

Liz Westover

And you could have these very strange outcomes where let's just say someone has $20 million in super at the beginning of the year, they get $2 million in dividends, interest, rent, whatever it might be, but the value of the asset actually declines by $2 million. So at the end of the start, you have $20 million. At the end you have $20 million, you will pay no division 296 tax. And yet that fund has a $2 million in revenue. So that's really inconsistent, I think, with what we were trying to achieve through this. There's also some equity around the starting date. So if someone has an asset that has declined in value quite significantly and let's say that's what it's reported on the 1st of July, the 30th of June 25. So the starting value is quite low and that asset recovers in value. So by the end of the year and it recovered as my money just recovered, they're going to pay off 296 tax on that recovery amount. And that to me is not fair. It's not federal. And then we're looking at the impact on farmers. If it was lumpy assets, how are they going to fund these new tax liabilities? So whilst all this this income is supposedly in super, not everybody's going to be able to access super necessarily. You do have a choice about whether you pay these amounts early or you get a release authority from the tax office to pay it from the fund. But again, if you've got lumpy assets in low income, your cash flow may make it very, very difficult to be able to pay some of these tax liabilities. There's some big issues around it that I think you've really been thought through. I think it's been sort of pushing, I mean, being able to implement this policy, I can't like I say, policy, no one's got a problem with the implementation is what everyone has a problem with.

Robyn Jacobson

I agree it's the design. And you could have an interesting outcome where you pay your division 296 tax on, let's say, actual earnings. Then the fund makes a loss. And we've been advocating with the other joint bodies to be able to carry that loss back to recover the tax that you previously paid through a credit or an offset or something. And that's not being supported at this stage. So you can carry a loss forward. But what happens if you then die, for example, or there was a peak in the growth of that asset and it never recovers to that venue again, You will see these amounts of tax being paid on amounts that may never actually be realised.

Liz Westover

Correct. And if you are one of those people that sort of fluctuates above and below the $3 Million threshold, one year you're in one year out, how does that affect your losses and your ability to do it? It's very strange how that how that will actually work. And it could be these just these losses that are lost forever, you know, gone. You're never going to be able to recover on them just for people listening. That is the way it kind of works. If you think about it. Similarly to the way capital gains and losses works is that if you have a loss, you carry it forward to offset against future gain. So similarly here you carry for those losses to offset against future gains of future increases in your total super balance.

Robyn Jacobson

Though to let everyone know that we have been working very closely with the other professional associations across superannuation tax and accounting and we've put in submissions. We have been pushing for possible indexation of this $3 million cap. We've certainly expressed our concerns about the taxation of unrealised gains and also the fact that we can't carry these losses back. So they're the primary issues we've got with us and we wait to see what this does when it comes back before the rest of the Parliament.

Liz Westover

Yeah, I fear it's going to come through with very little change, but there is even still some very strange things in there. If you die before the 30th of June, you don't pay dip tune on six tax for that year. But if you die on the 30th of June, you do. It's going to be a drafting error but doesn't seem to have been fixed in that period when it actually was presented to Parliament to harmfully in the final version will at least get a change on that one to make sense.

Robyn Jacobson

We have said that's something that we did put in our submission to the Senate committee because that's completely anomalous that a single day in an income year would be treated differently from any other day in that year.

Liz Westover

Exactly.

Robyn Jacobson

All right. So moving on to the SG rate. We've seen it increase in recent years. It's currently sitting, of course, at 11%, what's going to happen to the rate next 1 July.

Liz Westover

So we're going up by another half a per cent from the 1st of July 24 and that'll be the second last one before we go to 12% from the 1st of July 2025. So we're nearly there in terms of getting to the 12%, The interesting thing is watching this interaction with maximum contributions base and whether that what indexation that amount will be. So we haven't seen the release of the new contributions by set for the current financial year, any high income earner is pretty much having SG that takes them to the concessional contributions cap. So for next year with the kept going up to $30,000 will be just watching to see what that maximum contributions base actually goes to as well. And if there's any opportunities there for people to top up and play contributions.

Robyn Jacobson

And for anyone concerned that it seems that the maximum contribution base is indexed faster than the concessional cap is indexed, the law does contain a built in mechanism and what this does is basically limit the maximum contribution base to the concessional cap if it actually ever reaches that point, which it may well in the next few years.

Liz Westover

That's exactly right. And that makes perfect sense for it to be that way, because you do not want employer contributions from one employer causing you to have a breach of the concessional contributions base. Yes, we've got some built in stopgaps there, thankfully.

Robyn Jacobson

Yes. And a reminder that when these particular rates keep going up, so 11 and a half and then up to 12 over the next year or so, that increases based on the payment is made, not when the work is done. So employers can get confused about which rate they should be applying to which salary, wage payments.

Liz Westover

It's complicated.

Robyn Jacobson

It is. All right. Payday, super. Look, there's so much we could say about this, but just in a few short minutes, what's happening with this? Certainly the Tax Institute and other bodies have been heavily involved in targeted consultation, and that does continue. And we do expect to see some draft legislation and a bill later this year. Plus, we're being told that there will be some further announcements in this year's budget. But what does this mean? What can we expect in the year or two ahead?

Liz Westover

Yeah, So I think there's still a lot to happen and there's a lot of productive consultation on that revenue. You're very heavily involved and a lot of the consultation that goes on, which makes sense, right? We want it to make sense, to be practical, to anticipate any of what would otherwise be unintended consequences of changes in legislation. But it does mean that there's a lot of systems and processes that need to be built before this is implemented. So I believe it's we need at least 12 months or a clear year to allow payroll providers and super and employers to get their systems up to scratch, to be able to to kind of deal with it. But at the end of it all, it just means that contributions into super will be made at the same time as the pay cycle for employees. Again, that makes sense. Like there've been a lot of sort of amounts going in for them and there'll be more reporting to make sure we can identify where those are not actually being paid. So I think it's fantastic legislation. As we know, the proof is in the pudding. So, you know, we'll have a look at the legislation when it finally comes through. But I do believe there's some really good people doing some really good things in this area to get the right outcomes.

Robyn Jacobson

And look, we do hope the right outcomes are achieved. It is a great opportunity to streamline the current penalty rules and also to overhaul the disproportionate penalty outcomes we see on employers. With someone who pays just one day late is treated exactly the same as that really egregious employer who never pays the super. And we would like to see a lot more proportionality coming in there.

Liz Westover

Absolutely. And I think it is that opportunity to rewrite the legislation. It's always been clunky. It was hard to work out. It was easy to get it wrong. So streamlining it and making it easier to understand and easier to comply with is going to avoid a lot of problems for employers in and of itself, not least of all the outcomes, is that people get the money to super faster with greater clarity and investment earnings faster. So that's a good outcome.

Robyn Jacobson

The two major things that of course need to be considered apart from all the technical interactions with other parts of the law, the cash flow impact on employers who do pay quarterly at the moment, they will notice, of course, a big change in the impact on their cash flow. And secondly, the timing of all this. It is a one July 26 start date at this stage. Now that sounds like a long way off, but there's an awful lot of work to do in the meantime. Plus, we have a federal election that, on my reckoning, would need to be held by May of next year at the latest. And then we know that the digital service providers, those designing the software, want an act of law in place for at least a year so they can invest and design the systems that are needed in order to implement the new regime. So it will be an interesting couple of years. There is a lot to achieve and it sounds like a long time, but it's actually going to be gobbled up pretty quickly.

Liz Westover

Agree. And I don't blame them for wanting legislation in place. When things can change so quickly, so rapidly for a developer I imagine that would be a big problem until you've got absolute certainty. But it's similar, you know, even with the division 296 where we're talking about it, we're raising it with clients and so on. But at the end of the day, just hold back on acting until we've got legislation. We know exactly what it's going to look like.

Robyn Jacobson

And just a completely different sphere. Liz, We've got the $20,000 instant asset write off threshold for small business entities for the current income year. That is one July 23 to 30, June 24. We're now sitting here in March and that bill is still before the Senate. Interestingly, court obviously measures not arm's length of income. So we talk about having certainty for taxpayers and yet we're what are we, eight months into this income year and we still haven't got certainty on that particular measure. Wow. Yeah, not ideal. So where do we go from here? You've got your event coming up. We know, of course, there's lots going on in this space. And I think something that is of interest that you might touch on in your session, that's the superannuation intensive, the amount of money sitting in super. Now of course continues to be published every quarter. But what are the current figures for the self-managed fund sector.

Liz Westover

We've cracked the non $913 billion in self-managed super funds, which means the SMSF sector itself is not far off cracking the trillion dollars. So it's it's amazing amount of money that is sitting in our sector and just shows the importance and the criticality of what we do as advisors for our clients to protect those monies and encourage, you know, good retirement savings outcomes. So amazing. And I think the number was the same 23 figures, 214,000 is some six or just over that number. So we continue to increase in number and assets under management and so on. So a very healthy sector, but the bigger it gets, the more critical it is for advisors to stay up to date and back to attending things like the Superannuation Intensive, just to make sure that you're getting the latest on some of these strategies and measures and changes in our legislation.

Robyn Jacobson

Liz, I get very excited about tax, but I think you get even more excited about superannuation.

Liz Westover

I do.

Robyn Jacobson

Thank you for your insights and I'm very interested to hear your session and your insights. That's your session at the superannuation tax intensive coming up in March.

Liz Westover

Thanks Robyn.

Robyn Jacobson

Thanks Liz. Thanks for listening to this episode of TaxVibe. I've been chatting with Liz Westover, fellow of The Tax Institute partner and national estimates leader with Deloitte. If you've enjoyed this episode, we'd love for you to subscribe rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the center of the tax conversation a membership at The Tax Institute could be just what you need. Stay current and connected with tangible real-world benefits. Learn more at taxinstitute.com.au. Thanks again. Until next time on TaxVibe

Insights into the world of offshoring: is it for you?

Release date: 23 February 2024

If you're experiencing staffing issues in your practice, this episode is worth a listen!

Robyn chats with Jonathan Ryall, Co-Founder of Frontline Accounting and Paul Franks, Partner, Lambourne Partners, about their experience in offshoring accounting and tax work, driven primarily by labour shortages in the profession in Australia.

They cover:

The difference between outsourcing and offshoring
Managing risk
The offshoring experience from a practitioner's perspective
A special offer at the end of the episode!

Host: Robyn Jacobson, CTA

Guests: Jonathan Ryall, Co-Founder of Frontline Accounting and Paul Franks, Partner, Lambourne Partners

Robyn Jacobson

Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoy this episode of TaxVibe.

I'm joined by Jonathan Ryall, co-founder of Frontline Accounting, and Paul Franks, partner at Lambourne Partners, based in Newcastle and Sydney. Jon is a chartered accountant who's based in Melbourne, has more than two decades in public practice. Jhn previously worked in public practice serving many clients across large and small firms. These days he's focused on an innovative space bridging staffing gaps. He co-founded Frontline in 2012, an award winning Philippines based BPO. At his business process, Outsourcing, which provides a staffing solution for hundreds of accounting firms worldwide, Jon is also the coauthor of Offshore or Die The Original No Nonsense Guide to All Things Offshoring. Based on his own experience, hiring and training offshore team members. There's a special book offer for our listeners today, so stay tuned for more details. Paul is a chartered accountant and partner with Lambourne Partners and is based in Newcastle. He's also a chartered tax advisor and ACA SMSF specialist. The firm is established 38 years ago and is a business based practice offering tax business advisory, audit, financial planning, bookkeeping and mortgage broking services from the group. Lambourne Partners has been using offshore staff in the Philippines for the past nine years and Paul has been the responsible partner during this time. John and Paul, welcome to TaxVibe

Jonathon Ryall

Thanks for having me.

Paul Franks

Thank you, Robyn.

Robyn Jacobson

It's great to be here. This is a really interesting discussion and very timely with all the staffing shortages that we're seeing around firms at the moment. So it is the start of the year and it is important for practitioners to have hopefully had an opportunity to take time out and reset, recharge and come back into the year. Reflecting on what sort of opportunities are available for the way that you're running your practice.

We know that 2023 was a challenging year for many reasons, including the staffing shortages that continued to grip firms across the country. So there are opportunities out there to consider different pathways and looking at options and solutions that might improve the way you are resourcing your practices. So, Jon, can I start with you and just the basics of the language that we're using. What is outsourcing? What is offshoring? And is there a difference between the two?

Jonathan Ryall

Thank you, Robyn. Yes, it's a common question. And when most people we talk to and haven't really been exposed to offshoring, they just think offshoring and outsourcing is the same thing. So the models are different. Outsourcing really is you know, you take a piece of work and an actual job that goes to another company. Usually in another offshore location somewhere. And they quote the work on a number of hours or on completion of that particular piece of work. And then that comes back to you in shape. Offshoring on the other hand, is more of a labor hire arrangement where you have your own staff solution in another location. You're building your own team under your systems and training and management.I would say the biggest difference between the two is that is the issue of control around workflow offshoring. You have full control outsourcing. You're giving that control to another company.

Robyn Jacobson

There are lots of different models of offshoring, and some might involve using our own staff. Others might involve contractors or using labor hire firms. Can you run through some of those different models, how they operate and what are the advantages or disadvantages of using these different models?

Jonathan Ryall

In the early days, we would often engage in contractors. When I was in my accounting firm, we had managers that would just be brought into specific purposes to do bits, pieces of what I suppose that is in terms of remote staffing. It is it is a flexible remote staffing arrangement that's similar to two offshoring. So you get the flexible body and the skills you need without asking to put in a lot of training. If you go to the next, I guess another level of kind of a more managed service, which would be there'd be an actual office in a location with staff working you, you're really kind of like renting the desk, you know, in a sense, renting the infrastructure via the Internet and then the salary and wages. Really, you're just paying for those plus that monthly sort of infrastructure charge, which would be our service fee or leasing fee. And that still gives you that element of control over what's happening. And then the next probably level after that would be going to outsourcing, where there's some management in place watching over that person that you're working with and you've taken the workflows more on them than you.

Robyn Jacobson

In the pandemic, we had such a shift in work practices and the working from home. That acronym WFA, has become so familiar to all of us is this is an extension of that. So prior to pandemic, the idea of people working remotely was occasionally out there, but certainly not a mass idea that was embraced by the profession as a whole. Now it's become so commonplace and we're used to dealing with people virtually even this recording we are recording virtually as well. So is it just an extension of that or is it something completely different?

Jonathan Ryall

Yeah, good question. I would say it's a work from home. The difference there is probably been in the home, it's remote work or multi office is similar, but it but it's a bit more infrastructure around that person's working environment. I mean, for us, we have a big combination of staff that are working from home or working out of our office in Manila. And certainly the pandemic has broken down some of the walls that people had up around a kind of a set up. Yeah, true. What's going to be you have working in the home? And I think remote work is probably a little broader than just that.

Robyn Jacobson

But it's the idea of the firm being used to what I'm going to talk about. Control and security and all those sorts of issues as we get further into this discussion. But it is a cultural issue and it's a mindset, and that's a shift in terms of the way you might have run your practice in the past.

Jonathan Ryall

Yeah, definitely. And I think Australian firms, we've all been through that, haven't we, you know, through the pandemic. So we've all been forced along that journey to.

Robyn Jacobson

Come to you in more detail shortly about your experiences, all of this. But just as an initial question, how do you go about venturing into this space? What's the first thing you've got to think about? Or how do you go about taking that first step to go into offshoring?

Paul Franks

I guess it's probably a little bit easier now than what it was nine years ago when when we first started, when we did it, I guess we looked at the different locations, whether it be India or Philippines, and we decided to head over there with with one of my partners. And we then went to a number of different outsource companies within the Philippines and really looked at what then was the best match for us. That's how we came across that line. And we've been using their services ever since. But it's finding the right match. The company that works with you and going to get the best outcomes for your business. It's really looking at those different fits, the cultural fit and all the other aspects of what you need to do.

Robyn Jacobson

We, as we look at the sorts of countries and you've mentioned the Philippines, Malaysia, but there's also offshoring in India and Vietnam, other countries. So what are some of the considerations when you're choosing a particular country as the right fit for your practice?

Paul Franks

The language was was one of the first obvious things that people have concerns over. I guess people have had the phone calls and with people trying to sell them different products over the years. And what we found culturally, the Philippines was quite similar to Australia. It was, I guess previously a US sort of base. There was a lot of US influence within the country and culturally their English was was very good, they were highly trained, they timezones were quite similar. So they were working when we were working at similar times in Australia. So meant you could get on the phone, you could talk to them, you could zoom, call them. So all those sorts of aspects were important because if the staff overseas have to culturally mold into your practice and the culture of your own business. So if you can't do that, if culturally they're way different, then it's going to be very difficult for your business that way.

Robyn Jacobson

Now, Australia is always a long way from anywhere. It takes 7 hours just to leave our shelves in most cases. But if we're talking about physical proximity, some countries might be more attractive than others in that respect.

Paul Franks

Absolutely. And the Philippines is only, I guess, a relatively short flight of around 8 hours, whereas some of the other countries a further Y plus all the infrastructure in Manila makes it the i.t. Is is quite sophisticated and you get Paris into some of the other countries. So nine years ago I'm sure that Vietnam and India and those sorts of countries advanced a lot further, but we just found a much better cultural fit to our practice and that's what drew us to the to the Philippines.

Robyn Jacobson

Jon, what do you find is the main driver for the decision to outsource? Is it always about saving money?

Jonathan Ryall

Not usually, yeah. I mean, that is a benefit to using it, but going offshore is, you can operate out of a lower cost country with lower wages and things. But the vast majority of clients that we're in prospects we're talking to, we're doing it as a staffing solution. Unemployment's been low here. It's three and a half per cent or something and it's been low for quite a while, particularly in a rural or, you know, regional location. There's just limitations inside. They're getting access to, you know, the 2020 million people living in the Manila area and over 100 million in the Philippines as a whole. So there's just this whole other pool of talent that they can access. And we're, of course, noticing the challenges of getting grads and young professionals interested in this profession. Now, we think it's wonderful. We're decades into it and we can't think of doing anything else but try to get younger ones interested and attracted to tax and accounting and all that. It is a challenge out there. Absolutely. When I started as a, you know, university grad, someone invited me along to a CIA evening somewhere and I thought, Wow, this is great opportunity and it sets you up in the business world and all that sort of stuff. But clearly that hasn't been. Yeah, we've got the image problem in this area with the next generation. They don't see it. The same. And talking to some firms that I'm speaking to, I think a firm from it was regional Victoria and there's a university in their in their area and the volume of accounting students coming through just isn't there at the moment. So they weren't actually wanting to do offshoring but sort of had to because they needed some other alternatives.

Robyn Jacobson

So let's turn now to the, I guess, the business side of things, on the serious side where we need to look at risk. How does a firm in Australia manage issues such as quality control, supervision of staff, the culture, the regulatory environment, particularly cross-border and training and supervision of making sure that the staff are up to speed in the technical, see a lot of issues in there.

Jonathan Ryall

Ultimately, offshoring is going to be an extension of what you've got going in your own set. So if you've got good quality control procedures before you're offshore, you're probably going to adapt those into the offshore team as well. There's some key things that I would look for when I'm talking to someone that has never offshored. Firstly, have you got someone that's got the time just to supervise the staff that you're about to hire? You know, they're going to come in, they're going to need lots of training, they're going to learn new softwares and all that sort of stuff and have lots of questions and it's just not going to work Well, if they don't have a friendly face at the other side to be able to get help when they need it, that's a big one. So if the partner is swimming in work and can't get stuff out the door, offshoring, maybe not the best solution because there needs to be some freedom at the in the early stages to help that new person.

Robyn Jacobson

Quality control.

Jonathan Ryall

Yeah, quality control. So I mean, if you were to hire a grad out of uni, you'd have probably keep a pretty close eye on their work progress. Are they actually improving in the review points being repeated over and over again, or are they learning each step of the way? So in the early stages of quality, it really comes down to good training. You need to be prepared to put some training into the team. We have some training programs as a people. Some of our clients take advantage of an ongoing supervision beyond that. So it's definitely not a plug and play, it's not a set. And forget this is a new team member. They'll come to you with some good accounting skills. So debits and credits, I should know, maybe not so much on the Australian tax all the time. So that needs to be trained. So you need to have someone reviewing their work, writing that feedback to make sure that by the time it gets to the level or out the door, it's being checked and that the quality that the firm would expect it, which you would do anyway if you had a if you had a grade come in and learn from the ground up. Obviously there's security things to consider. So and again, no different to any any work from home set up. You need to have that security environment needs to be sort of considered. I mean Paul probably would have some of the specifics about what they do in that area. But but generally speaking, it's things like, you know, the hardware. So, you know, we provide sort of encrypted computers that, you know, where USB hubs a disabled and so staff can easily just grab things off and do what they want with it. There's monitoring type software if needed. There's think about password control and the normal things that your IT person would want to look at. We have an IT teams who are often working with IT teams to make sure that that is all sort of flowing from firm to offshore staff on a on a consistent sort of security environment.

Robyn Jacobson

All from a practical perspective when actually interested in the cultural challenges or opportunities and also the regulatory environment. So how do you manage both of those and ensure there is cohesion with your own practice?

Paul Franks

Just jumping back onto one of Jon's comments before I run into that, Robyn, the one point I probably make there is it's not that different putting on a new overseas staff member to putting on a garage here in Newcastle for instance, you're going to have to supervise and you're going to have to put in time training them. And the more effort you put in at those early days, the better outcomes you get into the future. It's no different from an offshore perspective. It really works in the same way. So I guess I don't want people getting the impression it's more because it's pretty similar. The difference is, is you're doing the training via a zoom or a phone call compared to walking up to their desk. But if they're working from home, then it's really no different in in that aspect sort of thing. So the key point in there is really if you want to succeed in the offshoring environment, you've just got to put the time in just like you would with the normal staff in Australia, put the time, you'll get the results long term. So that's a long pie if, if that's what you're looking for. In terms of the your question, the cultural aspects and engagement, we got our staff locally engaged by having a local mentor. So what they would do is there was a responsible senior staff member in Australia who dealt on a probably a daily basis quite regularly with the staff and that building, that contact between the staff built relationships. We also would bring we've brought our Philippines staff to Australia to, to give training. They then get to meet all the time in Australia and as work very well even for our local staff. Our local staff really get a kick out of seeing the staff coming from the Philippines. They've, they've never left their country before. They turn up in Australia with their eyes are as big as there's dinner plates send and they get an experience, but you get it back tenfold because their enthusiasm, once they've been here, they've know our staff, take them out on the weekends to do touristy things. But that all is a part of the business that's moulding them into our culture and building those, those personal relationships. So that's probably the key building, building strong personal relationships between the staff in Australia. And that's why I guess I've been the consistent sort of partner who will regularly, along with other staff. So that builds the whole team and the strength into the other team. So I guess our Australian staff see how from the top, how the partners deal with, with the staff over there and they're treated like any other staff and I guess that's where leading by example.

Robyn Jacobson

What's the legal nature of the arrangement? So are they contractors, Are their employees, are they your employees or are you paying fees through the intermediary?

Paul Franks

I guess technically they're not our employees, but I think look, Jonn can answer this. The legal aspect from the Philippines is they're not our employees, but we see them really as just another employee of our practice. Correct.

Jonathan Ryall

Just in substance, they are employees, but it's a legal and payroll purposes. We have a company that deals with the tax and and the legalities of employing in the Philippines. And so for one of to give his staff pay rise then he can, you know not just get notified they are or whatever and that'll just go on the invoice can be passed through straight to the straight to the team member. But yeah, there is a lot going on. I guess you'd call it an employer of record in the Philippines to handle that type of thing, the legality of it.

Robyn Jacobson

And they are dedicated staff for your practice. Also whilst there it's an arrangement through this intermediary, they are still wholly allocated to you. You're not having them part time or sharing. There are lots of other practices.

Paul Franks

That's correct. It's I guess it's probably calling it a labor hire arrangement, just like you could employ staff in Australia. It's exactly that same arrangement. So you have your your invoice for the staff that includes every cost, the provision of the, the seat, the computers, the technology, the I.T, the staff wages and hopefully a little bit of profit margin in there for Jon. So he continues into the future. You know, in all other aspects they're seen as our employees. So when we put the time and effort into them, we see the results through their improved skills and experiences. And one of the staff that we started with is still an employee nine years later.

Robyn Jacobson

So how do you protect yourself from whatever risks might be associated?

Paul Franks

Really no different to any of our other staff in Australia. We have our to factor authorities authorizations on all of our software. Most of the software we're using now within the practice is cloud based. We can switch them off if we have a had we've never had to. If we had to kick them out of software or not give them access, then it's very quick and easy and it can be done instantly. So and certainly the I.T. controls that are in place in Frontline is as good or probably better than than what we see in Australia. There really is leading edge technology to to ensure that there is no breaches of technology and it touch forward with. We've had an excellent experience and no issues in any of these type.

Robyn Jacobson

I'd like to delve into your experience a little more. What difference has this made to your practice and where do you see the benefits continuing into the future?

Paul Franks

I'd certainly say it's been a very, I guess, a very positive experience. What it's done is it's given us a capacity. That was one of the main reasons that we started looking at the offshoring quite a few years ago. It's also provide us a well-trained, very stable workforce. So what our experiences were and I guess many medium sized firm was we'd find that we'd spend a lot of time, we'd put graduates on every year, we'd spend a lot of time training them up. They'd get up to intermediate level, and that seemed to be the level where people in their careers might different choices had a staff member who joined the police service staff who wanted to go to Melbourne to to see the bright lights. So you'd spend a lot of time and a lot of resources training staff up for three or four or five years and then they turn over. So then you'd be back to square one. So from a client perspective, which was I guess top of the list for us, you saw turnover and that wasn't a great outcome for a client. So one of the top benefits with using the offshore staff has been the stability of clients sort of in that, you know, junior through to to sort of mid-range experience. It's it's been a really a really good outcome for us. And probably the other point we like many firms when we first started out down this road, was wondering what was going to be the client's reaction. How will our clients react to using offshore staff? A little bit nervous to start with, but we found pretty quickly that our clients just wanted a good service. And what these did was it enabled us to provide a better service. We were able to be more responsive. We had capacity, so we really don't want a staff member in Australia sitting around with no work to do. But if you've got a staff member offshore that is costing you significantly less, you can have a little bit of excess capacity there that if something needs doing, then it can be done instantly because you've got that capacity. That was sort of another key aspect and the client reaction is know they've seen better service, quicker reactions, their response times have only improved with that capacity. So they've been enthusiastic through, through the process as well. Not everyone likes it and I've got a couple of clients who, for whatever reasons, haven't been a fan of it, and we just use local staff to do it. But having those offshore staff frees up the local staff as well. But there's also there's arguments around that having a lower cost with those offshore staff gives you the ability and the capacity to look after your Australian staff even more as well.

Robyn Jacobson

Everybody wants foreign staff client-facing or have any contact directly with clients or is it only the Australian staff who deal with your clients?

Paul Franks

Good question. We have a number of our offshore staff dealing directly with our clients and we provide bookkeeping services. We have mortgage broking our at mean for their our parapan as in our financial planning practice. Also so broadly across all of the staff in the Philippines, they deal directly obviously with supervision, just like with any other staff member. But if you need something sent off quickly, some reports, you know, a payment slip, anything along those lines, then they have that direct contact and the clients are just happy to get good service. And these are highly skilled staff over there. Some of our staff have done the equivalent. If you're a CPA, they're university trained and they're doing bookkeeping, so you don't always see those sorts of highly skilled people in Australia providing that service.

Robyn Jacobson

To keep our listeners a sense of the sorts of differential in salaries or wages that are being paid. If you had, say, an Australian worker on 75 to 100000 K a year, what would be the equivalent in the Philippines for your workers?

Paul Franks

The range obviously depends on experience in that sort of range with all the own costs. So wages we provide medical even down to the presence that you send to them on their birthday, those sorts of things. The administration costs providing premises, I.T, services, internet, all of those all wrapped up probably cost us in the range of 25 to $30000 a year.

Robyn Jacobson

Being roughly a third say of what the Australian equivalent would be.

Paul Franks

Yes, that's correct.

Robyn Jacobson

Yeah. It's quite a significant saving by staff. Training was something that you know, certainly was my background. It's something that is dear to my heart and important and and it's worth sharing also that for our listeners, Paul was a trading client of mine a long time ago and for a very long time. So it's nice to have a chat with you again. But in terms of staff training, you run that for your Australian staff participation by the foreign staff as well?

Paul Franks

Yes, just like Australian staff, we want them as highly trained as well as we can get. So what we do is we involve them in all our internal technical trainings. So if we do an online webinar they will also log into that. We also will travel a couple of times a year to the Philippines and I'll take staff with me because my staff are much smarter than I am, so they will spend time training them and we also from time to time bring our Philippines staff out to Australia and give them a couple of weeks of intensive training as well.

Robyn Jacobson

Now something that I know is a challenge when it comes to getting access and security, let's talk microbiology for a moment because in Australia you've got to your various strengths and with our Australian driver's license or our passport, you can of course get the highest strength possible. When you're a foreign individual. That's very difficult and usually it's just the standard that is the maximum that is capable of being obtained. How does that work in practice for you? So does that restricts the ability of the foreign staff to do certain things because they can't get there, might have it to the strength that might be needed for the tasks that are being done by those in Australia?

Paul Franks

That's true. So with my goals, the only level you can get them to is the basic level and it's a bit of a process. It's not as easy as you would for an Australian, so you've got to lodge paperwork with the Australian Tax Office, you've got to get certified documents from the Philippines to send off to it, but it gives enough access for a lot of the basic, you know, pulling reports off, getting information off. But there's the upside as well, where I guess a lot of practitioners would probably feel positive that there are restrictions in on what they can do. So they can't go in and change bank details for a client. They can't go and do other aspects that you can with a higher level like I.D. So it actually provides some some additional levels of security within the practice without really stopping everything. So the access is adequate for what we need them to do. And it also gives people who would be new to offshoring the confidence that a client's refund couldn't get sent somewhere else. But an Australian staff member could do that as well. No different to any other employee that people have concerns in that area. So it's a strength as well.

Robyn Jacobson

Jon, I want to go down a couple of pathways now. Those who have been early adopters with this approach of resourcing their workforce and those that are yet to, they're shut down this pathway. So what would be your key messages for each of those groups? So let's start with the early adopters, okay?

Jonathan Ryall

So early adopters have had plenty of experience and don't sort of need to be told what to do or how to do it. It really is, I guess just an analysis of how their overall firm's going and how those staff are, you know, growing and and progressing in relation to how they'd expect an Australian to do. And in my experience, I mean, I did this myself for about a decade, like Paul, I had people start and I was I had spent nine or ten years with them and saw them move up the ladder really, So that manager level and able to handle quite complex things on their own sometimes will tend to put a little bit of a cap on their offshore team for some reason. Maybe it's like, Yeah, you'll only ever be able to do bookkeeping or things like that. So my approach is really don't put limits on what they can do with the right input. They'll grow and progress like, like anybody. So obviously that answers your question. So the established ones.

Robyn Jacobson

You've talked about a possible warning sign where screens go black on video calls.Can explain this?

Jonathan Ryall

Okay. So best practice is really you want to have cameras on. Plenty of contact with the team. I recommend that sort of a daily huddle or something. Checking on screen regularly. Daily is is probably best practice at least you know where things have fallen off the wagon a bit is where we had one client that only emailed his staff for nine months, never called them, never did a zoom or anything. To be honest, I'm surprised that the person stayed that long. You know, we've had people in tears in Manila because they've been chatted on from a manager in Australia and it's just, you know, maybe some small caps. I think the words were dammit, you know, in all caps on to do with a particular issue. But the staff thought they were directing that at that. Just a real signal that there's not the communications breaking down a bit. So so I would say extra effort around communication with all working remote and that really keeps things moving, keeps things working well.

Robyn Jacobson

The screens start going black and they start doing email only and they're not engaging with you. That's a reason to be concerned, definitely.

Jonathan Ryall

I think often times partners get this, and I think partners usually are partners because they're good at what they do. They're good with with people most of the time develop delegated to a manager, and perhaps that manager didn't want to work with an offshore team or, you know, it's a little bit intimidating. We've never dealt with Filipinos before or something like that. That's probably where you just want to make sure that those things are being done the right way.

Robyn Jacobson

Paul, any comments on that?

Paul Franks

I was just going to say you wouldn't have an employee in Australia and put him at a desk and not talk to him for nine months or only send emails. It's really not that hard. You walk in, you talk to yourself in Australia, that's all Jon saying. It's no different. It's not that hard.

Jonathan Ryall

In addition, there's there's social things you can do. I mean, you know, some firms will have, let's say a celebration, someone's on another birthday or a significant anniversary or something like that, and everybody gets pizza. So they order pizza over in the Philippines, not pizza in Australia, and then get on a call and have some banter and fun pizza, you know, that sort of thing.

Robyn Jacobson

Now, the groups that are yet to venture down this path are if you're coming cold, if you've been adverse to this idea in the past, if you're reaching the point where you're still struggling to find staff and this really could be an option, what would you say to them?

Jonathan Ryall

So we talk about it in depth in the book, but there's three components that you really need for it to work well with an offshore team. So and I say it's a bit like a triangle or a three legged stool. You have to have all three things in place. So you've got good systems in place. You need to have checklists for people to follow. If it's all in the partner's head, it's going to be a hard and frustrating training and getting productivity. So yeah, think about the systems that most firms are pretty good at. That training is, you know, one of the legs and monitoring is the other one. So accountability as your daily catch ups you've got with that, you're holding your team accountable to billing targets and things like that and called the offshore team to that as well, make sure that they know what their targets are, you know, and that it's visible. I think the real really good spot to be with this is is to set things up in a way that creates an internal team peer pressure so that if there's visibility on what everybody's doing, you know, team members can see other team members activity and that sort of thing, then it's not all on me to make sure that they're performing. It's, you know, they don't want to look bad in front of their peers. So it's just a way of setting that up. So things are visible, reports are visible, you know, that that sort of thing works well. Well.

Robyn Jacobson

Paul, you made the comment to us in our planning discussions on this that most of the risks associated with offshoring are not specific to offshoring, but in fact they exist with Australian staff as well. And I think you've made that point a few times throughout our discussion today.

Paul Franks

Absolutely. The aspects of offshoring are they're very similar to having employees in Australia and it's really just being consistent. It's just making sure that you communicate with them, you treat them as any other employee and that that's really the key and just dealing with them regularly. Like I said, it's not rocket science in that respect.

Robyn Jacobson

So Jon, if anyone ventures down this pathway. They get into offshoring, they set it up, they run out for six, 12, 18 months, two years, whatever. And then they find, you know, well, this is not for me. How is it to unwind or to exit from that particular arrangement.

Jonathan Ryall

That has happened? You know, on rare occasions that firms have gone down the road and then for whatever reason, it just hasn't worked for them. Obviously, from our perspective, as you know, we're a star staffing company. We have quite a few other clients to be extremely interested in staff that have got some experience. So it's it's quite easy for us to say, well, let's make an agreement and find new homes for them. But look, the normal procedure there is normal procedures that would be followed around, you know, making sure that is it performance or whose end is the fault? Is it the staff's performance or is it you know, the firm really didn't do their part and kind of making assessments about where those staff, what their future would look like in that regard. You would know the standard sort of procedure would be two months notice to switch off and then we try and find a quicker solution if that's on the cards too.

Robyn Jacobson

Jon, you've had the rare situation where you've actually asked a client, a firm, to leave the arrangements.

Jonathan Ryall

Yeah, Yeah. I mean, we've had a few. Normally we get warning signs. Yeah, we've got a, we've got a team that are checking in with staff welfare and all of that sort of thing regularly and we might hear, oh, such and such wants to resign and that's not unusual. And staff everywhere don't stay forever. But it's more when let's say the whole team wants to resign, you know, okay, we've got some problems, you know, so it's it let's pull out all stops. Let's find out what's been happening. The ones where it's it's usually mutually agreed in those situations or perhaps the firm didn't realize and they want to turn that around and we'll work with them to try and salvage where it had to be turned off. Like I said earlier, it was you know, we've had two or three where, you know, new managers come in. They're people skills are not really like the old one was. They sort of see it more like software or, you know, something that should just happen automatically that in terms of their offshore team. And it just turned it into a the offshore team didn't respond well, just turned it into a mess. So in those situations you've got it. Yeah, you've got to make some calls. We obviously our interest, we want to look after the staff, We want the clients to be happy of course. But yeah, it's, it's, it can be a bit messy but we would come to some sort of a plan to work it out.

Robyn Jacobson

Thank you. Paul, any final comments from you as to recommendations, advice your suggestions as to whether this is a good idea for firms and what benefits it could bring them?

Paul Franks

I guess like anything in business, owners and partners have got to continuously adapt. We've got to consider new innovations, technology that we can improve our business. And I guess offshoring has been around for a little while now, and I think that most businesses should at least consider it to see if it is going to improve their services to their clients. So there's that aspect to it. I, I guess also there's a risk factor there if you're potentially not using offshore staff and you've got competitors within within your local area that are using those, is that going to put you at a disadvantage? So I think that firms also need to consider that. But on the other side, they might go down the other path where they differentiate themselves by not having offshore staff and it's not for everybody. So I'm not suggesting that that either, but I think it's important to to consider it and to make sure that all those aspects and benefits. But for us, it's it's been a great success. It's given us good capacity. It's given us a good, stable workforce across all different divisions within our with our business. And to some extent, it's now quite critical to our business. If we didn't have them there, our our staff, then that would be quite a difficult outcome. And just having great stability, we've got a great team there in the Philippines and they do a great job. And it's not just that low level work. I guess John Knight mentioned before, we certainly not capped the sort of work that our staff do and they do everything from dealing with the ATO, talking to the ATO on the phone all the way through to self-managed super funds, super fund audits, all different structures and quite complex work. So we found just like with our Australian staff, if you challenge them, then they certainly will lift and you'll get the best out of them. So don't I guess, have the source that they don't have the skills. They're certainly highly skilled and worth considering.

Robyn Jacobson

May I add that it's perhaps made the world a little bit smaller for your practice as well, but the cultural benefits it brings for your staff working with offshore workers and the offshore workers getting access to the beautiful beaches of Newcastle?

Paul Franks

Yes, absolutely. The staff, it's like Christmas when they when they turn up our staff from the Philippines, everyone wants to take them out for lunch or take them whale watching on the weekend. And it's culturally it's been a great thing for our staff as well to experience another culture, even for my of my children, when when we started bringing staff out, we had them stay at my house and the experiences that gave my children and adults that the staff are seeing, what other cultures, what they experience and it makes them appreciate what they've got in Australia and when they see how hard the Filipino staff work and how they live, it's certainly much different to Australia. So it's a good it's a good wake up call. It values sort of aspects of it as well. But it's good for business and good, good for a lot of other aspects of what we do.

Robyn Jacobson

Thank you Paul and Jon, final words from you and then let's hear about this book offer for our listeners.

Jonathan Ryall

Yes. So if we have a book, which is just just that, read one there, I will. I'll send a free copy of that to anybody that's on this podcast. All you got to do is send me an email. At jon@frontlineaccounting.com and I'll have someone in the office send that out And that's got all the, I guess how to make it work, you know, all the various stories and things that can go wrong and how to avoid them and just our own experience over a decade of building offshore teams.

Robyn Jacobson

Terrific. And that email again is jon@frontlineaccounting.com and Jon with J.O.N.

Jonathan Ryall

That's it, no H.

Robyn Jacobson

Thank you both for your time. It's been a really interesting discussion and I hope our listeners have got a better insight into the world of offshoring.

Paul Franks

Thank you, Robyn

Jonathan Ryall

Pleasure

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Jonathan Ryall, co-founder of Frontline Accounting and Paul Franks, partner at Lambourne Partners. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the centre of the tax conversation and membership at The Tax Institute, it could be just what you need. Stay current and connected with tangible real-world benefits. Learn more at taxinstitute.com.au. Thanks again. Till next time on TaxVibe.

The 2024 tax terrain – treasure and traps included

Release date: 26 January 2024

Strap yourselves in, this is a long episode full of reflections on 2023 and the biggest insights for 2024!

Robyn hosts Todd Want CTA, The Tax Institute’s newly appointed President for 2024. They cover everything from the Stage 3 tax cuts to AI and so many things in between!

Listen to this episode for:

Key reflections on 2023
The biggest factors at play in 2024
Labour shortages in the profession and changes in work practice
The upcoming Federal Budget
Tax debts and ATO debt collection activities
All things superannuation – Division 296, Payday super, NALI/NALE
The integrity of the tax profession
Todd’s vision as President for 2024, including our new digital micro-learning experience, Tax Academy

Host: Robyn Jacobson, CTA

Guest: Todd Want, CTA

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I’m Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On TaxVibe, I chat with some of the tax profession's brightest minds, drawing on each guest's unique perspective to give you invaluable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by Todd Want, the president of The Tax Institute and a director in William Buck's tax services division in Sydney. Todd has more than 20 years of experience with expertise in private client tax matters. He advises clients on a broad range of tax issues such as CGT structuring and restructuring acquisitions and divestments, small business, CGT concessions, Division 7A, Taxation of Trusts, International Tax Issues and Tax Risk Management. Todd also provides specialist consulting services to accountants, lawyers, financial planners and other professionals in public practice to assist them in advising their clients. He's a regular presenter on changes to tax legislation and interpretations. Todd is a Chartered Tax Advisor with The Tax Institute and a member of Chartered Accountants Australia and New Zealand and CPA Australia. As well as being our President for 2024. Todd is also a member of the National Council and the New South Wales State Council with The Tax Institute. Todd, congratulations on your appointment and welcome to TaxVibe.

Todd Want

Thanks, Robyn. I'm really pleased to be here today and looking forward to what 2024 has to offer.

Robyn Jacobson

Kicking off the year but before we get into all the the business side of the conversation, how did you spend your summer? Did you get some downtime?

Todd Want

Look, I did. It's actually been a really enjoyable summer, you know, spending plenty of time actually away from the world of tax time with family and friends. Had some family come out from the UK to visit us, which is wonderful. Some of the kids went to cricket, spent the beach catching up on a bit of DIY around the house, that sort of thing. So getting plenty of stuff over the last few weeks. But looking forward to getting into, you know, into the world of tax again.

Robyn Jacobson

Sounds like a good Aussie summer. So we had a big year last year and I hope that practitioners around the country have had some time out and an opportunity to relax, reset, recharge, reinvigorate. We come back into the new year and as we do lots of collections. Briefly, can we cut back on 2023? What are the learnings perhaps at a macro level?

Todd Want

I think it's been an interesting few years and it's continued to build. You've had a whole range of cost of living pressures that are being felt. Rising interest rates, that type of thing, inflationary pressures and and that's built across a broad range of people and we have multiple speeds in the economy. I think it'd be fair to say some are really feeling the pressure on the household budget, others perhaps not quite as much. But I think if we if we're looking more broadly the tax system and where that heads to help people out to have some more fundamental changes to the tax system will be great to have some genuine tax reform on the table there. But I think we've got enough interesting areas or evolutions in the world of tax this year that it's certainly not going to be a quiet year in the world of tax.

Robyn Jacobson

I was just reading this morning there's been another construction company that's gone into administration this morning down here in Victoria. And I'm wondering with the all the government support that was provided during 2021 and even into 22 is that 23 and 24, we're really starting to see the impact and we'll continue to see the impact perhaps of the post pandemic and the fact that the government support has come to an end.

Todd Want

Look, I think that's right, Robyn, and I think businesses needing to stand on their own two feet, so to speak, and some of those things washing through the system as far as the catch ups where businesses that perhaps have overextended themselves or they've got labor market shortages that are hitting their workforce and their ability to fulfill contracts and do it cost effectively, I think all those types of things are really starting to hit and probably much like myself, getting a bit of time away from from the profession that are operating day to day, a lot of other business people will have taken the opportunity over the summer to to have a little bit of downtime, probably reflect on what has happened with their business and where their business heads moving forward and whether they need to make some difficult decisions leading into 24 or be prepared for difficult decisions that might come. And that's never pleasant. But I think there's also a lot of really positive decisions that people could look forward to this year and opportunities that, as the saying goes, never waste a good crisis. So opportunities also come out of this type of thing. So I think a lot of people will be ready to to step up in their profession and and move forward with a strong 2024 and beyond.

Robyn Jacobson

I'm particularly interested in delving a bit more into the the shortages with the workforce will come to that in a moment. In terms of 2024, what do you see as being the really important factors at play? What's going to shape the landscape of 2024?

Todd Want

Look, I think, as you say, we'll come back to the labor shortages in the profession and more broadly, but inflation is something that we saw obviously over the last couple of years. There was some fairly significant inflation that's know appears as though it's starting to ease. But how quickly does that ease and what does that do for for clients, for businesses, for pricing, for household budgets and also dovetailing into that where the interest rates go and I think have they kept out, is there further increases or will actually we see some cuts later this year. It's a fascinating little interplay there with, with what that means for borrowing capacity as well, be it for for businesses looking to invest. And we've obviously had certain government measures yo instant write off temporary full expensing type things that have meant a lot of businesses acquired, a lot of capital assets, the ability to borrow for those sort of things. Now where's the borrowing capacity for future acquisitions of capital assets, albeit perhaps they aren't as tax effective. Now with with the changes to the instant write off type measures, But still businesses looking to keep themselves at the forefront of their industries. So I think that's an interesting part. Tom. As you mentioned, Robin, the the government support and the ending of that, what will that actually mean? Businesses needing to to manage an environment where they need to be able to fend for themselves and genuinely be able to push a path through without those levels of support. And that will be tough for many of them. I think you've also got get the mortgage cliff that's been talked about and fixed interest rates coming off. People who are on these 2% interest rates or sub 2%, some of them rolling on to five, six, 7% interest rates. What does that look like? And same as business borrowing, What sort of interest rate of businesses borrowing money at and how does that flow through? So I think those things are certainly going to be interesting during the 2024 year. But those businesses, those clients, those taxpayers that have have managed through sensibly, they'll be able to work a path through this. And it's all part of of good business management and economic management, household budgets, business budgets, all those type of things. So certainly those those are some of the things. And perhaps, Robin, you know, we touched on this labor shortages aspect now, because I think that's probably one of the biggest things that is ahead is the labor shortage dovetailed in with what impact does I have on the on the profession. So labor shortages more generally, I think across the economy, the tax in a tax and advisory space is certainly not exempt from that. Are we seeing those shortages where people are trying to recruit more people to us despite proving very tough? And it's not just those people who are running businesses out in the regions and the suburbs. It's everywhere that trying to get good quality people isn't easy. And so that's not going to solve itself magically just because we've all had a Christmas break.

Robyn Jacobson

The idea of upskilling and training staff and looking at alternative pathways. In an upcoming podcast, we're going to be chatting with Frontline who are experts in offshoring. And that's going to be a whole different conversation about how the firms actually resolve that using labor that is offshore and how do you control that. But if we come back to the Australian market for the moment, the course is being studied.vAre we still getting people wanting to embrace the accounting and tax profession as a career, the traditional pathways where you had a job for life, where you stuck with this career and you might have changed jobs four or five or six times, but that doesn't necessarily the same anymore. We've got people who are exiting the profession now, whether it means they're going off into industry, meaning they're still an accountant, for example, but they're simply not working in public practice or whether they're actually exiting the profession entirely. It's an interesting landscape.

Todd Want

Look, it sure is, Robyn. And I think if we look more generally at businesses and and that is new businesses, technology, everything else that has meant that the breadth of skills needed to assist and advise those businesses has evolved over time as well. And the tax profession is is one where people from different backgrounds, not just their cultural backgrounds, but also what they've studied previously, what they may be, haven't studied, whether they do need to upskill in certain areas of tax, whether they specialised in areas. I think it is something that we have got an evolution of what that looks like and perhaps people are looking for different things than perhaps people in previous generations did. The tax profession, though, is still one where there's many, many hugely interesting and exciting things to look at in all areas of tax. But I think the key thing there, Robin, about upskilling and training is really crucial. It doesn't matter the background, if someone is keen and they are bright enough to do it, they can do the study, they can upskill, they can train and bring themselves up to speed and be able to be a really well equipped advisor to be able to provide the sorts of things that clients are looking for. And then that's exciting. I think as a profession that the the breadth of skills the different backgrounds bring can actually make the profession more vibrant moving forward. And I think that would be a fascinating thing to play out over the next generation or to.

Robyn Jacobson

Comment on cultural shift. And I'm not just referring to working from home, although that's a big part of it. Are we seeing changes in the way that an aspiration to be a partner? Amersham may not be the driving motivation for young practitioners. Maybe they do want to progress, but they don't want to take over the ownership or the capital, the equity or the responsibility of running a practice. What are you seeing out there?

Todd Want

Well, look, I think there's certainly still a a strong amount of people who do aspire for that partner type thing. But there's also a large amount who perhaps that's not for them and there's nothing wrong with that as long as it's clear to everyone and the balance is right, nothing wrong with people wanting the balance in their life and perhaps the changes of their career throughout, I think I certainly enjoy my week here. Yes, there's plenty of hours worked in my week, but I also enjoy going coaching my kids sports teams or taking them to swimming lessons. You know, every every couple of weeks they're going to see them. And that's a part of my work life balance that actually helps keep me sharp for for the time that I am focused on working on client matters or doing tax related things. So I think that the evolution of you're not chained to a desk, if perhaps there was a perception that that was the only way to to be effective. I think that shift is an important one. But the work life balance and what that phrase actually means, I think is a really important one. And getting that right for for everyone and making it clear between the employer and the employee that, hey, they might aspire to be a partner, but that doesn't mean they have to work ridiculous hours every day of the week getting that balance rights are important. So I think we'll continue to see an evolution of it. Robin, as you say, the work from home is a part of that. The flexible working hours, those types of things. I think it's just something that will continue to evolve.

Robyn Jacobson

In terms of the role of technology. Some firms have embraced it, others are still perhaps a little more resistant. And I'd like to do things the way they've always been done. There are certainly some great tools out there, but if we look at, for instance, CBT and in terms of it being a useful tool, productivity more efficient, but is it any way in terms of detracting from the quality of what we bring as professionals with the expertise and the experience? Can it make decisions? Can it judge ethical dilemmas? It's an interesting question about how I can be used in a practice.

Todd Want

I think you could open up a Pandora's box here, Robyn, of things, but technology there is no doubt about the fact that technology, if harnessed correctly, is very powerful in the world of tax, be it whichever part of tax you're you're coming from and what your job description or role actually is. But the efficiencies that can be driven there, if you understand the process and what you're actually trying to get the technology to do, I think is critical. And you take your reputation in that they can be very useful, but don't expect them to give you a completed solution to a problem. You still need to have the technical nous in the background to be able to identify whether it's complete and correct. It may be that something that GPT has put out is somewhat correct in a particular context, but is it actually fit for purpose for what you're you're actually trying to achieve? So those types of things, I think is where technology has a place and will continue and obviously I will continue to get better and better, one would assume. But the real skills that I experienced and keen tax professionals have, that'll be very difficult to replace the breadth of what that is. And as you say, Robyn, the ethical dilemmas is often those require a judgment call that is far from easy in many instances, and sometimes you need to to discuss that with others and take on board different views to come up with a solution to a potential problem. And a lot of people in the world of tax, the role could probably be more aptly described as a problem solver rather than a tax person. And and problem solving requires the same core process, irrespective of whether it's a tax issue or an ethical dilemma or whether it's something you're trying to as I've been doing, trying to fix around the house a few DIY problems and whatever else. You've just got to come up with solutions using a process to get there. So I think technology is something that 2024 is. Technology's only going to become more powerful, but people need to understand their process and make sure they've got an efficient process because the old adage of garbage in, garbage out probably still applies pretty well there, that you haven't got the right systems and processes you technology's not really going to help you in the way that you perhaps think it will.

Robyn Jacobson

Be also important to check the veracity of what it is you are reading that is produced by a I heard of a lawyer who was provided with some research and the precedents that were discussed in this research were compelling and persuasive, and it was all very well put together. And of course he did his proper due diligence and make sure that he checks that this was all correct. And the cases that had been described in this artificial, the intelligently produced document was in fact all made up. It isn't going to be just because you're provided with something from the computer. A computer may not be correct.

Todd Want

Well, that's one way of supporting your technical arguments with things that exactly fit the fact pattern not even led to a good story in the way the truth has.

Robyn Jacobson

So moving into our space, looking at what's on the radar from a tax perspective in 2024, it's a most dominant discussion at the moment and not just because of the time frame coming up. We have, of course, got the federal budget and it's this annual gathering. I'd describe it nearly as the most exciting night of a year, where, of course, at the Tax Institute. We all get together, we spend the night poring over the budget papers and producing reports and summaries and and videos, etc. for our members in the broader profession. But it is the 14th of May this year scheduled at this stage, and certainly the focus is on the stage three tax cuts. So it's worth making the point that these were legislated back in 2018. It was a three stage approach stages one and two were deliberately targeting the lower and the middle income earners first. And it was always intended that the stage three tax cuts delayed until 1st July 2024, would target the higher income earners. Now, in order for them not to proceed, the government would need to change the law. So they need to get the support of the Parliament to actually put some amendments through. We will watch and wait with great keenness over the next few months to see how this plays out. And I am not interested particularly in getting into the political arguments here, but certainly it is dominating headlines and cost of living Relief is something that the government has undertaken to provide in the budget. Your thoughts on this?

Todd Want

I think, Robyn, you've got obviously, as you mentioned, this was legislated a number of years ago, so this is not something that requires a budget and in future passing of legislation, it is locked in. So there would have to be superseding legislation to go and change those tax cuts. What we've probably got is the fact that we're not in that extreme deficit position that was perhaps forecast as little as a year or two ago, largely because of the natural resource prices and the strength of the tax, the inflows that are being coming in. So I think that means that it perhaps is the ability to have the stage three tax cuts just continue to to to flow through and happen in six months time when they're meant to kick in, but also provide some cost of living relief for those lower income to middle income earners who perhaps are finding it tougher. So it's something that I think the federal budget, as you say, it's a really exciting night for tax person. And reading through it, I'm not going to sit here and lie about that. It's interesting whether there is a lot of changes or whether there are not and the speculation around why or whatever. So it so I think I think it would be nice, obviously, irrespective of political party to see some bold tax measures. But I think the the budget position being where it is, there probably is some room for them to provide certain reliefs there perhaps that weren't as readily available without going into even bigger deficits, as I say, because of those natural resource prices and that type of thing that has assisted.

Robyn Jacobson

Yeah. And we are in the process of preparing our pre-budget submission. So this is an annual process. Again, the government calls for this each year and we are gathering feedback from our members and I'm putting this together to let the government know what our thoughts are on what they should do in the budget.

Todd Want

That's right. And I think we we're always looking to to make sure that the tax system is fit for purpose. And and some of that involve measures that are a bit more future looking rather than perhaps political type measures. And so I think trying to find the right balance and putting it forward to the politicians to to make sure they're at least considering some of the things that we believe as an institute and as a tax community are worthwhile to consider.

Robyn Jacobson

So perhaps my tip to those who are interested in budget night, cancel all your social engagements unless you're going to spend the evening with an accountant or a tax lawyer. Or do you pizza and settle in for an interesting evening?

Todd Want

I think the pizza delivery companies and the different pizza companies, that must be a real kicker for their not that they now would know that it's the accountants and the tax professionals that are are ordering big from that Tuesday night each major.

Robyn Jacobson

All right. On to another really significant development for those in the assembly side of things. We had a tribunal decision last year. And when we look at the decisions that come out of the Administrative Appeals Tribunal, which by the way, is in the process, of course, of being rebadged and redesigned as a new administrative review tribunal, that's not going to come further on down the track. We've got a decision that deals with unpaid present entitlements. Now, you and I and and of course, members of the profession have been talking about EPAs for about 15 years now. So it's 2009 and that particularly came on the agenda. And all these years we've been having debates about whether or not a an entitlement that is made from a trust to a corporate beneficiary is in fact a loan for divisions that repurposes. We've had various forms of ATO guidance. It's been reshaped and it's shifted and it's adapted and been extended. And I won't go back through all of that guidance that has been issued. But this decision Bindal has certainly grabbed our attention and it is now on appeal to the Federal Court. Perhaps. Can you describe a little bit more about the case, why it is so interesting to us and what it could mean if indeed having had a culture that cost the taxpayer win in the tribunal. The tax office has appealed this up to the federal court. So what happens next?

Todd Want

This is certainly one of the biggest things in the SME tax base for 2024 of them. There is no question about this, because for as you mention, this past 15 years, we've all been having to focus on distributions from trusts to corporate beneficiaries and how to deal with those distributions. Do they need to physically be paid in previous years? Could they be put on sub trusts, interest only facilities, all sorts of things like that? This decision certainly I won't say it flips that on its head, but it certainly brings the technical issues to the forefront and something that a lot of people are probably saying, Well, why has it taken so long to get here? These technical issues we've had the ATO's view for for well over a decade now or their broader view that's evolved over time there. But practitioners have had to either put their clients and themselves potentially at risk if they're taking a more aggressive approach or take them, perhaps what some may say is the more conservative approach consistent with the ATO view and paying those distributions through to corporate beneficiaries or putting them on Division seven, a complying loan arrangements, that type of thing. So this issue I think will be fascinating is to where the Federal Court decision goes. And if it goes in favor of the taxpayer, do we see legislative change? Do we see it reached the high court? If it goes in favor of the tax Office again, do we see it going to the high court? Where does it go? But probably more broadly, what does this mean for distributions in recent years where people are having to either clients or their advisers assisting them in making decisions on what do they do with these distributions from trusts to corporate beneficiaries? What does it mean for tax planning for 2024 for the June 24 distributions? And I think it's probably too early right now to make a definitive call on what people should or shouldn't do. But unless we get a decision over the next few months, which probably may take more time than that, they probably do have a really interesting next few months as to, well, will some clients push for their advisors to say, Hey, can we take a more or less less conservative approach this year than what we did previously? But does that come with a risk that if the Federal Court decision is in favor of the commissioner, what does that mean for those distributions? So I think this is a really interesting in the tax planning space and also the use of trusts where we've obviously had a whole range of trust related matters in focus over recent years. This one was one that had once it died down, but it certainly has not necessarily been the focus until the BENDALL decision came out. And now I think it's going to be a fascinating year on this front, Robyn.

Robyn Jacobson

It's important to remember this is an administrative decision at this stage. So in other words, when the tribunal makes a decision, they're not changing the law. They are simply standing in the shoes of the commissioner and remaking the decision that he's already made. But in this case, it was different to, of course, what the commissioner had decided when it goes to the federal court, or it could, in fact, go straight to the full federal court, we will have proper case law. And then, as you say, it's a case of whether it gets appealed further up to the high court. Also, I've referred to prior years in question. So, for example, if there was a UPC in June of 2022, it is now that the trustee and also the advisors are going to have to think about, well, how are they going to treat that? They go back to, for example, a distribution made in June of 2022 in that would have become potentially a loan by lodgment of the 22 return. So sometime in early 2023. And then if it is indeed a loan, it would need to be managed by lodgment of the 23 return of the company, which is roughly right of this year. So there may well be a reasonable approach where people are focusing on distributions made in the 24 year given we've now got Bendall in play. But in fact it could be 22 or 23 distributions that are actually affected at the moment or will be certainly by lodgment day this year or looking at June 30 this year. So as you say, we don't need to do anything right now. But I would hope in the months ahead that we would see a little bit more guidance from the ATO on what practitioners can do. They have already issued a decision impact statement in an interim form back in November last year. So perhaps they won't issue any further guidance beyond that where they stated we will stick with our current position until we're told otherwise by the court.

Todd Want

I think I think you're right, Robyn. This is yet another area where practitioners can't necessarily give a definitive answer to their clients on what they can and can't do, but more a position as to, well, this is where the whole matter sits at the moment. These are the options you've got. These are the potential downsides and upsides to each of them and making an informed decision or advising their clients or the client to make an informed decision based on where they wish to go. It is one that hopefully we do see this federal Court decision and if it does proceed that far, the High Court decision and get a bit more of a definitive set of ground rules as to how to manage GP's with corporate beneficiaries. But in the meantime, just another one of the areas of tax where we're all sort of sitting there looking forward to to where this takes us.

Robyn Jacobson

We should get our popcorn and sit and watch and play out.

Todd Want

Said like a true tax person. Robin But it's certainly not going to get me disagreeing on that.

Robyn Jacobson

Now, very briefly, the multi national package, there's a bit going on in this space, so can you just briefly run through some of the key points that this particular package is looking at? Because we know that people like to have a go at the multinationals and say they never pay enough tax. In fact, they are one of the best tax payers in terms of the gaps, the difference between what they should be paying and what they do pay. Nonetheless, we've had some fairly significant tax measures come in in the last decade and we've got some tightening up of some of those rules.

Todd Want

Look, we do, and I think this is where the multinational area continues to be a focus and continues to be one where the costs of complying or the technical issues just keep growing. In this instance, things like thin cap anti-avoidance rules for denying deductions, for certain payments relating to intangibles where they're related to a low or no tax jurisdictions, reporting requirements to enhance tax disclosures, debt deduction creation rules. There's a whole range of things that they require, not just necessarily an Australian coordinated response, but also knowing the broader group that an entity might operate as part of. And and that's certainly something that for multinationals, be they smaller multinationals in Australia, larger ones, it can touch these things can touch a whole range of businesses that operate cross-border. And I think that's where these packages and the issues where the Bendall type case may have been something that the SMB area, it's a hugely important thing. I think those who practice in the, you know, the larger end of town or the cross-border type in these multinational things and the continuing evolution of packages relating to multinationals and tax issues, there, this is just going to be another year where there's more measures that keep tightening things and requiring a very robust compliance approach for taxpayers and also a robust set of planning to to manage the issues so that it is not inadvertently achieving unintended poor outcomes for taxpayers.

Robyn Jacobson

Heading back to the ATO and away from Treasury, we've seen a firmer and quite definite shift in the approach taken by the regime when it comes to debt collection. So we know that during the pandemic they were going really softly and gently with businesses they didn't want to send them under and we had payment arrangements being offered and we had remission of the general interest charge. We had, if you like, a holding on things like garnishee notices and those sorts of things or actions. But all this has cranked up, including director penalty notices. So again, as a practitioner, what are you seeing out there? What are you hearing and how do you think this is going to play out when they've got still a very high level of collectible debt going by, in particular, small businesses?

Todd Want

Look, I think it is one problem where the government probably needed to go back to business as usual on debt collection, that it was very carefully managed by the tax Office during that COVID sort of period and trying to to give businesses the best chance to survive through that period and come out and and continue on. But the sheer size of the the debts that are sitting there, it's just massive. And so people who genuinely need some assistance and some time to pay it off, making sure that they get that time and assistance from the tax office is important. But equally, those who will never be able to pay it off, Unfortunately, the decision does need to be made and sort of making sure that those debts are managed appropriately because we can't just have debts continuing to balloon know forever. Ultimately, they do need to be paid or managed. And so I think it is going to be a year where because we have had interest rates increase, debts will grow a lot quicker just because of the interest component adding on top as well. So the ability to manage some of these debts will continue to be harder for those who don't have the cash flow and don't have the ability to pay it off. So speaking with an appropriate advisor in that area is probably quite a useful thing for those businesses who are just not sure whether they've reached a point where it's actually their debts too big or how best to manage it.

Robyn Jacobson

To put some figures to the large amounts you're referring to in June of 2019. So about six months out from the pandemic, we had collectible debt at about 26 billion. Now that increased 89% to June 2023. So over a four year period to more than 50 billion and about 33 billion of that is owed by small businesses. So it is disproportion that given the contribution and and the extent to which we have small businesses in the economy, given of course the turnover in the tax they pay. So it is a concern that that collectible debt has gone up. And I'm not talking about debts that are collectible. These are amounts which are regarded by the ATO still being recoverable.

Todd Want

So it's a big number and I think of that number, there's a lot of them that will have just needed some short term breathing space. Others where perhaps they are using the tax office as their pseudo bank and perhaps that's not the right mindset to have and actually coming up with a payment arrangement that they can manage, that they can work with and that chips away at the debt over an appropriate time frame is really important. So picking up the phone to the Tax office and having a chat to them about it in equally the Tax Office hopefully being reasonable in setting it a payment arrangement that will work in a sensible timeframe.

Robyn Jacobson

Many of our listeners may be aware that there was an announcement in the Mid-Year Economic and Fiscal Outlook in December which announced the Government's intention to make general interest charge and the shortfall interest charge, which is a lower rate nondeductible from I think it's 1st July 2025. So this is something that will have a quite a big impact because there may be businesses that have debt, but the way they're prepared to manage it is, yes, we know it attracts interest, but at least that interest is deductible.Once that deductibility is taken away, then it becomes a much more significant cost to have an outstanding tax debt.

Todd Want

There's no doubt about that, Robyn. And I think it's yet another measure that's encouraging people, whether it's with the carrot or the stick, to to pay their tax office debts and make sure that they're up to date with those. So it is something that for those businesses that are paying their debts on time, there's an element of probably fairness to them for those who are not, it's an increased cost that suddenly they're having to pay their tax office debts and that interest not being deductible increases the cost of that debt. And it is one of those things that will focus the need for some businesses to make some hard decisions on how they get themselves out of this into superannuation.

Robyn Jacobson

Two major reforms, proposals, measures on the horizon, and one of them's a little bit closer than the other. We've got a bill before Parliament currently which is due to commence and take effect from one July 20, 25 in the tax world as boffins call a Division 296, because that's where it sits within or will sit within the 97 Tax Act. But in layman's terms, this is the additional 15% tax on earnings from superannuation balances above $3 million. Now there may be many out there who say, I wish I had $3 million in my super fund, but for those who do, this is certainly going to be a significant change. Now, most across the profession agree that if the Government wants to increase the tax rate, not only is its prerogative, but those sorts of policies come and go all the time. The biggest noise we're hearing around this particular policy is about the proposed taxation of unrealized gains encapsulating those earnings. Again, your thoughts?

Todd Want

It's absolutely right, Robyn, that taxes, tax rates go up and down forever in a day when there's been a tax system. But the taxing of unrealized gains, that's the big one. That's the really big one here. And I think, you know, some of the concerns from people that, hey, I'll be taxed on again that's unrealized that I may never realise. So I'm paying tax on an amount that I never actually Kit And where's the fairness of that and the appropriateness of that? And I think that's the discussion and the real issue that a lot of people are finding very, very tough to to get their head around. And I think probably more broadly making sure that if this does come in as a measure, that it doesn't spread out into other parts of the tax system and suddenly become a norm across other areas, because we don't want this to create a precedent in that regard because it suddenly it will fundamentally change behaviours. And is all of it a good change to behaviours or not making sure that superannuation system and the cost to the tax system that superannuation has is sustainable into the long term is an important part of government decision. There's no question around that. But dealing with it in a fair and reasonable manner and taxing unrealized gains, is that fair and reasonable? I think that's where a lot of people are finding this one particular challenge. So how do to nine six evolves will be an interesting one. And obviously we will have a federal election between now and when that kicks off. So will that become an issue from a political point of view leading into the next election? Who knows?

Robyn Jacobson

My explanation for of in layman's terms, is instead of using a profit or loss statement, which is actual earnings of the fund for that particular member, they're instead using a movement in balance sheet approach. So the balance in your superannuation accounts and unfortunately the balance in your superannuation account is the unrealized gains that are embedded in these assets and that's what they're effectively going to be taxing. So that's why we're keeping a very close eye on this. The other measure, which is a year later, one July 20, 26, but no less significant, in fact I would suggest this has much broader application is what's called Payday super. And we're going to see a requirement of all employers at this stage. There is no carve out no de minimis rules where employers will need to pay the superannuation guarantee at the same time that they pay their salaries and wages. The Tax Institute and and in particular my self has been directly in targeted consultations and having sat through a number of these meetings and I'll say that many of them have not been confidential, so I am afraid to discuss this with you now. It's been very pleasing to see the collaboration, the openness to ideas, the tabling of issues, thinking through all the aspects, all the different stakeholders. It's not just a change in timing of payment. It's going to affect the onboarding of employees, the gathering and sharing of information, the development of reporting systems, how the ATO ascertains, whether there has been in fact a shortfall. It's going to necessitate a whole design redesign of the guarantee charge. So when we look at this current 11%, maybe 12 and a half, eventually to 12%, it's not just that the charges impose, but all the draconian penalties that come with it and that currently operates on a quarterly basis. So to start moving it to a weekly or fortnightly does need a rethink. So without going into any more detail, I see this as a golden opportunity to bring this very archaic regime, very necessary, but the regime itself is over 30 years old and bring it into the 21st century. From your client's perspective, are they going to welcome this? Is this something that they are going to be concerned about? Where does the business community sit on this?

Todd Want

Look, I think the vast majority of businesses do the right thing by their employees and they genuinely pay the right amounts of their wages, withholding, super, all that sort of thing for their employees, pay them their wages, comply with their SGP and other obligations. And so this will probably from a compliance point of view, be more of a cash flow type thing where it's a managing cash flow there at the moment they may be paying the super quarterly. This will require it to be paid earlier and in, you know, perhaps more bite sized chunks. But that cash flow change will be important for a lot of businesses. The degree that that interacts with. If you look at the size of the ATO debts there, that the sheer growth in the size of that, that's probably indicative of how tough some businesses are finding the cash flow at the moment. So is this going to be another thing that weighs on cash flow for businesses and creates bigger problems there? That's a question that I think needs some more delving into. You know, there's a whole separate issue there, but I think you're quite right, Rob, And the ESG penalties, the broader rules around super and the mischief or non mischief and the degree of a penalty when a business has genuinely tried to apply with their obligations but perhaps has an inadvertent error or mistake there and is the penalty that they cop for that fit. So what has actually occurred? I think it's the right time to relook at all those things. And so I'd love to see a broader piece here. And we've got time that these measures are not proposed to apply for well over two years. So I'd love to see that. And it's refreshing to hear that there is genuine breadth of consultation ideas, thoughts coming together, and hopefully we land on something that's user friendly and able to manage things appropriately.

Robyn Jacobson

We would certainly want to see a much more proportionate penalty so that if you one day like this is someone who never pays on behalf of their staff, they are treated differently and as they should be.

Todd Want

As you mentioned, Robin, with super heading to 12% for ESG and it started at a much, much smaller number than that many years ago with the cash flow impacts the the quantum of the penalty because of how it's calculated, it suddenly can become a very big number. So we need to make sure that it's fit for purpose.

Robyn Jacobson

Now, turning to the integrity of the tax profession, I know that we can speak for a long time on this alarm. We ran a webinar for our members, which is available on the member portal at the end of last year. So if members want to go and look at that from the Tax Institute, they can delve into it in much more detail. Very broadly. We've got some major legislative changes coming in affecting the regulation of tax agents and best agents. Some law has been enacted, some is before Parliament, some is still in the pipeline. So there are quite a number of stages being rolled out at an overarching level, the approach to this, it's certainly appropriate to look at improving the integrity of the system, but at the same time it is also valid for genuine concerns to be raised about the design of the provisions.

Todd Want

That's right, Robyn, And I think that's we fully support that. The Government wants to ensure that there is a high degree of integrity in the tax profession and that the profession does engage in ethical conduct. I don't think there's any issue with that. I think the vast majority of tax practitioners do operate in an appropriate manner and they are fully aware that society should hold them in high regard and they want to be held in high regard as someone that can be trusted to act appropriately, ethically, with a high degree of integrity, where, yes, they are looking after clients and taxpayers, but they are doing so within the bounds of the tax laws in an appropriate manner. So, yes, some have overstepped the mark, there's no question about that. But the response needs to be commensurate with that. Those who are operating at the fringes or even well outside the fringes, they should be dealt with appropriately. But we need to make sure that the measures here don't lead to the everyday client being unable to access tax advice and assistance because of cost effectiveness or that sort of thing, because tax practitioners are so burdened with the red tape or the regulation they need to go through to just be able to get a client on board. It ought to be able to document things or deal with it and so on to be able to give advice to clients. We've got to find the right balance there and make sure that we don't price the everyday Australian out of getting good quality tax advice from a tax agent and tax advisor. But we need to manage the integrity of the tax profession and ensure that tax practitioners do act ethically and do act in a way that is where the community expects that practitioners should be operating.

Robyn Jacobson

Finally, your vision as president. So you've got a year ahead and we've probably got you at the commas point of view a year. It's only going to ramp up from here and you will of course be traipsing around the country, going to lots of our events and other activities and meeting with members and looking at our advocacy work in terms of looking at submissions and so on. What do you hope to get out of the year for the Tax Institute? What direction do you want to take instituting and where do you think our focus will be.

Todd Want

As an institute, I want to make sure that we have got the, the offerings that are right for our current and future members that we're bringing through the next generation of tax practitioners. And that can be a broad range of things. You know, if you look at something like our Tax Academy that's just recently been launched, they bite sized chunks of micro credentialed learning. That is a fantastic set of tax learnings there where you can take the opportunity if you're a novice in the world of tax to upskill, if you're a strong, experienced practitioner but want to upskill or refresh in certain areas, you can take some bite sized chunks of learnings out of that. It's technically very strong, it's practical, great set of things there. So Tax Academy is something that we've built to help that be the way that people want to learn bite sized chunks on the go. But for a breadth of people who it's not just aimed at the novices or the experts, it's for everyone. As you say, Robyn, I'll be going around the country. I'm really looking forward to meeting members around the country, hearing what they've got to say, helping advocate for the issues that are affecting them and also taking the tax profession forward in an appropriate manner. I think one of the real strength of the Tax Institute is the sharing of knowledge, the experience and the skills. And I think that's something that we need to make sure is fit for purpose moving forward. As to how that is, we run some fantastic events where our presenters freely give up their time to both present on the day, but also write their papers, share their knowledge and skills and put back into the tax profession. And that's something that I want to make sure that our tax community continues to work together to pass the baton on to the next generation, but also help design a tax system that's fit for the future. So advocacy sticking up for the tax profession, not just providing, you know, one sided views, but a balanced consideration of what is good for the tax profession, also for members raising issues that and obviously for for part of your role, Robin, is taking forward issues that members might have and helping them get those resolved if they've got issues along the way. So supporting our members, our practitioners, our tax community to really make sure that as a profession it's an attractive profession to be part of. It's an interesting and exciting one. It's a fulfilling one and that it's one that we are fit for purpose for the future. So I want to help take the tax profession, the Tax institute forward. And that's that's something that really excites me. So I'm looking forward to 2024. Robyn I'm looking forward to working with the team at the Institute. I'm looking forward to working with the members, with the broader tax community to be able to achieve a lot of things this year.

Robyn Jacobson

Well, thank you, Todd. On behalf of the staff at The Tax Institute and all of our members and the broader profession, thank you for your commitment over many years. You don't just become president overnight. It's many, many years of voluntary work up through our working groups and committees and state council and then on National council. So congratulations again on your appointment as President. We look forward to your energy and your your drive and the vision for this year. And let's roll up sleeves up and get into the work.

Todd Want

Thanks, Robyn. I think it'll it'll be a cracker of a year for, for the world of tax and I'm looking forward to it.

Robyn Jacobson

Terrific. And thank you also for your time today.

Todd Want

Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Todd Want, CTA, President of The Tax Institute and Director, Tax Services with William Buck in Sydney. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute join us on LinkedIn. If your interested in being at the center of the tax conversation. A membership with The Tax Institute could be just what you need to stay current and connected with tangible real world benefits. Learn more at taxinstitute.com.au. Thanks again. Till next time on TaxVibe.

Shifting tax payment culture for taxpayers and employers

Release date: 17 November 2023

In this episode of TaxVibe, Robyn Jacobson, CTA chats with Vivek Chaudhary , Deputy Commissioner, Lodge and Pay, at the Australian Taxation Office, about the ATO’s approach to taxpayers’ lodgment and payment obligations, and the shift in payment culture, from the anomaly that was the pandemic, and how things need to change in the future to ensure a fair tax system for all Australians.

Host: Robyn Jacobson, CTA

Guest: Vivek Chaudhary, Deputy Commissioner, Lodge and Pay, ATO

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate of The Tax Institute and your host to today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of Tax Vibe. I'm joined by Vivek Chaudhary, Vivek joined the ATO in 2019 in his current role, Deputy Commissioner of Lodge and Pay at the ATO. He has 20 years of global financial services experience transforming and growing business teams into highly productive operations. Vivek previously worked at NAB and was responsible for transforming its collections function into NAB assist, making NAB the first Australian company to make the Fortune's Change the World's list in 2016. Vivek has reshaped the ATO's approach to lodgment and payment obligations to one that focuses on tailored solutions based on a deep knowledge of the client's circumstances and behaviors. Vivek, welcome to TaxVibe

Vivek Chaudhary

Thanks, Robyn. Thank you for having me here today. Yes, at the recent Tax summit, I spoke about how the ATO is returning to normal operations to address collectable tax debt, and I look forward to discussing that with you here today.

Robyn Jacobson

Yeah, that's great. We know the ATO had a very different approach during the pandemic. Not only were you handing money out through things like job keeper and cash flow boost, but the very supportive approach in terms of remitting GIC and other penalties and payment plans and so on. But we are now in a situation where debt has increased and we do need to return to a business as usual type approach. But we also know that there's been some observations made out in the community and in the profession regarding the ATO’s changed approach. So I look forward to unpacking this with you. So at the Tax Institute's recent tax summit in Melbourne, you recently outlined the shift in the ATO's approach to addressing collectable tax debt. Would you give us a brief overview of what you provided in your address?

Vivek Chaudhary

Sure. Through the pandemic, we shifted our focus from debt collection to stimulus payments and assistance with tax. We redeployed over 5000 staff and turned our attention to focus on how we help and assist taxpayers. As part of this, we paused most of our firmer debt collection actions, which was appropriate at the time, and we encourage taxpayers to lodge even if they couldn't pay. We offered payment plans deferred due dates and as you mentioned, remitted penalties and interest without question. Offering additional time to pay was an effective lever to help small businesses stay on track. And a large portion of the tax bills were paid before those deferred due dates. This was the right thing to do for a lot of businesses and it delivered many successes. But it has also had an impact on payment culture. And we are seeing more businesses not paying tax on time since before the pandemic began.

Robyn Jacobson

So Vivek, do you think there's a bit of change in approach? People have got used to those supportive approaches from the ATO and they've taken that into a post-pandemic phase?

Vivek Chaudhary

Some businesses, yes, are probably have changed their habits for the worse, but the vast majority of the system continues to operate at good health. 70% or more tax obligations are met on time and the vast majority of tax liabilities are paid on time. And our concern is for those that are doing it tough, but yet paying taxes on time, it makes it unfair for them that some others are not. And that's why we are changing our approach. Otherwise it remains something that is growing at an unsustainable level and may get out of hand.

Robyn Jacobson

So what are you seeing out in the market and in the community?

Vivek Chaudhary

What we're seeing is that too many businesses have accumulated unsustainable levels of debt and we also see a number of profitable businesses who have the capacity to pay their bills but are choosing not to. Over the past 4 years, collectable debt has increased 89%, and now we do feel it's the right time to reestablish that culture of paying taxes on time and turn this trend around. Where we see businesses are behind with tax, there's a fair chance that they are also falling behind in payments to creditors, suppliers and even their employees, which isn't good for those that are directly impacted. It's not good for the system and it's not good for that business itself. We do know that many people are facing cost of living pressures right now, but we also know that the community expects all taxpayers pay the right amount of tax and pay it on time. And the ATO has a critical role in protecting not just the revenue but also the taxpayers themselves from creating too much debt and from impacting their creditors or the broader economy.

Robyn Jacobson

So can you provide an example of what you're seeing out there.

Vivek Chaudhary

Obviously I cannot talk about individual taxpayers, but I can tell you if and this is a recent real life case and something we do see more often than we would like to, the case concerns a smallish business, one that had quite a few staff, customers and suppliers. The business was impacted by the pandemic due to the lockdowns, but also other factors that resulted in the business started to pay late and our response was to support them with payment plans and other support options and ones that were supportive and gave the owner some breathing space. It also meant that the business owner was not forced to face what the business was and some of the habits that were not in the best interest of that business were formed and they weren't forced to think about their pricing, whether they were too reliant on debtors who were paying late or might be in trouble themselves, or whether they needed to slow up their expansion plans. In the end, the business became insolvent and the business owner has now personal debt that are substantial and will probably take a very long time to pay off. But it doesn't just impact the business owner. They were over 150 creditors both businesses and consumers, as well as staff who had not been paid their entitlements, including their superannuation, which is their retirement savings. So in this case there were no winners other than the insolvency professionals. While we can never know what might have happened, we have to think that if we had intervened earlier about the debts they owed to the ATO and their staff, there is a chance that the business owner might have either taken action to set the business on the right course or taken action to close the business earlier, which means less damage for everyone that was involved.

Robyn Jacobson

And sadly that's not going to be an isolated case.

Vivek Chaudhary

There's like I said, there's many more that we're seeing than we would like to see.

Robyn Jacobson

So what are the trends that you're seeing in terms of collectable debt?

Vivek Chaudhary

As I mentioned so the total collectable debt has increased by 89% over the last four years. 90% of the collectable debt, which is $45 billion of it is owed by businesses and small business continues to be overrepresented in our debt book. And so of the 45 billion, 33 billion is owed by small businesses, 23 billion of the 33 billion is unpaid activity statement debt. So this is your PAYGW the withholding from the wages. It's net GST that is collected or adjusted but not paid and it's PAYGI which is based on anticipated profits in the future year. $1.8 billion of this is also superannuation guarantee charge and that has that direct impact on the employees.

Robyn Jacobson

So Vivek, I just want to make an observation. Leaving aside the PAYG instalment, you mentioned then PAYG withholding, GST and the unpaid SGC and all three of those are of course personal liability for directors. So director penalty notices can be issued in respect of those debts. So they're not just business debts. This can actually flow on to be a personal liability of the directors.

Vivek Chaudhary

Absolutely. In fact, the liability exists in a corporate structure from the time someone becomes a director and the director penalty notice is a requirement for the ATO to issue those prior to commencing recovery proceedings is a requirement for us to do that, and that creates an account into their personal tax obligations until either it's paid by the business or by any of the directors themselves. We do as a strategy and a contemporary approach during COVID because we had stopped our firmer actions. As we look to recommence them, we issued awareness letters. So writing directly to directors of these businesses and we had seen some great engagement from many on the back of that awareness campaign. There are so many that at the moment that we do not have the engagement from businesses or their directors and we are continuing to issue director penalty notices to them and collect from those. I want to make a point clear, although small business is overrepresented in the total tax, collectable debt, non or late payment is a focus across the board for the ATO from individual taxpayers all the way to the big end of town. So our expectation is that people will lodge and pay on time and if they are not able to do so, that they will engage with the ATO before the due date, not after the due date. Our expectation is that people engage with us before.

Robyn Jacobson

The point of engagement. So if people aren't in a position to pay, you'd much prefer them to at least come on to your radar and keep up to date with their lodgments?

Vivek Chaudhary

Keep up to date with their lodgments and have a payment arrangement in place. If they do not have a way to enter a payment arrangement, that should be something that they need then to consider whether their business is viable. We would be able to provide them additional time to go seek advice from the appropriate professionals. May that be tax advisors or insolvency or restructuring advisers. But we do not want that they grow the amount of debt without actually having a good understanding of whether they can recover from it. Because I was saying earlier, it's in their best interest to do that, but it's also in the best interest of other businesses that are dealing with them and their employees who we are very concerned about.

 Robyn Jacobson

While small business makes up a sizable chunk of the collectable debt. You are still seeing issues across the board.

Vivek Chaudhary

Yes, we are, absolutely. In fact, our focus is not in a particular segment of business. As I said, 90% of the collectable tax debt is from businesses. Our focus is that, particularly for this year in five specific areas, the first one is super guarantee charge so those that have already have a super guarantee charge debt that they have not paid. We have always prioritized these debts. So this focus area is not new, but it's certainly one that we would be keeping on top of our pile of work because it is so important for us to make sure that we can reunite that super to the retirement savings of those employees. We're also focusing on refund fraud. We view that fraud and take it very seriously, that taxpayers who engage in refund fraud that they can expect serious consequences. We have a very clear and deliberate approach to recovering these debts, and we won't hesitate to apply to all of those clients who are involved in this. We will fully extend our stronger powers where necessary, beyond our ordinary posture for these clients. We are also doubling our efforts in the recovery of aged and high value debt. So these are debts that are of high value and aging. The 2023 24 budget has funded a four year program for us to focus on public and multinational groups and privately owned groups that have debts over $100,000 and have been overdue for more than two years. For these clients in particular, that are no concessions available. Debts will progress to firm actions and payment plans will be very limited and for a very short duration, and they will align to the reporting cycle. So what we do want to see is these businesses get back on track and remain on track, otherwise they really have to consider their viability and seek the appropriate advice. There is one more that we are increasing our focus on this year and they are employers with new debts. Our experience shows that ultimately businesses that choose not to pay the employee superannuation, they start by not paying some of their initial obligations, such as their BAS payments, and that includes a PAYGW and GST. And what we are doing is looking at timely action and quick turnaround in terms of these debts. So anyone that employs staff should expect that we will be prompt in taking action if they incur debt.

Robyn Jacobson

Looking further down the track, Vivek of course we've got pay day super which is proposed to commence on the 1st of July 2026. So without getting into that many detail, it's going to be another game changer for employers where it's going to be yet another obligation that they will have to meet at the time of paying the salary.

Vivek Chaudhary

You're absolutely right. In fact, we are actively thinking about how that is not a shock to many businesses. And if we can influence and communicate now to start turning those payment habits and that payment culture, that will mean that when that new legislation comes into place, that those businesses are ready to adapt to that rather than be finding themselves in a state of shock.

Robyn Jacobson

Yeah, that's really important. So why are the changes being made now? You've talked about we're out of the pandemic and the level of debt is not sustainable. So I guess that answers the question. But can you provide a bit more detail around why the changes are being made now?

Vivek Chaudhary

Look, it's essential that we shift payment behavior for the good of the Australian community. We are reaffirming now that our expectations have climbed and resetting what clients can expect of us. And practically speaking, this means that tax professionals and their clients can expect to see us acting earlier than we have been. We know that preventing debt is the best way for businesses to stay on track, and we have seen that leaving debt unchecked and unmanaged for prolonged periods rarely improves future viability of a business. We have a role to play to protect the taxpayers from accumulating debt. That becomes a burden sometimes for the rest of their life. And may impact their family home and those who pay late or do not pay and do not proactively engage will have interest and penalties apply. And we do not want clients to rely on remissions, and we will consider them only in very limited circumstances. But clients who make a choice to contact us early will be best placed to discuss options that are available in early means before missing the due date, not after missing the due date. Certainly not after the ATO has had to chase them. You know, at that stage we would have very limited room for concessions. The taxpayers that are contacting us can expect a conversation about making payment in full. So if we will assess if they have the capacity and we will encourage them to make the payments in full. But if they need a payment plan, our approach will be that it is one that is in the shortest possible time frame and really an ideal payment plan would be one that gets them back to square before their next payment obligation. Like I said before, if there is an inability to do that, that is the time for them to consider their viability in their financial status and position and they should seek advice and that is what we would recommend to those businesses. I do want to make a point about superannuation as well. That is a growing concern for us. It has grown over the pandemic from less than $1 billion to now over $2 billion, and we do review every complaint of unpaid super. We monitor payments to ensure that employees receive the correct and timely amount of super, but we will continue to apply a full range of firmer actions, including garnishee, The Direction to Pay, Director Penalty notices, the disclosure of business tax debt and prosecution actions to ensure payment of super. And we will continue to detect if employers are taking advantage and not paying the relevant entitlements. This is a key concern for us and a key area of focus that we'll continue to look into.

Robyn Jacobson

Back in yourspeech at the tax summit, you mentioned the range of firmer actions, including director penalty notices, DPNs, disclosure of business tax debts and insolvency, and you've just mentioned those again now together with garnishee notices. Would you tell us a bit more about when the ATO is likely to apply these firmer actions?

Vivek Chaudhary

Sure. So over the past 12 months we've started to use more of the firmer and stronger actions, but they are for those who are choosing not to engage with the ATO. And some of these stronger actions are director penalty notices and disclosure business tax debts, to credit reporting bureaus and the potential legal actions to either wind up a company or bankrupt an individual. There is over $5 billion owed by clients who currently meet the criteria for disclosure of business tax and the signs posts are that this is likely to grow. And what we are seeing is that the disclosing action, it does provide strong incentive for the engagement with the ATO, either when we intend to disclose notice, we see lots of businesses that engage, but then some engage even after they have been disclosed. Since July 2022, over 24,000 director penalty notices have been issued and these are in relation to about 18,000 companies. In last financial year we issued 19,000 intent to disclose notices and nearly one in three clients had engaged with us in response to that entered a payment plan or made payments in full. I think 2000 clients paid their debts in full, that was nearly half a billion dollars that was put back into the system for critical services that was otherwise not being paid. We do know that not all businesses are viable in having a tax or super debt is often a symptom of insolvency. And you would have seen there’s a lot of media currently that insolvencies are on the rise after a slowdown during the pandemic. We are a party to many insolvencies and we are often a major creditor. Generally, corporate insolvency action is initiated by the directors themselves or by other commercial entities. ATO initiate one in six insolvencies. So we’re not a major initiator of insolvencies. In terms of timing, I think more businesses who remain disengaged can expect these actions. And like I said before, we are also looking to bring forward the timing of these. So, for example, employers who are choosing to not pay their activity statement debt they will see quicker action that includes disclosure and if their debts are greater than $100,000, that disclosure of business tax debt will be quite timely in those cases. Finally, I would also say that the disclosure of business tax has been a reasonably new provision in the suite of actions that the ATO has and we've completed now the full system implementation of all the letters that have to be issued and the exchange of information with the credit bureaus. And that means we will be clearing up a backlog of many businesses that are already eligible or were eligible for some time before the system implementation. We have now written to over 15,000 of these businesses and in the month of October, if they still remain disengaged, that we're likely to disclose them.

Robyn Jacobson

The winding ups that you take through the Federal court, what's the trend you're seeing here?

Vivek Chaudhary

Normally we wind up pre-COVID about 1000 companies in a year roughly. During COVID that had significantly reduced due to our approach in the last six months that's about 500. So, we are sort of back to our pre pandemic levels and in the most recent month of July, we had about 100 wind ups initiated. So that kind of gives you a sense for we're back to normal levels and these are the levels that we expect to maintain. In some months they may go up, they may come down in another. But overall, go back to the same levels.

Robyn Jacobson

You’ve made some recent comments about the need for a collaborative approach to shifting the payment culture of predominantly the business community, but also individuals. So why do you see tax professional's contributing to this change in culture and the role that they play in terms of fitting this alongside the other pressures of their roles and there are many of them out there, including ongoing labor shortages?

Vivek Chaudhary

So we are very conscious and aware of the pressures everywhere in business as well as businesses that are professionals. And our aim in shifting our approach is to position businesses to avoid falling behind in the first place and position them to better be able to recover if they have fallen behind. As trusted advisers for their clients, tax professionals can help their clients avoid bill shock by setting up good habits and see them put aside the money that they have collected or withheld from others, so they can pay it when it is due. And tax professionals can reinforce that their clients are only the temporary custodians of GST, PAYGW and super guarantee, it is not theirs. Professionals also know the time when a business is struggling on the brink of insolvency or perhaps needs to be told the time has come to exit gracefully. Having these conversations at the right time rather than clients waiting for us to take action will ensure that they are best placed to manage their bills, avoid actions that may have more lasting effect. We also encourage professionals that their clients and to their clients that they talk to each other. And particularly if someone is experiencing financial difficulties, they need to contact us as soon as possible so we can provide them with support. And we do appreciate that tax professionals are busy and that helping their clients with debts will take more time. And to save some of the professionals time, we will increase our self-serve payment plan threshold in November this year from $100,000 to $200,000. And what that means is that more clients can be put through that self-serve online option. But I must emphasize that this is for those who have capacity to pay in full, should still pay in full rather than enter a payment plan. We have also heard from tax professionals the feedback that our calls can sometimes be untimely. We don't allow people to prepare for a conversation and that results in a game of telephone tag. And what we are making now is appropriate adjustments and have recently implemented a change to streamline our lodgment and payment interactions. When we are unsuccessful in a phone conversation, we will send a practice mail through the online services for agents platform and that will allow the agents to contact us back at a time when they are prepared to talk about the matter and have their client's instructions on hand. So we hope that some of these things will help reduce the pressure on the tax professionals. But we do think that it is a collective role for everyone to influence what is best for the broader system.

Robyn Jacobson

You mentioned the increase this November of the self-serve payment plan threshold to $200,000. That's a permanent increase in that threshold? It's not a temporary increase?

Vivek Chaudhary

Our intention is to keep it at 200,000. That said, I cannot predict the future. It may be more suitable in the future to increase it. It may be suitable to reduce it. We don't know that today, but based on what we are seeing and the value of money itself continues to change. So the $100,000 threshold was set up quite some time ago. We do think that the $200,000 is an appropriate setting for now, but yeah, we do not have an intention for it to just be temporary. So that should remain in place.

Robyn Jacobson

So what is your final message or key takeaway for our listeners today, for those who have tax debts, it can be an incredibly challenging and difficult time, very stressful but there’s obviously ways that they and tax professionals can work with the ATO. So what's your takeaway for those who are listening?

Vivek Chaudhary

Thanks, Robyn. My key takeaway is it is essential that we shift the payment culture for the good of the Australian community. Australia needs all taxpayers to pay the right amount of tax in full by the due date. It's also crucial that employers withhold and pay their employees correct pay as you go withholding and super. My final message is that tax professionals, as their trusted advisor help their clients understand that it's in their best interest to pay on time and engage with the ATO rather than waiting or having the ATO reach out to engage with them. And I do want to acknowledge the role that the Tax Institute plays. And Robyn, you fearlessly advocate for your members and your sector, but also I think really contribute in a very positive way to the overall system operating at help and building it better for the future. So I do want to take the opportunity to acknowledge that and thank you for having me here today in your podcast.

Robyn Jacobson

Thank you, Vivek and very much appreciate on behalf of the Tax Institute your comments and your feedback. We obviously represent the tax profession and our members, but we're also so dedicated to improving the tax system overall and whether that's tax reform and the development of policy on the Treasury in the government side of things, or whether it's tax administration in working with you and your colleagues. So thank you. We all want a better system that serves all of Australians. So I really appreciate your time today. It was very interesting to hear your address at the tax summit and for those that want to go back and look at formally your address, it is available on the ATO website in the media section. But thank you again, Vivek.

Vivek Chaudhary

Thank you very much.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Vivek Chaudhary, Deputy Commissioner Lodge and Pay at the Australian Taxation Office. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of The Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.com.au. We look forward to you joining us next time.

Improving the administration and integrity of the tax system for all taxpayers

Release date: 27 October 2023

If you’ve ever wondered who conducts independent tax dispute investigations for taxpayers and is committed to ensuring the tax system is administered fairly, equitably and transparently, you’ll want to hear this!

In this special episode of TaxVibe, recorded in person at The Tax Summit 2023, Robyn chats with Karen Payne, Inspector-General of Taxation and Taxation Ombudsman, about the office and role of the IGTO. This is a rare opportunity to hear about the work their office undertakes to support the tax profession and taxpayers.

They discuss current reviews and investigations, how the IGTO works to improve the administration and integrity of the tax system, and their important role in ensuring accountability of ATO decisions and actions.

Host: Robyn Jacobson, CTA

Guest: Karen Payne, Inspector-General of Taxation and Taxation Ombudsman

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax here at The Tax Institute. We do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you might not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Karen Payne, Inspector General of Taxation, the Taxation Ombudsman. Karen was appointed the Inspector-General of Taxation and Taxation Ombudsman and commenced a five year tenure on the 6th of May 2019. She leads the Taxation Ombudsman Complaints Management Service for Taxpayers and Adviser’s and the Inspector General of Taxation is review and public reporting function, both of which are directed at improving the tax administration system for all taxpayers. Karen was previously a member of the Board of Taxation, as well as the inaugural CEO of the Board of Taxation. She was formerly a partner with Minter Ellison, specializing in corporate and international tax mergers and acquisitions and capital raising for various sectors. She brings a wealth of experience and extensive networks to the role of Inspector general, having worked with a range of government and private stakeholders, as well as the legal profession and many industry bodies. Karen is a solicitor admitted in New South Wales. A chartered tax advisor with the Tax Institute. A chartered accountant and a member of the Australian Institute of Company Directors. Karen, welcome to TaxVibe

Karen Payne

Thank you.

Robyn Jacobson

Karen, can you explain the role of the Office of the Inspector General of Taxation and Taxation Ombudsman? Because there are two different roles here. What's the purpose of each?

Karen Payne

Well, the Inspector General of Taxation was set up in 2003 and it's fundamental to address the secrecy and confidentiality provisions in the tax rules. So we were set up with powers to, if you like, lift the secrecy veil to go and take a look and provide independent assurance back on back to Parliament and all the community and all the minister on what should be improved. In 2015 we inherited the Taxation Ombudsman role and that is a very different role where we're now investigating on behalf of individual complainants. And by individuals I mean not just people with heartbeats but entities as well, but anyone who's a taxpayer who wants to complain about the way in which their affairs are being administered. So that is a role we've been providing since 2015. And we can also sorry, I should mention, even though more than 90% of our complaints are about the Tax Office, we do investigate complaints by practitioners about the way in which the Tax Practitioner Board has dealt with them as a practitioner.

Robyn Jacobson

Essentially, the role of the Taxation Ombudsman is to deal with an individual taxpayer complaint. When I say individual, it could be any type of taxpayer that initially made a human being taxpayer create a complaint of an individual taxpayer who has a situation. Whereas the role of the Inspector General of taxation is more about understanding the processes. And if there are systemic problems within the way the system is being administered. But might there be occasions where in looking at a taxpayer's matter, you realize that they're not alone, they're not Robinson Crusoe, if you like. There in fact repeated instances of that occurring, and somehow this has morphed into a systemic issue which might indeed lead to an investigation.

Karen Payne

I think that's exactly right. And I think the key thing is that these two roles are very complementary. So we see stuff happening in our review space in death and taxes, for example, and that then leads to people acknowledging or recognizing they can lodge complaints with us about the way the ATO is administering deceased estates. But the the genesis for the Death and Taxes review was the complaints we were in fact receiving on deceased estates. Similarly, we saw through the job keeper, job maker processes a number of complainants coming to us and we had investigated those individual complaints, but collectively we thought actually this is something we should report on publicly So people are aware of and this has been the improvement we've identified in administration for the Tax Office to take on without needing to come and lodge complaints with us. So the two processes, the two investigation models absolutely are complementary and one informs the other.

Robyn Jacobson

Could you briefly explain, Karen, the scope of the powers? So what are you able to do? What can you ask for? What do you have the right to demand of the ATO and what do they have to comply with?

Karen Payne

I'm going to start with the very extreme view. Right. We have powers of compulsion. We can go and conduct a Citibank raid on the Tax Office if we need to. So we have very, you know, compelling powers to access information if we choose to exercise those powers. Now, I would say that it would be ridiculous for us to exercise those types of powers of compulsion on every occasion. So the more frequent way in which we get access to information is through our ordinary investigation rules. Now, once upon a time when we were the Inspector General of Taxation, we had access to information as a right. When we inherited the Commonwealth Ombudsman, Legislative framework. We now have access according to the rules of the Ombudsman Act, and those rules say we have access to information. If the Commissioner chooses to give us access to that information now whilst practically I'm not suggesting the Commissioner is preventing us from accessing information, if I were to stand back and say what what is independent access? What does an independent investigation look like? Well, for me, it doesn't look like the head of the agency that you're investigating gets to choose whether you do or don't get access to the information. So if I you know, if I could have a wish for Christmas, it would be that we got actually unfettered access to information. Because even though I'm not suggesting we don't get the information that we request, sometimes it's a challenge. I think the fact of having an unfettered statutory right to access information changes the way people see that they should engage with you. And you can see some of those recommendations in the robodebt Roll Commission report, where the commissioner has suggested that there should be an obligation to assist the agency through an investigation. The recommendation is not that it's just imposed on the head of the agency, but on all officials that work in that agency. So that's one of the recommendations in the Royal Commission that we keenly watching.

Robyn Jacobson

You've been delivering sessions for the duration of your tenure to date. And one of the questions you ask in your sessions is about the importance of integrity and the awareness of your office, both that of the inspector general and that of the ombudsman. What are you finding in terms of awareness and is there more that your office and more generally the profession can do to understand what it is you do?

Karen Payne

I think absolutely there is a need for greater awareness of our office. We did a review into how effective is the ATO in advising taxpayers of their rights to appeal, complain and dispute challenged decisions. And one of the recommendations out of that review investigation was that actually the Tax Office should proactively tell people how to lodge a complaint with them with the tax Office and with us as the Taxation Ombudsman. You'll see in our charter on page three, the Tax Office have now put that into our charter, but that's only recently come out. It came out in June and they've made clear in our charter that your position, your rights as a taxpayer are not affected, just because you choose to lodge a complaint either with the Tax office or with ourselves. That's very important because fear of reprisal action, I think, is what sometimes holds people back from lodging complaints. Anyway, it is now formally in our charter that you can lodge a complaint with us as the Ombudsman, but ideally in the first instance you try and resolve your complaint with the tax office. It's also the case that the Tax Office should be putting that information on decision correspondence going to taxpayers. They should be reminding everybody that if you disagree with the decision or you wish to challenge the decision, here are your avenues and one of those avenues at the at the very least should be recognizing the tax ombudsman. But I absolutely acknowledge there's more for us to do. I am always surprised at how many people, when I put up my polling questions at conferences will say either they don't know that we existed or if they're aware of our existence, they don't know what we do know. I'm should also add the Senate Economics Legislation Committee did a review three months into my term. They did a review of the performance of the Inspector General of Taxation and one of their recommendations. They make 16 recommendations. All good, in my opinion. But one of their recommendations was that the government should fund a program to promote the fact that there is in fact a taxation ombudsman and service.

Robyn Jacobson

To the community.

Karen Payne

Correct, yeah, I didn’t advocate for that, the committee came up with that idea themselves, which would be.

Robyn Jacobson

But you're perfectly happy

Karen Payne

Happy, but I'd be very happy to read that to receive additional promotion because as I said, I'm speaking to sophisticated tax literate audiences and they don't know that we exist. Well, how is the rest of the community going to be identifying that we exist?

Robyn Jacobson

Karen, do you have any observations on the evolution of your role from its genesis to now and from now into the future?

Karen Payne

Yeah, I think we are evolving as an agency in terms of where our core focus is on. I think it's always still the case and I think it always will be that we need to make sure we're engaging with stakeholders to understand what are their concerns. That's kind of fundamental and core to what we do. So I don't see that changing. And whether that's to inform our review investigations or to just help, you know, promoting the fact that there's a tax ombudsman in the system. But on the Taxation Ombudsman side, I can see that that will evolve materially and significantly. And in particular, because we're now seeing ourselves investigating more complex and highly complex disputes where, you know, we are looking to see if we can get outcomes for people where they've been recognizing they've been through three or four decision processes internally at the Tax Office as well as a complaint process sometimes as well as, you know, objection and or appeal processes. And then they come to us. So you know, we're at the end of the complaint chain. And so by the time they come to us, they're very frustrated, They're sometimes angry, they're very confused. You know, they just looking for answers. They think something's unfair. We're finding that we are more and more engaging in investigations of very complex dispute issues. And that's a big drain on our resources and our time. But the rewards, even though we can't compel the Tax Office to do anything, I think the community does respect the fact of our independence when we've gone through the process, even if we sometimes come back to them and say, look, we've taken a look at what the tax officer have done here, we would have done this differently, but we can't compel them to do anything. And, you know, here is our report. So more and more complex investigations and trying to find better ways to interact with the community so they understand where their investigation process is at. That's where I kind of see the next stage in our evolution.

Robyn Jacobson

And I think it's fair to say that your office is not about that. I use the word in a non-criminal sense prosecuting a government agency or otherwise acting in the interests of the taxpayer. It's about what's good for the system, particularly with your inspector General Hatchell, and trying to improve the efficiency and the way the tax system is administered. Now, there are times the taxpayers, of course, can play a greater role in the responsibilities, particularly we look in the fraud space of making sure that everything is done properly according to their obligations under the law, but equally, the administrator has enormous responsibilities to administer the law properly. So in terms of your role, I always see you as a bit of a guardian or a custodian of the system. You're always trying to improve the way that works.

Karen Payne

That's right. So we're not a taxpayer advocate service like they have in the US. We're there to investigate independently, and that means we're not taking the taxpayer's side or the tax office's side. We're there to report or mediate, if you like, exactly what we find and what we think is the fair outcome as an independent observer. So I don't think that's always understood. And sometimes the complaints that we get back after we finish an investigation is, you know, oh, well, you weren't able to change the tax officer's view. You couldn't get me a different outcome. What got your decision Override the Tax Office decision? It's an ombudsman model. We we don't.

Robyn Jacobson

You don't? The Federal Court That's right.

Karen Payne

We don't pretend to be substituting for the Tax Office's decision. It's their decision. It's their administration. We like an independent commentator on whether or not that administration is fair and consistent with law and the Tax Office's own guidance.

Robyn Jacobson

Hey, Karen, I'd like to look now at some of your previous investigations. There are many of them, and anyone who wants to look at those can jump onto the website, which is i g t decaf dot aew. So some of the key investigations have undertaken. You've looked at the way the ATO administers and manages objections and there's an interim report available for that. You've looked at how the ATO deals with deceased estates. You've examined the future of the tax profession. You've looked at how the ATO handles and manages the use of garnishee notices. And even in 2014 there was a report that circled back to some of the previous investigations to say, Well, how have these reports gone and the recommendations that we put forward? Is that still the case? And if not, what is the process now for looking at whether prior recommendations are implemented?

Karen Payne

So we did actually change the way we're going to go back and if you like, do a post implementation review, recognizing we have limited resources, we thought another approach that might have suitable integrity was to rely upon the ATO's own audit and risk committee process. So since 2014, we don't do post implementation reviews to see how things have been progressed and implemented. But instead what we do is we write and confirm at various regular intervals with the Audit risk committee that they're seeing sufficient evidence of the implementation by the Tax Office of those recommendations. It's also fair to say that because we do still engage actively with stakeholders, if things that have been promised to be implemented and are not actually either progressing fast enough or they're not being implemented in the way that it was once anticipated they would be, we get stake all the feedback on that and we, you know, we go and make independent inquiries or individual inquiries to say, hey, what's happening there? So deceased estates is a classic. There are still a lot of complaints that we get around the ATO's administration of deceased estates, and I still get lots of stakeholders coming to me saying, Hey, this was supposed to happen and it hasn't and where is it? And we're, you know, we do chase those things.

Robyn Jacobson

Have there been any positive changes as a result of your report, an investigation into the handling of deceased estates?

Karen Payne

Look, there's been a recognition that the representative that the Tax Office can engage with is not always going to have probate. And there has also been a recognition within the tax office that the threshold before, which, you know, they can deal with somebody, has been increased to allow more people to engage with the Tax office, even though they don't meet those formal legal, personal, representative requirements.

Robyn Jacobson

Because the law is very strict around, of course, who is authorized to act on behalf of the taxpayer or when your taxpayer has passed away, then they, of course, can't authorize anybody. And we often see the example of the executor and administrators a slightly different situation, because it tends to be, of course, that more court appointed. But an executor wants to go to the accountant who looked after the deceased person's affairs and said, Well, why can't you just do this? Why can't you just lodge the outstanding return and why can't you make this happen? And there's all this administrative red tape around what they're able to do and what they're authorized to do. So they've got to be some practical cut through as well.

Karen Payne

Exactly. And there was actually a report that was released earlier this year. It's not in the tax base, but it's on the operation of my golf where they acknowledge that, you know, not everyone who should or needs a myGov account is going to be computer literate. So the suggestion I think it was some folks report the suggestion was that you should have some kind of a nominee arrangement that is acceptable in relation to my job rather than people basically defrauding their relatives, pretending to be them. You should just set up a nominee account or a nominee arrangement and that should be permissible. I'm not sure where that's all got to, but I guess it's the kind of same theme where you have a number of well, in the case of deceased person, they're dead, right? They can't they can't engage with the tax office. But somebody who is acting on their behalf and or who has responsibilities to wind up their estate, even if they don't need probate, why can't they be recognized for the purposes of engaging the tax office.

Robyn Jacobson

And just to play devil's advocate, in this current climate, an environment of identity theft and cybersecurity issues and even elder abuse, I can see why there would need to be a great control series of controls over who would be authorized to do that, because you certainly don't want to pave the way for people who are not authorized, who claim to be authorized getting access to that type of information.

Karen Payne

I totally agree. But you also want it to be user-friendly, so you try to keep in balance these two competing objectives sometimes. But provided you've got the right checks and balances in the system, it does still seem appropriate that you can have lines of communication that are user-friendly and that are accessible.

Robyn Jacobson

So turning now to your current investigations, there are certainly three that are currently sitting on your website, and this has to do with the exercise of the commissioner's remedial power. Secondly, the exercise of the commissioner's general powers of administration. And thirdly, the ATO's administration and management of objections that you've been working on these for many months. In fact, I've got to suggest over 12 months in some cases. Where are these actions and when can we expect for those to be publicly released? And what do you hope will come out of these three reviews?

Karen Payne

So the report that looks into the commissioner's administration of his general powers of administration is currently with the minister. That report makes recommendations for both the Tax Office and makes recommendations for legislative change because it includes recommendations for legislative change. It has to be I don't get to release that publicly. It has to be released by the minister, but I've provided the report to the Minister for his consideration and he may or may not choose to respond to the recommendation at the time he releases it, but there is a statutory obligation to release it within a particular time frame. I think it's 25 House of Representatives sitting day. So that should be out before the end of October. Similarly, the remedial power report is largely written and if not currently with the Tax Office soon to be with the tax Office. So again, I would say that that should be released to the public sometime before the end of October. And importantly for me, because I see both of these reports as dealing with to some extent a similar problem. I wanted to do these two reviews together, but I was persuaded that we should separate them. So anyway, they'll both be in the market largely around similar times. The objective report. We're still working through a raft of information that the Tax Office has given back to us. The phase one process was to put out the will. This is the data, and then phase two is then to go and interrogate for some of the concerns that people were raising, whether it's around the data. So that's probably not going to come out. I haven't seen a draft of that report. I don't believe that will be out this year, but in the meantime, we've released other reports and we're doing other self-initiated or unemotional reviews. So we recently released a report on the ATO's administration of the Small Business Litigation Funding program, which the funding from the Tax Office came to an end on the 30th of June this year. But I believe the Tax Office's intention is that it will just roll into test case funding. We've made a number of recommendations in that report, even though it wasn't a review. We did it on the back of having done two very detailed dispute investigations where we engaged a cost assessor who's, you know, clearly experienced in the ways of the Federal Court to come to look at what the process was for those funding arrangements. And based on their report back to us, we've then made, if you like, recommendations on on what we would like to see as improvements to the funding arrangement, because fundamentally people were not clear upfront on what costs would or would not be compensated. And if you're about to go into litigation, I think you need to be very clear on is how much of these costs are you funding yourself and how much is being funded. Because the Tax Office has chosen to brief somebody externally. And then we've got a number of other own motion investigations that we're either currently scoping or will we'll get off the ground soon. One concerns the way in which the ATO administer a debt release on grounds of serious hardship, and that was a follow on from an earlier review that we did in relation to collectible but undisputed debts. And then we've got another review, a self, an own motion review where we're looking at the concept of an approved four. Now you might say, well, that's a pretty specific thing to be looking at, but it has big implications on whether or not the commissioner has a discretion to give you more time to lodge an approved form. So we're kind of we think it's important to take a deep dive on that.

Robyn Jacobson

There's always a lot that you're managing, but with all of that going on, what's ahead in the next 6 to 12 months? Say what's on your radar and how do you see your role evolving even further to bring fairness to the system?

Karen Payne

So there's a lot on my radar. There's a lot of things I'd like to be doing. I have to manage resources and do, you know, do the things that we can do. And for that reason, I have to prioritize. So the one thing I would say is we keep a register of potential review investigations on our website. I wouldn't mind if people took a look at that and maybe feedback through the Tax Institute. You know what are your top three issues? If you have a look at that list, or maybe there's something that is on your top three that's not on the list that you want to feedback to us. And that way that helps us to prioritize what we should be looking at in terms of the dispute investigations. The key thing we're looking to do in the next 6 to 12 months is to implement a new case management system. That system, I think, will be game changing for us because it's going to have a protected portal that allows a complainant to see where our investigation on their complaint is at. And that way they'll feel like there's more control from their end in terms of understanding, you know, is it the ATO that's delaying the in the conclusion of their investigation? Is it the fact that we requested information from the Tax Office and we haven't got it, or is it in fact the complainants delay because we've asked them to give us something to, to progress their investigation and we're waiting on that so we can progress it. I think that aspect of our complaint Investigation service will help us a lot in terms of helping the community understand where their investigation is at. And take a if I'm frank, take a lot of the frustration run out of the process because sometimes it does feel like a bit of a black box. And I totally get that.

Robyn Jacobson

Considered also improving the relationship or communication because essentially what you're describing here with that system upgrade is improve transparency and visibility. So instead of something being submitted through a website or ad, that's generally how complainants will do so. But they might also make a phone call that might save some of those unnecessary calls, which the more occasions your staff are dealing with phone calls to say, where is this at, the less time they have to spend on actually investigating the particular issue. But certainly having that transparency will be a really good thing to taxpayers.

Karen Payne

Yeah, So I agree. I think it's all about improving the transparency of our investigation, but improving the accountability within our investigation by for those that could objectives.

Robyn Jacobson

And I assume there'll be some communications about that next year when all that rolls out and improved experience for the complainants.

Karen Payne

We hope so. Absolutely.

Robyn Jacobson

Karen, thank you so much for your time. It's been great chatting with you.

Karen Payne

Cheers.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Karen Payne, Inspector General of Taxation and Taxation Ombudsman, to keep up to date with Tax five. Be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of the Tax Institute. Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.ocm.au. We look forward to joining us next time.

The Superannuation landscape: an ATO perspective

Release date: 6 October 2023

In this episode of TaxVibe, Robyn chats with Emma Rosenzweig, Deputy Commissioner, Superannuation & Employer Obligations, ATO, about the current Superannuation and FBT environment.

They cover the top issues currently facing employers, what happens if employers get it wrong, how the ATO is supporting employers and employees and why a ute is not a magical purchase that is automatically exempt from FBT.

Host: Robyn Jacobson, CTA

Guest: Emma Rosenzweig, Deputy Commissioner Superannuation and Employer Obligations, ATO

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate of The Tax Institute and your host of today's podcast. I'll be chatting with some of the tax profession's great thought leaders who will take valuable and practical insights you may not hear every day. We hope you enjoyed this episode of TaxVibe.

I'm joined by Emma Rosenzweig, Deputy Commissioner Superannuation and employer obligations at the Australian Taxation Office. Emma is responsible for ensuring a complex ecosystem of employers, workers and retirees and ensuring that superannuation funds operate efficiently. Support willing participant nation and safeguards entitlements has worked for the ATO for 24 years in a range of roles across nearly all areas of the organisation. Emma holds a Bachelor of Laws, a Bachelor of Commerce and a masters of tax. Emma, you last spoke with us just over a year ago now. So welcome back to TaxVibe.

Emma Rosenzweig

Thank you, Robyn. Thanks for having me.

Robyn Jacobson

Look, it's really good to check in with you on a regular basis to see what's happening in your ecosystem. And it's a big one when you're looking at the employer obligations as well as the entire superannuation system, both large funds and small. So there's always a lot we can talk about. But as usual, that's a good place to start with the superannuation guarantee regime. Now a few things are going on here, but let's just set the scene. We've had 31 years now of the regime and yet it continues to be a challenge both in the area of law, the way that it is interpreted, the way that it's applied and of course dealing with it in practice by both employers and employees. But there is still a really significant gap and that is basically the difference between what you should be receiving by way of employer contributions through the superannuation system and what is being paid. So what's the extent of the gap and what's the ATO doing about it?

Emma Rosenzweig

That's right, Robyn. So people would be familiar. We measured tax gaps across a range of the texts that we administer and so the super guarantee gap does the same thing as you describes. Our last measurement of the gap puts it at 4.9% or $3.4 billion, and that is the net gap. So after our intervention, that compliance intervention, so, you know, that is still a very big number. A small percentage in a very big system still relates to a very big number of gap. It does mean that a large number of employers are doing the right thing, though, and I think it's important not to lose sight of that. It's easy to talk about the problems, but that that really does say that 95% of the contributions that should be going into the system are going in, which is actually really, really good. So we should recognize that most employers are doing the right thing there. But it is important that we tackle those employers that are not doing the right thing. And I guess for the ATO Super Guarantee is one of those things where we do probably have a tolerance for people who are not compliant because that is entitled minutes that we collect on behalf of employees. So some of the things we take it very seriously. We obviously action any of the complaints that we get from employees about unpaid super. I've got the figures for the 21/22 year. We got 19 and a half thousand complaints from employees in that year and actioned all of those complaints. We also initiate our own cases based off data that we have, and we also get voluntary disclosures from employers who do undertake things like payroll audit or they have an employee come to them directly and they realize that they've made a mistake. And so we do have employers come to us voluntarily to lodge super guarantee charge statements. So we do try to be very active in this space. But I really predominant approach is to try to help employers get it right this time. So we also try to do a lot of communications and messaging. We've got some videos out at the moment having conversations like these. We do a lot of speaking engagements, conferences or direct to employers where we try to help them make sure they understand their obligations and get it right, because that's really the best way for this to work that they get it right the first time and super goes into funds for those workers

Robyn Jacobson

Like so many other parts of the tax system. The ATO relies heavily on data in regular data, not just through single touch payroll, which has been in place for a few years now, depending on whether employees transitioned in early or later on. But of course, you've now got the data coming in from super funds, so there's quite a bit of matching going on. To what extent is this vital to the work that the ATO does?

Emma Rosenzweig

So data is a growing increasingly important part of the work that we do, and we are making some big investments in the way we can bring that data together. We were provided with some additional funding by government in budget to do that as well and to enhance our ability to be much more proactive where employers have made a mistake. So we've been talking for a while to both employers and super funds about the importance of quality of data and the importance of so the data that they were reporting to us is right because we are increasingly bringing those to big datasets to talk to that together to try to identify where an employer has not met their obligations. And one of the things that we are looking to do is for April next year or the end of the first quarter next year, we'll actually be starting to nudge employers who have not met their obligations to that quota. Or five forces will be starting to prompt them and actually write at them, indicate that we're aware. We've identified that there might be a problem. We will obviously make sure those employees get a chance to correct Doctor, if that's incorrect. You know, sometimes that happens, but we will be much more proactive. So at the moment, you know, compliance activities are predominantly driven by employee compliance. And we still take that very seriously. But we really want to get to a position where we are proactively identifying those underpayments much earlier, and we're not reliant on an employee. We don't put employees in a position where they feel that they have to come and complain to us. So data, as you can tell from that, will be increasingly important. And I know you want to ask me about payday Safer in a bit, but if you think about as we work towards payday Safer on 1st July 2026, it's really important that employers start to have those expectations that we will be more proactive and that we will be identifying problems earlier and that we will be acting on it and expecting them to act on it, which we also hope will help employers get back on track. So I think super can be one of those problems where if people get behind, they can bury their head in the sand a little bit and then the problem grows and grows and sometimes gets to a point where they actually can't deal with it. It gets to be a very big liability that they have to be paying off. So we also hope that by acting earlier, we will actually be able to put employees in a position where they can respond faster, hopefully get back on track quicker.

Robyn Jacobson

You’re right Emma, I will be asking you about payday super very shortly, but before we get onto that, it's probably worth reminding our listeners that the rates are continuing to increase at the moment and when I say at the moment, there was some rate increases put through some years ago that go right through until 1st July 2025. So at the moment we're on 11% for this year. Is the SG rate or the charge percentage and it will move to 11 and a half and then finally to 12% of years' time. With all the pressures on businesses at the moment, in fact, more broadly across the entire community with cost of living and rate rises and so on, are you findin that I guess there are two issues in here. One is about the change in the rate and making sure employers are on top of that information so they know when they go into a new income year, they are actually applying the correct rate. And there's the secondary issue that as that rate increases, depending on whether the employee is on a package, which means as the rate goes up, take home pay comes down, or whether it's more a wage plus super, in which case the employer pays that and that becomes very much a financial impost that's increasing on the employer.

Emma Rosenzweig

That's right, Robyn. I think you've described the scenario. We do a lot to try to remind employers about those rate increases at the right time. We don't see that as a big problem, that employers are getting that wrong. So that's great. Obviously, the message is getting out there. I think also many payroll systems actually have it built in and have those automatic updates built in, which also makes it really easy. That is probably one thing that with checking, sometimes employers have overridden those automatic updates or they might have an agreement in place that they've put a different amount in. So it is always worth checking at the beginning of the year that your system has actually updated and has gone to the new amounts. So we don't see it as a really big problem that employers aren't on top of those increased rates. But yes, all those challenges you just noted that that working out the total remuneration package amounts or whether this is in amount on top is something that employers just need to keep on top of.

Robyn Jacobson

Let's turn now to the rising debt. So you've referred a couple of times to employers who sometimes don't pay it and then it becomes a growing problem and sometimes it all becomes too much and they just turn away from the problem but that doesn't make it go away. And I do remember the ATO saying at a conference years ago that, you know, don't ignore us because we don't go away. We're still here. And that debt doesn't disappear and it's not going to magically evaporate just because you don't want to deal with it as an employer. So when you talk us through these, the level of debt now a concern, what is the ATO doing about this? How closely do you work with the Chaudhri and his team at Lodge and Pay? And just on that point, we have separately recorded a podcast with Vivek and we will be releasing that in the next little while. And what sort of action are you taking in respecting employers who don't do the right thing? So it's quite a bit to unpack there.

Emma Rosenzweig

Look there sure is, And look, I was going to say, many of you or many of your listeners might have been at the tech summit and heard Vivek speak personally about the reset approach to our collection activities, which is really critical and super guarantee is a priority for them. As part of that. So if I just paint a bit of a picture, the debts to super guarantee, which is the amounts that we have identified, people go and actually crystallized as a liability, has grown from just under $1,000,000,000 before the pandemic to around $2 billion today. So really increased significantly in a fairly short space of time. The other challenging part of that picture, to paint is that about 87% of that unpaid super guarantee debt is owed by small businesses. And as I said earlier, super is an amount that really is an entitlement to your employees. And these are the people who are working in your business, helping your business grow or thrive or survive perhaps. And so amounts that you're not paying are really directly impacting their futures. So we do take that pretty seriously. And as you can see from that growth, it is something that we are concerned about. I'm sure that we'll talk to you in the other podcast with him about some of the actions he's taking. But certainly we give people plenty of opportunity to engage with us. The best outcome is that they can be in a position to pay those amounts and get on top of their top of their liabilities. But if people can't and if people or people won't engage with those debts, there are steps that we can take. So we have direct penalty notices that we can issue. We can issue directions to pay any fee. And if you Don't comply with the direction to pay. It is a criminal offense. We also wind up businesses and can prosecute people. And another power that we have that we haven't used very much yet. We were given this just before the pandemic. And so it is something that we're thinking about, how we use that we actually now have the power which is an exception to our secrecy provisions, that if you have not met your super obligations, we can actually inform all of the employees that you have of that, not just employees who have complained to us about unpaid super. So obviously that is almost putting people on notice about your behaviour as an employer, because often employees don't pay attention to this, so they might not realize. So that is another power that we have to make sure that the people who are affected by this understand that. So, you know, I think, as I said, those are all almost last resort things we'd like to do. We'd really much prefer to be in a position where we can work with the business and get them back on track, paying their obligations.

Robyn Jacobson

I’d like to ask you about the winding up, and I know over many years we've been conversations around, well, if the ATO proceeds with winding up, then doesn't that eliminate the ability to recover anything? Whereas if the business continues to operate, at least there's a chance of recovering something. How do you respond to that? And also, where does the issue sit as a priority in terms of that is do you see liability in a winding up of the company?

Emma Rosenzweig

So I might start saying I'm not insolvency expert, so Super guarantee does have priority in a winding up. And as I've said a couple of times now, that is because it is an entitlement that goes to the workers. So that's important to realize. And look, getting that balance right between is a business in a position to be able to trade out of the difficulties or not. It is a real judgment call that our staff have to make And it is a hard one tonight. I would say if you're a business who is having that conversation with us, the more engaged you can be in that and helping us understand why, on what basis you think you can actually try it out of that, the better informed stuff to then make a judgment about whether I agree with you not. I think people also need to think about not only do you have to be in a position to recover the liabilities that you currently have, but you have to do that on top of then meeting your ongoing obligations as they do. So there's no point cutting up past liabilities if you're actually just digging a bigger hole next door with new ones. So all of those things are relevant. I think in the case of business with employees who are not meeting the super obligations we have, and I certainly have a lower tolerance for businesses who may be just digging a bigger and bigger hole and getting themselves into more and more trouble. And so that judgment call about the reality of cannabis and actually try tried out of this problem is probably one we have a lower tolerance for when there is belt simply because you know I've said I'm like a broken record today but it is the employee's money. And in a sense we have to really think about how long we let that business go on becoming more and more indebted to their workers before we take any action. So, look, I think getting that balance right, it's not a science, it's a bit of an art, but the more informed out stuff be, the better position you can put them in to understand your thoughts on it.On why you think you can trade out the better decision making might

Robyn Jacobson

We think about superannuation. I am not suggesting that it is any more or less or greater importance than paying salaries and wages. But if I don't pay you a dollar today as an employer, you're missing out on that dollar. Let's assume that some after tax that when we're talking superannuation, a dollar today that's not sitting in the superannuation fund and isn't invested for what could be 40 years, we're talking an enormous compounding benefit that's not available to the employee either.

Emma Rosenzweig

That's exactly right, Robin. So and I think one of the challenges with Super is that often employees, particularly young employees, might be in this job. It's not something that they're necessarily thinking about and it's not as easily identified to them if it's not being paid. So if you're not getting salary wages and you can't go out on Saturday night, you might have been paid. That's really obvious. If you haven't been paid to super, it's not something that particularly young people are really checking. So I think some businesses think it's easy to get away with it because it's one of the last things that people might identify that they haven't paid and I guess this goes back to the point we were talking about, about our use of data. We really want to be in a position where we put all the data that we've got in the system to work really hard so that we can identify when that happens. And those young people go out on Saturday night and know that we we are looking after it for them.

Robyn Jacobson

There's also the power imbalance that when you've got a young employee, they might find it incredibly challenging. And I get why to take on their employer and challenge them on the fact that maybe super's not being paid for fear of losing their job or for it to have an effect on the way that responsibilities are allocated to them in the workplace or their relationships with their colleagues or their employer. So it becomes really difficult from a workplace perspective too.

Emma Rosenzweig

That is true. That is that is very true. It is interesting. We are saying, you know, we're in a tight labour market at the moment and we're actually seeing an increase in employee notifications coming to us. So that's where employees come and complain about unpaid super. And we are seeing more and more employees complain while they're still employed then previously used to be much more common for people to wait till they had left a workplace to complain. You know, I've not done any scientific analysis to prove that that is related to the tight labour market, but it is a really interesting thing to observe that some people seem to they might also be students, that there's a lot more conversation about super at the moment. And so that encourages people to pay a bit more attention. But we are seeing a lot more people come forward and complain at the moment.

Robyn Jacobson

And if nothing else, it shows there's an awareness of that mechanism to be able to notify the ATO. So that's good.

Emma Rosenzweig

Yes, that's right.

Robyn Jacobson

Okay, Payday Super. Let's chat about this. So it's an announcement that was made in this year's federal budget. It is due to commence 1st July 2026, which sounds like a long time away. But having already been involved on behalf of the Tax Institute at some of the target of consultation, that's taken place, I've got an insight as to just how much work is involved, and we're going to need every minute between now and then to be able to design the framework, get the policy implemented. And of course that needs to pass through Parliament. And then of course the ATO needs to turn its mind to the rolling out of this in the awareness campaign and so on. So broadly, can you tell us what Payday Super is all about, What's going to change and for both employers and employees and so many other stakeholders in this, for those two cohorts, what does it mean for them?

Emma Rosenzweig

That's right, Robyn. It's it's quite an exciting reform that the Government has announced. So I'll probably need to qualify this by saying it is in announcements and it's not law yet and there is still work to do to come back to budget in next year to consider the actual detail of the policy. But the announcement was that employers will be expected to pay their super at the same time they pay salaries and wages. And I guess we've been on this journey for a while with the introduction of single touch payroll. We started reporting at event. So rather than once a year getting that reporting from employers that we actually get event based reporting through single touch payroll, this takes the next step to say actually we need event based payments as well of superannuation. So that's that's the basics. So employers just pay more frequently or some employers pay more frequently than they are now because we know there's already a large number of employers paying more often than the quarterly minimum obligation at the moment. As you said, though, there's lots of parts of the system now that need to actually operate to make this work. So employers are reliant on the software providers to report to us, but also to automate these payments. So we know that digital service providers are going to need to update their systems to do this. There are clearinghouses that offer services to employers. They're going to have to be able to accept these super funds who report regularly to us on contributions. And so they're going to have to make changes to allow for this. And one of the other potentially slightly overlooked, except perhaps by super nerds, elements of the government's announcement was the fact that they will be made to be changes to the super guarantee charge regime as part of this in order to really could temporize those rules about what happens if an employer doesn't meet their obligations. So that is a huge job, but also a really great opportunity to be able to tackle some of the issues that we know employers struggle with at the moment. We know some of the rules are very inflexible and it's partly because they were designed a very long time ago. So very different operating environment than we're in now with prior to choice, prior to a quarterly regime, even never mind a pay day regime. And so it's a really good opportunity to think about what what is the right mechanism to have where employers do not meet their obligations and how do we have the right consequences in place to tackle those problems. So really exciting opportunity and I'm really looking forward to it. I know that we've got a very diverse group of stakeholders in the community as well who will really work with us to help get this right.

Robyn Jacobson

I see it as a golden opportunity to modernize these rules and they were, of course, the back in the early nineties. So history we've had since 1992. Back in those days, we didn't have quarterly payments. That only started in 2003. We had payments made by check. We certainly didn't have a hefty we didn't have the clearing houses, we didn't have stapled super, we didn't have choice of super as you say. And we've ended up all these years later, over 30 years with a system that you describe it as inflexible. I'm going to go a step further and call it draconian because when you've got employers who are treated exactly the same way, regardless of whether they never pay the super for their staff or they pay at one day late, that happened not to tell the ratio through a formal history statement and paying the charge. And that's where it's unfair because it shouldn't be the same penalty regardless of the level of culpability. Also, the fact that the nominal interest continues ticking on whether or not you've paid the amount when that was actually designed to reimburse the fund for the lost earnings, for the contribution having not been made up when it was supposed to. So if you paid the contribution a month late, but you still do till the 80, So that interest keeps ticking and in my view it becomes effectively a double penalty because we've already got the part seven penalty for not notifying the ATO when at a policy level you've also got this interest that keeps on ticking. So that's nothing the ATO is able to exercise discretion on. There is no flexibility for the commissioner as we well know. So that's why I call it a golden opportunity because I think this is a chance to bring these rules into a modern environment, into the 21st century, where we can acknowledge the digital tools we've now gotten, the technologies we're not paying by check, but as you say, to have a quarterly charge when you're going to be potentially paying on a weekly or a fortnightly payroll basis just doesn't work. And that's why it does need to be altered and refined and made much more flexible to cope with a flexible payroll cycle.

Emma Rosenzweig

That's right. And look, we've done what we can in terms of we do have party remit the pot seven penalty. And so I think we've worked with a bunch of people a little while ago to put out a press statement about how we would apply those. And that seems to be working very effectively. And the goal of that is to really think about applying or remitting those penalties in line with the behavior of the employer, whether they're someone who regularly doesn't pay, whether that's someone who one off has made a mistake, we hope. And I think the way our penalties are applying now does genuinely reflect that behavior much better. But I think this is an opportunity really to take all of that feedback about the current consequence rules, the current charge regime, and think about what's the right model to have in an environment of pay discipline, a digital environment and really contemporary it. So I agree, Robyn. I think it's a golden opportunity. I don't want to preempt what that outcome might be, but I think reflecting that the goal of this is to get money into the fund for employees in a timely way. It is really important and I think it is a real opportunity to ensure that employees are getting the right amount of money to ensure that business is can manage their cash flow appropriately, reflecting the fact that those amounts are really entitlements. So they work as is really a great opportunity.

Robyn Jacobson

We shouldn't overlook either the cash flow impact. So it's one thing to change systems and upgrade software systems and technologies and processes, but this will have a real impact for those who are currently paying super on a quarterly basis. The idea is if you're paying smaller amounts more frequently, then you more able to keep on top of those obligations rather than it building up and even potentially falling behind.

Emma Rosenzweig

That's exactly right. You know, the thing is, I gave you before so that 87% of the current debt is held by small businesses and in some cases they are businesses. Very few cases. Their business is willfully not paying. In most of the cases that we see, they are businesses who have struggled to manage their cash flow in a way that lets them meet those obligations. And so I think that's right. There will be a real impact that hopefully we can get on top of the issues earlier and in the small moments.

Robyn Jacobson

Moving to another issue that never goes away and that sort of employee base as contractor from the perspective of looking at how the tax rules deal with this, there's currently a draft ruling 2022 D3, and there is also advice under development with the ATO at the moment and that can be found on the ATO website. This continues to remain a challenge. So do you have any remarks about where we're at with this particular debate? And of course we've had the recent High Court cases and I'm sure there'll be more cases in the pipeline.

Emma Rosenzweig

It has been surprisingly active lately. This issue, you know, it goes for a bit of a lull and then we have had a number of cases. So as you said, we have put out a new draft ruling at 2022 slash 33, which was drafted after those two big high Court cases in gem sick and personnel contracting. It also has we have also put out a practical compliance guideline with it which talks about where we're putting our flags on the dates in terms of employers making decisions about how they treat their workers and where they can expect us to apply our resources to looking at those issues. And I'm really grateful for all people who provided a step back and comments on that. So far they seem to be taking an approach that seems to be practical and realistic for people to be able to comply in a way that might give them a bit more certainty. They asked to draft. We have had a bit of feedback on them, but we also had a recent Federal Court case of James versus the commissioner and we want to make sure that we reflect the considerations in that case in those two cases. So if there are more cases in the pipeline that then it will become at what point do we finalise these and have to update the cases? We're not aware of any other cases at this point, although we have sought as special leave to appeal in the JMC case on one particular element of it. So we are just waiting to hear about whether we'll be granted that special night before we finalize those. There has been a bit of a that has taken a bit longer to finalize them than we initially thought, but we do want to make sure that they genuinely reflect the current state of affairs in this issue. But but it is an interesting and complex issue. We know for a lot of businesses to work through. So we really do highlight that our approach in that case gives some clear guidance about the steps a business can take if they want to have confidence about how they will look at the decisions they've made.

Robyn Jacobson

Neither of us are particularly Fair Work experts that I just also want to mention to our listeners that there is a bill before Parliament that is dealing with proposed changes to the Fair Work Act, and for that reference, it's the Fair Work Legislation Amendments, Closing Loopholes Bill of 2023 and might be good to look to bill once it goes through Parliament, may be early next year and have a chat about what that means from an employer and a superannuation perspective.

Emma Rosenzweig

Yes. So that that Bill does not make any changes to superannuation or tax legislation. And so we're obviously interested observers in how that progresses. It's been referred to a committee who are due to report early next year, but at the moment that Bill does not make any amendments to any of the tax laws. So we don't say it directly affecting the way we administer any of that current legislation.

Robyn Jacobson

Thank you. So to another of your huge portfolio, Fringe benefits tax. Now, we're not in FBT season at the moment, as we all know, but you are still finding that there's a bit of a knowledge gap, and particularly with this tight labour market that you have referred to already, you're saying particular types of behaviours that concern the ATO because there could be some employers not aware that they're offering taxable fringe benefits and therefore could be overlooking their obligations here.

Emma Rosenzweig

That's right. So I would say maybe it's not FBT return season, but perhaps all year is FBT big. And if you are offering some of these benefits. So, you know, I have to put a plug into good recordkeeping here and make sure that even though it might not be tax return time, it is important to think about the records you might want to keep. But that's right. We are seeing more and more employers think about how they can retain staff or check staff. And part of that might be to offer them non-salary benefits. And that might mean some employees who've never been part of the system before are now suddenly brought into it or aren't aware that actually they should be paying if they pay on these benefits. So really want to encourage people know your business listening to this and you are providing non-cash benefits, whether you're giving people tickets to the footy or to the theatre, or you're providing a car or all sorts of things, if, if it's a benefit you'll give in to your employees. Have a think about whether they could apply. And if you're a practitioner, perhaps it's great to ask some of those questions to, to some of your businesses as well about whether they've taken on any paper or offered any new package arrangements to people because it is a real challenge to make sure people are aware that they've got these obligations.

Robyn Jacobson

You provide some specific examples of the sorts of benefits you're seeing out there that perhaps are more common or perhaps being offered by an employer for the first time?

Emma Rosenzweig

Well, look, I think one of the things that we might have seen a little bit of media on recently, because we've been trying to bust some myths about the fact that providing a car, particularly a use this seems to be a myth that if you buy a you can provide it to your employees that it's not subject to if they take a there's no magic in it being a ute. And so I think it's really important to people to know that it will be subject to FBT unless there's really minor and incidental private use of that vehicle. So that's one of the things we say, you know, people providing a car, that car can be taken home in the weekend and you drive kids to soccer games and you might go camping with it. Particularly Ute’s really good set camping that is not incidental personal use and does make that subject to fringe benefits tax. So I think thinking about the use of work cars is really important. There are record keeping requirements people need to meet to to show the use of the car. And we do look at those. If we if we come and look at you and ask you questions about your as they say, the cars would probably be one of the biggest benefits, Robyn, that we say people, people get wrong,

Robyn Jacobson

but it could also include tickets to events and I'm thinking of, for example, the Melbourne, the Australian Open is coming up again and we've got Melbourne Cup season coming up and football finals and all that sort of thing. So a lot going on down in Victoria. There could be school fees being reimbursed by the employer that you may have to sacrifice arrangements, not into super, but I'm talking other types of benefits. So there could be a range of things that people do need to turn their minds to.

Emma Rosenzweig

There are a whole range of benefits that people offer. And and I think that's right. There's all sorts of entertainment benefits that we say people are afraid to say meal expenses, reimbursement of living expenses. So all of those things can be subject to, as they say. And so I think if you're providing any of those to your employees, it's worth going and asking the question.

Robyn Jacobson

Might be worth highlighting another one that people can overlook, we've got the changes over the last year relating to the provision of electric vehicles. And if I might, certain conditions they can be exempt from FBT, but it doesn't stop them being reportable as a reportable fringe benefit. So that's something else that employers need to be mindful of and employees because it can affect, of course, their overall reported income.

Emma Rosenzweig

That's right. So it's still important to recordkeeping purposes to make sure that even if they do meet all those requirements to be exempt, so an employee salary packaging an electric vehicle, it may well be exempt from FBT. But you're right, Robyn, that it will still be considered a reportable fringe benefit. And that is important to report through to us. And as you say, it can affect people's entitlements to other benefits, welfare benefits. It can affect if you have a fixed it, it it gets included for calculation of your HEX debt. And the other thing with electric vehicles, I think is important to note, so things like the running costs of the vehicle registration insurance and I understand they don't need anywhere near as much maintenance, but repairs and maintenance costs can also be, if they take free things like the provision of a home charging station is not actually included in that exemption. It is it is not part of the vehicle running cost. And so that's another thing to think about too. If you're actually providing reimbursing for the home charging station, that is likely to be subject to if it's a property fringe benefit or an expense payment fringe benefit.

Robyn Jacobson

Helpful. For the last one, on a technical level, consolidation for income tax purposes does not facilitate consolidation for FBT purposes. They're quite separate pieces of law.

Emma Rosenzweig

Yeah, look, it is something we do see that some that businesses are trying to lodge a consolidated return and so that makes it really hard for us to data match. It is very likely that if you're trying to lodge a single FHA return for a group of companies, that it will generate some questions from us. And generally people prefer to avoid having us come and knock on the door and ask them questions. So I really encourage that if there is a corporate grade in place, the H employer in the group needs to lodge their own FHA return.

Robyn Jacobson

So in closing, any tips or where people can go for more assistance or help?

Emma Rosenzweig

Well, we have plenty of information on our website ato.gov.au. We try to give it in lots of different formats. We have some great videos on Super Guarantee and a lot of information about FHA as well. If people are interested in what we do do in terms of super guarantee compliance, if they search for ato.gov.au/sgsnapshot, you will get straight to some information about the compliance activities we do and we'll be updating that in about October when our annual report goes out. That would be the latest SG gap as well. But obviously then organisations like yours as well, Robyn, and tax agents, BAS agents, payroll advisors are excellent resources for people to ask for assistance in.

Robyn Jacobson

As always, there's always so much to unpack, so much more we can say that I thank you for your insights and for sharing your various experiences and anecdotes with us.

Emma Rosenzweig

Thank you so much for having me.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Emma Rosenfield, Deputy Commissioner Superannuation and employer obligations at the Australian Taxation Office. To keep up to date with TaxVibe. Be sure to subscribe, rate and review wherever you listen to your podcast. If you'd like to connect with us, you can find us on socials.

Not a member of The Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit, TaxInstitute.com.au, we look forward to you joining us next time.

Uncertainty vs. certainty in death and taxes

Release date: 22 September 2023

In this episode of TaxVibe, Robyn chats with Ian Raspin, estate taxation specialist and Managing Director, BNR Partners, about his broad experience in advising on the myriad of tax issues associated with deceased estates.

They cover:

Valid wills, intestacy and assets that cannot be dealt with by a will
Tax issues, including CGT, GST, Division 7A, superannuation and so much more
Probate, the role of executors and estate law considerations
Other considerations, like control of entities, digital assets, social media accounts and disputes between beneficiaries

Host: Robyn Jacobson, CTA

Guest: Ian Raspin, estate taxation specialist and Managing Director, BNR Partners

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of Tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the Tax profession's great thought leaders who will say valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Ian Raspin, who is an estate taxation specialist and managing director of BNR Partners, based in Melbourne, which is specialised in the taxation of deceased estates since 2008, provides estate taxation, compliance and technical advice services across Australia exclusively by referrals from legal practices listed on public trustee companies and by direct appointment from the Supreme Court. BNR has one of the only dedicated teams of accountants in the country who specializes in this neat and often complex area of taxation, which frequently involves cross-border estate issues. Ian is highly regarded nationally and internationally on estate taxation matters as a published author, as a frequent presenter at legal and accounting conferences and events across the country. Ian also consults with the professional associations, government agencies and regulators and the private sector on estate taxation issues. Ian is a chartered tax advisor at the Tax Institute, a fellow of both CPA Australia and CAA NZ, a current sitting member of CPA Australia's Tax Centre of Excellence for Registered Practitioner at the Society of Trusts and Estate Practitioners, of which he is the current National Chair and a graduate member of the Australian Institute of Company Directors. Ian, welcome to TaxVibe. Great to have you here.

Ian Raspin

Wonderful to be joining you again, thank you for the invitation.

Robyn Jacobson

So, Ian, you've certainly established yourself as one of the preeminent experts when it comes to the taxation of estates and related matters. And we can draw back on a very famous quote from 1789. I don't think anyone who works in the tax profession, who hasn't had this one and many outside the profession, from Benjamin Franklin, and he said, ‘Our new constitution is now established. It has an appearance that promises permancy. That in this world nothing can be said to be certain except death and taxes. And you've very successfully combined the two.

Ian Raspin

Growth industry at that too, Robyn. Great, great quote.

Robyn Jacobson

So what makes this area of law so complex?

Ian Raspin

Great question. And really, I think we need to sit back and look at it and say, well, as tax practioners we are working with federal tax law, so, you know, Income Tax Assessment Act, but a state law is a jurisdictional base thing. So every state in Australia has their own jurisdiction or staff succession law as well as the trustee act. So it's an interplay between tax law, the Income Tax Assessment Act and those particular areas. You overlay that and say, well, the income Tax Assessment Act has particular provisions in the way that deceased estates are actually treated and estate actually falls into Division six of the act. So it's treated like a trust, but by default that creates a whole heap of technical nuances when it comes to deceased estates. So it's a combination of those sort of areas. We also need to be, I guess, judicial changes in our interpretation of law. The location of the beneficiaries and the LPR also changes the domicile and treatment of assets and tax purposes out of that and believe it or not, the circumstance of the deceased are their wealth, what structures they've got that wealth in their migration patterns. Where were they when they died? How does that interplay in relation to this area of tax as well? And I think overlaying all of that, you've sort of got to go well, complex area that's probably not appreciated by many practitioners, but at the end of the day, that is there is ITII guidance out there. Some of that guidance is dated and some areas and it's sort of lacking in relation to that. And look, I think in that sort of area that things are progressing very quickly, whether it's generational wealth transfers and growth and in death rates in Australia. So it's an area that needs quite a bit more focus I think.

Robyn Jacobson

And the expertise of practitioners, how specialised or otherwise do they need to be to work in this space?

Ian Raspin

Look, I think a lot of it starts with the Manila estate where with things are black and white and it's pretty straightforward. You know, mum and dad were guys a hassle? I'd be a bit of money in the bank on the share portfolio and that's that's about it. And prima facie, again, it's a pretty simple estate, but embedded into that, there's a lot of potential through tax nuances and traps that come along with it. And what can seem to be very simplistic can soon become quite a complex estate and given numbers. United Small Estate. The risks probably pretty small. If it's an estate, tens or hundreds of millions of dollars, all of a sudden the risks exposures and those levels are quite high. And one of the nuances I guess with deceased estates is that the LPA, the executor, administrator or whatever title might be given in that particular case is personally liable for tax. And, you know, they finalized the estate administration, their liability remains. It's not on to the beneficiaries. And so if something goes wrong, that means that those people will be turning around to their technical advisors as to what's actually go on here. So I think an awareness of these areas are really good. Know what you do know and what you don't know? And to reach out when you get into some of these technical nuances and every day I'll reread the legislation around provisions I know just to make sure that things navigate their way through the way I think they should on a particular matter.

Robyn Jacobson

And to give us a sense of the scale of the number of estates you cover each year, what are we talking about?

Ian Raspin

On average, we'd be doing with about 5000 estate tax matters a year across Australia, which sounds like a very large number. But when you sort of break that down and you say in Australia last year there was just over 190,000 deaths in Australia that's an average of 521 deaths per day. You know, so many dealing with a fraction of the market. But I think if you start looking at that too and you go, well, a lot of those estates are just going to be really simple estates, age, pension, not much else. That's a nice easy estate to just off. So that deals with the majority. But there are the others and that's where the Frankenstein monsters are, is for the Paid Representative Tax Institute. Just a couple of weeks ago.

Robyn Jacobson

As I go into this next question to you, I just want to set the scene, because sometimes terminology can be a bit confusing and there is a whole different language when it comes to estates. So, for example, we talk about someone who dies intestate. And I want to make it clear, I didn't say interstate, it's interstate. You might be interstate when you die intestate, but it's about someone who doesn't have a valid will when they die. Now, that itself informs the terminology we use because we've already mentioned the other legal personal representative, which is effectively the trustee of the deceased estate, the trustee of the trust. But it breaks down into further terminology. So if you die with a valid will, you have someone who is called the executor. And in fact, the executrix, if we're talking about the masculine and feminine version of those words, whereas if you die without a valid will, holds an administrator, and again there is a female equivalent of that. So in our space, we often see accountants taking on the role of executor for their clients. And yet you've seen a trend by many legal practitioners who in fact decline copies of invitations from their clients. So what are some of the risks and why do you think the lawyers are perhaps moving away from taking on those roles? But we're seeing accountants still taking that on behalf of their clients.

Ian Raspin

I personally won't take on the roles any longer because I become very much aware of what's involved here. I think to the legal fraternity, you know, remember a while ago there was one year I attended. I regularly speak at law courts across Australia. The three conferences in one year where somebody got up as a presenter and actually lectured a roomful of lawyers, that qualified lawyers that specialized in this space with their master's degrees or specializations, accredited specialists, and telling the audience not to act as executors. The risks in the area are phenomenal and thus look at it and say, well, look, if the legal fraternity at telling people that understand law and are actually qualified just in this space and focus in this space not to act executives, well, why would another professional stand into that place like an accountant? We don't understand that most accountants would not understand or probably haven't read the succession Law Act in their local jurisdiction, let alone understand the terminology. You look at it and you sort of go, Well, am I covered? And this is a really important one for a journalist to be looking at. Am I covered by professional deputy insurance? And when you look at the PR cover for me, accounting firms, you are not covered to act as an executor. So it's a personal responsibility, not a professional responsibility, right? You will be held paid professionals standards in relation to acting in that role. So a number of times I can give examples where I saw practitioner will act as an executor and the impact on their practice from doing so is just phenomenal. You only need a simple family maintenance claim against the estate and you find yourself in court, know, defending the estate and the world against those sort of claims. And so much of your time and energy has gone to that you're not really qualified to do and you're getting legal advice to be able to do that, that you drop the ball around your own practice. And I've certainly seen practitioners suffer significantly from taking that so wrong. I advocate very strongly that probably not to look at it. It's very nice. You know, a client comes in, they'll be the client for years and you go, Well, hey, you know, you act as my executor again. This is a major, major honor, you know. Yes, I'm happy to do that and help tie the family together. But again, you can do that, but you might find yourself in a fight with next generation. Then you end up with no clients. Right.

Robyn Jacobson

So it could be better to keep your arm's length and charge for your professional services as you need to, but not get legally involved in the arrangement.

Ian Raspin

To find someone else. Now, more so where, you know, people will actually say, I'd like you to refer to my accountant X, Y, Z for advice on this matter. Therefore you can go looking to charge those professional fees as an executor. You might be an executor or a commission born into the world, but it doesn't mean you're actually going to get that commission. It's open to challenge by the beneficiaries in judicial interjection. So it's not necessarily a cash cow. Some people think it's going to be.

Robyn Jacobson

So moving on to some broader estate issues I've already discussed with you, we have people who die with and without valid wills, but I often feel there's a perhaps a false comfort that people get by having a will. They think that it kind of deals with everything. And in fact, there are quite a number of assets that you can't deal with through your will. Can you give some examples of those?

Ian Raspin

Oh, absolutely. And really good point. You know, particularly for some practitioners out there that are trying to have those discussions with their clients around estate planning. Superannuation is not part of your estate unless you get a binding death benefit nomination to pay to the estate or the deed is hard wired for it's county estate. That's often an estate planning technique not to have it part of the estate, particularly if there's a second, third or fourth family. Nobody knows about their assets holding companies or individuals, trusts, family, trust. That is, they don't form part of your estate loan accounts to those entities. Well, maybe the assets within a company that owns a whole heap of real property, you know, you won't own the real property. You own the shares of the company, but it doesn't give you the right to actually transfer that real property in the company to a particular beneficiary and of course, jointly held assets. The rules of survivorship can come in here where the asset actually moves across to the surviving spouse. And so it's a matter I think it was sitting down and listing what the assets are, who owns them. So estate planning, working out who's ultimately are they an asset to which a will can actually control?

Robyn Jacobson

It's an interesting one because if you have, say, a couple who are both killed at the same time, so let's assume there's a car accident and they're both killed instantly. The law of survivorship, where you've got one person leaving their estate to the other and vice versa, you've got a tiebreaker needed because how do you work out which model you invoke first? And the law says that the oldest person is taken to die first.

Ian Raspin

Exactly right. So marry somebody older than yourself.

Robyn Jacobson

All right. So to superannuation, we talk about the role of the Biden death benefit nomination. Now, you could either arrange to leave all of your superannuation benefits directly to your estate or of course superannuation being a trust in its own right. You can direct the trustee of the fund to pay those benefits out to nominate a beneficiary. It strikes me that in recent years we've seen increasing litigation, often involving, as you say, the second, third and fourth families that people didn't know about. I'd like to think people did know about the vote anyway. So in terms of that litigation, it's often two generations that you'll have, if you like, the current partner and perhaps the children of the first or former partner. And it can lead to some pretty ugly disputes between families.

Ian Raspin

Are hundred percent. In fact, the Law Council of Australia, you know, started a few years ago that this is the biggest or one of the biggest growth areas in litigation in Australia and that is around the sister states and super is part of that. You know, beneficiaries going after executors or going after each other or going after professional advisers. Litigation is rife in this area, people trying to obtain what they rightfully think is theirs and recipients start looking, well, what's the binding death benefit, you know, executed in accordance to the terms of the will and not the will? The trustee wasn't in the right format, was it actually submitted to the trustee? You know, there might have been completed, but was it ever submitted or acknowledged it lapsed.And so all these sort of things into place through there. So a very, very complicated area in which professional advice is very much needed. But yes, a lot of litigation.

Robyn Jacobson

In terms of administration. When you very briefly outline the concept of probate for those who may not understand it and for those who don't have a will, because probate suddenly where you do have a will is called matters of administration.

Ian Raspin

So it's an application of the court. So the Supreme Court, in the relevant jurisdiction, you make an application and effectively turn up with will. Your Lloyds ends up with where we make an application. And the role of the court, I guess, is to determine whether that's the most current and valid will and therefore the appointment of the executor. And by getting that in the case of a will, by getting your letters or a grant, what actually happens is that's effective your license now to go and deal with banks or the assets or to represent that particular party in the case where there is not a will as you sort of said, that's an intestacy. And so that goes down to the last administration and as a ranking order is who can actually apply for that. But you go on to make an application as administrator and effectively the same sort of thing. It gives you a license once the courts are allowed you onto that or appointed you to act as the administrator to deal with those assets. I think what's really important is to concepts here. One is that once appointed, it's very, very hard to get out of it, to renounce will be removed. So once you're in there, you're always in there. And secondly would come in that you intermingle with some estates that as you actually start to act as an executor, even though you haven't been formally appointed, you may actually be deemed to be the executor, and therefore you may end up in that role, but you don't want to be particular in. So I think it's really important to not intermingle with the estate during those early stages until a grant has actually been provided. Third thing outside of that is just in every state of Australia except for Queensland and these are required Queensland, you don't necessarily need a grant of probate to be able to act for the estate. So again, that sort of goes down to every state is different.

Robyn Jacobson

I want to play back to your remark then about that period in between. We know that when an estate is beyond the stage of probation, it's being administered. It is, if you like, a regular trust. Now there are special tax rules that apply as to how the incomes taxed and so on. But broadly, we're into a tax base where it has to lodge a tax return, it gets its own TFN and you either distribute the income to the beneficiaries or the income's retained on the assets to the trustee at a special tax rate. What about the period between the date of death? So when the estate begins to be administered now that could be a period of months or even years and legally owns the assets in the meantime.

Ian Raspin

Good question. And that'll come down to a state by state jurisdictional basis. But generally you will find that will actually exist within the public trustee around Australia. But there's no no active role where it's this thing just sits and idle. It's all, you know, often a grant is actually provided to then the executor or PR. It's got LPA as the term for executor administrator. It's sort of a joint term. They still retrospectively become responsible for that all the way back to the date of death and need to deal with the tax returns, etc., during that period. So it's not once they've been appointed, once they've been appointed, it's not like you can wipe your hands and say, well, that was at eight months that we don't have to write that. Now, you still have that responsibility retrospectively.

Robyn Jacobson

There's a whole lot of administration, and I particularly at this point, want to go into the TFN for the estate and DE-REGISTER and GST and ideas, but there's certainly a lot of bureaucratic process that needs to happen from that perspective. In terms of notifying the ATO and receiving the administration of the estate, what are the issues that need to be considered here?

Ian Raspin

Well, there's an obligation to actually notify the ATO death form. So simple form, you need to notify the ATO death and nowadays that needs to be submitted to the ATO. Sadly, in hardcopy it needs to be sent with certified copies of will, probate, etc. Along with that, the ATO has a little bit of a problem and it's time that you bring that up because you know, you need to submit this to the ATO to prove that somebody died. That makes sense. They want to know somebody is dead before they actually, you know, provide access to the ATO portal, etc.. Right now this process can take 3 to 4 months with the ATO. Not only that, even though in my office, again we deal with a large volume of these, you know, you send them in, we'll do it by certified mail where be able to track it's the ATO that it's physically been received by the ATO, but then it falls into the void and often we had one matter just this last week we've done three different submissions for the same estate in relation to date of death notifications, because whilst we can prove it's been there, it's just been lost. There's no lying issue here. That's certainly creating a lot of social media attention at the moment too. And that is that you said that you need a certified copy of the will and grant, etc.. Well, lawyers are signing those. You know, you act for a client you've drafted. Well, you've now they've died. You've got these documents, you certify, you send them in either through us or through your accountant or directly and the ATO announcement around and saying, well actually there's a conflict of interest there. You know, you've acted for the client, we can't accept you certifying this document. And so that's creating a backlog on this sort of stuff as well. So once you get through all of that, you can then get access to nowadays in the deceased's pre-death area on a portal access. And obviously as you and I have spoken about previously, that was an issue for a few years. Then we can certainly access that and apply for an estate to and start that process. But until that point, it's an offense for the ATO officer to speak to anybody around a person's tax affairs that they don't have authority for. And it's a sexual offense that carries a two year jail term, but for the ATO officers, so they take this role very, very seriously. So you have to jump that hurdle before you can really start interacting.

Robyn Jacobson

You talked about having to notify the ATO of the death toll signature and not receive information from the Registry of Marriage.

Ian Raspin

Robyn, I think he just playing with my buttons here today. Yes, yes. So there is data sharing and this is one of the areas I think is quite frustrating that certainly does interact with the registry of marriage, births and deaths right around Australia. Again, a state by state or territory based jurisdiction thing, but that just doesn't seem to correlate into this area here. And whilst there has been recommendations by our Inspector General of tax the get away from this area up and through to explore this that certainly hasn't happened. And as far as I'm aware, saying not on any immediate ATO radar list, I'll take that. It's helpful to Robyn and it's a sad indictment because sort of set of a lot of the states are very simple and small and you know, this is surviving spouse that needs access to that money, those kids that need access to the money, maybe 30 or 50 grand. But, you know, by the time you get a grant of probate, you go through, notify the ideal things you might be a year or two later before you can get that out. The process should be a lot simpler for those simpler estates.

Robyn Jacobson

And that has real ramifications for beneficiaries.

Ian Raspin

100%. 100%.

Robyn Jacobson

So the Inspector General of Taxation and the Taxation Ombudsman, Karen Payne, did release a report in July 2020 titled Death and Taxes An Investigation into ATO Systems and Processes for Dealing with Deceased Estates. And that investigative report is on Inspector General's website. What have we learned out of that investigation?

Ian Raspin

Great [ ], investigation by the campaign at her office, the inspector general on that, and to commend the office for the work that went into that. But I think at the end of the day they raised some very pertinent points and the ATO has responded to a number of those points and has acted in parts of some of those points. But I think there's still some serious work there to be done and trying to build that space up and to bring all that together. But I think in the scale of things and to the Commissioner's sort of defense, I mean, the tax revenue, as I understand it from the space is about 4% of tax revenue in Australia that comes from deceased estates. Currently it's growing. And so the focus of the ATO on these areas aren't necessarily as large as it is, but there are holes and chance reports, certainly points some of those out and I think it'd be good to see a little bit more traction from that report.

Robyn Jacobson

We'll keep an eye on that one. Now, in terms of the tax issues, look and you and I could spend the rest of the day talking about this stuff, but let's just perhaps pick on a few of the high points we've got to trust. Let's assume that we are retaining the income while the estate is being administered. We're not distributing assets or income out to the beneficiaries at this point. In a sense, we've got the normal rolls in Division six, in part three of the 1936 Tax Act. That is, the trustees assessed on that share of the trust's taxable income. To the extent that no one is presently entitled to the trust income, there are special rights. And what do we do when it comes to resolutions? Do we still do them when it comes to a deceased estate question?

Ian Raspin

So, yes, look, a couple of things. There are special rights. It's Section 99. So ordinarily, our listeners will be aware of Section 99 rights which apply to a trustee of a trust, and that is tax rights all the way through context to the stage two state section 99 rights apply at the commissioner's discretion. He generally use that discretion if he lodge the returns on that basis, and that will apply for the first three income tax years after death. So if I died on the 1st of May, my first income tax year would only be two months. Okay, so two years and two months. And that effectively Texas's adult marginal tax rates the 18,200 tax free providing it's a resident trusts estate and not a nonresident trust. And thereafter Section 99 rights will apply. But without the 18,200 tax rates are still progressive marginal tax rates. But I go back to my point that it's at the commissioner's discretion and he can invoke 99 rights at any time that he believes the estate administration has been delayed intentionally for tax advantages. I don't want the example. We have every beneficiary in the highest marginal tax rate, so they want to try and take advantage of the longer years. And so I really, really caution against that.

Robyn Jacobson

If you've particularly seen that in practice when 99 has been used instead of 99.

Ian Raspin

Per cent of [ ], and I've seen cases where it really should be invoked and I say in a live case no, because the way we practice and I guess the trustee companies around Australia practice and we consult and work with, we certainly adopt a more considered view on that because you'd be exposed as an executor if she did something like that, the beneficiaries may come after you. I am aware that there are practitioners and practices out there in Australia that are taking advantage of these provisions and they bear the risk. I guess is the best way I can respond to that.

Robyn Jacobson

Question, what about resolutions? Are they still needed?

Ian Raspin

Yeah, look, I think so. As a tax ruling, I tell you, 2622, very outdated ruling. It came out before self-assessment in Australia, certainly. BANFIELD And in an Australian tradition. So it certainly needs to have a right, which I think at the tax conference last year, Robin, the ATO representatives did say there were close to releasing a redrafting my take 2620 to understand it's on backburner now but that sort of talks around stages of administration and divides the estate into three stages. So during that stage where you're trying to work out what's going on, what the assets, how the liabilities, get a grant, etc., all incoming as the trustee, it's a it's a matter of that ruling matter in law. So that's clear middle stage. You're in that stage where if you make an interim distribution that's were beneficiary of income, they would be assessed on their share of trust income. And the final stage, obviously, where you've got to the stage that you've basically administered the estate, you might not have transferred assets, but you can say, well done, everything. Now I've put money aside to pay for tax pull out. Now I've got to do is to transfer assets. At that point, beneficiaries can be presently entitled to income. I'm a big advocate, however, the sort of game I think doing resolutions around present or specific entitlement, particularly specific entitlement are absolutely paramount in this space, particularly for the larger states where you really want to clearly demonstrate what the intention was. And again, it comes down at risk. Then in failure to do that, you know, the trustee will be assessed against that capital gain or that income. And it was a capital gain, for example, or a beneficiary had a capital loss or it was a not for profit beneficiary. And I said, for the not for profit sector are shaking down the market at the moment. They will come after executives and advisors for not doing that. So I think best practice is definitely to look at that and say, no, let's, let's do a resolution, let's get this correct. That's really document and demonstrate what the intention of the LPI our trustee of its testamentary trust is at year end in relation to both those areas.

Robyn Jacobson

Let me respond to the notion that a deceased estate would be regarded as a fixed trust.

Ian Raspin

Or another really good question. So really the fixed trust sort of thing during the estate administration stage? No, they can't really be a fixed trust until the end of the state administration because, one, you don't know whether you're insolvent. You know, a person may look solvent, but they might have a couple of million dollars worth of debt. You know, it's in the background that nobody knows about. There might be ATO history you don't know about and you don't know whether you can distribute. So it's only in the final year of estate administration that you can actually turn around ground and go, Well, is this a state, a trust? And in that final year, certainly you could argue you're that's final stage. You might have beneficiary offshore, for example, entitled to the capital gain from a nontaxable Australian property. You could try and argue that that was a fixed trust at that point. And certainly we've got some rulings with the ATO where that's actually been confirmed. I will 540 which effectively means that if the fixed trust are to which the nonresident beneficiary is in receipt, the trustee wouldn't be taxed on the non taxable Australian property portion of that distribution. But I think it's sort of one of those areas that I would never take for granted. Certainly the trust sector right across Australia, wiseguys for rulings and those sort of areas as well to to make it there. And given the delays in getting proper rulings at the moment of the ATO, you want to make sure it's a sizable amount of money before you started delaying processes.

Robyn Jacobson

Division 7A, another area where of course across the country and across private companies there are some very substantial sized loans. Yeah, even the old quarantine ones, those were made prior to the 4th of December 1997, when Division seven commenced. They are still liabilities that are effectively owed by these individuals. I don't know is regarded as such, but an asset that is receivable by a company by definition means that it is payable by the shareholder or the associate. So when they die you do have to consider the implications of that line. So briefly, can you talk us through what happens when you've got a line that inside back to a private company and it hasn't been repaid? Does the estate then assume that liability?

Ian Raspin

So yes, and this is a really complex little area that sort of dies out. So if you had a the estate does, so the executor effectively stands into the shoes of the deceased and so you become the deceased for all intents and purposes. So that for tax purposes is a separate area, a separate tax entity. So any individual seven guideline agreements that are in place when that person dies, an executor needs to continue to meet the obligations of that division, separate loans through the estate administration, and that is to pay the minimum amount with interest, etc., all the way through back and finally to do that will trigger a Division seven dividend to that extent, which is a little bit of a problem. It's interesting, though, that if a deceased died and let's say there was a loan and it was taken out in that year of death and in that particular case there, they hadn't actually entered into a loan agreement, but the company's tax return lodgment date hadn't come to light as yet. Well, the taxpayer hasn't had the opportunity to enter into a Division seven guideline agreement. The APRA is not obliged to do so. And so whilst yes, it's still an effective line back to the company, it falls outside of the scope of Division seven provisions. And so you've got those sort of areas through there. And if it happened during the loan and the estate was compliant on the way through, you know, the deceased was two. Again, you don't have that issue. But as an executor, if you sort of students the shoes of the deceased and you go on, okay, well, we do have this loan agreement. Are they retrospective years? What was non-compliant? You had that obligation to look backwards and go, well, three years ago, we failed to make this right. We need to go in a minute, depending on your amendment periods, because it's a real issue and we'll see. Often people will draft wills where they sort of, I think, give these lines, you know, either way. And they try to clear things up. And we just got to watch their, I guess, the commercial debt forgiveness rules, etc., and the implications that they could have on it. So a really, really important area to look at up on the other side, Robyn. You know, that's an estate asset and so that's an asset that could be called upon or should be called upon by the estate or the administration. It might be an asset that they pass across the next beneficiary like an upper until they've lost trust as opposed to calling it in and effectively maybe causing the trust to collapse. This is where it starts to get a little bit more nuanced and we need to sort of really sit down and have a look at what's going on.

Robyn Jacobson

With other thoughts. You talked about the commercial debt forgiveness rules if the loan is forgiven, but if it's a Division seven alone and it's forgiving, you could actually just have a straight deemed dividend and depending and on the estimate itself, my other thought was if your loan is big enough so you might have the beneficiaries, the family who think I we're going to be inheriting $5 million from the family member who's passed away. But it turns out that there was a $6 million loan back to the private company. So, in other words, when I say back to us, the money was went to them and that's a liability. So you may actually have an insolvent estate because by the time the loan is discharged, you may not have any net assets left over.

Ian Raspin

Also say whereby the shares in the company are being gifted to one party and the residual beneficiaries who thought they were going to get in. Your example, $6 million end up with a Coke bottle at of time that loans going back where they all went up one person.

Robyn Jacobson

So even if the loan is repaid which effectively depletes the value of the estate if they become the shareholders of that company, then effectively all you've done is convert a receivable in the company into, let's call it cash back. But if it's other shareholders who take over the control of that company, then the benefit of that line being repaid goes off to somebody else, as you say.

Ian Raspin

So it goes back to our early conversation around litigation. Now, this is the massive area of growth of litigation in this area, and that is if you're say you and your brother were in that scenario and it all went to you and your brother began, Well, I actually I should get everything this was never the intent. I've got to go and challenge the will. I've got to take the executor to court. If that executor happens to be one of our members, well, they've got to be in court for the next 12, 18, 24 months, whatever it is trying to argue that as opposed to focusing on their practice, unintended.

Robyn Jacobson

CGT, huge area when it comes to estates. And again, there's so much to unpack that we can't possibly achieve in our short time together that we of course have rules around the date of death being pre or post CGT post 85 we've got when the asset was acquired, how the asset was used. There are special rules for the CGT discount and of course we've got all our main residence issues as well. So and in fact you and I have run sessions together talking about mine residents. So this short time we have. What do you see as the key aspects or the key considerations when it comes to the maintenance.

Ian Raspin

Of things for practitioners to put in their mind? And that is that to the extent that is the main residence of the deceased at date of death, you get a market reset at that particular point. But one of the requirements is that it's not income producing a date of death. And so I had a case just this last week whereby, you know, it was a property mum had that she was living in her property, but the granny flat out the back was rented to a third party. So all of a sudden we have a problem because it wasn't primarily used for her date of death as a principal place of residence. So to that extent we can get that uplift. I think that's really important to look at. But then you've got to step back and go, well, what was the size of the property? We had one and Toorak of all places, and you go into our problems, it's going to influence the exemption size of two hectare exemption. Well, this lady had actually acquired just over two hectares of land and we put an African mansion down a track. And so, you know, point whatever percent of her estate was now subject to capital gains tax when her main residence was sold. And again, the amount of tax in that was quite considerable, let's just say just over six figures just on that small proportion. And again, if you failed to pick that up in an active audit, they didn't match with title officers. They lost more than two hectares executors going to where that and I can't go after the beneficiaries Brown's case 950 whatever it was they'll come after your cover. So it's about sitting back and going, okay, two hectares, is it under that? Yes. Do we get the market uplift? Yes. Were they a resident or non resident when they died? That changes the entire dynamics but one but yet again. And then looking at it and saying, well, proportional rules, you know, days that it was main results versus days it wasn't main residence and the ability to be able to access those provisions as well. Also very important. I think the other thing that I'll be saying there is that and a really interesting one that's often missed is that, you know, you have two years from date of death on which to sell a principal residence without triggering CGT as a concession. It used to be 12 months and often it's two years. They've now come out with a peg which allows you to say, Gee, six, 19, slash five, I think it is, which allows you to extend an additional 18 months on that in the Safe Harbor rules. So looking at those and sort of going well, we saw it as sort of two years. Do we now have another 18 months? Do we make those rules? If we don't, doing it's going to get a private ruling by the commissioner, you know, to protect that the parties that are actually involved, a really important sort of considerations as mine residency rules to step up to market value also attach themselves to any private residential property. So if you had a couple of investment properties that were pretty five that were owned by the deceased, now you get market step up as a daily death as well, but you get two years to sell them without capital gains as well. So you might be as so say three properties in my example without CGT consequences within two years, without a death.

Robyn Jacobson

In the situations where you don't get the market value, uplift in cost base for whatever reason, it could be that within fact got it high CGT property that wasn't solely a main residence, for example. There are going to be enormous challenges in identifying when it was acquired, what the cost base is. And imagine this three chains of muscle chains of estates. So, you know, I'm very good at my record keeping, but I know that plenty of people are not. And so when you got someone who bought it as the home is on the ever used it for their home but let's say they were renting out the granny flat at the end. Suddenly you can't use the market value rule on death. So in fact, we've got to go back and reconstruct the cost base. How do you manage that? What do you do with the records?

Ian Raspin

It's horrific. We had an estate for about three years ago and I think they had about 15 properties in this estate and they were all being try. And so I think we're in the fourth, we just heading into the fourth generation. But these properties have been a series of, you know, fairly quick deaths that had happened through this family. But those properties had all been used for different purposes through the years as main residence for different people and different things. And it's a matter of tracking that back and being able to work it out where it is. And I think a really important note to our members is to say that when you lodge a tax return, not only is the client saying it is true and correct, but so is the taxation. And so if you can't backtrack on that and I've had many a scenario where you can't you can get to the titles office from most jurisdictions and get a detailed research which provides you the cost base of the property, etc., not necessarily the duties that were paid on all the legal costs. Nothing around the swimming pool that was built in the backyard or capital improvements. You put together what you can and sometimes it's a matter of going to the commissioner and saying, look, vulture disclosure, you know, basically we've got everything we can here to pull together on this. But this is what we've got to and I'm a big advocate to say that, you know, adopting a more conservative approach, particularly, is the opposite. Personally liable is probably the better approach. And government commissioner putting a position up to say, well, look, basically this is the best that we can possibly do. Can we get some effectively coverage from this? We've agreed to these terms and therefore, can we pay the tax on the settlor and settle the estate administration without leaving the executor personally? But, Robyn, that that opens a paradox. There are issues, too, because these are historically, you know, lots of senior tax counsel around the country, etc., that do work in this space. You know, they watch these sort of voluntary disclosures to the ATO, and we've been out to settle millions of dollars worth of tax debt across Australia with the ATO on these matters, on many, many estates. And it's a bit of a change of practice in the eighties at the moment where they really push back on such voluntary disclosures around assist states, and I'm not sure whether that's an administrative practice, but somehow states have sought, according to within the aggregate, whether it's a broader issue that that in itself is relying on state administrations as those parties are actually now having to grapple. Well, we can't sign this tax return because it's perjury, but we can't administer the estate because we to be personally liable, that's going to clog up the judicial system in Australia as people go for court directions to be able to take themselves on that or they're going to continue fine with the ITII in trying to release those. So that's an area we're actively engaged in some discussions with the ACA at the moment, but if you can't sign it, it's not correct. You need to open up the door ways to try get that certainty.

Robyn Jacobson

As we say, we've fallen short on what we would like to have as the documentation or the tax position. Can you help us out?

Ian Raspin

Correct. Yeah.

Robyn Jacobson

Look, there is one shining light in all of this doom and gloom that we've been talking about and try to reconstruct records and those tax liabilities, those who pass away, who still owe a hex or helped debt. It's one of I can think of two things that go to the grave with you. Apart from any personal belongings, capital losses and tax losses cannot marry for to the estate or the beneficiary. So they go to the grave with you. Now, that's not a good thing necessarily.

Ian Raspin

It's very, very pertinent observation. As I say, too many tax practitioners where matters are referred to as post their work that send a message that they can't use those losses in the estate. I think.

Robyn Jacobson

They're gone. But so as you [ ] you help liability. So there has been some talk over the years about possible legislative changes which haven't proceeded. So the current law remains the case that when you die out, the liability does not pass to your estate or to any surviving beneficiary of the estate. It goes to the grave of you. It's completely white.

Ian Raspin

Now, it's an interesting topic. In the year of death, the executor still have to pay up to the date of death in a proportional sort of basis because the personal still life and they have it. You're right, the debt's written off. And you also make a good point. There's been many discussion around that's not fair. It's costing the Australian economy so many dollars and significant amount of money. But I think we need to sit back and this is where it always sort of starts to pull back on and to say, well, who are the parties that that debt is? And you know, we all think every day, you know, it's you know, when you turn 80, 90, 100, whatever, by accident or something, you're going to die. So it's an aging population that many has died. I a car accident 30 year old you know suicide 35 year old fire. All these incidents like that, young people die and these people are often just recently married. They leave a spouse, maybe two or three kids, you know, maybe a mortgage, maybe nothing, maybe maybe they were living on the brain, borderline.And there's an extent and there's a little bit of superannuation or a little bit of something coming in. So it's probably not a good example, but a little bit of money there that could help that family significantly. But if it has to go unchecked, it and that's why this thing keeps getting pulled back. But it is still very much a lot of discussion. Your 100% are on.

Robyn Jacobson

A bundle of issues to wrap up with things like control of entities. So we've spoken about how you might own shares in a company, but you don't personally own the assets in the company. So the role of the director, the trustee, the appoint, all those office holders that control entities, this doesn't automatically pass to the APRA, does it?

Ian Raspin

Not at all. And this is again where estate planning, particularly space, is really, really critical. I recommend going to an accredited specialist or a member of Step Society Trust. And so practitioners there, people that just do it's not general practitioners that I guarantee GP the documents need to be provided. You need to have a look at the trustees on the constitutions. How does control really pass? Is it possible to hardwire that in the will do you need to change, you know, the constitution of the company to be able to make this happen. And in a maybe and I've seen this happen to where, you know, the deceased is a sole shareholder and director of a private company that employs people, dies. How do you pay the staff? You know, if there's nobody in control of this thing, like how does this sort of get dealt with? And this sort of issue is live issue. And it's a matter of addressing this as part of estate planning and working out how it goes. Now, an example such as that, arguably, yes, the estate will inherit the shares once you get a grant, a probate three, six months later, you know, ordinarily you could then you have the shares you can vote your self in based on those shares as director. But you got my staff left. They've all gone walkabout. So I think it's really important to look at that. But also situations and we've had situations whereby there's a company in the state is no control there. But at the end of the day, you know, we had one here in Melbourne whereby the family thought this guy would support, you know, those $1.3 million in their bank account. His company, the estate got the shares. That's how we found out about it. But it was like, well, hang on a minute. What does that money come from? They all thought he was doing nothing since drugs, this is people trafficking where they come from and like, holy cow, who wants to be director of this thing? What liability or responsibility you want to take. So they sort of issues are really pertinent to be part of the estate plan.

Robyn Jacobson

What about digital assets, cryptocurrency, social media accounts, other digital assets that have wealth that are sitting in these accounts? To me, the control and being able to access those accounts is a crucial feature and very much an emerging issue because a lot of people are getting into this space.

Ian Raspin

Then very much an emerging issue and. You're right, the control of those things. How do you get that? You know, Facebook, for example, I believe it varies jurisdictions, you know, they block that. They won't pass it on to an executor. Okay. So as far as what sorts of things in there that all of a sudden you can't access, so you're not necessarily dealing with Australian law, you dealing with different jurisdictional law in relation to the grants of access and agreements that people have just ticked as they are into these environments that they haven't read the detail or ever considered. And if there's some real intangible assets within some of these areas, that needs to be considered as part of the estate plan, it's that about access. You know, you sort of turn around and say, well, somebody has got a few Bitcoin, you know, IP worth half a million or ten, 20 mil, who knows? You know, but how do you pass that across? How do the coding to be able to get access to that on the Keys? And you know, there's a law conference just last week, two of them actually speak at regular law conferences and both conferences. There were there was a speaker talking exactly around this and that we're recommending to lawyers, do not hold the keys to these things in your vote. You do not want to take that responsibly only so these sort of things need to be brought to the table. Our members are understand, I hope, how you know, cryptos taxed, etc. but these are real, tangible assets and they can be some real value in a it's a nightmare. That's an entire conversation at a time.

Robyn Jacobson

It is. Look, so is this next point aging population. So challenges in the next, let's say 10 to 20 years. What do you see as the major issues there are?

Ian Raspin

Look, we've just on the cusp of the largest generational wealth transfer to ever occur. 2019. The wealth transfer by succession in that year was just on $107 billion. By 2050, they're going to say it's projected to be $224 billion one year because all of a sudden you've got all this intergenerational wealth transfer going on. We have a people in Australia, a very multicultural society, so we have assets, beneficiaries, executors, all sorts of things in and out of this jurisdiction all over the globe. And we're one of the most multicultural countries in the world. So that into place. And so to me it's really the issues and the challenges in the next few years is one of the biggest growth areas litigation going on biggest in the generational wealth transfer a recurring the complexities around structures and things that are people have got their overlay with international jurisdictional sort of play on all of these across all of those parties involved in an estate and the assets and tax law that really needs to be looked at. You know, to me, the sister states, because it was kind of it was logical at the time you and I formed part of Division six antitrust provisions, but it doesn't necessarily make sense to be there. You know, we because of that, we fall into things like family trust elections. We fall into nonresident estates. So I could be a resident of Australia.I point somewhere in Singapore as my executor and my state becomes a nonresident estate and that opens up an entire paradigm of new tax issues there. Go to the UK, the residents of the estates determined by the residents to the deceased. So that would stay in Australia. So I think there needs to be an overhaul. I'd like to see special provisions invoked around assisted states in Australia. I'd like to see the domicile put back here, Australia and particularly with a risk to our members around this litigation. It is absolutely horrendous. It's an exciting area, it's a growth area, but there's a lot of a lot of risks and a lot of complexities in there that people need to be aware of.

Robyn Jacobson

And this is within the around 40% of Australian adults having a valid will.

Ian Raspin

And how scary is that, you know, because you love the people around you, but yes, there are rules of intestacy in which who's going to get what? But they need to go and deal with that. If you want things to be uncertain direction, go make a well. It's not hard and I deprecate our clients in our clients, our members, you know, representing taxpayers. So these people are your clients, you know, they're paying you money. One question whether you don't have an obligation to actually try and point them in this direction, you know, go get a will, get professional advice, deal with these matters. Just reverting back to your earlier comment about, you know, what else I see playing out, I think that you'll see a death tax play out again in Australia. I'm not an advocate for it. I think if you look across the OECD world, you know, a lot of countries are actually pulling back from the administration of death duties, you know, gifting provisions in place as well for these sort of things. And administrative costs of running those and all these other jurisdictions often outweigh the benefits of these areas. You know, if you got a 0.5 or 1% move to GST, you might get a similar outcome here in Australia as opposed to the administrative burden of doing the other. But I think politically there will still be a push for this. It does keep raising its head. It's tall poppy syndrome, the haves and have nots, the minority, you know, taxing the upper echelon to to death duties, etc., sort of politically makes sense. It's an election platform or it was an election platform that was lost on a few years ago. I do think we'll see that surface, but it's just demonstrated anecdotally around the globe and I've said countries that do do these things, but it just doesn't work the way it should.

Robyn Jacobson

So and you're going to be speaking at our Death and Taxes conference in Brisbane in early October.

Ian Raspin

That's correct, Robyn. It's a fantastic annual event. I'm really looking forward to that. I'm sitting on a panel up there and I'm really looking forward to the event two day event in Brisbane and highly recommended to our members.

Robyn Jacobson

Terrific look. Thank you. And your insights as always have been so valuable and thank you for your time.

Ian Raspin

Nice to be involved. Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Ian Raspin, managing director at BNR partners. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of The Tax Institute, join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit TaxInstitute.com.au, we look forward to you joining us next time.

Getting tax returns right the first time

Release date: 4 August 2023

It’s that time of the year again – tax time! In this episode, Robyn Jacobson chats with Tim Loh, Assistant Commissioner and Tax Time Spokesperson at the Australian Taxation Office about helping people get their tax returns right the first time and avoiding mistakes at tax time.

In a jam-packed near-hour discussion, they cover:

Tax time season
What’s new this tax time?
Records, records, records!
The ATO’s top focus areas for 2022–23
Support available this tax time
Scams – and how to protect yourself

Don’t miss this one, and see if you can keep count of the number of times the word ‘records’ is mentioned to get an idea of how important it is to keep good tax records!

Host: Robyn Jacobson, CTA

Guest: Tim Loh, CTA, Assistant Commissioner and Tax Time Spokesperson at the Australian Taxation Office

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

I am joined by Tim Loh, Assistant Commissioner and Tax Time spokesperson at the Australian Taxation Office in the Individuals and Intermediaries space. Tim's role is focused on understanding the risks and behaviours that drive noncompliance and designing a strategy to address those concerns with the aim to reduce the tax gap and make it easy for individuals to comply with their tax obligations. Prior to joining the ATO, Tim worked at one of the world's largest mining companies, two large international law firms and a big four accounting fair. Tim holds a Master of Laws, Bachelor of Laws and a Bachelor of Commerce. Tim is a chartered tax advisor and is admitted to practice in Victoria and Tim, this is not your first rodeo with us. So welcome back to TaxVibe.

Tim Loh

Thanks for having me, Robyn. It's really great to be here again.

Robyn Jacobson

Look, it's that time of the year again. You're on your usual media circus. You've been chatting to anyone and everyone who listen about tax time. So we're very pleased to be here today and have a chat about what this means for taxpayers and for the profession. So what are the key messages and why is tax time important?

Tim Loh

Yeah, thanks, Robyn. And I've seen you on the circuit as well, so it's fantastic to see and hear your voice as well. You're incredible role model in the tax industry. So it's great to see you on the look out over the next few months and millions of Australians will be watching their tax returns and my job as the spokesperson for the ATO is to get out there on the TV screens, airwaves and print to help people get their tax returns right the first time. And we know for many interacting with the is a once a year occurrence if you don't live and breathe tax like we do. Robyn Communicating these key messages means taxpayers are aware of any key changes and focus areas and can avoid mistakes when it comes time to lodge.

Robyn Jacobson

Look, we get rather excited about tax all year round, but for these people it is a once a year occurrence. So to try and get together and get all that information and all the documents which we're going to run through, it's something that people do tend to put off. Others will jump in in the early days and lodge so we can chat about that. So how long does tax time typically run for?

Tim Loh

Well, as you know, text time begins on the 1st of July. And for most self preparers, they'll need to lodge their tax return before the 31st of October of this year. Now I have access to later lodgment dates if you are up to date with your lodgment. But those planning on lodging with an agent will need to be on the books of a registered tax professional before the 31st of October. So if you do use an agent, you typically have until May four. It's really important that if you've got all your prior lodgment lodged on time already.

Robyn Jacobson

And just on that point, Tim, it's really important that taxpayers understand they may have a delayed or deferred lodgment date of, say, 15 May if they're lodging for tax agents. But that doesn't mean they should be turning up on the 13th of May and saying to their agent, Well, I'm here, make sure you can lodge within two days. The purpose of a Staggered Lodgment program is so that agents can manage their workload over that entire 1011 month period. So I really encourage people not to leave it until March, April, May, to turn up at their age and say, Well, here I am, that actually try and get to their agent earlier in that period.

Tim Loh

That's right, Robyn. So it's really important that, you know, you've got all your information ready. You really organize it present to the registered tax agent, all that information so they can streamline that. And like you said, don't leave it to the last minute.

Robyn Jacobson

I imagine the tax office does a lot of preparation well in advance of one July. So what are the some of the things that The Age has been doing this year to get ready for tax time?

Tim Loh

Yeah, look, it's a really a year round job for us. As soon as one tax time ends, we're already preparing for the next one. I know a couple of colleagues already who are already preparing for next year's tax on it for 2024. And what we are doing at the ATO is we're obviously constantly trying to work and build and improve our systems through updates and testing. You know, the tax agent community is a really important partner for us when it comes to that testing. And we have a range of new data matching technologies that we're trying to use to help assist with incorrect reporting and making sure that tax agents have access to that so we can actually help reduce the tax gap. Now, leading into tech start, we develop a range of communication and media activities to help educate taxpayers and reach the tax agents, making them aware of any changes. Our focus areas and additional resources we have available to support them and help understand their obligations and eligible deductions. They always are constantly working to improve our online services. We anticipate that during the tax time period, particularly through July into September, of course, centers and service centers will be in high demand and we may see some increase waiting times. We know that most people call about these issues and some of these issues particularly can be managed through our online services. So that's something to keep in mind. If your client can use the online services to view their income statement and check the progress of their tax return, for example. And while tax professionals can use online services for agents, among other things, check your client's progress and return. Set up payment plans if they're in a deposition lodge business activity statements and also report single touch payroll as well.

Robyn Jacobson

Tim, is there a key message that profession should hear as to their role in how they can assist the ATO or making tax time run more smoothly?

Tim Loh

Yeah, so look, from our perspective, it's we've got up to date information. Our systems, it's really important that you check that information out on our system so you can really plan in terms of their workloads with your clients. You know, this year, remember mining tax professionals to make sure their clients preferred financial institution details are included on all returns.And this includes when you lodge multiple returns and for debit assessments as well. So when the information is left off a client's tax return, their financial institution details will be removed from their income tax account, which means any refund or future payments, including interest from early payments, will be issued as a check, which we know is in anyone's preference. Right. We also recommend that tax professional utilize any pre-filled data that is available in the preparation of the tax return at this minimizes their errors and actually save you time as well. Talking to clients to understand if any of their circumstances have changed. For example, do they have a second job or side hustle? That's really important in terms of getting the tax return right the first time.

And finally, the terms and conditions for online services agents have been updated. From one July of this year, agents are required to complete verification prior to providing tax or agent services for those clients using IT systems. As you know, Robyn, you need strong client verification that helps take tax professionals, clients and Australia's tax and superannuation system from misuse and abuse due to identity theft and related issues that we've seen quite a bit over the last 12 to 18 months.

Robyn Jacobson

Not more about identity theft and scams later, but it is rife and right through our community. We hear every day of people that are being scammed and cyber attacks. It's it's just awful. So I think on this particular point, it's important to mention that agents shouldn't be retaining these documents per say. So you don't want to take a photocopy of your client's driver's license or their passport and keep that on your files, physical or virtual, in an electronic form.

Because if that information is stolen, whether it's a physical break in or something where it's a cyber theft. So there are lots of software solutions available today where practitioners can verify this information, but it's not actually storing that off the site. So it's something for them to consider.

Tim Loh

Absolutely.

Robyn Jacobson

Right now, terms of lodgement stats have you got some rough figures on how many tax returns a year we lodge collectively across the country? It must be many millions.

Tim Loh

Yet to date, 3 million income tax returns have already been received this year, which surprisingly is an 8% decrease compared to the same time last year where we had received 3.3 million tax returns in total. Last year we received nearly 15 million income tax returns and when it comes to lost income, know 67.8% of those income tax returns were lodged by REG the tax agents and the 32.2% were lodged by self preparers.

Robyn Jacobson

So it's really interesting. It's often been maybe more than two thirds, even three quarters of individuals use the tax agent. And I think the figure, something like 95% of business taxpayers use the tax rate so that 2122 figure is suggesting it's down slightly. So it'll be interesting to see what the data looks like for the 23 year amount.

So that's in.

Tim Loh

Yeah. It will be interesting to see, you know, from our perspective, we're always, you know, big believer in choice whether you want to do it yourself or whether you want to use a registered tax agency, it really is up to you, and particularly if you've got more complicated affairs. We do recommend using a tax engine to help with your tax return.

Robyn Jacobson

Absolutely. And look for the world that I live in. We certainly know how complicated the tax law can get. So, yeah, there are minister. I think. Can be extremely useful. So let's turn our minds now to what's new this tax time. There are quite a number of changes that taxpayers need to get their heads around.

Tim Loh

Yeah, look, there have been a number of changes, Robyn. That's right. The first one that a lot of people are talking about is the working from home expenses and how you can calculate that to claim working from home deduction for the 2020 223 income year. There are two methods to choose from the actual cost method and the revised fixed rate method when it comes to the revised fixed rate method from the 1st of July of last year to the 30th of June this year, we have the revised fixed rate method that would increase the rate from $0.52 per hour to $0.67 per hour when you work from home and the key change that's happened, there are a couple of changes that happened there, but one of the key changes is no longer either dedicated home office space or Home Office to use that method. So you could be working on the couch, the kitchen bench or the dining table, and you can access that method.

Robyn Jacobson

So many more people are working from home permanently. Now, whether that's five days a week, seven days a week in some cases, or whether it's just two or three days a week, the idea that you're no longer bound to an office and I think this recognizes that post-pandemic there are much more flexible work practices.

Tim Loh

That's right. One of the reasons for updating the method was to reflect the changes coming out of the pandemic in the way we work. And one of the things we wanted to change was making sure more people had the ability to access the revised fixed rate method. Then one of those big changes was to remove that dedicated workspace requirement.

Now, in terms of what else has changed with the working from home expenses, we've also changed what expenses are included in the rate. So the right now includes the cost of any additional running expenses. So things like energy costs as well as any computer consumables, stationery and phone and internet usage as well. On top of that method can also claim separately for the declining value of any depreciating assets that you purchased during the year that you use to work. Those are things like your laptops and home office furniture that you might have purchased during the year. Now, most importantly, the recordkeeping requirements have also changed. Using this revised fixed rate method, the clients are required to keep a record of the number of hours they've been working from home so you can use a timesheet or diary entries. So document the number of hours that you've been working from home. Now, one thing we have done for this year as a transitional provision is allow for a representative period from the period of 1st July 2020 2 to 24 February this year. And you can just use effectively a representative periods of four week diary or timesheet entry to reflect that period. But then from one march of this year to the 30th of June this year, you need to show the number of total number of hours using that diary or timesheet entry time.

Robyn Jacobson

It's also important to note that this requirement to keep a record of actual hours is ongoing. So certainly for the period one March to 30 June for this tax time. But as we move into the 2324 year and onwards, that requirement to record actual hours will be ongoing.

Tim Loh

That's right, Robyn. So it's really important that you've got good record keeping always on the TV or radio, same records, records, records and you know, having good records gives you the flexibility to choose the methods that suit your circumstances the best. Right. So you may want to choose the revised fixed rate method used to calculate that we've got you on the show or speak to your registered tax agent that might give you a particular result or the actual cost method, if you've got really good records, can give you a potentially a better result. So it really is up to you. But if you've got really good records and as you suggest, probably keeping a record of the number of hours you've been working from home, the receipt for anything you purchased during the year that will give you maximum flexibility to choose the method that gives you the best result. Now, one last thing I wanted to mention in terms of record keeping was any of those additional expenses that you have incurred. If you are using the revised fixed rate method, just make sure that you've got a copy of the phone bill, electricity bill or an Internet bill in your recordkeeping suite. Now, more details about it on our website at update forward slash I.

Robyn Jacobson

Thank you Tim. Look I'd also expect there would be an inverse relationship between people that are claiming travel expenses and working from home expenses. In other words, you can't have it both ways. You're either traveling, in which case you're not at home or you're at home. In which case you're not traveling. So I would expect that if taxpayers had claimed significant working from home deductions at the height of the pandemic and they normally do a lot of travel for work, that their travel expenses would start to increase. So maybe the employer is covering those costs for them and they're working from home. Claims would drop down. So people just need to be mindful that this sort of relationship is noted by the ATO. And if you've got someone is claiming high travel expenses and high working from home expenses, that could be a red flag raised.

Tim Loh

That's right. You know, everyone knows that you can't be in two places at once. Men can't be in two places at once. And what we say to people is, don't just copy and paste loss use claims. It's really important to look at your facts and circumstances. And like you said, we're tracking all sorts of different records. We do see the trains much busier between Tuesday and Thursday because employees of US employees are coming back into the office. So yeah, absolutely right. You travel expenses might go up to the extent it's not reimbursed by your employer, but it's really important just to look at your particular facts and circumstances, especially you might have even changed jobs or have a second job, that it could be different expenses that you might be able to claim. So copy and paste, you might be undercutting your own tax return because you've just been copying the previous year's claim. So it's really important to put your facts and circumstances.

Robyn Jacobson

All right. So what else is new or different this year?

Tim Loh

Yeah, two other things that have changed this year is on one July of last year, the requirement to exclude the first $250 of certain self-education expenses has been removed. This change applies from 2020-2023 financial year onwards. And the second thing that's changed is for those who are eligible to claim those cards, Spencers, the cents per kilometre method, if you are using that method, has increased to $0.78 for the 2020-2023 income year. So that was $0.72 previously. So that's quite a decent increase as well.

Robyn Jacobson

It is. And look really good to see that old 250 rule being removed. Most people wouldn't understand it was actually a legacy from some changes that were made way back in the early to mid eighties. This just remained in place and it really shouldn't have been in place all these years. So that is now gone and that's good to say with the cents per kilometer. If anyone's thinking about car or engine size, that's irrelevant now. It is just a flash cents per kilometre. And I think I'd also just point out to everyone, just make sure you're picking the right rate for the right year. We're now sitting in the 23-24 year, but lodging the '23 returns. So make sure you're using the rate in your 23 return being the $0.78, not the $0.72 from the year before or the $0.85 that now applies that this current financial year.

Tim Loh

That's right, Robyn. A really good tip.

Robyn Jacobson

Also worth noting with electric cars, the ATO has provided some guidance around what sort of rate per kilometre can be claiming working out your electricity charging, because clearly you're not going down to the servo and filling up your fuel tank. So the ASIO's released a draft package which is 2023 D, one which puts forward a proposed rate of 4.2 cents a kilometre. Now that sounds really low when you compare it to the $0.85 for this year or the $0.78 that we'll be using for the '23 year. But this is really about working out the FBT aspect for employers who provide a car or for those who are using the logbook method. And this enables you to work out how much electricity charge you might be using because it's very difficult to keep track of this in practice. But I just want to point out to everyone that you can't claim your 4.2 cents for these electric vehicles on top of the $0.78 that you might be claiming under the cents per kilometre method. So you've got to make a choice which method you're going to use.

Tim Loh

Yeah, that's a really good call that, Robyn. And it's really important that you don't you do double dip in terms of the deduction methods that you're using.

Robyn Jacobson

All right, So let's turn now to record keeping, which is, I've got to say, the dullest part of tax. Even as we get excited about tax, can't get excited about record keeping, but it's a very important part of the tax process. So what sort of advice can you offer to people in this space who are wondering what records they should keep or how long ago to keep them for and how to go about it?

Tim Loh

Yeah, you know, I'm going to sound like a broken record, but it's red records, records, records. Robyn And if your clients are planning to claim deductions, you need to have records full stop. And these can vary, obviously, depending on the type of expense that you have. And you can use the information on our website to help guide those conversations with the clients. Now, if your individual sole trader clients want to, I would suggest using the ATO, the actions tool. It's great. It's a great place to have all your receipts in the one place. And we are the records as well. And when it comes time to lodge, they can easily send them to the tax agent or if they are self-repair, I can upload it into my tax. So I always say that's a really good place to keep your records. Whenever I talk to people, everyone's got slightly different record keeping processes. You know, when I speak to a number of people, they sometimes have a folder in their email account labeled Tax. That's another way in which you can keep all your records. But the key thing is, starting from the 1st of July, making sure you've got those records, and then when you come to lodge your tax return, you're not looking around in the old shoe box for those receipts or manila folder here or the glove box in the car. Having an all in one space ensures that you're not rushing when it come to lodging your tax return. And then you can also maximize the deductions you're entitled to nothing more, nothing less.

Robyn Jacobson

The issue is often spoken of three golden rules, so we should roll those out again to remind everyone what are the three golden rules when it comes to record keeping?

Tim Loh

Yes. So when it comes to record keeping, you must have spent the money not be reimbursed. Second, the expense needs to be related to your work so they can't be a private component to it. If there is a proportionate. And the third is making sure that you've got good records or receipts, the best form of records to have when you ignore deductions like.

Robyn Jacobson

The many years the shows put together some very useful tax time toolkits. I think the actually loves the alliteration here with all these trades. So what do these tool kits having them? How are they useful for taxpayers.

Tim Loh

When it comes to these tool kit? So what we try and do is we're not about to audit people when we need to. But, you know, our preference is for people to get it right the first time. We always talk about prevention before correction and making sure that people have the right information so they can actually get their tax return right, whether they're lodging the tax return themselves or using a registered tax agent. When it comes to the tax agents, we want registered tax agents to help the clients get it right the first time. So we're all about producing these tax time tool kits to really make sure that people, I guess, get it right. As I said before, the first time. And so we've got a number of different toolkits that are available this tax times. We've got a regular tax time tool kit that helps so preparers work out what deductions they have. We also got nearly 40 occupation guides to help people get that right in terms of what deductions that they can and can't claim. So registered tax agents can use that as a guide to help them educate their clients about what kind of claims that they might be able to claim when it comes to lodging their tax return. When it comes to investors. We've also got an investors tool kit as well, which is a really great useful resource for anyone who's got a rental property investment as well as any investments in shares crypto as well. So my box is to really have a look at those types of toolkits. They're really great resource and they can help facilitate a much more well rounded conversation with the clients as well.

Robyn Jacobson

I'm not sure how routinely the ATO does this, but we've certainly seen cases where the ATO has engaged with the employer. So for example, if there's a taxpayer who's claiming a higher amount of work related expenses and then they speak to the employer and the employer says, no, they don't travel or No, they don't need to carry that for work or whatever the case may be. So, there are occasions where you may engage with the employer or other third parties to help establish the profile of the taxpayer or verify what they're saying is correct.

Tim Loh

Yeah, this can happen on occasion. You know, our preference is you already have information to substantiate your clients. As I said before, it's all about the records. If you've got the records, there's nothing to worry about from our perspective. But typically we find that when we have to progressing to that direction, the taxpayer doesn't have those records and we don't have those records. Life becomes a lot more tough. And we go, we're going to go through things with a bunch of Australians want to know that people are doing the right thing. So it's really important that you have those records. But like you said, you know, there are certain situations that will go in that particular direction to get that substantiation, to corroborate the claim that people are making their tax returns.

Robyn Jacobson

A quick anecdote. I was in one of the major department stores speaking to one of the sales assistants in the handbag department and these are the ones that are all chained up, the really extensive ones. And I was looking around and having a chat to this lady about the rate of theft in this store. And she didn't tell me how much is stolen or quantified, but it just gave me a sense that it is a substantial cost for retail businesses. And it just made me think if you look around the store of all the goods that have to factor in the cost of theft, they have to price all of their goods accordingly to cover that cost. So I think it's the same with tax. If everybody paid exactly the right amount of tax that they should be paying, potentially we'd all be paying less tax because the government wouldn't have to cover the cost of evasion and avoidance that's undertaken. So that's an interesting aspect about people that think, oh, well, someone else is doing better out of this, so I'll just claim this because no one will notice the ATO does notice and it does affect the system as a whole.

Tim Loh

Yeah, that's spot on Robyn. And I always say you know when you over claim incorrectly by $100, if everyone does that it's about $1.5 billion. We're talking a lot of schools, it's probably a hospital, you know, in terms of operational costs. But, you know, for schools and hospitals and all the public services that we rely on as a first world country. So it's really important that people understand that it's important to do the right thing just because someone else is doing it doesn't mean you should do that. And I think the commission feel comforted by the fact that we are making sure that people do the right thing at the ATO and we will come down on people who are deliberately gaming the system.

Robyn Jacobson

You remember that series of ads in the zine? Just because the traffic was doing it doesn't mean you should as well.

Tim Loh

Yeah, that's right. That's right.

Robyn Jacobson

So it's interesting the increasing use and understandably this use of data and we've seen for many, many years now the ATO using data matching projects where they will obtain data from a third party and then extract certain information or run certain tests through it and match it up to what's been lodged in these things don't make sense. So some practical examples of this. There are some projects underway at the moment with landlord insurance. So the ATO is going to the companies that provide landlord insurance, which tells the ATO who owns a rental property, and then that can lead you to inquire about if the rents are appropriate or deductions are appropriate or whether there's a capital gain on the sale of it that's been properly declared. You're going to the banks to look at who's obtaining loans for obtaining residential property and again, whether if that's a home, they shouldn't be claiming anything. And if it's a rental property, is that being done properly? There's also a current project underway for motor vehicles. So the ATO is going to all the registration boards all the way down to Victoria. We call it VicRoads, of course, and understanding who owns a vehicle and that's a really good one because if it's owned by a company or trust, then the obvious question is how is the FBT looking if it's owned by an individual, well, do they use it for work, in which case it's okay that there are claims being made, but if in fact it's not being used for work, why are claims being made? So I think there's a whole series of questions that come out of this. But when I look at the scope of what the ATO can gather, so it has information, mobile phone, metadata, sort, it need to be making a phone call for the ATO to know that my phone's connected to a particular tower. And we know, for example, in criminal investigations the police are using this increasingly to place people at a certain point in a certain location. So you come back to superman earlier comment. He can't be in three places at once. Well, how can I be on the phone in a holiday beach area or a vineyard area when I'm claiming to be meeting a client in the city and therefore claiming some sort of tax deduction relating to that meeting? So with passport records, if I'm claiming I'm in the country using my car for work purposes, but my passport shows that I'm voluntarily out of the country, then questions need to be asked.

Tim Loh

Yeah, that's right, Robyn. And I think you touch on a really important point, which is we are using data a lot more, both from a compliance perspective, as you pointed out, but also we want to use it from an education perspective as well. As I said before, you know, it's all about prevention before correction. We want people to get it right. The first time we are in the business of auditing everyone, we are in the business of making sure people get it right. The first time. So for us it's about how do we make it easier for people get it right. First time there's an education component to it, but also, as I mentioned before, there is a compliance component, but we only want to use that component for the people who are deliberately doing the wrong thing.

AD BREAK

Robyn Jacobson

All right. So what are your top areas that are being focused on for 22, 23 returns? So this is the 23 income. Yeah.

Tim Loh

Yeah. So we talk obviously a lot about expenses, work related expenses. You mentioned before around the travel expenses and not copying and pasting losses claims. That's a really important area for us. It will continue to be important area for us this financial year and beyond. We've also focused on capital gains tax. We are seeing people make errors in relation to disposal of property, particularly around the main residence. So we are seeing a lot more people rent out a room in their main residence. So we're just reminding taxpayers there are capital gains tax consequences when you do sell that main residence into the future. So just making sure that got good records in place. The other thing we're focused on is rental property deductions, in particular for rental property investors. We are seeing nine out of ten rental property investors get it wrong. So it's really important they get it right this time.

Robyn Jacobson

That's a really high figure. Nine out of ten returns.

Tim Loh

It is a very high figure. It's something that we're very conscious of. And of these returns, 87% are prepared by tax agents. So what we're saying to people is particularly agencies, to ask those extra questions of a client in relation to the state of affairs to make sure that they're giving you the right information. It's really important that you do that because we just can't have those mistakes being made year on year. And one of the key things that we do see people make mistakes with is just in relation to rental income being left out. So for example, some of the things that we are seeing able to claim the matching amount after deductions from the annual property management statement rather than the gross amount and then claiming deductions. Again, it's another example of double dipping, right? So it's really important that you just take the extra care into making sure that the right income's been included. There isn't the double dipping of the deductions and the client is giving you all the information that you need to make a proper assessment particularly, but also around relation to introductions as well, where there's a bit of refinance you've done for private expense. It's just really important that you get this right because it is an area, as I said before, that we're really focused on this year.

Robyn Jacobson

And this is quite dynamic at the moment. And I mean that because we've had all these months of rate rises over the last 14, 15 months now, that's had an effect on, of course, potentially pushing up negative gearing losses, but it's also going to be an increased cost along with everything else going up with the cost of living and insurance and rights and so on. So rental incomes are also going to be going up. So there's no one size fits all in terms of the outcome. I've got to say, for taxpayers, some might have bigger losses, some might have more positively geared income coming through. But my point is that I'd expect to see changes this year compared to last year's return.

Tim Loh

That's right, Robyn. That's exactly right. So, yes, obviously the interest rates rises will potentially have an increase in terms of the deduction side. But we also know that there is a shortage of rental properties and the rental incomes have gone up as well. So we expect that to increase. But like you said, it really depends on the area city involved in the location. So like you said, it's really important to understand that your tax return will be different this year and the agent is really important just to make sure that you ask those questions of your clients to make sure they can get it right the first time.

Robyn Jacobson

That one on the net rent is really interesting and I could see how that could happen because if you own a property and it's managed by an agent, they of course take their agents fee and certain of the repairs and maintenance that they arrange out of that gross rent. So if you were simply relying on your bank statements and you went through your used bank statements and picked up the rental figure, yes, that will be the net rent received from the agent. So that's why I think it's really important for agents, international tax agents, to be asking the right question of their clients to say, would you give me this rental income figure? But as you said, Tim, is it the gross or the net figure? And maybe some taxpayers just don't realize that they have to declare the gross amount, not just simply what turns up in their bank account.

Tim Loh

That's right, Robert. So, yeah, it's just really important that you take that extra care. Like I said before, it's a real strong focus area for us this year and going forward. So people need to understand that you've got to get it right the first time and that's why those investor toolkits are really important kind of access. It's got all the information there for you to make your job a lot more easier and have those conversations and ask those questions of your clients as well.

Robyn Jacobson

One more mention on property before I move on to the next topic. But holiday homes, we've always had issues with people potentially not allocating expenses when they use it for private use or during mates rights or things like that.

Tim Loh

Yeah, look, it's that's again is another focused area, you know, holiday homes, Robyn, it is important to distinguish between a rental property and a holiday home. People can't claim deductions for those periods. They are producing income which includes when they use a property for private purposes with a renting out mates at mate's rights. And when the property isn't advertised in a way that is desirable for tenants. So for example, we've seen properties stipulating a three night minimum stay, then every Sunday it's blocked out, right? So those are things that we're looking at and we'll be taking a really close interest this text on.

Robyn Jacobson

Right. So onto capital gains tax. It's been around many decades now, but it continues to be a complex area. So why the focus this year.

Tim Loh

When it comes to capital gains tax? We are seeing people make mistakes on it. And if your clients do have investments like shares, crypto management investments or rental properties, they need to tell you when a CGT event occurs. So that includes things like selling assets, share buybacks, transposons, exchanges of crypto gifting, typical situations where you no longer the legal or beneficial owner of the asset. So it's just really important to ask those questions when you are speaking to clients now, when it comes to selling property, as you know, Robyn, some of your main residence is exempt from CGT. But as I've said before, if you are renting out a room through Airbnb or stage, it's important that you have good records and when you do sell the property there are some capital gains tax consequences that you need to work out, which can be quite a complicated calculation. So I would suggest speaking tourism, taxation about that one practical tip I have is typically getting a market valuation done at the time. So you've got a starting point to calculate that CGT rather than waiting to eventually sell out potentially years in advance, do that again. It's those records which I keep talking about. I do sound like a broken record now, but that is really what it's all about when it comes to working out what those capital gains tax consequences are going to be coming out of that. The other thing to note is that we've got a new fact sheet that we brought out in our investor toolkit. As I mentioned before, you can find that out today for such a fact sheet. So it's really important that just to finish up on this particular point that we don't want your clients to fall into the trap of thinking we won't know this if we sell an asset for a gain and don't declare it. As you said before, Robyn, we're using a lot more data from different sources. So we've got the residential investment property loan data, over 1.7 million individuals, but the landlord insurance data as well. So we've got different data points that we're using to cross-match against the data that we have on our systems. And then we use that to make sure we cross-check against the information that's put in the tax return as well.

Robyn Jacobson

Cryptocurrencies is a burgeoning area and we've got lots of tax payers getting into this space either for the first time or have been doing it for many years. But the point is there are still CGT implications for dealing in crypto and if you're going to exchange one type of crypto for another, it's no different to exchanging some Telstra shares for BHP shares, for example, CGT that still get triggered. So try to get that message through. How, how's the ATO going with that particular issue?

Tim Loh

We think of these things similar to kind of other investment assets, right? So we think of it like shares in many cases. And as you were quite rightly pointed out, Robyn, there are capital gains tax consequences when you sell, swap or change cryptocurrency. Now everyone knows that cryptos fluctuate a lot over the last 12 to 18 months. So some people would have made a capital gains, some people would make capital losses. But if you have held some of your crypto for at least 12 months or more, you can get the 50% CGT discount. So that's something that investors should be aware about. The other thing to note is with any capital losses that you made into your crypto, you can offset any other capital gains not just from crypto but any other message that you have. So just something for investors and clients and savings to think about when you lodge any tax return this year.

Robyn Jacobson

But you can apply those capital losses against your normal income like rent or interest on your salary.

Tim Loh

That's right. Robyn. Yeah.

Robyn Jacobson

Now side hustles, gig economy. There are lots of names for this particular part of the economy. What are you seeing in this space?

Tim Loh

Yeah, we've got a lot of data that's showing that nearly a million people have multiple working jobs. So that's about 7% of Australian workers working two or more jobs or supplementing their income with these side hustles or gig economy activities. And look, there are obviously new and different ways to earn an income these days. You can be driving movies or you could be making content on Instagram and you can get some dough out of that. So it's really important that whatever way you were earning your money, the tax obligations are exactly the same. Clients need to make sure they keep accurate and complete records and declare all their income in the tax return. Now, if new clients already come through continuous and repeated activities for the purpose of making a profit, that's going to be considered a business. And it's really important, as I said before, to declare that income into your tax return. You know, some things aren't going to be considered to be running a business if you're doing the annual garage sale of some old items, that's probably not going to be a side hustle. You won't have to include that in your tax return. And one thing to kind of also note in this is if you do have clients earning income, that isn't just money. So could be just goods or services. They receive tips or gifts, you know, subscription payments or fees. That's considered to be income. I need to include that in the tax return as well. And one thing that we have noticed is people have been getting tax bills. And part of the reason for that is people with some of these side hustles aren't having any tax withheld at the time they receive some of these payments.

So that's resulting in a large tax obligation at the end of the year. So it's really important that you have a think about signing up to the page. You go withholding installment regime to make sure that you are withholding tax on an ongoing basis so you don't have a big tax bill at the end of the year.

Robyn Jacobson

Really good advice, too. And we certainly see instances and it's reported across the media a lot lately with people with unexpected tax bills and some of these people have formerly been employees where all this was taken care of them. And when you go out on your own, you are now responsible for your own tax position. So if you've not been paying installments along the way through Pay I YJ and you've no longer got an employer taking withholding amounts out of your salary, then yes, you will have a shortage of tax paid during the year, which means it's got to be paid almost into the return. That's when some of the surprises happen. But also it can lead to unexpected steps that people aren't prepared for. And of course, they're not getting super support because there's no employer to pay that anymore. So they also need to think about should they be putting some money aside for their own super. And it's difficult because often gig economy, they're on relatively incomes.

Tim Loh

Yeah, that's right, Robyn. And you know, you're spot on in terms of what you just said when you are with an employer panel where you think it's kind of like living at home, your parents typically pay for everything, but then when you move out of home, you've got to take more responsibility. And it's really important that you put aside money for your tax obligations. And as you said, a really important point when it comes to superannuation, consider whether you need to keep some way for when you retire, which is always a bit hard to do because it's obviously many years into the future. But super is a really important asset for your retirement, so it's well worth having a think about that and speak to a financial advisor. That's something that you're interested in doing.

Robyn Jacobson

We know that there have been some taxpayers with unexpected tax bills this year. Part of this that I can't say it's wholly attributable to this is the removal of the low and middle income tax offset, which ended on June 30, 2022. Now, whilst it ended that date, people of course, were still seeing it coming through their income tax assessment notices throughout 20 to 23 years. They lodge their 22 return. So it's really only now one year on that people have said, oh gosh, we're now seeing a smaller refund of perhaps some even payable. There was plenty of messaging about this at the time through the ATO and by the profession that maybe not everyone understood the implication of what the removal of that offset has done. So I think it's important to note that the amounts of the low and middle income tax offset was effectively baked into the stage. Two personal tax cuts that kicked in some years ago, and then it was temporarily extended for another couple of years. So if people have unexpected tax bills, what can they do? What sort of support is available for people that find themselves in a tax position they didn't expect?

Tim Loh

Yeah, look, if you do get into a tax debt position, it's really important that you don't bury your head in the sand. It's really important that you do know that we do have payment plans. So you can do that, actually do that yourself online. And if you do get a tax bill, just don't stress about it too much about it, but make sure that you do lodge as per normal. And then if you are having trouble paying for this, make sure you're trying to pay a and you can do it yourself or mine or you know, or you can speak to a registered tax agent who can help when it comes to agents, you know, you can use your online services for agents to view, set up, adjust or cancel payment plans for your clients.

Tim Loh

So that's something that happens as you start to lodge a tax return on behalf of your clients. Do go to our website, which is Oakdale Value Forward slash module paid and get some further information to help you out in relation to this.

Robyn Jacobson

What about agents themselves who might be feeling under the pound for a bit overwhelmed? We know there are still labor shortages across the profession as there are in many sectors across the economy. What can I do to seek support?

Tim Loh

Yeah, good question, Robyn. Tax time is a really busy and challenging time for the profession. You know this, I know this, and tax agents listening know this. And we do acknowledge the aggregation of events over the recent years, including the pandemic, has added significant pressures on all of us. Really. We think it's really important that you're having those conversations with your clients to manage expectations. And we know a lot of agents are already doing this as well. And as you said before, we've been telling people for months now about potential for lower refunds and potential depositions. But we do know, you know, that some agents might be encountering circumstances beyond their control that will prevent the potential of lodging on time. So we've got, as you know, a lodgement program and lodgement deferrals that can provide agents with additional time to lodge without incurring the failure to lodge them. Time penalty. Now, the problem of your experience affecting your whole practice, for example, as a result of a significant event or ill health, you can request assistance via a supported lodgement program. So whatever the reason, we're here to help and work with you to get your lodgement program back on track and making sure that we can tailor our support to you, to your particular facts and circumstances. So my best tip is to check out our website, look after reports that lodgement program help and get some further information to help you with the potential support options that we have to help you get your practice back on track.

Robyn Jacobson

We've also got a new feature within a CSA online services for agents, and it's a new lodgment deferral function. So any agent is listening to this. So remember the, the wonderful days of having to send in a spreadsheet with a list of clients they Clare's ato can we have a on these particular lodge lodgment and a working group and set up of which the Tax Institute was part of. And through this process we collaboratively designed this new feature. So we're really pleased to see this go live and effectively it's a digitalized approach. So instead of the old fashioned spreadsheet being sent in, there's now a digital feature where you can basically say to the ATO, These are the clients, we want to submit a deferral request form and in real time you can see what's happening. You can keep track of what's being progressed. If something needs to be manually dealt with by the ACR, then they're made aware of that as well. But it seems to be much more efficient and more responsive than the old spreadsheet.

Tim Loh

Absolutely. Whenever you have to look at a spreadsheet on Excel, it's a good thing. I would say, look, you're absolutely spot on. We have worked collaboratively with tax practitioners, professional associations like yourselves to come up with this new function. We do hope it does dramatically cut the time it takes to lodge a deferral request and we wanted to make things easier. You know, this is a cost to tax agents that they shouldn't have to deal with. And we hope this new process helps tax agents streamline their processes. This tax time and beyond.

Robyn Jacobson

Something that people should be aware of. And this isn't a particularly happy note, but the amount of a penalty, you know, increased again on the 1st of July. We do see indexation every three years, but we also had a separate increase on the 1st of January. So one penalty unit is now worth $380. Now that may not sound much when you're talking one unit, but when you go to the tax law and you might have ten penalty units or 20 penalty units or 50 penalty units for not doing something such as lodging or not attending to a particular obligation, these penalties can get quite substantial. So I just remind people that in the background where there is a breach of a particular tax obligation, you can find yourself with some hefty penalties as a result, and that's separate from the general interest charge. So turning now and basically finishing our discussion on another not so happy note scams, cyber security, fraudulent misuse of identity and it's just such a hideous part of reality that we all need to deal with. We've seen the banks tighten up an enormous amount of spend that they've invested in tightening up security. We're seeing all the government departments and agencies doing the same thing, and scammers will always find the weakest link. So if they find that at the government level, things are so tight they can't penetrate the defenses so good, then they'll just go to the next weakest link and they might filter down through the professional, they filter down to businesses or they filter down to the individual taxpayer. What are your best tips? I mean, there is so much available online that people can rely on, but there are certainly some do's and don'ts when it comes to being really smart about looking after your data and your identity.

Tim Loh

Really good points and observations from the weakest link observations are really pertinent point and unfortunately, you know, scams are becoming increasingly widespread. There's been a lot of data breaches at Optus, Medibank and a few other organizations as well, and the scammers are just unscrupulous, right? They're going to, like you said, find the weakest link to make sure they can potentially get that data and use that to infiltrate not only the government systems, but any other organization for that matter, to extract moneys for devious purposes. Now, when it comes to the advice that we give when it comes to tax time as we are now, it's just pretty important to be on the front foot, be wary of any scam emails or text messages, phone calls and impersonated accounts on social media claim to be in the show. So a few tips I'd like to tell people is never provide any personal identifying information by email service will never include that type of request in those emails. Something else that you don't like to do is any hyperlinks. Hyperlinks are typically there to fish information from you so that scammers can direct you to a fake website where you're putting your personal details. And through that, they can access information relevant to you and use that to commit identity fraud. The other thing is, when it comes to phone calls, we always call you with a no caller I.D. So a number that would never project onto your phone and the other thing to also note is, will never speak to you in a threatening tone, threatening rigorous deportation or jail. Typically contact you in a friendly voice at the ATO. And the third thing is we do engage on social media, which we do. We never ask for personal information like your myGov details, your bank account details or your text phone number. Given why you might give details like giving away your case to Australian Media House and then watching them change the locks on your house, it's not a place that you want to go and with identity as this they can make your life so and it's really important that don't give those details away. So those are my best tips in terms of making sure that you look after your personal information and your bank account. You want to give your bank account details to a stranger. Why would you give your Marg update details to a stranger? So take those really personal details, then hold them really closely to him.

Robyn Jacobson

How do I know if someone calls me and they say they're from the 1890? How can I be sure? How should I respond? How do I act?

Tim Loh

Yeah My best tip is actually to hang out. My best tip is to hang up. If it does, tell me that it's a scammer. So my best hope is to hang up. And there's two things you can do. The first is to call us on our dedicated scam hotline, which is one 800 00540. And the other thing you can do is also check out our website at 8:00 today for that scam. Now, it's really important to ring that number because sometimes it could be a genuine person from the show, but by ringing that number, you can find out if in fact all the genuine call from the show or indeed was from a scammer. So that's my best tips when when it comes to working out whether it was a scam or someone calling me.

Robyn Jacobson

Thank you, Tim. I know that wasn't the most positive note to end our discussion on, but a really important one. As our community continues to be vigilant and fight off this hideous aspect of modern cyber activity. We love the online activities and we love being able to do things efficiently and be connected. But it does come with some really big risks.

Tim Loh

Yeah, and I just want to add probably one thing which relates to tax agents. Obviously, as you've said before, we talked about ad nauseum, Robyn, about identity fraud and cyber security risk across the community. It's really important as an agent, but you've got those range of controls and security mechanisms in place to prevent the fraud, which agents are responsible for managing their own security and cyber protection, and to not lose sensitive identifying information. And it's really important they've got that security in place. So some of the tip I have is to check out a website. I talk to you for us, touch professional security for for more information on this. It's really important because it can be quite disruptive if there is a situation where the scammers get a hold of your information or your client's information.

Robyn Jacobson

Absolutely. Because one of the first things the show will do is close off access to online services, which means you can't logically engage with the ATO, you can't access your client information. So it becomes very debilitating. And speaking to agents who have had this happen, there's a lot involved and it can take many, many months, if not longer, to be able to get them back up and running again.

Tim Loh

Yeah, that's right. And it's unfortunate, but these scammers are unscrupulous and un-Australian, and they'll do anything to take people's money.

Robyn Jacobson

Yeah. Look, Tim, thank you. I also wanted to personally thank you in terms of your contribution to the tax profession. I know this is your last round as tax time spokesperson for the ATO. You've become a very familiar face on our TV screens and across the airwaves and right throughout social media. I hope you've enjoyed it as much as we've all enjoyed your little anecdotes and your tidbits of advice, but you've done a wonderful job in this particular space now.

Tim Loh

Thank you so much, Robyn. It's been a privilege to have the opportunity to represent the ATO but also represent the tax community as well. For me it's been a real privilege after working many years in this space. But yeah, looking forward to getting back into the books a little bit more over the next coming years. So thank you for that wonderful acknowledgment.

Robyn Jacobson

You’re very welcome. Thank you, Tim. Thanks for listening to this episode of TaxVibe. I've been chatting with Tim Loh, Assistant Commissioner and Tax Times spokesperson at the ATO in the individuals and intermediaries space. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of the Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.com.au. We look forward to you joining us next time.

Why your favourite colour matters for data security

Release date: 9 June 2023

From the archives — recorded at The Tax Summit in October 2022, this is an in-depth discussion between our own Senior Advocate, Robyn Jacobson, CTA, and a couple of experts in data security: Debra Anderson, ATI, Board Member at the TPB, accountant, registered tax agent and cyber security specialist, and Corey Cacic, Founder and CTO at Annature.

They discuss current data security issues, the steps practitioners can take to ensure the security of clients’ data, the 3 golden rules for all taxpayers, and of course, why even your favourite colour is an important consideration for this type of security!

This is just a taste of the type of content you can expect at this year’s Tax Summit. The 2023 Tax Summit will be here before we know it — catch you in Melbourne from 5–7 September!

Host: Robyn Jacobson, CTA

Guests: Debra Anderson, ATI, Director, Anderson Tax Consulting and Corey Cacic, Founder and CTO, Annature

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Debra Anderson, Director Anderson Tax and Consulting. Deb is a registered tax practitioner and specialises in tax and technology for small businesses. Deb also works alongside me as a member of the ATO's Tax Practitioners Stewardship Group and a bunch of other working groups. More significantly, Deb sits on the board of the Tax Practitioners Board.

I'm also joined by Corey Cacic who is the product and engineering visionary, at Annature with more than ten years experience in Digital Signature Solutions. Corey carries numerous Amazon Web services specialty certifications, including cloud security. Deb and Corey, welcome to TaxVibe and particularly in-person at the Tax Summit in Sydney.

Debra Anderson

Thank you, Robyn.

Corey Cacic

Thank you. Pleasure to be here.

Robyn Jacobson

Great to have you. So in light of a lot of interest in the media and in the community about security of data, I thought it would be great to have a chat with both of you in your respective roles and with the expertise that you bring. Now, I googled data security as a search and it produced 6.3 billion search results. So that tells me a lot about how much interest there is and how many sources of information. I didn't have the opportunity to go through all 6.3 billion of them to see how many but legitimate. But you can say my point now in this technology revolution, and with so much of our personal and professional lives spent online, data security is more important than ever.

So, Deb, I'd like to start with you. How do you define data and why is it important?

Debra Anderson

How do I define data? Data is anything and everything that we put online. It can be something that is completely irrelevant or we think is completely irrelevant. Such as your favourite colour. You know, when you're on Facebook and you do those sort of Facebook quizzes, those types of things, or it can be really important data, which is things identifiable to you.

So your tax file number is an obvious one for what we're talking about today, your date of birth, your address and on its own bits of data don't really, depending on the type of data, don't really matter. Right. Like if it's just what's your favourite colour? But when you start putting lots of data online, you can actually then be mapped, I guess, and profiled and all that data becomes an identity. And that's when people can take all of that data that you've put online and actually create another you.

Robyn Jacobson

So when you're looking at people who are, let's say, not so honorable, they have tools and mechanisms and resources to be able to extract this data and collate it and then build profiles or create new ones, don't they?

Debra Anderson

They do, and these people are so clever. I just wish they would use these skills for good instead of evil. But what they are doing is setting up these really cool little, you know, press here on this Facebook quiz and it'll tell you what this is. But what you're actually doing when you press. Yes. Is giving over your data to an unknown place. So, yeah, data is everything.

Robyn Jacobson

When we look at tax practitioners, whether they be tax agents, best agents, legal practitioners, essentially anyone who's acting in an agent or representative capacity, they've got a lot of data that might be stored at their office. It could be on a local drive, it could be on a cloud based drive and then of course, there's all the ATO data, and the ATO has been sharing with us for some time that they can have 4000 hack attempts in an hour. They can have two and a half, 3 million attempts in a month. There's a lot of unsavory activity going on out there. So in terms of being aware of this, your thoughts, Corey.

Corey Cacic

Yeah, when you acting in a represents capacity, you're dealing with many individuals data, attacks on individuals themselves may be common, but the end result of an attack is to understand what are they looking to gain from getting access when after an individual they're getting one person's identity and they look at a legal professional or a tax professional, the end result can be many identities. It's important to understand the targets and what the desired outcomes are for these people that are, you know, conducting malicious activity.

Debra Anderson

And I think tax agents are high value targets.

Corey Cacic

Exactly.

Debra Anderson

You know, we hold rich data, we hold lots of data, and we have access to systems just by being us as well. So our own identity is under threat.

Robyn Jacobson

When we look at the impact of a data leak, we've heard many stories over the years of people that have been sucked into scams or been vulnerable and weren't aware what was going on. And we continue to read in the media about, you know, someone lost $100,000 here or they lost $60,000 here. And all this different circumstance. With identity theft, we've got fraud and there's financial losses and reputational damage. And we've had some quite high profile leaks which have been affecting millions of Australians. They've been not just recent but very sobering and I think it's a bit of a wake up call for everybody. Again, I'm interested in your thoughts as to do we need to reset, we just need to increase awareness, don't we?

Corey Cacic

I certainly think we do. It's important to also understand when you're dealing with software providers or other companies, are they keeping up to date with technology and their security protocols and what they're doing? So what may have been acceptable ten or 15 years ago is no longer acceptable these days. The methods they're using to obtain access to these data is evolving a lot quicker than some of these large enterprises are keeping up with our internal measures to prevent against this.

Robyn Jacobson

Is there ever going to be a time where we can be in front of us? Are we always going to be catching up?

Corey Cacic

I think we'll always be catching up. There's too much to be gained by attackers that are successful in their attempts.

Debra Anderson

I guess, you know, if we look at some of the more high profile hacks recently, we look at something like Optus, for example, and then you look at the average practitioner or the average tax agent business in Australia and you know, if a corporate such as Optus struggles to keep the hackers out, how does the average person like us manage to keep the hackers out? And I think, you know, for me that's the stuff that keeps me up at night. As a practitioner, how can I make sure that I'm keeping everything safe? And that's a challenge, because if they can't do it, how we supposed to be doing it?

Robyn Jacobson

And you are a guardian of that information.

Debra Anderson

What tax practitioners need to realise. It's not a matter of if, it is a matter of when someone tries to get into your system and all you can really do is make it really hard for them forgetting. It's like knocking on someone's front door and going, Oh, they left the door unlocked. They'll just walk in versus Oh, they've locked the door. I'll go next door and say their door's open. And so I think, you know, that's pretty much all you can do is just try and keep them out. You know, Robyn, your question of will we ever get in front of these people? I don't think we ever will. And the reason is they are so agile, they are so smart. I don't think we will unless we get some of them coming from the dark side to the light and actually helping.

Robyn Jacobson

Deb, from a regulation point of view, we have something called the Notifiable Data Breaches Scheme. Can you briefly explain what this is and how it works?

Debra Anderson

Sure. It's if you are a tax agent and you have a turnover greater than $3 million, if you are subject to a breach and your client's data has been compromised, you need to notify the Office of the Australian Information Commissioner and also the affected individuals. If you are a tax practitioner below $3 million, you still need to make a notification to those individuals. And you also need to contact the Australian Tax Office immediately to let them know that your client's data has been compromised.

Robyn Jacobson

Deb, in terms of interactions with government. We've got relatively new platforms and I say new because they weren't around 20 years ago. We've got myGov and we've got myGov ID and I just want to explain the difference because there's still confusion about these two. myGov is a platform which is how you interact with government services, and that was primarily built by Services Australia. So you get your Medicare information through it and Veteran's Affairs and of course you can attach the tax module and that gives you access of course to ATO information. myGov ID is a digital identifier, so it's an app that you download on your phone and you upload or have verified your documentation might be driver's license or a passport. And once that is accepted, then that is a way of proving who you are in order to access services. So with my given myGov ID, what do you say to those who are still so concerned about using these technologies or these platforms or ways of accessing information?

Debra Anderson

myGov ID is fully encrypted. It is really secure. You've got fingerprint or face I.D. technology behind it and you know, the documents are not stored on your device. The identity documents are matched in the background and then just said, yes, they're verified. So it's very secure. And I think, you know, we should be encouraging everybody whenever to use myGov ID and we should be encouraging other agencies to take on myGov ID and wherever we can use it.

I think the biggest risk with myGov ID is people are still sharing the logging details and we do say that at the TPB that people you know, in the old days he put the password for the ATO portal app on a post-it note and these dice they sharing it might have ID date. He cannot do that. And I think in this day and age, we need to be safeguarding your identity more than anything. And as a professional, you need to be safeguarding your identity because when you're communicating with the Tax Office or any other agency, they need to be sure who they're dealing with. And if you are letting other people use your ID, you are responsible for that.

Robyn Jacobson

It's also worth noting within myGov ID, you've got different levels of strength so you can have standard or strong and of course would encourage people to have the strong setting rather than just the standard one. It's extra security.

Debra Anderson

And only takes a couple of minutes to do

Robyn Jacobson

Yeah, it's quick and sun in real time so when we've got scam call as was so prevalent out there how do you know it's the ATO calling and call comes through and I might say no caller ID. How do you trust the person you're speaking to? And I'm interested to get in both your thoughts. I'll start with Corey.

Corey Cacic

The sensible answer is don't trust them. You don't trust that it is the attack on you. If you believe that there may be a valid reason for you receiving a call from the ATO, let them know that you're going to be calling them back. So you go to the ATO’s website and you find that contact number and you call them yourselves. That way you know that you are in fact reaching someone at the ATO and then you can pick up, you know, exactly where you left off when they called you.

Robyn Jacobson

Deb I'm just thinking, particularly when you bring the ATO, you can wait in call centers and lines. Things have improved of course, but trying to get back to the person who called you isn't always easy, is it, as a practitioner?

Debra Anderson

No, it's not. But if you call the agent line, it's really quick. So it's usually not an issue. But I do subscribe to what Corey was suggesting. Do ring back. It is really important. And in fact, what's really scary is if the call comes through and it says ATO on the call because that's usually when the fraudsters are spoofing the ATO's phone numbers. And we had a situation about this recently, about two or three years ago, where they were actually using real ATO officer numbers. And so when people were bringing back the number on the phone, they were actually ringing people at the ATO who had never rung them. So, you know, these people are really clever and I think the important thing to do is, as Corey said, go to the website or an independent place to get a phone number. But I will also add to that, be really careful that you're going to the right website, okay? Because if you are Googling a number, the first thing that comes up in most cases will be the right one. However, it's not always the case. Okay. So it could be, for example, that you're getting a phone call from a financial institution that may not actually be a financial institution about your client. So really make sure that when you are speaking to people that you identify them as well and are confident with who you were speaking to.

Corey Cacic

I think to add to that as well, coming from a development background and understanding how SMS’s and phone calls can be made, it's I think everyone would be incredibly surprised,to understand how easy it is to spoof a number, even when you're talking about text messages to spoof that number and send a text message from the ATO, it's incredibly easy to do so when you have a mobile number saved in your phone under Mum, for instance, if an attacker is then able to send you a text message from Mum, certain phones will actually place that message in the same thread. And unbeknownst to you, that's just another message you've received from attackers.

Debra Anderson

And that's that high mum scam that's been going around recently, right?

Corey Cacic

Exactly.

Debra Anderson

Exactly.

Corey Cacic

Exactly, So just understanding that. Yes, spoofing numbers is an incredibly easy thing to do. And so just getting back to what do you do, call them back yourself.

Robyn Jacobson

So I think there are three golden rules. One, don't provide your personal details over the phone unless you totally trust the person you are speaking to. In other words, you're calling a family member or you're calling the ATO because you have sourced that phone number from the ATO, legitimate website or another institution, etc., that you're trying to get in contact with too. Don't click on suspicious links in text messages and emails. Three The ATO will never threaten you with legal action or arrest via a voicemail or any other recorded message. And I think all of us have at some point been threatened with that. I know I have Amazon from Customs, from the ATO. It's amazing how many warrants are out there for my arrest at the moment.

AD BREAK

Robyn Jacobson

So Deb, as a practitioner, what steps can you take to ensure that your client's data is secure? Some thinking in a physical office the old days and going back to many decades ago, you would have made sure your desk was clear of confidential papers. You would have locked up your computer, put your client files in the filing cabinet, and locked everything up in a secure fashion, and you will shredded any confidential ways to make sure that that's all properly disposed of. Now that we're in a shared workplace, we could have shared offices which people are now using in a literal fashion, not a virtual fashion. We're sharing rooms with other organizations. We could be sharing printers. And then of course what the working from home scenario. So as a practitioner, how do you manage all this?

Debra Anderson

Carefully, I think all those situations, my anxiety levels went up with each one of them because thinking about, for example, you mentioned shared workspace. I think that's why it's risky. I think any kind of printing in a shared workspace that is not your practice is incredibly risky. You know, you need to be so careful that your client's data, your client's information is not able to be accessed by anybody outside of you and your practice. So if you even leave your computer on and go to the bathroom, your computer is vulnerable. If you print something and go to the bathroom, you know, a tax return, for example, there is a lot of data on the he even if he's selected the option of no TFN, you've still got date of birth, address, income details you know all of that kind of information is available. So I think, you know, you need to really have a look and risk assess that particular situation and whether it's right for your practice because it's not just the printed material, it's not just the computer. It's also when you're on telephone calls with clients, it's also when you're on telephone calls with the ATO. Every time you ring the ATO, you need to identify yourself every single time. So every single time you're in a shady environment, you are sharing your data. So I think that's called a whole bunch of issues there. Working from home is another really good one and I think again, you need to have really secure passwords. Ideally have facial recognition on your computer. I know I've taken all pins off. It's all facial recognition. So I think we just need to be making sure we're doing all of those really basic things. Using a password manager, not re-using passwords, I think is for me the number one thing, not sharing too much information about ourselves wherever possible. And I know with social media that's particularly tricky. And also making sure that if you are having client meetings that you are in a, a quiet space. So you're not having those identity type conversations in a café, in a shared workspace, any of those types of things. And you know, the youngers out there who are share housing, you really need to be making sure that none of that information gets out.

Robyn Jacobson

Deb, what about cloud based services? So we've certainly got rules within the code of professional conduct in the Taxation Services Act where you're not permitted to share any of your client data without their permission unless legally required to do so. Now, I think almost all practitioners would be well aware of this, although they're expected to know it as part of their registration. But sometimes there's just a differentiation, perhaps in some minds that if I'm just going to cyber follow my computer, it's actually being saved in iCloud or Dropbox or OneDrive or any of these other cloud based platforms. And that actually is a third party provider. So you've got to need your client's consent to save their information. If they don't consent, you can't save it there.

Debra Anderson

It's a really good point, Robyn, because I think there is a misconception we always think about the file is here, it's in front of me, I can see it on my computer. But in fact, the most people, they're not actually looking at a file that is on their local computer. The file is up there in the cloud on another service. So practitioners do need to be aware that they cannot use cloud based services that have not been approved for want of a better term by their client. Now, the ideal way of doing that, I guess, is to include all your cloud based providers in an engagement letter. That is a practical solution. And, you know, unfortunately letters of engagement are not mandatory, but they are highly recommended by the TPB and this is another really good reason.

Robyn Jacobson

And bear in mind, different professional bodies have their own ethical and regulatory requirements for membership. So it can be separate layers there. Cory, your thoughts on the tips and tricks and pitfalls of using this sort of third party storage?

Corey Cacic

Yeah, so thinking in a practical sense, saving a PDF document, probably the first thing that a practitioner wearing so thinking of a PDF document where that document is being stored may be the most obvious example of where you are storing that data. So whether it be on your local computer or up in Google Drive, for instance, understanding that when it is on your local computer, you may have services turned on that do sync your data and do back up your data. Where are that data being backed up to? When we think about things like HubSpot, if you're using HubSpot as a CRM, where are those data centers located? So where are those physical files located? In a data center. So while you may access it from your computer in your home in Queensland, that file also exists in a data center, possibly in the US, and that may then be backed up into another location. So thinking broader than just where that file exists, think of all the data controllers

Debra Anderson

And Cory, to go even further with that, we also access a lot of those documents on our telephones. So, you know, it is even bigger than that. And we really need to make sure that we guard these electronic devices as best as we can.

Robyn Jacobson

Proper passcodes, face ID, wherever you can.

Debra Anderson

Absolutely. Do not share passwords. Do not share pins, but where possible, use biometric type, you know, authentication. So facial ID, a fingerprint, those types of things don't make you children on your phone. I know on my telephone I can access all my emails. I can access my accounting system. I mean, forget the Internet, right? We can access almost anything, right? The had everything. But I've also got all my client Pauls I can access through because I use, you know, Dropbox, you can access that on your phone as well. So we do need to be incredibly careful. And going to Corey’s point about it's not just a matter of saying, okay, well, I use this particular provider, you need to understand where that provider is storing that information and what the jurisdiction of that particular information is.

Robyn Jacobson

Corey, how do you know where the data's being stored by these third party providers?

Corey Cacic

Says software providers do have an obligation to disclose where their data is being stored. So that's immediately looking at the privacy policies of a lot of these websites and providers, but also understanding that certain jurisdictions may have disclosure rules into what data must be disclosed. So investigating what those jurisdictions are, if the data is being stored in a certain state in the US, does that state have disclosure regulations that may force that vendor under certain parameters to disclose the data that is being held there without, you know.

Debra Anderson

To finish on this particular note before we move on, I think we also need to address that when we dispose of our laptops, our computers, our smart printers and our smartphones, we need to be really aware of what data is on those phones and that they all the computers or the memories that are in those printers. So I think, you know, they're all the types of things you can't just get your phone, say, you know what, I got a new iPhone 14. I'm throwing this one in the bin. You can't just say even worse. I've got a new iPhone 14. I'll put the 11 on eBay and sell it. We need to be making sure that all the data is deleted properly. So just like you would have a piece of paper and would throw it through a shredder inside to be making sure you're doing that correctly with your electronic devices as well.

Robyn Jacobson

Really good point.

So let’s move away from security of data. And let's talk about the clients themselves. We've got a lot of new guidance and regulation in relation to proof of identity, proving who our clients are or then proving to us who they are. So can I start with you? What are we required to do? What do we do with all these photocopies and scans of ID documents? And then I want have a chat to Corey about some digital solutions here. But let's kick off with what do you have to do?

Debra Anderson

I think the first thing there is you mentioned, I'll start with the proof of identification. So the TPB have issued a practice note on the proof ID requirement as earlier this year. What that means is that for new and existing clients, you need to do a proof of ID. All for existing clients could be an assessment of the proof ID. What I mean by that is new client comes in. You need to prove that who you're dealing with is actually who you're dealing with. All right. You need to verify that by looking at, for example, a a photographic piece of identification that shows their full name residential address database. If they don't have photographic ID, you can use a non photographic ID like a primary one being something like a birth certificate, a citizenship certificate, and then you can use a secondary form a by de such as a medicare card or something like that for existing clients. And you know, everybody's got existing clients they've had for 20 years and you're thinking, why do I need to do a ID check on them doing not assume that if you are dealing with someone electronically, for example, you cannot assume that the person you're dealing with on the other side of an email is the person you were dealing with last year. On the other side of the email, and I did see a case recently come through the Board Conduct Committee where a client had been going to a particular tax agent for a couple of years. And then this year I think it was like the 2019/2020 year the client emailed the information to the agent. The agent had a new employee. They junior person prepared it all, got it all signed off and the client got a refund, very large refund. Thank you very much. What had happened was that client's email had actually been compromised and so it was a fraudster on the other side of that email. So even though this was a client that they had dealt with beforehand, there were some situation changes which didn't cause alarm, which should have. And I think the number one thing is when situations change with the client, you know, when all of a sudden they change occupation and so it's wait a minute, you've got all these losses or something like that, right? Or you know, they've paid a lot of package compared to their income with a complete different employer. There's also the really big one for me is bank details. All right. And let's be honest, no fraudster start lodges a tax return with an amount payable. It's always refundable. So, you know, they're the types of things that you should really be looking out for. The interesting thing about a lot of the cases that we see with that is that in most cases, the practitioner is not even using the pre-filled and the pre-filled would have been another red flag saying, hey, there's something wrong.

Robyn Jacobson

But some of the things you mentioned then I would have thought would have been overcome if you just picked up the phone and spoken to your client and said, you know, have you changed jobs or have you changed your occupation having a dialog, wouldn't that assist?

Debra Anderson

You know, it's interesting, Robyn, because I don't think picking up the phone isn't always the way clients like to work with you these days and the world has changed. In a lot of cases, some clients only want to deal with you via email and that's really hard because these fraudsters are so clever and they mimic you. So you just need to be really careful. Now, in that particular case, I don't know whether a proof of identity would have even fixed that. Like they may have had access to that. But the fact that they didn't do a proof of identity, the fact that there were all these red flags but none of it was checked, was obviously concern and cause for not using reasonable care.

Robyn Jacobson

Corey, solutions. How can we overcome some of these challenges?

Corey Cacic

Best judgment is understanding that a client that you've been dealing with for ten years has consistently submitted returns where there has been a small amount, either payable or refundable, and then suddenly you now have a return with thousands of dollars so that there should immediately rise flags in saying that our best judgment is good. But there are also tools that you should use before that judgment comes into play. So at Annature, we saw this notice coming through in June and we immediately found a product we could build to meet the requirements that were laid out in that notice. So a digital tool where you are able to collect a name, a date of birth and an address from a client and a primary photographic identification document, a license or a passport. The important thing to remember with this is that these information is not being transferred over email. Email inherently is insecure. None of this should ever be going over an email. So what we've done with our platform is build upon the foundation of our ISSO certification that we have, and all of the security protocols that were built into the core of the product and provide a host of Experian s where a client may provide that information and photograph the ID document. That information is then stored securely with us in our data centers in Australia, all encrypted on the best practices and then only through our platform, which requires a practitioner to sign in and two factor with them. Mobile as well is always enforced for us and it's through that platform that they are able to temporarily review that information and sight that license electronically.

Debra Anderson

I think going back to your point, Robyn, where you say what do we do with all the photocopies? So if they are using the, you know, traditional methods for photocopying, the TPB strongly recommends that you do not create any record of the ID, that it is securely destroyed. And, you know, you don't need to photocopy it. You know, you take the details, you visually take the details and you document that in your checklist. You know, the date that you took it, the time who took the information or you know who verified it, what the ID was, but do not document the ID numbers. And I think that's really key as well. So it's one thing to say or, you know, verify. Debra Anderson, you know, New South Wales driver's license. One, two, three, four, five, six, seven. Whoa. All of a sudden, like we saw in the Optus hack that all that information is available. Think of it like your credit card numbers, you wouldn't leave that lying around. So you know, x x x x with, you know, one two on the end or something like that. That's practical. That shows that you did do the verification checks, but you have nothing that could be used to recreate that identity. Because again, we come back to tax practitioners, hold really rich data on their clients.

Robyn Jacobson

Look, I think this is a conversation that we could just continue for hours and hours. And I'm very grateful for both of your insights. I think of the challenges that face businesses, the community, generally, government and, of course, organisations. And we talk about the profession in particular in this case. So thank you Debra nd Corey, for both of your insights and hopefully around a little bit more mindful and aware of the sorts of challenges that are out there.

Debra Anderson

Thank you, Robyn. And you I do say the TPB website, we've got some great handy fact sheets on there. We've got a fact sheet that you give your clients so that they understand when you are doing a proof of identity that it is a requirement that you need to do so they won't be questioning that as well.

Corey Cacic

Yeah, thank you for having us Robyn.

Robyn Jacobson

My pleasure. So thank you for listening to this episode of Tax Bob. I've been chatting with Debra Anderson, Director Anderson Tax and Consulting and a board member with the TPB and Corey Cacic from Annature. We recorded this episode of TaxVibe LIVE at the biggest tax event of the year. The Tax Summit. The Tax Summit is three days of tax,

technical insights, thought leadership and will post networking opportunities. Where the profession's best and brightest come together. Tax Summit will be coming to Melbourne. We hope to see you there. To keep up to date with TaxVibe sure to subscribe, rate and review. Wherever you listen to your podcast. You can also contact us by emailing us at taxvibe@taxinstitute.com.au, we look forward to you joining us next time.

Bonus Episode — Federal Budget 2023-24

Release date: 12 May 2023

You won't want to miss this bonus episode of TaxVibe, where you'll get a special insight into our post-Federal Budget reflections - a sneak peek behind the closed doors of our member-only webinar.

You'll hear the highlights of key tax & superannuation measures and their commercial and practical implications. Facilitated by our own Robyn Jacobson, you'll hear from panellists Clint Harding, CTA, Partner, Arnold Bloch Liebler, Clare Mazzetti, Chair, The Tax Institute, and Marg Marshall, CTA, President, The Tax Institute.

To hear the full webinar and access other member-only insights and resources, become a member of The Tax Institute. You can learn more at our website.

Host: Robyn Jacobson, CTA

Guests: Clint Harding, CTA, Partner, Arnold Bloch Liebler, Clare Mazzetti, Chair, The Tax Institute, and Marg Marshall, CTA, President, The Tax Institute.

Robyn Jacobson

You'll hear the highlights of key Tax & Superannuation measures and their commercial and practical implications. You'll hear from our panelists Clint Harding, CTA partner at Arnold Bloch Liebler, Clare Mazzetti, chair at The Tax Institute, and Marg Marshall, CTA and President of The Tax Institute. You'll also hear me facilitating the discussion. To hear the full webinar and access other member and the insights and resources become a member of The Tax Institute. Head to our website to learn more. We hope you enjoy this episode of TaxVibe.

I would like to seek your insights and your reflections on the budget that was delivered last night and it's hard to disagree with a headline appearing in the Financial Review today that talked about, as I quote, spending and taxing puts off all the hard decisions.

Clare, I'd like to start with you. What are your reactions to the budget? Did it achieve everything that you thought -we could use this opportunity for? Is there more that could be done?

Clare Mazzetti

Look, I. I'm surprised the opportunity wasn't taken to start a broader conversation around tax reform but if we really think about where the government is in its lifecycle, it's one year into a three year term and it probably doesn't want to expend too much political capital on what's going to be a very difficult and big and broad ranging conversation that will be needed with the electorate.

So, in some ways I'm surprised, but in others I'm not. Globally, we face significant economic challenges and headwinds, not just in Australia, but in many of our like minded countries. Interest rates have continued to rise and probably will for a little longer, even though we're probably toward the peak of the cycle. Inflation challenges are still there, so it makes sense that the government have focused on cost of living relief, particularly for those in our community that need it most and so I think, you know, you can't fault them with that but unfortunately, those measures probably will be stimulatory and reinforce the need for more interest rate hikes. And so you get caught into a bit of a hamster wheel of structural challenges that will need to be discussed and will need to be tackled. So I understand probably where they've prioritised, but maybe a lost opportunity to start talking about things of of substance so that that would be my reflection.

Robyn Jacobson

Clint, your observations?

Clint Harding

Yeah, I'm glad Clare can speak as more as an economist than I can. My take on it really as a tax nerd was that it was a pretty small target budget. A lot of the measures that were in the budget had already been announced or had already been the subject of significant consultation and so doesn't mean that they're not interesting and not important, but it means that they weren't a surprise.

So I perpetually wake up in the morning hoping that there's something that no one knew about. There's not a lot of that in there. So I definitely think there are some hard decisions to be made, whether they get put off to next year or taken to the next election cycle as is anyone's guess but certainly with what we've got in front of us to talk about today. there's lots in there but I thought it was a, as I say, a fairly low profile budget.

Robyn Jacobson

And Marg, there didn't seem to be too many surprises, but against the backdrop of 11 rate rises in 13 months and the inflationary impact which we will return to a few times in our discussion today, the global uncertainty. There isn't a lot of substance in the budget. It's not short on volume. There are certainly plenty of measures. But in terms of real substance, and as you say Clint, us tax nerds like to look for that substance? Has it targeted those in need? Could they have done more?

Marg Marshall

Look, I certainly that there's been a distinct effort on the government's part to to target the most needy in our community. Some of these cost of living measures will be well and truly, gratefully received to Clare’s point, some of them may well be inflationary of course, when whenever there's a handout that tends to be additional spending. Unfortunately, that's just the nature of who we are as people but to the point of what's in it, in terms of real meaty stuff that we can get in to improve the system, yeah, it's very light on. Yeah.

Robyn Jacobson

Clare, we've already hit this referred to as the high taxing and high spending budget. Is this the case? In an earlier discussions you've referred to the concept of inefficient taxing. We headed down that pathway.

Clare Mazzetti

Well, I think that this is part and parcel of the need for a broad ranging conversation on holistic tax reform. And, you know, obviously, the Institute is a very big proponent of that. And I know we'll pick up that conversation as we go through today's chat. But yes, I would argue it's inefficient, taxing, you know, bracket creep obviously is something that continues to raise its head, among other things and so when we think about what the community values the most in terms of government services, you know, NDIS, broad access to good quality education, a strong medical system, all those sorts of things. They are increasingly expensive services to provide but important services to provide. So unless we, you know, have conversations to help every part of our community understand, you know, what, we want to continue funding and what is the best way to be able to pay for that. Then we will get into the situation where things fall short or we can't prioritise the things that we need. So I would I would argue that until we have that conversation on structural reform, it's it's inefficient taxing.

Clint Harding

And Robyn, I suspect the starting point of that will be one of the things that didn't touch she said was she had tax cuts. And so they were introduced to as a sort of tip of the iceberg. Let's try and address bracket creep, which most economists and academics will acknowledges is a bad thing. But that will be if those things that need to be funded, that will possibly be the first thing on the menu that the government takes a look at in terms of what they're prepared to do. And that might start that conversation around structural reform.

Robyn Jacobson

So we're all well aware of the rate rises and the impact that is having financially on many households and businesses around the country. Inflation seems to have the start of its descent back to what we could describe as a more normal level, but it's still remaining stubbornly high. So for now, the cost of living pressures really remain a challenge out there.

Where does this take us? So internationally, Clare, we look at the measures that we've got in place and is it enough the rate rises and the fiscal response? Is this a responsible way of dealing with the challenges we've got at the moment?

Clare Mazzetti

Well, typically when you have inflation sort of running above, you know, 3 to 4%, obviously governments will increase rates to try and slow the economy down. And that's what's been happening. But unfortunately, inflation has been running well ahead of, you know, government's ability to be able to increase rates and to keep up. So while it does look like it has reached the peak globally and it is starting to to moderate when you've had big global situations like the Ukraine war, which has interrupted supply chains, food chains, these flow on effects typically take, you know, six, nine, 12 months to flow through and that's exactly what we're seeing now. So we're on the receiving end of those challenges, but inflation isn't coming down fast enough. And so governments probably will need to increase rates or reserve banks will a little more to to moderate those pressures within the economy. So it probably will remain more challenging for a little while longer. And my sense is that probably as we get toward the back half of the year, that rate cycle will have peaked but unfortunately, it probably does mean a little bit more pain ahead and potentially, you know, for the US to go into a recession toward the back half of this year, which has global implications for other economies too.

Robyn Jacobson

Clint, I think the one thing that did surprise me last night, the surplus forecast, you know, there has been talk over particularly the last couple of weeks about the fact that we are very likely to go into surplus. But the way it hit seemed to be the 23/24 year. And so the surprise for me last night was opening up the papers to understand that that is predicted for the 22/23 financial year but if we look at the turnaround, it's been massive. We're sitting at roughly a $37 billion deficit when the budget figures are updated last October. So that's roughly a $40 billion turnaround but given the spending measures that are in this budget, we are going to see deficits return from 23/24 and again for many years on. That's the horizon. So is it going to make it a very difficult budget next year?

Clint Harding

Yes, I think it will. Look, I think as a non economist I get a bit fatigued when we talk about deficits because we've had one four, call it now 14 of the last 15 years, go 2023 but I mean, what does it really mean? And governments roll them out and they become topical for a week around the release of the budget and then life tends to go back to normal until we see the size of the interest bill and next year's budget. But I think what it does mean is that they've announced a whole lot of spending programs that will carry on over the forward projections that need to be funded. How Treasury goes about modeling inflows of taxation. I mean, important to things like the Ukraine war and the impact on Australia's commodity prices, Australia’s great at digging stuff out of the earth and selling, that's what we do. That's been a seen there's I've read articles about how they take a conservative approach to price of iron ore and things like that. So your guess as good as mine as to what those numbers look like but it was surprising to find us and an immediate surplus but then being taken away over the next four estimates how far you want to go.

So I think that does make for a more difficult conversation and will potentially restrict their ability to roll out further cost of living measures or largesse in future years.

Robyn Jacobson

And this is not to frame spending as a negative. There are, of course, reasons and purposes and occasions where it is necessary and appropriate, particularly with the cost of living pressures, at the moment.

Clint Harding

I have three teenage daughters. I have that conversation quite a lot.

Robyn Jacobson

We're all aware of this! Marg, turning to funding, so there's always been allocations in the budget for various government agencies and certainly The Tax Institute supports the appropriate allocation of funding but do you see that we're going to have potentially more touch points with the ATO because of increased funding? I'm referring to compliance activities and taskforces and the like.

What are your thoughts on this?

Marg Marshall

Oh, look, like I said, we do support the regulator having funding that it needs to do the job to ensure that we have a system that's working well. What we would prefer to see, I think, is is more permanent funding as opposed to temporary funding, where there's a program that's meant to achieve a certain target of so many complying taxpayers or so much of the tax gap collected or that sort of short term response. But having said that, those sorts of programs do mean that there will be more comms coming out from the ATO, approaches about the various different things that they decide they need to look at, whether it's a GST gap or a tax deductions for work related expenses, which we've heard about in past years. So yes, I do think that we will probably be hearing more from the ATO because they've been provided with more funding and extension to the compliance program.

So that creates more work, obviously, in an environment where we're all struggling with resources across the board, really, including the ATO, I might say, they also struggle with resources. Like while the funding's there are the people, they're not sure. So how that gets efficiently done is always a concern. So, you know, should we be thinking about funding?

And that's the proverbial sort of royal way as a community to make sure that what we're actually funding is something that's going to achieve an outcome of long term benefit rather than short term gain.

Robyn Jacobson

The idea of having permanent funding versus temporary funding. There are often been budget announcements where a section of funding is provided to one of the agencies, let’s call it the ATO and it is on a temporary basis. It'll be announced for two year period or hopefully in the year him and it kind of just means it's handed out in dribs and drabs and we wonder whether there might be benefits in having a proper, reliable permanent source of funding like anyone's like having a permanent full time job versus a casual job.

If you don't know when the next dollars coming in, it's difficult to plan ahead. So those agencies need to resource themselves the same way that any other organisation does.

Marg Marshall

That's correct. Yeah.

Robyn Jacobson

Thoughts on this Clare?

Clare Mazzetti

Look, I think that could take us into sort of a long winded conversation about, you know, efficiencies of business and what levels of resourcing and productivity and how much people can do. Look, one observation I would make in certainly in the post-COVID world, even though we're still living with COVID, is that all the businesses I have touch points with, their teams and staff are exhausted and there is a significant amount of fatigue.

There are significant resource gaps and challenges. So outside of our regulatory friends, you know, we have a lot of interaction with, that is a common problem across all businesses. And you know, as our budget pressures in being able to to attract the right people, to retain them and and to be able to keep up with needing to give pay rises because of things like cost of living.

It is a broader conversation and obviously not one that we can solve. But I think your point is very, very valid, that where there are increased compliance requirements for, you know, an increasingly complex tax system and for our ability to to serve our clients in whatever capacity, then the regulators equally need, you know, budget certainty to be able to do their compliance and enforcement work.

So it would be something, I would imagine that, you know, should be looked at.

Robyn Jacobson

And certainly The Tax Institute position is that we would favour funding that allows there to be the development of good law and good reliable guidance as opposed to the funding of taskforces that are there to achieve a certain revenue outcome. It leads to a better tax system overall.

Robyn Jacobson

Marg, SME’s, there has been quite a number of measures in the budget that deal specifically, but there seems that mindful also that over the past few years we have had quite a range of measures that have really targeted the SME market, whether we're talking under 10 million to go get a turnover or 50 mill. So there's not a lot in it this year.

But do you think what is that hits the mark?

Marg Marshall

I'm not sure actually. Like, I think certainly there will be businesses out there that will be pleased to see an extension to the instant asset write off, $20,000 for another year.

Robyn Jacobson

I say again.

Marg Marshall

Yes, yes. This is one of those things where every year we get an extension. It's like, can we just maybe think about something permanent, is the $20,000? I mean, I'm pretty sure that's at the smaller end of the market that's going to be well received. There are questions about what happens down the track. Of course.

Robyn Jacobson

As it is headlines, we're talking about the tradies. I kind of like this for their tools, that sort of thing.

Marg Marshall

Yeah, that's right. Yeah. Again, like, there's still the detail to come. Like with a is this just an extension or are we going to see some some tinkering with what's eligible and what's not? We don't know at this stage. And otherwise, the $20,000 figure seems to be popular this year. We've got the energy incentive boost. That's also that maximum of $20,000. This seems to be a measure that's partly tax, but also partly about the environment. The electrification of assets, moving away from the traditional fossil fuels to electric assets. That's going to be an interesting thing. I'm not sure really like in manufacturing. Is that really enough? I wouldn't think so. So that would be interesting to see how that goes.

Of course, we're still waiting for the previous posts that were announced to be legislated, so it'll be interesting to see how long that actually takes. Another one that I feel is more likely to be about the environment, less about taxes. The EV concessions in the FBT regime, last night's budget announced that plug in hybrid vehicles won't be eligible after 31st March 2025, so still a couple of years.

But given the timeframes that people are waiting to get their cars, if you haven't got your order in now, it might be too late. But I'm not not especially surprised, I think there was a bit of noise at the time that it should have just been 100% electric vehicles in the concession in the first place from that sector of the community. One that many of our practitioner members will probably be pleased with is the the amnesty for failure to lodge penalties. If we've got clients and I certainly know that there are people out there who do whose 2021 tax returns haven't yet been done for various reasons. And we all know how hard practitioners worked during the pandemic and some of us did get behind in our lodgement programs as a result of having to step up and implement the stimulus measures. So it seems as though the government has heard the noise that we're behind, and we need to we need some breathing space to catch up this might just help again in an environment where we're a bit resource strapped, but at least if our clients aren't copping penalties, that might help the things they and just enable us to to catch up.

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Robyn Jacobson

Superannuation, there's been a lot of talk over the last six months. This $3 Million threshold consultation has begun. I'd just like to make some observations as to what I'm seeing, particularly with the three measures that should appear in the budget. We firstly got the NALI changes so the non arm's length income and there's always been this wonderful verbal debate or audible debate as a NALI or NALE?

The non arm's length income and then an arm's length expenditure provisions. So we have seen an improvement. But the question is whether or not this two times multiple versus a five times multiple for determining what is able to be subject to the gnarly provisions and how you determine what has got to be taxed at the high rate. Does this ultimately address the concerns that have been raised by the professional associations?

And it's really not clear yet, we're yet to see the legislative changes that would be put forward. So there's certainly a commitment to improving the NALI provisions, but we really want to understand whether that's going to achieve the purpose. But I do acknowledge, and I think we should commend the fact that there's been an extensive amount of work done, both by The Tax Institute, but also with our Superannuation Technical Committee and a number of our members who are heavily involved in this space.

And I'm not talking a couple of meetings over a few months. This has been years and years of work and meetings with the ATO and Treasury and Ministers. So to me this is a wonderful example of the benefit of the value of consultation and how this can actually lead to these sorts of outcomes where yes, we are starting to see some proposed amendments, which is great.

I'll now move to the current consultation, the $3 million threshold, and that's going to be very, very important in the final design of these measures. The Tax Institute submission is available on our website, so please feel free to have a look at that. But it's going to be interesting as this moves from what is currently a discussion paper stage into the exposure draft to phase as to what improvements we see and whether it can be more workable.

Whether you agree or not with the actual policy, there are certainly improvements that could be made to the way that it's going to function. And that brings me to the third element. So we've looked at what consultation can do with what emerges from that process. We've got the current consultation going on and we're about to embark on what would be one of the most crucial consultations we've had in years, and that is the payday super.

Now I think back many years I was involved in the single touch payroll consultation when that was first being designed by Treasury, and there was a suggestion at the time by the Government that we may well have real time payments as well as real time reporting. And there were some pilot studies done and the feedback was that no, that would not be well received, it would have a very big impact on cashflow.

And so the decision was made to just stick with real time reporting, and that's been implemented very successfully over the past few years. But when we look at a 1 July 26 proposed start date, which is deliberately some years off, this is going to be a huge amount of work that needs to be undertaken. And so the value of understanding the feedback from our members, what you see is the issues and the risks and what issues need to be brought to the attention of both the ATO and Treasury as this policies designed is absolutely crucial and the value of consultation cannot be understated.

So can I ask how you see the value of consultation? That's just a brief example of how we're seeing it in practice. We're seeing it right now, and we're going to be seeing that consultation in the months and years ahead. Clint?

Clint Harding

Consultation's crucial and The Tax Institute along with with other bodies have been doing outside of the obviously some of the controversial elements that are in the media at the moment. But behind the scenes, there's a lot of work being done between the professional bodies, including The Tax Institute, Treasury and the ATO to work out how what is the optimal consulting mix in terms of bringing a piece of policy from a conceptual stages through to design to exposure draft, and then what guidance goes around with that?

What goes in the end, this is what goes and ATO guidance. So there is a lot of good consultation that happens. It's very important and it continues. We had a very busy, as I said, six months on our committee with putting in submissions on some very crucial points. And we'll wait and see where that lands.

Robyn Jacobson

As chair of one of that national technical committees, you meet every month or so to talk to a group of committed committee members. The value that they bring to it, the importance of us tapping into all these volunteers in our member base who bring forward these issues and enable us to help prepare the submissions and provide that feedback to the agencies.

Clint Harding

We couldn't do it obviously without them. I mean, taxes so complicated and we’ve got a mixture of corporate members and other advisors. And between them everyone has sort of specialties and are able to contribute at different levels to conversations and that works. And I don't think there's anyone in the market that is all knowing and can answer and give meaningful feedback on every division in the Tax Act where it counts.

So you've got to be able to have a broad spread and be able to call on people who you know and a bit to give up their own time. And you invariably find yourself writing submissions and doing policy work when you're on your family holiday, which is always soul destroying. But that's what we do. That's that's what we're prepared to give up to help do that and, and a bunch of like minded people that, that and think like that.

Robyn Jacobson

I'd like to get a comment from each of you, Clare as our Chair and Marg as our president the value that the members bring to our ability to do the work that we do.

Clare Mazzetti

Yeah. Look, I echo what what Clint has said. Obviously, it's all about, you know, getting to the best outcomes and being part of the process to ensure government and our regulatory friends are best set up for success in what they do by leveraging our expertise. So I echo all of those points and I think more broadly the other point that I would make is that it gives us an opportunity to help influence and shape the political discourse, and I don't think that can be understated either.

So collaboration has a very, very important part to play in trying to tone down the political rhetoric and help governments or help key stakeholder groups progress, or to push forward really important policy changes or in tax system changes that otherwise might not, you know, get there or get there quickly enough.

Robyn Jacobson

Marg?

Marg Marshall

I think one of the beauties of our membership base is that we're a very broad church. You know, we have everyone from the corporates and the large business advisors, right through to our sole practitioners who see on a daily basis the challenges that our small businesses have and how even individual clients can have in the system. And so having the mechanisms that we have where we can seek and and obtain feedback from our membership base across the board to inform the consultations that are going on. You know, it's a fabulous resource that we have at our disposal. It's it's unique, I would suggest, in terms of of how engaged our members are in that process and I would encourage members if when you see those emails come through in TaxVine, for example, saying we're going to be doing a submission on X, Y and Z, tell us what you think.

That's a real request. We're actually asking you for your views. So I would encourage people, if you've been a bit sort of all I think we know something about this, but, you know, maybe I don't don't worry about that. Just let us know what you think. It's important.

Robyn Jacobson

I would add to that, Marg, that if any member is out there and thinks that all my issue is too small and I don't feel comfortable raising this, and I'm sure that they've got other members to worry about and more important issues to worry about. You'd be amazed how often a members contacted us, and it turns out that they're not the only ones.

And then we realize there's a systemic problem out there. We escalate the issue, and in some cases, yes, we can resolve it promptly. In other cases, there may be some particular challenges or roadblocks along the way that are beyond our control. But I implore all of you to come forward, talk to us of the tax policy and advocacy team, because you never know when your issue is being experienced by many other practitioners, and you may well have identified something fundamentally systemic that needs addressing within the system.

Marg Marshall

Absolutely right.

Robyn Jacobson

All right. I'd like to see this now into the tax reform discussion. That's something very dear to our hearts, something that we are very committed to. So we know that we're likely to see this returned to surplus for this current financial year, likely to return to deficit thereafter in the context of Australia's debts. And we are headed for that $1 trillion mark in the next year or so.

What does all this mean for our tax system? So Clare, I'll continue with you for the moment.

Clare Mazzetti

We'll look at the structural issues in the budget haven't gone away. The increasing demands for public services are not going away. And so, you know, at some point very, very soon as a community, we need to face into a very broad ranging conversations about how we're going to pay for the things that we need and how we're going to pay down the debt.

Now, the beauty of government is that they can tax and they can increase the size of the pie or they can change the mix of the pie. And and I think, you know, we are very, very well placed to continue helping that discussion because it will need to be a broad ranging discussion and it won't be easy. There are no choices that will be easy and there will be trade offs.

But those structural challenges won't go away easily or quickly, and certainly not without facing into them. And so I perhaps want to focus more optimistically that while not all of the things that we had hoped to see conversation start as occurred last night, I think we're in a really good position to be able to help drive those conversations which are needed.

Robyn Jacobson

Marg?

Marg Marshall

Look, I would echo what Clare saying. I think while whatever we continue to see a little adjustment here and a little adjustment there in budgets, we're not going to get what we really need, which is holistic structural reform. And I do wonder whether the, the political environment is such that that there's not enough courage out there just yet.

Your point earlier about them being this government is only one year into it, into their first term, and perhaps that, you know, that sussing out the landscape a bit first, I don't know, but it's really important that we're there and that we are continuing to make noise about it. It's encouraging that the community is starting to participate in that conversation, we're hearing more about it in mainstream media and hearing more about it from some peak bodies as well. So it's gaining momentum. It's inevitable in my view. We need it, the country needs it. So yeah, they just need to keep the conversation going.

Robyn Jacobson

I'm going to channel Scott Treatt because I know if he was here he would make this comment. Tinkering doesn't solve problems and the announcement of temporary measures does not solve permanent problems.

Marg Marshall

No, absolutely right.

Robyn Jacobson

Clint, does the community confuse tax changes tinkering, with holistic tax reform?

Clint Harding

Look, my concern is, is a fear of tax reform dominating the conversation when a lot of the work's being done. I mean, the challenges have been well articulated over the various processes that we've been through even in the last ten, 15 years. The Henry Review had a whole lot of recommendations that still haven't been pushed through, that are probably been back and revisited them.

But there's probably many that are still as valid today as they were back when he made them. We had the white paper process not so long ago. Those conversations have been had, or especially around some of the big picture issues, the the tax mix, as you say, the pie to grow the pie to change the composition of the pie.

It's pretty well understood where Australia gets its tax and the burden it places on segments of the community. So I just want people to understand that we're not starting fresh from all of this. There's a whole lot of knowledge we can build on that has been done. Those discussions have been had. We can pull all that together. I would have thought reasonably quickly and get to the nub of some hard decisions.

But you've got to have that political will to make those decisions. Yeah. Back to your question, which you asked. I'm not quite sure I answered. Do I think the community confuses tax change with tax reform? No, I think I think the community, the taxpayer community are smart enough to see tinkering in short term measures like one year instant asset write offs as something different to let's have a discussion about whether we broaden the base of GST or how we redistribute GST takings across states and federal governments.Do we play with negative gearing or CGT discount? I think people are smart enough to understand that there is a bigger and different conversation to scanning the paper on the morning after budget to see if someone's given you another $10 a week to put towards your rent.

Robyn Jacobson

In 2010 we, of course, had the Ken Henry Report and his colleagues who put together that mammoth review, and it was described at the time by many as a blueprint, that it might sit in the drawer and gather dust for a little bit. And that turned out to be particularly true that it is still a blueprint along with rethink, along with our Case for Change report or all of these, as you say, Clint, are very valuable sources from which to draw inspiration for reform.

And on one hand, we would have loved to send the government announced that it was going to progress discussions on tax reform, but it also would have been disappointing if it had been all week to announce another review. Because we don't need another review. We need action. We know what needs to be done. I'm not saying we know all the answers, but we know what the irritants and the challenges are.

We know what the possible options are. We need to navigate our way through that. Our electoral cycle is always going to be an inhibitor of that. No, it's not unexpected terms of the budget outcomes, but we do look forward to the day when politicians can have this conversation, be part of it, and have a mature dialog. We talk about courage and that seems to be really the missing ingredient at this point.

How do we inspire? How do we play a role in the community and be a true thought leader both in the profession without the professional associations with business leaders? I'm just drawing on your collective thoughts. How can we get ourselves out there and drum up this support?

Clint Harding

Look, I mean, the difficulty for us or for me as an adviser, I'm not placed to talk about big policy. And with a getting rid of the imputation systems, the best thing for the Australian economy, those are the bigger brains than mine to figure that out. So I see my role and certainly the role of a lot of us through The Tax Institute as being able to clearly articulate systemic issues or problems and outcomes so that at least when people are making that decision, they're aware of what the impact of that decision will bend that, I guess, is how I would sum up what our best input into sort of big policy reform will be.

Clare Mazzetti

And look, I think my my view on that would be for for our members and through our committees to keep doing the things that they are doing because it's used and leveraged in so many different ways. You know. You know, throughout government and the political sphere. But probably one of the things that will be of more use in coming years to the conversation we've just had that we know what needs to be done. So I guess broader consultation and collaboration with other industry groups with government like across the political divide are probably needed to help all of these different parties navigate their way through having conversations about change. That's where the difficulty will lie ahead. And so I think, again, our our expertise will will help others navigate those conversations.

Robyn Jacobson

And to Marg, what are your thoughts on how we can progress this?

Marg Marshall

Oh, look, I think we just need to keep doing what we're doing, frankly, like the amount of work that went into, for example, the Case for Change, which is now coming up to its second anniversary. That's been well received. But but it's it is kind of just sitting on some government shelves. And I would be encouraging us to be saying to them, get it back out, have a look at it. Like, this is what a large section of the community that is involved in tax has said about it.

Robyn Jacobson

So perhaps a final comment from each of you as we walk away 24 hours, nearly 24 hours on from the budget. I'll start with you, Marg.

Marg Marshall

Sure. Look, I think we've certainly missed some opportunities. Disappointed on behalf of my clients for yet again, no certainty around DIV7A. But let's because keep the conversation going around that stuff.

Robyn Jacobson

Clare?

Clare Mazzetti

Look, I, I think my focus will continue to be the good work that the Institute does. Clearly, there is so much here to continue talking about, and we're very fortunate that we have a deep experience to be able to address these issues. And while the budget last night didn't address many of the things that our members and our committees would like to have seen, I think we are on the cusp of some more holistic change. I think that we're very well placed for that.

Robyn Jacobson

Clint?

Clint Harding

Look, I'm pleased to report we're going to be busy for the foreseeable future on the measures that we've already got. Hopefully we see some of those unannounced ones come through the budget. I think what some good attention to some of those measures and how important they are. So hopefully that will focus everyone's especially on the timeframes that we've been given to push them through. So that's illuminating and I look forward to being here next year.

Robyn Jacobson

Let's do it all again.

So I'd like to thank you, Marg and Clare and Clint, for your time, for your insights. It's really appreciated being able to bring this to our members today. It's very valuable.

Thanks for listening to this bonus episode of TaxVibe. You've had the highlights of one of our two member-only post-budget webinars. If you want to hear the full webinar and join a collective voice of 10,000 practitioners at the heart of the tax profession, become a member of The Tax Institute, head to our website to learn more. To keep up to date with TaxVibe, be sure to subscribe wherever you listen to your podcasts. Please join us on our socials and let us know your thoughts or of any topics you'd like to hear us discuss. I look forward to your joining us next time.

Episode 27 — True crime, tax and reform — oh my!

Release date: 28 April 2023

We’ve pulled this one from the archives — recorded at The Tax Summit in October 2022, it’s a candid chat between our own Senior Advocate, Robyn Jacobson, CTA, and Principal Fellow, University of Melbourne Law School, Andrew Mills, CTA (Life).

They recap Andrew’s Justice Hill Memorial lecture at the 2022 Tax Summit, diving deeper into the fascinating topics he covered. They move on to discuss an interesting crime-related case with significant tax implications, followed by a hearty conversation on the need for tax reform.

This is just a taste of the type of content you can expect at The Tax Summit. The 2023 Tax Summit will be here before we know it — catch you in Melbourne from 5-7 September!

Host: Robyn Jacobson, CTA

Guest: Andrew Mills, CTA (Life)

Robyn Jacobson

Hello and welcome to Tax Vibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax, and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of Tax five. I'm joined by Andrew Mills, CTA (Life) who is the chair of the Financial Reporting Council.

Previously, Andrew was the second commissioner law design and practice at the Australian Taxation Office from 2013 to 2019. He has 40 years experience in taxation, including periods in the ATO, commerce and the tax profession. Andrew was president of the Tax Institute in 2006 to 2007 and he is a principal fellow at the Melbourne University Law School, aswell as a member of the Tax and Transfer Policy Institute Advisory Board. Andrew, as our inaugural best of tax five way back in 2020, welcome back to Tax five and particularly in person at The Tax Summit in Sydney.

Andrew Mills

Thanks, Robyn. Glad to be here.

Robyn Jacobson

Wonderful to have you here. Yesterday you presented the Graham Hill Memorial Lecture as part of the tax summit here in Sydney, and you referred to a case where you had instructed Graham Hill and of course, he went on to become a very famous and highly regarded judge. You mentioned it was sort of to do with tax, but involved a lot of other things as well. And it got us really intrigued. There were people who are not fortunate enough to be in the session and those of us who were would love to know more about what this case involves. So can you share with that?

Andrew Mills

Sure. I mean, it's on the public records, but there's, there's plenty of interesting aspects to it. And the reason I picked it up was because it was the first time I had been involved with Graham Hill but eh, it was just a fascinating case in so many different ways, for a young ATO appeals officer to not be doing the bog standard, go to the AAT. It has something to do with deductions or income or whatever. This was just fascinating. It em..it involved a request for release on the basis of hardship. So you don't get those every day as a tax officer. And Dr. Gerber, the famous Dr. Paul Gerber, who was always giving these quips in these decisions of the Taxation Board a review as it was back then.It involved a meriva injunction, which back in the 1980s was a little bit novel, but it was basically a freezing order and that was obtained in the New South Wales Supreme Court. And the reason that was obtained was, and I forget the order.

Right, I may, I may get this wrong, someone may correct me along the line, but the order was something like the guy had been under audit, he was presented with a bill that was a167 assessment, as you know.

So the commissioner's estimate of liability…

Robyn Jacobson

The old default assessment

Andrew Mills

The old default assessment, exactly, and the em, the bill was presented. He then subsequently went to the bank, withdrew $200,000 and took it to Lebanon. So that disappeared off the face of the earth effectively and was hard to track.

So in response to that, this embrace of an injunction was sought to stop him from doing anything else or dealing with assets in any other way until the liability was sort of settled. And, well, next thing we know, we find out that after the facts that he's trotted off to the local court to get a transfer of property between his wife for a property settlement between he and his wife under the Family Law Act, which you can do by agreement under I think it was section 89 on a bear as it was back then. But under the Family Law Act, as a result, the commission went, hang on, you're dissipating your assets when I'm supposed to have a freezing order against you. So he's going back to the New South Wales Supreme Court and sort of contempt order against the guy. But he's also gone to the Family Court and sought that local court order to be reversed, which is pretty unusual apparently.

And so you'd think that we might get specialists in family law or we might get specialists in contempt proceedings, or we might get all kinds of things. And we did at different stages, engage some barristers who had those specialties, but for different reasons.

They fell away. And Graham was left holding the cane, doing all of them, and he acquitted himself amazingly.

Robyn Jacobson

So you'd expect to see in this situation a boardroom table lined up with the barrister, effectively representing each section of law but you had Graham Hill wearing the hat of all these experts.

Andrew Mills

Yes, as it turned out of course what we were really doing is we're going to different chambers to see them independently. But in fact one of them involved someone who went on to become a high court judge. Yeah. So it was a fascinating case. It was a fascinating engagement. And with the reason that I also like to pick the case out was that it was the first time Graham probably unknowingly mentored me. It wasn't the last, but it was certainly the first. And it was around. What's a kind of penalty that you seek from a court in the situation where contempt was involved? And, you know, I was all gung ho, young and all that kind of stuff and going, well, this guy's, you know, done something he's had a court order freezing his assets and he's gone off and done something. Surely that's Whiteman's and you know, he should be made an example of and they had been, I think it was Neville Wran or maybe One.Tel. I better be careful about which politician, but it was certainly a New South Wales politician who had been in the media but with a contempt of court matter, and I think he'd been fined $5,000. Now this is the mid eighties and that doesn't sound like much, but I did a quick calculation. Maybe it's probably about $100,000 today and yeah, well it's that's not an insignificant amount, but it's not going to break the bank completely. And so by telling the court, you know, there is these kinds of cases out. Air NZ mob serve the court as a guidance as to the appropriate amount of penalty. For me was the lesson about being temperate might be a nice word to choose in the way in which you approach your responsibilities as an administrator.

Robyn Jacobson

Look where my mind's going as well is this interplay of state and federal courts. So I'm wondering how that played out?

Andrew Mills

Well, absolutely. And you have to be in the right now jurisdiction. So whenever you're enforcing debts, it's usually the state courts that you have to do that in. And you'll see some cases, some tax cases around debts often being dealt with in the state court. In fact, I recall in the last few years it was quite a an unusual one where the Supreme Court in Victoria actually sort of almost sort of walked away from a tradition about accepting what the commissioner said was a liability based on the assessment that was presented to the court. And so, you know, we had those kinds of interactions where state courts are, in fact, asked to intervene in tax federal tax matters that would whereas the federal court doesn't take jurisdiction over that. It is an odd thing. You'd think that courts would exercise broader jurisdiction, but there is, of course, also among the courts the exchange of the scope of what they do, and they can act in each other's space from time to time. But when it comes to dates, it's only always the state courts, hence getting the injunction and the Supreme Court of New South Wales

Robyn Jacobson

Again. I'm just reminded also when you look at interesting cases and interplay of things, I'm sure you remember a case many years ago that ended up going to the High Court. So I just want to relay the story because I think it's one of the best tax cases we've ever had and it was the start of Mr. La Rosa. Now, Mr. La Rosa had been trafficking in vitamins and the police had caught up with him and he was on criminal charges and the proceeds from his crimes had been confiscated. And when the ATO came along and said, Well, we're going to assess you on those proceeds, he said, no one they said, was running a business and therefore proceeds from crime are still assessable. And he said, Well, in that case I'd like to claim a deduction against the proceeds. And the ATO said, What do you mean? And he said, Well, I'm carrying a business of drug dealing and I had a loss in my business that I'd like to claim against my so-called assessable income. And I said, loss. And he said, Well, I had $200,000 as of the year 2000 in your story that was buried in my backyard and it was ready to pay off a supplier. And the night before the night in question when the deal was going to go down, my daughter and son in law came out to the garden with me and we dug up the cash and counted it and yep, all ready to go. The next night when I dug it up, someone hit me on the head. I was knocked out and when I came to, the cash was gone. I've lost $200,000 in the carrying on of my business. I want to claim it as a tax deduction. And the commissioner said, You can't do that. And he said, Find me a provision in the Tax Act that says I can't. And so it went to the 80 and the 80 agreed with the taxpayer because there wasn't a provision in the act that said it wasn't deductible. So the commissioner appealed it went to the Federal Court by this time and it hit the media waves. And I do remember a number of radio shock jocks talking about this and how outrageous it was that a taxpayer was able to claim a tax deduction for something relating to stolen drug money. The taxpayer won again. It went to the full federal court and then the commission, after having lost for the third time, sought special leave. The High Court granted that special leave and in the end the High Court said, well, the Tax Act, as it was worded at the time, isn't about morality. He wants to question morality. You go to the Criminal Code, but as far as the text is concerned, there's nothing that makes this nondeductible. So he got his deduction. The law was promptly changed. I'm sure you remember that.

Andrew Mills

Well, the interesting thing is that in that case, as an and I recall that university having to deal with this concept of public policy that fines as a general proposition, fines are not deductible And of course, the law was changed to make that absolutely clear as well. I think possibly as part of that that whole set of changes. And yet it was always fascinating and I was amazed that the public policy principle wasn't applied in that case because a bit on some of it with the shock jocks, you know, well, you know, it's crime boss. Who's that other question about? Well, hasn't the income already been earned? So what you're arguing is it's incurred in carrying on the business for the purposes of gaining assessable income. Yeah, it's a bit like that case where the person got robbed, taking the business proceeds to the bank. Yeah, that's all very interesting. I still wonder who hit him over the head. Was it the daughter or the son in law?

Robyn Jacobson

I always thought it was somebody external. But, there's another dynamic to that story.

Andrew Mills

Absolutely.

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Robyn Jacobson

Look, also in your role in all sorts of positions over the years and you've worked in commerce and you've worked at the ATO and you've worked at a time with the Tax Institute as well in a professional body. You've seen it from all sides as a practitioner and as a regulator. At a 2021 tax summit, Dr. Julianne Jakes QC proffered that successful tax reform leads to three things And I love this because I think there's so much truth to it. I'm interested in your thoughts, she said. You need an idea, a government that wants it and a community that accepts. Do you agree?

Andrew Mills

I do, but I would just be cautious about the way you define an idea as a first point, because I've and look, I think I'm not alone in this. I've been a big believer that you don't take a single concept out and run it up the flagpole, as I said in my speech yesterday, because it's bound to offend someone and the successful you look at the very successful big changes, there's always a package of changes. So whether it was rats in 1985 under Keating or ants in the Costello in 98 and so on, there was always a package. And the package said, Well, we're going to give you a little bit here and we're going to take away a little bit here. But overall, you'll be better off. And most people, nearly all people were better off maybe by a few bucks. But the point was that they were they were not harmed by the by the tax changes, particularly when they were doing some big things, like introducing capital gains tax, introducing FBT, those kinds of things in 1985 or when you came to the Costello changes introducing GST, which was an enormously big thing, but they were able to show that yes, we've got to do a package, we've got to structurally change and broaden the base, change the way in which we tax, but at the same time we're going to make sure we compensate.

Now I remember Dr. Hewson saying back in 1992 that he took that

Robyn Jacobson

93 was Fightback.

Andrew Mills

Yeah, Fightback He said we overcompensated, we deliberately overcompensated so that we could make sure that no one, absolutely no one was worse off because we knew within a matter of a few years that would have all been covered off anyway and it would have been paid back and that would have been gone back into balance. So it is possible to go, well, we'd have to spend a little bit. We have to effectively put a down payment in there to ensure that we get the change that we really need. So while I absolutely agree with Julianne about her approach, I would say that the idea has to include a package of ideas.

Robyn Jacobson

Also, if you look at the two other elements she mentioned, a government that wants it in the community that accepts it. You obviously need a government that is committed to reform, and that's very difficult at the moment. And secondly, it's not just about the community understanding that there is going to be a trade off or that they might wait on this bit but lose on that bit overall. And I don't like to use the terminology of winning and losing, as the media always does, but you know what I mean? But it's about trust. How does the community get to a point that they trust the government to be able to implement such a substantial reform package?

Andrew Mills

So going back a step, yes, you do need a government that's committed to it. And you can see with things like ratings that there wasn't adequate commitment to it. But I'm pretty sure the Labor Party was committed to what they wanted to do in 2019, but it was an incomplete package in my mind. At the one half of it it wasn't it didn't have a giving back path. But when it comes to, you know, getting a community that wants it, there were some great comments yesterday in the panel. At the end of the day, I may have been Joe Masters, but I forget who the basically they were. They were talking about the need to get that conversation going and explaining to people. But, you know, you've got to show people what's wrong. Bruce Billson was great at saying you've got to explain what the problem is first. You've got to tell them why there's a problem because at the moment they don't understand that there's a problem. And once you can tell them the problem, then you're able to start giving solutions. It's a bit like that old adage, you know, never waste a good crisis. So you've got to create the crisis almost and tell people, and hell, with trillion dollar debt, you would have thought, we've got the crisis.

Robyn Jacobson

Plus COVID. Isn't this the best opportunity? It's not going to get any better than this.

Andrew Mills

It should have been. We've maybe we should have been doing this a year ago, but anyway.

Robyn Jacobson

Yeah. So where do you see we go from here? What are the next steps? And we will continue to be committed to tax reform and trying to make sure this holistic change, not the tweaking and the constant bickering and the things that are media grabs. We want this to be taken seriously and looked at as an entire system. How do we do this?

Andrew Mills

Well, that's that's an absolutely great question. And it was unfortunate the panel didn't get to that answer, because I think that that would have been great to really explore in the detail about how you do it. So but we have an army of professionals who actually care about tax, and I think we need to arm them with the ability to be able to carry on those conversations with other people, to actually say, here are the problems. So we need to create the subject material that allows them to go, Oh, okay, I do get that. There's a problem in the personal tax system for the second income earner on the fourth and fifth day, because all you know, they're paying way too much in effective marginal tax rates. I do get that. We've got a problem with fringe benefits tax because it's honored in the breach and it's too wide and it catches ridiculous, stupid things like toilet usage and all kinds of stuff until it's taken out again. I do get that we have all of these particular kinds of problems, not just in the specific, but what it means economically for people, why they're worse off with the way the system is. We really need to get those little anecdotes out, if you like those stories and be able to tell it in a way that tells people We've got to fix this. This is a real problem. You know, we're not set up or an age that has to do with climate change. For example, we don't have the tax system savings that allow that to happen.

So there's so many little stories that we could be telling. We have to arm all our members and the. More broadly with these stories and it will start to generate. I think it's got to come from somewhere. And unless you've got a committed politician who also has those stories and we can share it with them and they're prepared to tell those stories, then we're not going to see any reform at all.

Robyn Jacobson

Is it fair to say that we're not starting a what I'm going to call a zero base and I'll explain what I mean. If we're at a zero base, then we're trying to build up the conversation to a point where there is an acceptance that we need change or there's trust in the government, or there is that understanding that we need to proceed with change. But I don't feel we're at that zero base. I feel we're actually in negative territory.

Andrew Mills

I knew you were going there.I could see that because the number of the distrust that's been built up,

Robyn Jacobson

The distrust, and you mentioned the word tax reform, and instantly there are opponents and critics who will say it's always going to favor the wealthy or favor the rich. There'll be this group misses out or someone's going to advocate for that. We're in this negative territory. We've got to get it back to a positive conversation.

Andrew Mills

We do. And, you know, I mean, people talk about it. You use as you say, you use the word tax reform and people say, yes, yes, we need to hit the multinationals more or something. You know, that's their reaction. It's it's a one single solution. They become one trick ponies. And you've got to go. No, no, it's more than that. It's much more complex than that, which is why it's important to tell the story. So I agree with you. I don't think necessarily having to start from ground zero, we actually almost have to turn a really poor conversation around and then get it off in the right direction, which will take effort. And good tax reform doesn't happen overnight.

If you look at Asprey, most of the Asprey things that were done were spoken about and reported on in 1975, were implemented ten and 12 years later by Keating and some of them not implemented until Costello got hold of them. So a lot of this stuff does take quite a while and we just have to accept that it's going to take a while.

Robyn Jacobson

Look, just as well, you and I and the rest of us in the tax provision are very patient.

Andrew Mills

And passionate.

Robyn Jacobson

Absolutely. Andrew, thank you for your insights.

Andrew Mills

Pleasure.

Robyn Jacobson

Thanks for listening to this episode of Tax Vibe. I've been chatting with Andrew Mills, CTA Life. He was the chair of the Financial Reporting Council. We recorded this episode of Tax Slide live at the biggest tax event of the year, the tax summit. The tax summit is three days of tax, technical insights, thought leadership and world class networking opportunities. With the profession's best and brightest coming together, the tech summit will be coming to Melbourne. We hope to see you there. To keep up to date with tech vibe. Be sure to subscribe, rate and review wherever you listen to your podcasts. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 26 — Championing small & family business

Release date: 31 March 2023

“Small businesses aren’t just shrink-wrapped large corporates” - The Hon. Bruce Billson GAICD.

In this episode, our guest, Bruce Billson, tells the story of small business in Australia and the role of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).

With nearly half of all small business owners in Australia over 50, and only 8% under 30 (when it was 18% a decade ago), the unique needs and challenges of small and family businesses are things we need to consider and plan for.

ASBFEO supports small businesses through the challenges they face – including support for disputes, mental health, resilience and financial well-being, and provides a Tax Concierge Service – helping to navigate the Administrative Appeals Tribunal process.

Tune in to hear more about how they support small businesses in communities around Australia, and how you can use ASBFEO for your business.

Host: Scott Treatt, CTA

Guest: The Hon. Bruce Billson GAICD

Scott Treatt:

At the Tax Institute, we love the vibe of tax and we do tax differently. Hello and welcome to TaxVibe, a podcast by the Tax Institute. We'll be chatting with some of the tax professions grateful leaders who will share valuable and practical insights you may not hear every day. I'm Scott Treatt, the general manager of tax policy and advocacy at the Tax Institute and your host of today's podcast. Today, we'll be discussing the role of and the services provided by the office of the Australian Small Business and Family Enterprise Ombudsman. And I'm joined by Bruce Billson, the Australian Small Business and Family Enterprise Ombudsman. Bruce, welcome to TaxVibe and here in person at the Tax Institute's Private Business Tax Retreat here on the Gold Coast.

Bruce Billson:

Scott, it's fab to be with you in your audience and may all your balance day adjustments be good ones.

Scott Treatt:

Indeed. Indeed. So let's start with yourself, Bruce. Not too many people would know you and your history and how you've got into this role. So what's the journey you've taken to get into the role of the ombudsman?

Bruce Billson:

Oh, humble journey. I suppose. Went to school in the housing commission area and battled my way through to do a bachelor's, a grad dip, a master's degree. A lot of focus on accounting and tax issues because I was one of the youngest city managers like, CEOs in councils and you needed to have finance competencies to do that. So I did that at quite a young age. Ended up working for the Kennett government in Victoria.

Scott Treatt:

All right.

Bruce Billson:

That then dragged me into consideration where people thought I might have been a useful advocate and champion for the Riviera of Melbourne down in around Frankston and Mornington. So I put my hand up for pre-selection and was pre-selected as a liberal candidate, and was elected in '96. Got elected seven times. Ended up for a few ministerial portfolios, cabinet minister for small business and competition policy, that sort of area. Did a lot of de-reg sustainable cities. Was a junior minister in Defense, looked after the Aid Program, did some work with indigenous and in immigrant communities. Was quite a bit of fun.

And then after 20 years of doing that, my family thought they'd like to have me around a bit more. So I retired, undefeated. So I took my bat and ball and went home after seven elections and picked up where I'd left off, shaped a few businesses, helped involve and create the Judo Bank as one of their foundation directors, just to give SMAs a fighting chance to get access to finance. Chaired a few boards. And along the way, was asked to take on this role, which ironically and mildly creepy, I might say. It was actually one of my initiatives when I was the cabinet minister.

Scott Treatt:

Oh, right.

Bruce Billson:

I created this role. I was concerned about-

Scott Treatt:

And you saw a retirement plan.

Bruce Billson:

Well, I didn't actually consider it at the time, but I was tickled pink to come into the role. It's almost like pig mud Bruce. It's really in my space and aligned with my purpose, objectives for life. I was honored to be invited to pick up the reins after the inaugural Ombudsman Kate Carnell, who did a great job establishing it. But I formed it because in my 20 years in public life, I often was considering policy proposals, programs, legislation that had a direct impact on small business. I was concerned, it looked like no one had ever spoken to a small business. Now, the beauty of two and a half million operating small businesses in Australia, they're so eclectic. They're so different, but they're hard to consult with.

I get that. I get that. It's so much easier for policymakers, bureaucrats, others just to go to a big industry association or talk to the big players. Yet, small businesses aren't shrink-wrapped large corporates. They just don't have a percentage of an HR department, a smaller number of people in the compliance team. I just thought, "Hey, there's this disconnect. Let's do something about that." So the agency was set up as a reliable and authority voice into government. So it's got an advocacy function. Doesn't always please government and policy makers and regulators, what that is. But I made it an independent role, so it could speak with courage, but thoughtfully when are necessary. The other part of it was, I looked after competition policy and was driving force behind some of the major reforms around misuse of market power and the like, and introduced unfair contract terms.

There was a lot of codes work, trying to make big and small business counterparties play nice together and have the battle for success based on merit, not on muscle. I noticed in the federal jurisdiction, if we couldn't find a resolution somewhere, the next port of call was the Federal Court. Now, that's quarter of a million dollars, couple years to wait. Now, what small business can carry that? So we're in our economic policy infrastructure. There's expectations of conduct and fairer practice provisions. And if they're ever infringed upon, it was too hard for small business to get a fair day. So that was part of it. And the last part of what we do today is around telling the story. A lot of people don't realize the nature of the small business community. When you look past the meta numbers that two out of every five private sector jobs, tick. One third of GDP, tick. Really important meta numbers.

But sitting beneath that is a lot of other stories about the reliance on self-employment for people that are mature age women juggling livelihoods and other objectives. Even sadly, the demographics, nearly half of all the small business owners in Australia are over 50. Now, that's something we need to plan for. Your audience you needs to think about, that succession planning, dignified dismounts. I suppose, wealth capture for retirement. But only 8% are under 30. 8% of small business owners are under 30. Was 18 a decade ago. Something's happened, and I think we're the people that get in under the hood and unpick that. Celebrate traineeships apprenticeships, 43% hosted by small business twice the number of big business. So there's really important stories to tell, and that's the work that we do.

Scott Treatt:

No, fantastic. So the name of the office, obviously, it is a bit of a mouth full. So-

Bruce Billson:

Just rolls off the tongue, doesn't it?

Scott Treatt:

Indeed.

Bruce Billson:

ASBFEO is the acronym, it's like a South American fungus. But, no, look, there's a story to that. You can blame me for that as well. It's interesting in our office when something comes out of our legislation phrases or some peanut thought that was a good idea. Well, that peanut was me. No, look, there's a story to that. There's a story around earlier that this policy initiative I put into the political domain many years earlier before I had the opportunity to implement it, and other political interests had pick up the idea, implemented a diluted version. It wasn't really what we were aiming to do. Originally, I'd called it the Australian Small Business Commissioner. Someone was appointed with that name but without the powers.

I said, "Well, hang on. That's a commissioner with no commission." So it was really about differentiating from that and actually pointing to really what we were looking for, which is a legislative, independent statutory role with clear functions, legislative authority, and a real mandate to be championing the interest of small and family business every day.

Scott Treatt:

So not too... I don't think too many of our listeners would've really heard of the office too much.

Bruce Billson:

Well, that's part of why I'm here. It is argued to be one of the greatest surprises few people know about. But when we are involved, we make a difference. There's six to 7,000 people contact my agency through our call center or our case managers every year that are having problems.

Scott Treatt:

So let's break down those services then. You spoke of the advocacy part.

Bruce Billson:

Yes.

Scott Treatt:

But it's far more broad than that. In terms of their lines. What are those services?

Bruce Billson:

Well, let's knock over the advocacy one first, very important. We have statutory powers to conduct our own inquiries. We can probe areas that we are concerned about that even government might not want us to look at, or they might want us to look at. Just in recent days, the Finance Minister Katy Gallagher, sent me a referral saying, "Bruce, we've got all these Commonwealth procurement rules that's supposed to make it accessible for small business getting a piece of the Australian government goods and services requirements. How is that actually going?" So we'll get that tasking to independently fresh eyes, have a look at something. Similarly, we had one on small business disaster preparedness and resilience. There's a task making business continuity planning sexy. But we had a crack at it and made some recommendations. And then in other areas, we might initiate one ourselves.

We've done some work in the insurance space with the hardening insurance market, Scott, that a lot of small businesses can't actually access the insurance they need to lawfully engage in commerce. We looked at the amusement leisure recreation area, very little appetite for insurance. An idea of a DMF, a discretionary mutual fund, a different risk vehicle. They had that idea and we thought, "Well, let's have a look under the hood, and just see what we can advise government about this near insurance product that isn't actually insurance in a market that's dysfunctional." We also do about 120 submissions a year to inquiries. Treasury reaches out to us at the early days, which is great to say, "Well, here's some thoughts. What do you reckon?" And we'll provide some feedback and field evidence, and some granular insights. Also, we get involved in risk processes, parliamentary inquiries and the like. So that's the advocacy piece.

We also have an assistance function. It's got two tricks. One is, we surface better practice advice. I'll give you one example. A small business engaging a search engine optimization business, very funky in this digital age. Scott, they'd come to you. The SEO business would come to you and say, "Look, we can double your revenue. Why? Here's what we'll do. Bang, bang, bang, double your revenue." And the small business will go, "Yeah, I'll have a piece of that. I'll pay you $900 a month to double my revenue." When the contract actually says, no, you're paying $900 a month for this amount of certain searches, posts. It may, in a good world, result in a doubling of revenue, but it often doesn't. And then small businesses will go, "Well, hang on. I've been taken for a ride here. I'm in dispute." We're trying to avoid people getting into those situations by being more informed about good practice in engaging with these things.

Scott Treatt:

Better education upfront.

Bruce Billson:

Yeah. So we provide resources. A little bit of counsel, "Have you asked this question?" Maybe you might want to think about more as not an instructional manual, but more of a thought provoker and a sense of things to take into account. People talk about having good mental health, and that's great, but small and family businesses are time poor. They want to know, "What exactly does that mean? What should I do? What should I think about?"

Scott Treatt:

And that's a big issue in the present day.

Bruce Billson:

Oh, it's enormous, and there's good programs around. But again, small businesses are disinclined because they're self-starters, self-contained, self-relied. They're less likely to go and reach out for say, an emotional wellbeing program. And I wonder how I'd go if I said, "A little dose of mindfulness might go well." That's probably not exactly the advice that they're looking for. But we'll unpack that. We'll work with clinicians at beyond bit [inaudible 00:11:20]. We'll highlight the programs that are available, urge people to engage with them, but then say, "Here's some practical action steps about managing your time, about not trying to do everything, and about being able to disconnect or put some, what we call actionable information." Information people can pick up and put into action. We do that in different areas. Disaster preparedness is another one. So that information's there.

But then we get into case management. Yes, now the case management is really important. This is where our self-help ethos, informed by good insights and good practice, hasn't been able to get a result that we're looking for. It is us believing that a power imbalance plays out badly for small business, and if we can't find a mediated remedy or solution, the idea of going to the courts isn't just simply not attractive. The other thing is having a combative resolution isn't what a lot of businesses are looking for either.

Scott Treatt:

Absolutely not.

Bruce Billson:

Because they want to get back to business and resolve an issue with someone they want to continue doing business with. So we provide this alternative dispute resolution avenue, 67,000 contacts a year.

Scott Treatt:

That's a large number.

Bruce Billson:

Yeah. It is a bit. And that's off the back of your good observation, which rattled me deeply. We're not well known. Imagine if we were, but that's how... One of our challenges is that we get involved in dispute resolution. About 40% of the matters coming to us are payment related. The next largest chunk is about contract disputes. "I've got this blue with a business. They're supposed to have delivered this outcome by a certain date. The supply chain challenges have made that not possible. Now we're in an argument I don't want to pay." They're saying they've done nine tenths of the work. So we'll get involved in trying to find a satisfactory resolution. And then in some other areas, we are the recognized ADR, alternative dispute resolution enabler, for a number of industry codes.

Think franchising, where a dispute blows up. Often a power imbalance between the franchisor and the franchisee. We get involved to manage and get an ADR practitioner in there. Food and grocery code, a supply to a big supermarket chain. That's an interesting conversation to have. Similarly, with the oil industry, you might run a small convenience store with fuel out in Bundaberg, and we're having a blue with a multinational oil company. How's that going to play out? Even in the horticulture space, where the contest might be over the quality of fruit that arrives at a particular point, at a particular date and time, and what's the value of that? So we get involved in that.

Scott Treatt:

I just want to pick up on the power imbalance comment that you made. I think our listeners, a lot of them are in the tax space or have a tax inclination. And many of them will sit there, "Yeah, but that's us. That's us." And the ATO, like...

Bruce Billson:

Wow. There's a nice segue, sir. You've done this before, haven't you? Nice segue. One of our services is something called the tax concierge service, and it deals expressly with what your audience is.

Scott Treatt:

So how does that work? How does that work?

Bruce Billson:

Couple of things. It sees us trying to help an aggrieved small business taxpayer navigate the behemoth that is the ATO. So often a matter will come to us. Someone will be aggrieved about their treatment. You need to know a fair amount of the nomenclature of the tax office to know whether you've got a difference, a dispute, an objection. And then the channels that activates. There's a number of internal review mechanisms. Again, you need to be quite experienced to navigate those. Now, if you're working closely with a trusted advisor like your audience, well they know that stuff. That's their jam, and they'll be able to navigate that.

We often find ourselves dealing with unrepresented people who are really crabbed off and don't know how to express their disappointment or to frame their argument in a way that's persuasive. That'll come to us. We saw this during COVID where some of the payments that were made available to support business, arguments about how long your ABN had been active. There were eligibility criteria that were a little hard to work at. Couple of the discretions that were available, didn't always break the way people wanted. Well, we'd get involved, and we had a very positive relationship. We aim to be collegiate with those we work with. Whilst I'm an independent officeholder and can upset people if I need to, I find if you poke people in the eye too often, they're not that keen to work with you to resolve something. So there's a fine line-

Scott Treatt:

It's a balance, isn't it?

Bruce Billson:

Fine line.

Scott Treatt:

Yeah. There's a balance.

Bruce Billson:

And this is with the tax office. So we will try and help people find their way through the tax office systems. And we've got people in the tax office that are key contact points that help with that. Often, it might just be, "Hey, we've had a look at this. This looks a bit odd. You might want to have another think about it." Yeah, and sometimes that's enough, or that might be some information that helps to provide a clearer picture that might be enough. Or it might be to land them with the internal review processes. We champion some of those fresh eye review processes because a lot of small businesses can't necessarily afford to have potent representation. So giving a chance to use those internal processes is something we value. But if it all comes to not march, and they're unrepresented, we get involved. So the tax concierge service will say, "Okay, you're thinking about going to the AAT. So you've exhausted these other avenues. You're self represented."

So frankly, that's not in anybody's interest, but it happens a lot. It's not in the interest of the person trying to make their case because that might limit their capacity to argue their point and shape their evidence in a persuasive way. It's not that great for the tax office either, because they're sometimes chasing red herrings everywhere.

Scott Treatt:

Exactly.

Bruce Billson:

And there's not a Christmas and clarity in the issue, and it's certainly not helpful for AAT with a long book of matters before it. They'd rather happy to do what they can do. But if they can be packaged up, ready to go where the parties know what they're arguing about, that can be fantastic. We get involved at that stage. We ask the unrepresented small business for a $100 contribution, so they've got a bit of skin in the game. And then we fund the rest of one hour's consultation and very senior tax lawyer to frankly reality check what's going on. Now, in some cases, the accountant or tax advisor isn't party to the next action to the AAT, and the small business might actually be arguing with the advice they got off the accountant. So sometimes that fresh eyes, this reality check, reaffirms what their accountant's been telling them over and over again, that perhaps wasn't the advice that they were looking for. It basically says, "Look, you really don't have much of a case here. Here's the precedence. Here's your arguments. Here's how they'll be mowed down. Don't-

Scott Treatt:

Don't waste your time.

Bruce Billson:

Yeah. So that's helpful. Or it might be, "Yeah, we think you're onto something now. This is the focus it should be. Here's the evidentiary base you need. And if you do go forward, here's the line of argument that you should take." Which is great.

Scott Treatt:

It takes a lot of pressure off the system. Doesn't it?

Bruce Billson:

Absolutely. And because you then get informed engagement. You then have knowledgeable parties, knowing what the contest is about in a forum that wants to get to the nub of the matter, the AAT, resolve it and get on with it.

Scott Treatt:

Yeah, indeed.

Bruce Billson:

So once that fresh eye, let's call it reality check, appraisal is done with... Subsidized by our service, if that unrepresented party then wants to lodge the AAT, we then hold their hand.

Scott Treatt:

Well, let's pick up on the topic of the AAT, if you don't mind just for a second. And I'm sure you would've seen in the recent weeks and months, the government's position around the AAT, that you were disbanding the AAT and bringing in a new body or tribunal to look at these issues. Do you have any thoughts on that? Do you see that as a good thing? Do you see it as something that might help unplug the system or create efficiencies in the system?

Bruce Billson:

Look, the anatomy of the concerns that have given rise to being reviewed, that there is a risk that could happen whatever their structure. From our point of view, we value the commercial division of the AAT. The commercial and the tax space is really important for us. It's where we can get a determinative resolution. Now, I use the word determinative and your audience is probably rolling their eyes thinking why is the peanut using that phrase? But well, I'm going back to why the AAT is there, and how tribunal structures operate in the Commonwealth system.

Scott Treatt:

Sure.

Bruce Billson:

Now, bless its cotton socks. Chapter 3 of the Australian Constitution actually states, "If you want a determinative outcome, it has to go through a court, unless the parties agree." Now, in the AAT process, when you lodge your tax return, you agree to have any determinative process in the AAT. Thanks very much. The tax office agrees. Same thing with the social security system. When you're applying, you agree to have any difference on administrative law, blah blah blah blah. So that enables it to be taken out of the court system and put into what's supposed to be a more nimble agile process, tribunal like. Now, for us, that's very important.

Scott Treatt:

Indeed.

Bruce Billson:

Because that's more right sized for small business.

Scott Treatt:

You spoke of the prohibitive cost of the-

Bruce Billson:

Correct.

Scott Treatt:

... Federal Court earlier.

Bruce Billson:

And that's the issue because when that doesn't happen, it's off to the Federal Court.

Scott Treatt:

Exactly.

Bruce Billson:

And that's an enormous leap, and that leap is frankly character building for smaller litigants. The tax officer will go, "We can fund our litigation in Federal Court. No probs. See you in the Federal Court." Now, if you and I are a small business, that opportunity is no opportunity at all.

Scott Treatt:

No way.

Bruce Billson:

We can't fund it. There's even a contest over the stay provisions whether the tax offer should still be recovering amounts that it believes small business is liable for. Even though there's a contest over that. We had a bit to say about that legislation, but it's that challenge. That's why the tribunals there now. Off-topic slightly from tax, I'm arguing for something similar in the court system called the Federal Circuit Court Small Business and Codes List. So small business matters say, under a million dollars, rather than go to the Federal Court. They're still going to a court. But it's a smaller ring of the circus. You can put in court rules about how much evidence is required. The big fear is, Scott, isn't just-

Scott Treatt:

Reduce the barriers.

Bruce Billson:

That's right, and also reduce the risks so that people can self-advocate for their own economic interests. At the moment, if you feel you've been infringed upon in a franchise matter, you are hoping and are praying the ACCC will pick it up for you because you can't afford to do it, and you want your money back. You and I buy into a franchise business, we exercise our rights under the cooling off period. We want our 600 grand back. And the franchise says, "Yeah, I'm not so sure about that. We'll get it to you one day. It's like, "Hang on a minute." That's 600 large. That matters to us.

Scott Treatt:

Exactly.

Bruce Billson:

What do you do? So we are looking for improved access to justice mechanisms that are more responsive. An example of which is the AAT and the way in which you can handle tax.

Scott Treatt:

Yeah. That's great. Now, I wanted to come back then. When you were speaking about the concierge service and I guess, the way in which complaints and disputes can then move through that process. I know some of our listeners would be sitting back saying, "Well, actually how's that different to, you've got the inspector general taxation ombudsman? You've got the tax clinics that are out there helping a lot of the unrepresented and tax clinics.

Bruce Billson:

And use them to expand the tax clinics. Isn't that fantastic?

Scott Treatt:

It is.

Bruce Billson:

We work closely with all of those parties. If someone comes to us and says, "Look, we haven't filed a tax return for three years. I don't know, I can't afford it." We'll guide them to the tax clinic. Fantastic. If they've lodged and there's a dispute over a determination or an interpretation, well we'll try and help guide them to the landing points. And like a good concierge, we can't solve all problems. There's some that will weaken our gift and others we will have to reliably refer off in a warm referral phase. In the case of the Inspector General of Taxation, we work very closely with Karen and the Inspector General. They're looking more at systemic issues.

Scott Treatt:

Yes, they are.

Bruce Billson:

We're looking at cases. But what happens is, if we see a pattern of cases, we'll flag it up the tree with Karen and say, "Look, this is a recurring issue coming through. We're not sure this is quite the way the tax office should be rolling. We're not quite sure this is a reasonable interpretation." Or it might even be a conduct matter where too often, and I've spoken about this for 20 years, even as a cabinet minister, it's better now. But so much of your treatment can depend on who you get and how discretions are exercised, whether it's in a consistent and predictable way.

Scott Treatt:

Absolutely.

Bruce Billson:

Or whether you get unexpected out-

Scott Treatt:

That's right.

Bruce Billson:

So that's where we get involved, and I suppose, part of the work that we do. I co-chair the small business tax stewardship group with the deputy commissioner, where we bring different industry associations, trusted advisors, accountants, and all into a room and just talk about how the process of administering the tax system or even governance around the tax office thinking, we're going to push out some director penalty notices. Well, hang on. What's the governance around that? What processes are you going to go through before you use one of your many powerful sticks to go after a small business counterparty?

So we'll probe that and try and make sure that from our eyes what they're doing is reasonable.

Scott Treatt:

Indeed. And importantly, have safeguards in place when it goes wrong.

Bruce Billson:

Correct. And then checkpoint opportunities for conversations. Not a shirt front, not a Liverpool kiss, but something that is more engaging. I keep saying, "Yeah, just stay engaged with the tax office. You've got a problem, talk to them. Don't have them come and talk to you."

Scott Treatt:

Exactly.

Bruce Billson:

Yeah. We try and keep that narrative quite consistent. And this is just some of those touch points where we seek to influence the way the place rolls.

Scott Treatt:

And communication is the breakdown of every relationship.

Bruce Billson:

Well, it is. That's a cutting remark for a man who's been divorced once, but thanks Scott.

Bruce Billson:

It's all coming flooding back to me now. Yeah. So I'm just being mildly facetious there. No. No, it is. But we'll even get into some of those things like, some of the notifications that go out. Again, the sophistication in the language assumes a-

Scott Treatt:

A certain level of understanding.

Bruce Billson:

... level of knowledge that people-

Scott Treatt:

Yeah. That's right.

Bruce Billson:

... in the tax office have because they deal with it day-to-day. But tax is one of a plethora of compliance issues a busy small business is having to attend to. Let's be sure about something. Few people got into the business of their business for the backend of the business. It's not the spark, it's grudge business that everyone hopes to do well knowing if they don't, it can be problematic. But it's not necessarily a strength or a full toolkit.

And then some of the correspondence that goes out gets a little hard to interpret, that even when the tax officers thinking it's being softly, softly, a notice from the tax office can shake you to the boots anyway. It is.

Scott Treatt:

Exactly.

Bruce Billson:

So we say, "Look, hang on. What's going on here? And haven't there just been 15 other messages going out about single touch payroll or whatever? There could well be a blizzard effect here. How do you differentiate something that you really need to turn your mind to please from, here's a useful bit of information, and here's a due date that's coming up. So that's where we get involved.

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Scott Treatt:

So I know you've mentioned payments a few times, and I've heard you in recent times. And I think even during Senate estimates yesterday, which they did treat you quite partly.

Bruce Billson:

Being a former parliamentarian, I get the theater of it, but I also really respect the underlying accountabilities.

Scott Treatt:

Yeah, absolutely.

Bruce Billson:

So I try and engage in a very approachable way, and try and give thoughtful answers and hope that's helpful. And then I think if you go about it that way, reasonable people will treat you reasonably.

Scott Treatt:

Yeah, exactly. I think that's exactly right. But there was an issue around payment terms you raised there. And I thought, what are you guys seeing in the broader economy at the moment? There's a lot of talk of doom-

Bruce Billson:

Oh, well-

Scott Treatt:

... and gloom and interest rates. How is small business being impacted and why are you raising these issues around payment terms? How's that...?

Bruce Billson:

Well, if I could use a phrase, they're crap. The payment terms are crap. And I think I said in that Senate estimates hearing to quote my inner John McEnroe after a bad line call. For the big businesses saying they want to do the right thing by small businesses, you can't be serious. The numbers are absolutely appalling. You've got 31% of big businesses are paying their small business invoices within 30 days. So under a third... are paying within 30 days. My view is 30 days isn't that flash to start with. And we saw that during COVID that a lot of responsible bigger businesses saw cash flow challenges as a real crisis for many of their small and family business suppliers.

Scott Treatt:

Absolutely.

Bruce Billson:

And they did something about it. Even the mining companies notorious for being bad payers, time wise. They were paying small and indigenous businesses in the mining industry in four or five days.

Scott Treatt:

Wow.

Bruce Billson:

So the ability is there. If this is about appetite now with 31% paying in 30 days, that is not flash. But whether it's 30 days or 35 days, that is the high point of mediocrity anyway. But let's not split over a day or two. I know in the businesses I was running, I wouldn't be that fussed. So there's no great ambition to... We should get them down. Don't get me wrong. I think 30 days is pretty ordinary, pretty pedestrian. But when one in four big businesses are taking more than 120 days-

Scott Treatt:

120 days.

Bruce Billson:

120 days to pay their small business suppliers, that is just outrageous. That is a gratuitous use of a power imbalance.

Scott Treatt:

That's a massive-

Bruce Billson:

It is.

Scott Treatt:

... financing cost for a small business.

Bruce Billson:

It is, but that's interesting, isn't it? I use this, reaching into my economics days, in my studies. You say, it's a financing cost. I agree with you. That is a massive financing cost. Now, in a market that was working in a pure sense, the cost of funds for a big business is less than that for a small business.

Scott Treatt:

Absolutely.

Bruce Billson:

So you'd think if the market was operating correctly, that both parties would see the advantage in paying on time because the big business in a properly functioning market would think, "If we are paying in 120 days, our small business supplier probably is building in the cost of those funds into the price that we get." And the big business would think, "Well, hang on. That's going to be more expensive cost of funds for them than it is for us. Aren't we better off just paying on top?" But that's not what happens. You know why that doesn't happen? Power imbalance. Power imbalance. This happens. Big businesses, some of them do it because they can, and it is to the detriment of this small and family business suppliers who worry about the long-term relationship. They don't want to lose that big business, as a client.

If you and I were making balanced day adjustment cookies to go into a big supermarket chain. We upset the supermarket chain, well, there aren't that many options. There's not that many choices. So this is something that's quite significant in the land of the duopoly, which is the Australian economy. That if you're a small business supplier in key markets, there's only a handful of big players. So that fear of damaging the relationship by saying, "Hey, you think you might actually pay me in a respectable time?" That's a real challenge. The risk of retribution, like, "Oh, you are a problem kid. We'll go and deal with somebody else."

Scott Treatt:

Somebody else.

Bruce Billson:

This is the atmospheric of it.

Scott Treatt:

So how are you helping? How are you-

Bruce Billson:

Well, the previous government introduced a payment times reporting register. So 7,000 of the biggest companies turn over a 100 million report quarterly. Not just on their payment performance, but on their terms, their aspirations. Now, even the terms aren't getting any better. So they're not even talking a good game. They're not improving. There's been three reporting cycles thus far, and there's been virtually no movement. But because the payment register is almost impenetrable in its denseness of data, my agency I think is the only agency public sector or academic that's actually unpicking the data to get through the fog to find out actually what's going on. Now, it shouldn't be that hard. That data should be readily available on an app.

Scott Treatt:

Yes, indeed.

Bruce Billson:

That you pop in, might-

Scott Treatt:

To clear, this day and age.

Bruce Billson:

Well, I'd call it good business pays. And I'd say, "Well, what is the performance?" Oh, okay. Yeah. Yeah. And then if you're a small business thinking about becoming a supplier, at least you can see their form. One idea was, in all of the cloud-based software, why isn't there an API into it? As you are using your e-invoicing tools, you see that counterparty and then it pops up and says, "Oh, by the way, this outfit normally takes 90-

Scott Treatt:

20.

Bruce Billson:

... days. This is-

Scott Treatt:

Plays right into governance and transparency.

Bruce Billson:

Exactly. Exactly. So that's where we're focusing on trying to make that tool work-

Scott Treatt:

Fantastic.

Bruce Billson:

... better. Dr. Craig Emerson, former minister, he's leading that work. So we've been working closely with Craig on this. Just to say, "Well, can we make this more accessible, more transparent?" It was supposed to have been an incentive for big businesses behaving badly to improve their performance, to showcase the exemplar businesses that are doing the right thing. It's too darn hard to find that out. 23% of the businesses that report have no small business customer. You'd be familiar with that. Your listeners would be.

Scott Treatt:

Absolutely.

Bruce Billson:

I know when we're building businesses, we had the 10 IP sitting in a separate company. We helped shareholders funds here. You do these for intercompany structures. You Google what's BHP's form. I think you get 14 separate entities pop up, and then you're left scratching your head with this ugly spreadsheet trying to work out what it all means. So that can be improved. And then frankly, I think there is a need to say, "Is this an unfair business practice? Is there something about fair conduct that's being infringed upon, where a business has taken 120 days or more to pay their small business customers." And just say, you and I are electrical contractors, and we popped in a substation out in the central west of Queensland for a new mining project or something like that. The contract might be worth 150,000 bucks, but the transformer might be 120 of it.

So we've already forked out the money for the supplier to give us the kit, so that we can then add our value add to it where our business is at. But we are burning our dough and our cash flow whilst we wait to get-

Scott Treatt:

And still carrying the risk.

Bruce Billson:

And still carrying the risk.

Scott Treatt:

So in the current environment too, what are you seeing or what do you see as the outlook over those 12 months?

Bruce Billson:

It's patchy. It is a character building time for small business. I marvel, frankly, at the greatest renewable energy in Australia, and that's the optimism of enterprising men and women. You have business conditions that you've seen those numbers hop around a little bit. Confidence is down a bit. You've seen interest rates hitting consumer behavior. So there's key markets, particularly hospitality and the like that are viewed as more discretionary, that are really struggling off the back of already struggling to get staff, rental costs, cost of key inputs, energy. And in some cases, landlords and financiers. And in some cases, the tax offers who provided certain accommodations for obligations that were due to defer some of those, to get through COVID.

Well, we're now saying, "Well, we need to make good on those as well." So in that challenging environment, I'm not surprised to see quite a number of businesses really struggling.

Scott Treatt:

Struggling.

Bruce Billson:

And in that space, it's going to be more and more difficult. The inflation environment, a lot of business owners haven't navigated inflation at this level. We all know, and your listeners know it's been much worse. But this is new too. The fixed term contract, a fixed price contract, that's okay. Get some delays. You're getting input, cost pressures coming through. There's a lot of profitless trade going on and a lot of exhausted small businesses with an ambition for growth. At a time, you're seeing areas of contraction to try and get some margin going. So we're seeing that pressure. Talked about emotional wellbeing. Small business owners are exhausted right now.

Scott Treatt:

So over the last 12 months and the last few years, your office has been doing a number of reviews. You've put out there a number of recommendations. And I'm going to focus specifically on tax just now.

Bruce Billson:

Yeah, sure.

Scott Treatt:

Are there some tax recommendations that you wish the government had picked up or should be picking up now, which will help in the present environment, if that were-

Bruce Billson:

Yeah. Look, we touched briefly on the stay issue. I think there should be an automatic assumption that if you've got a dispute about the amount owed, there shouldn't be a continuation of recovery activity. Now, at the moment, the tax office will, in fairness, say, "Well, that's ordinarily what we do." And that's true. But just to emphasize so many of the challenges with the tax office, they do that and you hope they play nice. Where's the capacity of the small business taxpayer to actually feel the locus of control for those sorts of decisions sits a little bit with them? You shouldn't have to rely upon tax officials being their best selves to get a fair interaction with that process. So that's probably one.

We were also pretty adamant that there's a need to have a look at the way the tax compliance burden lands. There's some good work done by some of your audiences' industry bodies and your own. I think we're involved in at the time about the tax compliance cost per a 100,000 of revenue. I can't remember what the metrics were, but the disproportionate, the eye watering burden that a smaller business respondent pays.

Scott Treatt:

Okay. Is it?

Bruce Billson:

And I just think, "Well, hang on. I'm all about rightsize regulation. What's the minimum effective regulatory imposition and compliance burden?" I think in that space, the administration burdens land disproportionately on small business, and I think the tax office is right to be looking at, was it tax 3.0 and the OECD idea around realtime data and those sorts of opportunities. I think that's very real. And I think there's scope to do that, so that tax burdens are met in a ordinary course of business mode, and that they happen in the background rather than being a traumatic event. I also don't understand for the life of me, and I've been banging on about this, it feels like for a dozen years, why the tax office at the end of a reporting period gets our returns, runs the benchmarks against it, sees there's nothing to be seen here.

Why they don't then go back to the small business and say, "Look, thank you. Thanks for paying tax. Fantastic. Here's-

Scott Treatt:

You've got a clean bill of health.

Bruce Billson:

"Here is a service for you. We do run benchmarks, but for businesses just like yours, here's where you sit. We're not offering any warranty on this information. We're not telling you what you should do about it, but your cost of occupying your premises is 22%, when the likes in your business is 14. You might want to turn your... Yeah. That's useful. But also say, "Look, there's nothing there that troubles us. Thank you. We will be taking no further action, unless there's some black swan bit of material that lands in our lap. Go and worry about something else, but not us." You just take that worry, that something-

Scott Treatt:

Off the shoulders, Saying-

Bruce Billson:

And just say, "Look, you're clean. Go and pursue entrepreneurial opportunities." So I think that's a pretty important message and easily done. Easily done, I think. And probably the last one's more around a reform idea. Now, we haven't done any more work on it, but it's something that we've fed into productivity commission reviews and the like. I suppose, it comes under the banner of my belief in energized enterprise. We really need to encourage new forms of wealth creation and income. We're very fortunate with what nature's gifted us in the ground and in the sky. We know, but we need to think more carefully about it. So I like some of the Singapore models where you've got a tax reimbursement in the early years of the business. So that value of cash flow death, you still have to report. You still may identify a tax liability, but you might not have to meet that liability if you can show you've put the money back into the business.

In those early years, I think-

Scott Treatt:

Just enhanced innovation and growth.

Bruce Billson:

Absolutely. And there's a couple of things like that, would then encourage businesses to incorporate. So there's some structural benefits there. And then what we see so often is that lub between private interest in the business. Now, I know that is a challenge for your members in your audience, at times, with tax reporting, but it's also a challenge for people's lives. We've got this idea in our system that you're either the oil of a business or the water of an individual. Now, in small family businesses, you're a salad dressing. You're combined in every part of your life. You can't get a business loan, unless... Well, half of all small business loans are secured by personal assets.

Scott Treatt:

Absolutely. Yeah.

Bruce Billson:

Even when you look at personal bankruptcies, 41% of them are triggered because of some business interest. So this fiction that there's two separate in... That's got to go. Now, what we are thinking is, well, if they're some of the challenges, let's look at... And I've got a little bit off the tax topic, but let's tidy that up. So some policy measures that are an incentive for innovation and enterprise may also help with structural messaging to tidy those sorts of things up a little bit.

Scott Treatt:

Indeed.

Bruce Billson:

So there's just some of the opportunities. The other one is, I think we need to have a big conversation with the nation about independent contracting. It's a vital and valuable form of wealth creation and the pathway for more than a million Australians in their livelihoods. Now, to have it characterized as some sham arrangement or a curse on the labor force. It's about mobility, it's about choice, it's about flexibility. I touched on it earlier about women. So many women are self-employed independent contractors because it works for multiple objectives in their lives. Mature age people, disproportionate number are sole business operators in that mode. A high percentage in the number, the same age cohort that are actually employees.

We need to think about that and wonder why only 8% of our business owners and leaders are under 30. Is it just not attractive enough? I don't know.

Scott Treatt:

I think your point's-

Bruce Billson:

We need a look at that.

Scott Treatt:

Your comment's right though, we've got to have the conversation. We need the politicians to be brave and have the courage to be able to start these conversations in an environment, talk about the business and talk about our taxes.

Bruce Billson:

Well, let's loop back to where we started. This is where I'm working with my team to think, should we do an inquiry on this topic? Should we unearth these realities a little bit when they're talked about at the margins? No question. We get Uber drivers that come to us. So we do a lot of digital platform dispute resolution, and we've seen examples where people haven't been treated well. We get that. But does that mean that mode of engagement in entrepreneurship is of itself invalid or wrong? No. No. There's bad behavior within it, but there's bad behavior in a whole range of fields. It doesn't mean you junk the whole mode of economic engagement. So these are the sorts of things that I think we need to have a bit of a conversation about, so we don't end up overreaching by assuming the outlier conduct is actually at the core. That's where we get-

Scott Treatt:

So Bruce, your comment before you talked about energizing, in a way.

Bruce Billson:

Enterprise.

Scott Treatt:

Energising enterprise.

Bruce Billson:

My goodness. So something I've said was interesting. Yay. This is a good... You should push that button you've got that has the cheering going on. So-

Scott Treatt:

Through this conversation, there may be a whole handful of listeners, a few handfuls of the listeners, let's hope, who now want to engage with you, and get in contact. How do they do that? How-

Bruce Billson:

Well, through-

Scott Treatt:

What are the next steps, Bruce?

Bruce Billson:

Through our website. They can do that. Well, they can just email me directly. I've got a really sophisticated email address. It's Bruce, spelled the conventional way, .billson, two ls, @asbfeo.gov.au. Shoot me a note. Think out loud. We value that input. One of the things that even our website does is, we just don't consult when we want to talk to people. We're always on. We're always open. We value people's insights. Your audience are vital contributors. We have policy forums where we get practitioners sharing their story. I was the guy that put a suburban accounting firm on one of the tax review processes.

It was great to have the big corporate tax leads at the major consultancy. But I can't remember last time they lodged a bass for somebody. I said, "No, no. Get somebody who lives and breathes-

Scott Treatt:

Breathe these things.

Bruce Billson:

... this every day, and then get that empire, that input." And that was Shannon Schmidt. Her contribution was highly valued and outstanding. So yeah, value the field evidence, value the insights. Even if it's just a half thought up idea. That kernel of a thought, we might be able to chase it down and shape it. So yeah, we're very, very engaged and-

Scott Treatt:

That's fantastic.

Bruce Billson:

And interested. Yeah.

Scott Treatt:

Thank you so much, Bruce. Yeah. Any last messages for our listeners before we close?

Bruce Billson:

Well, look simply, we've dealt with good balance day adjustments and many problems you have, these small ones. But just to reiterate though, to your audience, we highly value what they do. We are constantly emphasizing the importance of trusted and competent advice, and not just on... We actually have been arguing that we'd like to see more of that, not less. Particularly at a time when businesses are thinking about, what's next? We have this strange, you don't want to be insolvent in Australia. It can be a commercial death sentence. In the US, if you haven't been insolvent once, they don't think you're trying hard enough. But here it can be tough. And therefore, I think the discussions around dignified dismounts, whether we should salvage what's working in the business and try something else, or reshape and dare, I say pivot. We want those decisions, those conversations to be a natural order of things, so that what is likely to succeed has its best prospects. It's not within our gift to make every business succeed.

Our mission though, Scott, is to make sure none failed because they didn't know about something that might have helped, and that's why I'm pleased to be with you on your podcast today.

Scott Treatt:

Thank you so much again, Bruce, for joining us. It's been a pleasure having you.

Bruce Billson:

Cue the applause.

Scott Treatt:

Thanks so much for listening to this episode of TaxVibe, and I've been chatting with Bruce Billson and the Australian Small Business and Family Enterprise Ombudsman. We recorded this episode of TaxVibe live at the Tax Institute's Private Business Tax Retreat on the Gold Coast. And what a great event it has been to keep up to date with TaxVibe. Be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials or visit taxinstitute.com.au. We look forward to you joining us next time.

Episode 25: Tax clinics — making a real difference

Release date: 24 February 2023

If you've ever wondered about tax clinics, this is the episode for you.

Scott chats with Dr Rob Whait, CTA, Senior Lecturer in taxation at UniSA, and Claire Clinton, student at Griffith University and participant in the Griffith tax clinic.

They dig deep into who tax clinics are for, the very real difference they can make in peoples' lives, and the positive impact Claire's participation in the clinics has had on her tax education experience.

This is tax tackling the real issues - after all, any tax practitioner knows that it's not just about the law - practising tax is about the relationships.

Host: Scott Treatt, CTA

Guests: Rob Whait, CTA & Claire Clinton

Scott Treatt:

At The Tax Institute, we love the vibe of tax and we do tax differently.

Hello and welcome to TaxVibe, a podcast by The Tax Institute. We'll be chatting with some of the tax professions, great thought leaders who will share valuable insights and practical aspects you may not hear every day.

I'm Scott Treatt, general manager for tax policy and advocacy at The Tax Institute and your host of today's podcast. Today we'll be discussing the National Tax Clinic program. We hope you enjoy this episode of TaxVibe.

I'm joined by Dr. Rob, Whait, CTA and senior Lecturer in taxation at the University of South Australia. Rob has over 20 years experience in tax and has been with the university for 16 years. He's the founder and co-manager of the UniSA Tax Clinic. I'm also joined by Claire Clinton, second year student at Griffith University studying accounting and taxation. She's also a student in the Griffith Tax Clinic.

Claire and Rob, welcome to TaxVibe and in person at the 34th annual Australian Tax Teachers Association Conference here in Brisbane.

Rob Whait:

Thank you, Scott.

Scott Treatt:

Great to have you both.

Claire Clinton:

Thank you for having me.

Scott Treatt:

All right, so tax clinics. It's great work, but I'd suggest there's a lot of people out there, Rob, who really don't understand what the tax clinics are, what they're about, et cetera. Let's delve into a bit of the history of the tax clinics. What are they about?

Rob Whait:

Yeah, the tax clinics, they're based on a US model, came out of the US where they have low income tax clinics and in Australia, Annette Morgan and Donovan Castelyn set up the first tax clinic in Australia, Curtain University where they wanted to adopt a US style low income type model.

After the success of that, the federal government decided that they wanted to do a trial of tax clinics, at least one in each state and they would fund that for a trial period. At that time, nobody really knew what the demand would be for, as a little bit of thinking around who our client will be, but there was always this notion that there was a gap in the marketplace that there are potentially a group of taxpayers in Australia who aren't being served through the current system and it's mainly because they can't do their tax themselves. It's far too complex or they've got some barrier or issue that's preventing them from doing their tax on their own or they can't afford tax agent representation. That gap in the market, that trial period was ready to see whether there was a gap in the market.

And after 12 months, it was pretty clear that there was, there were significant groups of people in Australia who were in that position.

Scott Treatt:

How are they helping? Walk me through what they're doing to help these people.

Rob Whait:

Primarily, and it does vary in each state. With South Australia and in the clinic in Adelaide, we do a lot of lodgements for people who simply just need to do their annual return. Now we help them through myGov. We might help them set up a myGov account and link myTax to that. And very basic steps there, we'll show them how to do their return in myGov and it couldn't vary in complexity. Many of them run micro businesses and they may have come from overseas. They've got potentially poor literacy. English is a second language. Their businesses are very small, so they don't have a lot of money, but they still have to address complex business obligations like GST, PSI, those sorts of things.

And there's a combination of things that are preventing them from being able to do their tax. And what we will do, focus in Adelaide in particular is to train them up a little bit and then they can either go and do their tax on their own after that, after we've shown them a way, if they have maybe another issue or they want to come again and get a little bit more help, we might do that again. But generally the idea is that we give them a start, they've learned how to do their tax and then they can complete it themselves in the future. Or if their business grows or whatever they want to do, then they can go.

Scott Treatt:

They grow and evolve in getting a tax agent.

Rob Whait:

That's right. And then other types of people are people that have just got themselves into a real pickle.

They're either through a divorce or some sort of mental health issue or something like that's happened to them. They may have gotten involved in running a business or not, but they've just let their tax go for many years. Because maybe they're on Centrelink or some sort of disability support pension, they can't afford professional help. Again, it's about getting them back up on their feet. They get up to date with their lodgements and then they're set to maybe engage in an agent after that or they've got some skills to do their tax on their own after that.

Scott Treatt:

That's fascinating. And if you look at the fact that these tax clinics, they're all run by universities, why did you guys start, why did you get into tax clinics?

Rob Whait:

Again, it follows the US model where universities, although it has expanded a bit in the US to other organizations, but universities offer clinics in the US and it's thought to follow that model again. At universities where socially orientated institutions trying to do social good and it seemed to be appropriate there.

The fact that the services are free goes along with that. Universities are the type of organization where a lot of, nobody's ever done the costings I don't think, but a lot of in kind support is provided to run the clinics as well as the federal grant. But we also have access to a pool of students who can come into the clinic and get training under supervision and can end up getting lots and lots of skills, which will help them gain employment and succeed in that employment once they've left the university.

Scott Treatt:

The resourcing within the university is, and this is why we've got Claire, it's students, you've got a lot of students coming through.

Rob Whait:

That's right. We rely on the students to really do a lot of basic work, filling in forms, doing research, doing the returns. I must stress that it's always supervised.

Nothing leaves, certainly in our clinic, nothing leaves the clinic without it being passed by the tax agent who supervises them. But they gained all sorts of skills in taking notes, doing returns, speaking to their supervisors, speaking to clients, making appointments, working with each other. I developed an entire list of skills that I gave to my students. I couldn't remember that off the top of my head now. But all those office things, people coming to the clinic and especially after doing a fairly technical tax unit. And I think it's more just law and deductions and income and of course that is part of it. But I say to students, "It's more about the office environment." When you move into a firm, whether it be an audit firm or a tax firm or any other type of office job, you are going to know a little bit about filing.

You're going to know about the receptionist and what they do and making an appointment, making a phone call, talking professionally. And those skills are extremely important in simply fitting in to that type of environment. When I worked in practice, I all came to the view that tax is more about relationships than it is about the law. A person who you are giving a service to in tax, or really anything else for that matter, has to be confident that you're able to deliver that service. And they assume that you can because you've had the training. But that rapport, building a personal relationship with them is part of that confidence. If a person can't relate to you, then they have difficulty really having their needs met.

Scott Treatt:

The skills, which don't mean to be disrespectful in any way, but a traditional university degree doesn't teach.

Rob Whait:

That's right. And that's where the clinics and there are other types of clinics that all the universities operate as well as other work placement programs. But that really creates a difference and an opportunity. When I was a student going through university, I never had access to any of that. You just had to rely on your wits and what your mum and dad taught you, going to etiquette school or something like that when you started at a firm. But now students have much more on their side when they started. They've already been there, but now they just get paid for it.

Scott Treatt:

Yes, indeed. And Claire, that that's probably a great segue to you and why you've got involved in the tax clinics. Why did you choose to get involved in being a student within the tax clinics?

Claire Clinton:

For me, it was coming out of the lecture hall and everything, being in a book and actually getting to see it in practice before I actually finished my degree because I was afraid that I'd come out of my degree and I'd be going in completely novice into a company. And I just wanted to make that connection while doing my degree. And that's when I found out about the tax clinic. I was straight in there applying for it because I was like, "I really want to do this. I want to see how what I'm learning actually translates over into the real world." And getting that on the ground training while still studying.

Scott Treatt:

Was that a difficult process then to get involved, but you say you applied for it. Were there a lot of students applying? What about other students out there who might be listening to this? What advice would you be giving to them if they hear this, get to the end of this and go, "Actually that's something I'd want to get involved in." Did you find it difficult, challenging?

Claire Clinton:

For me, I found out about it earlier this year through the job talk at the university and I just made a mental note going, "I want to know what that is." I started researching more into it and then I was going, "Right, when does it run? When does it suit me best to fit in with all my other courses that I do that I could actually dedicate the time for it." I'm doing it in trimester three, so week one of trimester three, I was straight in there to the lecturer that runs it and interviews it, straight in there, emailed her going, "Hi, I am really interested. I don't know when the application's open." And I just got in there and, because I know the application's open, I think it was about week five, then she interviewed around week 10 and then we found out by week 12 if we'd gotten a place or not.

But I was in there by week one, just making myself known. I was hoping that would give me a bit of a competitive edge because there's only a very limited space of how many students can get in each trimester to do it. I think there's a probably, I'd say about 13 places is all there is in this trimester. That's very small when you've got people doing law degrees and accounting degrees, all trying to buy in there. For me, I was like, "Be proactive from the beginning. Get your name, chat the lecturer, put the face to the name. When they see your resume coming in." They'd be like, "Yeah, might give you a lead up there."

Scott Treatt:

Great advice. What are you enjoying most?

Claire Clinton:

For me, it's seeing the clients at the beginning of the meeting to where they leave at the end because I've noticed a lot will come in extremely nervous, not really intimidated, but they're nearly embarrassed because some might have left it six, 10 years where they've gotten so far down the rabbit hole of not having their taxes done properly, that they're nearly too afraid to deal with it. And they're like, "What's going to happen?" And then they come in and you see them get all the advice that they need, the assistance they need, and you just see that weight come off their shoulders and they're suddenly like, "It's not so bad. It's okay. It's not so scary." It's broken down simply because taxes are confusing to people. When you have someone like the registered tax agent meet with you and sit one-on-one and break it down to basics, it just makes it less scary.

And then they help you with the information you need to get yourself back on the right track. And it's seeing that transition of people from going, "I don't know what I to do. I'm so embarrassed. It's been so long, I'm so scared to see what's going to happen. I don't sleep at night over this." By the end of the meeting they're like, "This is so good. I can relax now." One woman was like, "I can finally sleep after six years." And for me, that was a huge experience to witness because you realize just by giving this help to this lady that you had changed her day, her life really, because she was like, "Okay, I no longer have this thing hanging over my head anymore. I can now go right, I've everything sorted, I can now move forward. And I've been given the information and the tools to move forward and keep doing it."

Scott Treatt:

It's so rewarding to know that you're making such a difference to people's lives in the tax system. And Rob, you were talking about the clients before around their ability to afford, but Claire, what are the types of clients you've come across? Let's look at some of the demographic of the types of clients that clinics actually do deal with.

Claire Clinton:

It's very interesting because you can have people come through that are brand new novices. They're setting up a company for the very first time, they're wanting to apply for their ABN, and they're just like, "What do I do? I can apply for my ABN number, but what does that mean? How do I do it? What records do I need to keep?" And it's giving people that basic information that before they even start or if they're in their first year of business, that you can get them prepared rather than being six years deep and not have any information, trying to backtrack. And then at the same time, I've had people come in with domestic violence and they've had all these issues in their lives where tax became really minor to them because these other major aspects we're taking over.

We've had people with mental health issues who were getting help to come in where they've just had really, really troublesome. It's varying from people starting off with companies just wanting to know how do I step forward to people being like, "I've had all of these issues in my life and I need someone just to help me get back on my feet." And it's, I think an amazing service because it's free in them to come in and to get that help to put a bit of that bad negative side of their life, push it to the side side and go, "Right, I can positive focus, move forward."

Scott Treatt:

I just think from a personal development perspective, I look at you, unfortunately, our podcast team can't see the glow on your faces as you're talking about it. You can certainly hear it in your voice, but just the development that it brings out in an individual. As a employer, I listen to what you are dealing with and think, "Wow." The personal skills you are developing right now around dealing with a lot of very challenging circumstances. People who have difficulty from a mental health perspective or just an emotional perspective with what they're faced with at a point of time, for you to work through that as well as the tax law to assist them is tremendous. How do you perceive the development that you are receiving through this? What rewards do you see are coming out of this?

Claire Clinton:

I knew I would gain experience from it. I just didn't realize I would gain so much experience. I was thinking, "I'll go in, I learned to do some of the paperwork and then that'll be it," but it's not. It's so much more. You're on the phones, you're on emails, you're learning how to do the paperwork and all that side, but you're also learning how to deal with the human aspect. When you have a person come in, you have basic information as to why they're coming in, but you don't know what emotional side will come in as well. And they'll come in, they'll start talking and you're sitting there going, "Okay." It's learning to deal with that human aspect as well as the theory aspect and the actual paperwork side.

It gives me so much more than I'd expected because I feel where I was on week one, where I am now is very different because I've gotten to witness so much and I've got to experience so much and I've got to learn so much that it's a lot more than I thought I would've gotten, that I definitely would recommend it to any future student that was thinking of maybe doing it. I'd be like, "Get in there and do it because it's phenomenal exposure."

Scott Treatt:

We'll be back straight after this break.

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Scott Treatt:

Welcome back. I'm joined by Dr. Rob Whait, CTA and senior lecturer in the University of South Australia and Claire Clinton as a student in the Griffith University Tax Clinic. Rob, from that development perspective as a lecturer, do you see changes in your students, the students coming through?

Rob Whait:

Yeah, definitely we do. And it's all those same things. Claire at Griffith Tax Clinic and at every other tax clinic, you'll see that the students, that's the thing that they say to me exactly what Claire said, that, "I knew that I would learn, but I didn't realize I would learn so much." And it's from the variety of the work that comes through and the variety of skills really that it demands and the fact that you are helping real people rather than simulations or some other thing like that. In many respects, the clinics are just like a tax practice.

There are some differences. We don't have ongoing clients. We tend to only see them once and then they move on. It's not like a business in that sense where we have retention of clients, but it also means that we see lots and lots of different clients. We have people come through numerous times a day, not the same person, a new client. And a student is having to do that, build rapport with a new person multiple times. And over the course of a semester, they see many different types of people. Some people will react to their situation very differently. And reading what they're going through, adapting the way they talk to them or whatever through the meeting. Those skills are extremely important going into practice because as we know, all clients are different. We're able to build on more long-term relationship with those clients in a practice that's in the profession proper, but still managing those personal relationships is very important.

When I see students grow significantly, their communication improves, their writing improves. The other thing is note-taking. They learn how important it is to take good notes and write up good notes that somebody else can follow. And of course, for evidentiary purposes.

Scott Treatt:

And as you're describing it is large tax practice and the fact that I've heard anecdotal stories that practitioners can be a bit fearful of tax clinics and the fact that you are going to take their clients. What's your reaction to that and your thoughts?

Rob Whait:

The reaction really is that it was never the intention of tax clinics to compete with the profession more broadly. Like I said, right at the very beginning, it was designed to address a perceived or potential gap in the market. And when we started, nobody really knew how many clients would be in that market, the person who can't afford representation and can't do their taxes on their own.

They're really, in broad terms, the two key criteria as far as I understand it. These are taxpayers who the profession wouldn't serve in the first place because they simply can't afford representation, but the clinics can actually benefit the profession in many ways.

Scott Treatt:

How do you see the profession of the clinics and working together?

Rob Whait:

Firstly, with the students, we are training students so that training doesn't have to happen in the profession. Once they reach it, they're already got 10, 12 weeks or wherever long they worked in the clinic worth of experience before they go. And some of that experience, as you heard, is quite significant. They hit the ground running when they're going to the profession. We really take a client and get them back on their feet and then we send them on their way. If it weren't for the clinic, they probably would never be compliant.

They would never go into the profession. Their affairs would just get worse and worse and worse and worse until the tax office eventually dealt with them in whatever way they deem appropriate. We get them ready and then they can be served by someone in the profession. After that, they may have their tax debts managed, their business gets sorted out, they feel happier, much more confident about running their business. And their tax isn't on their minds. And now they can move forward and potentially engage an agent after that. They reenter the profession quite often after we've helped.

Scott Treatt:

If I was to describe the relationship then, and correct me if I get this wrong, if a potential client rocks up to a tax agent with significant amount of outstanding affairs and that client just can't afford to get those affairs up to date, they could refer that work to you effectively to say, "Hey, this person needs help, help them out. We understand you're not charging, they can't afford fees to get this done." You would help them through that process and potentially resolve any disputes that arise from that with the AGO and then be able to refer them back to an agent where it's then economically viable for the agent to be doing the work or the client themselves is actually then back into a financial position to be able to afford a level of fees.

Rob Whait:

That's right. And many of the clinics take referrals, particularly from financial councils. That's a big source of clients for us as well as other non-government agencies. They're the people that have found themselves in these are really difficult situations. Having a tax firm refer to us to help them for a short period and then they go back to the firm.

But that's not something that happens a lot at the moment. But that's something that could happen in the future where working with the profession. In fact, I think a couple of clinics do have pro bono help from the profession. My clinics just started that a little bit, but the people from the profession come in, they're not working on their own clients, but they're getting to meet the students. They're getting to see the work the clinics do, how the social good that it creates. Some students have even been employed by firms, some pro bono firms that have come in have said that they really enjoyed the aspect of giving back, because they can see directly the work that the clinics are doing, the effect that it's having. They can see the clients that are coming in and how the state that they're in their vulnerabilities, I suppose.

And they've come away from that feeling good about it. They meet some students potentially. There's some recruitment going on there. It's really quite a positive thing in that respect. We see the clinics as really lifting the profession and there's room for that to grow. The profession and the clinics can obviously always work a little bit better, once more understanding about what clinics about is out there amongst the professional membership. But there's no need for the profession to fear clinics at all. We don't see ourselves as taking the clients off the profession because they simply would never have been clients.

Scott Treatt:

Thank you for clarifying that. I'm sure our listeners would be interested to hear that perspective. We spoke earlier as well about benefits for the system, benefits for the university, benefits for the students, et cetera. But what do you say is these benefits then for the tax system?

Rob Whait:

I think with people coming through, the people slipping through the cracks, that was perhaps one of the phrases that was used in setting up clinics, serving people that are slipping through the cracks because they can't afford to get help and they can't do it themselves. But what it's also exposing is people that are having troubles with the system generally. The way the system is administered, systemic issues, there are some people that just simply don't fit into that system. And an obvious choice is people that are in jail. Working in the profession, years ago, I would never have thought about people in jail having to file their tax. They would never have been a client of mine either, for example. However, they are people that have to do that, otherwise they get failure to lodge penalties. And we've had clients that's happened to, there has to be something resolved there systemically to help people who are in jail to prevent them from getting these penalties.

Otherwise, we just have to go and reverse them. We see a lot of these minor variations, but there are patterns that are starting to develop, and that's where we could do more to perhaps collate these stories of taxpayers, what prevented them from complying in the first place. Obviously their situation, if they had a mental health issue or a domestic violence or whatever, that was an initial thing. But after that, what from the administrative perspective prevented them from getting back on track? And we can look at that sort of thing and start recommending some changes to way the system is administered to try and help. Otherwise, we're just going to continually see these same situations over and over again. And that was one of the objectives of the tax program was to advisee about systemic issues. I think it's probably, we've only been going for three to four years.

We're only really now starting to do some research into that space. You mentioned about the Australasian Tax Clinic Tax Association Conference, which we're at, I'm presenting some research tomorrow with some colleagues from Western Sydney Clinic and University of Tasmania about some clients who came up against some particular problems. And the situations that we see more than once. It's a bit of a difficult one because they're not situations that are so common because of the type of group. They're a vulnerable group, they're not going to be situations that are all over Australia, but they're not one-offs either. Sometimes maybe some early intervention or being a little bit more open and communicative with the client could have maybe helped things not get so far down the track as they did.

Or sometimes it may be just simply be parts of the tax office need to communicate a little bit better. It's not to have a dig at the AGO, but it's about things can always get better, things could always improve, and we see the types of things that those types of clients have and the barriers that they face.

Scott Treatt:

That's fantastic. Closing remarks, and this has been fantastic just to hear the background, the experiences from both a clinic supervisor or manager perspective and a student perspective. But for those out there closing remarks around the clinics themselves or be it for students, Claire, I'll start with you.

Claire Clinton:

From a student's perspective, it's something that future students should definitely get themselves involved in because the learning aspect is phenomenal. It gives you exposure to so much more, and you will learn so much more than you realize. It's definitely extremely beneficial to students. It's an amazing service from what I can see. And being in there and seeing how clients changed throughout the process and how more confident they become that it, as a student gives me the confidence to be like, "I can provide this service when I become qualified, I can do good in the world. I can help people." From a student's perspective, get out there, get into the tax clinic if you can, and give it a go and learn. It's amazing.

Scott Treatt:

Great advice. Rob, closing remarks?

Rob Whait:

Closing remarks. It reminds me really of what Claire said about doing good and getting out of the classroom as an academic focus mainly on teaching in classrooms. It's great to now be able to have an opportunity to really have impact, do social good in the community through the clinics, not only through helping students, but also the direct benefits that our clients have. And hopefully then, because I think that if we can help the administration of the tax system in particular, and maybe some law changes as well if necessary, if we can help the most vulnerable in society with those challenges, and I think it benefits all of society, the types of things that would make it easier for a vulnerable person to comply with the tax system will make it easier for everybody to comply.

That's where I think the benefits to everyone can come through the clinic.

Scott Treatt:

Perfect. Thank you both. Really have valued this discussion, and thank you for taking the time to come in and talk with me.

Rob Whait:

You're welcome. It's been a pleasure.

Scott Treatt:

Thanks for listening to this episode of TaxVibe.

I've been chatting with Dr. Rob Whait, CTA and senior lecturer in taxation at the University of South Australia and Claire Clinton, who's a student at Griffith University and in the Griffith Tax Clinic.

We recorded this episode of TaxVibe live at the Australian Tax Teachers Association Conference in Brisbane. It's now in its 34th year. This conference provides an environment for tax academics, industry, and government professionals to share research, develop teaching practice, and promote networking opportunities to advance the discipline.

To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can also contact us by emailing taxvibe@taxinstitute.com.au.

We look forward to you joining us next time.

Episode 24 — Raising the bar of tax teaching in Australasia

Release date: 27 January 2023

In this episode of TaxVibe, Scott chats with Annette Morgan, CTA. Annette is a Senior Lecturer in Taxation at Curtin University, Co-Founder and Clinic Director of the Curtin Tax Clinic, has her own tax practice, and is the immediate past president of the Australasian Tax Teachers Association.

Scott and Annette discuss the role of academics and teachers in the tax system and how it's about more than just teaching students - it's about being a custodian of the system, nurturing the youth of the tax profession and raising the bar across Australia. Live at the 34th annual Australasian Tax Teachers Association conference, they also discuss the conference itself and the theme 'tax in a disrupted world'.

Host: Scott Treatt, CTA

Guest: Annette Morgan, CTA

Scott Treatt:

At the Tax Institute, we love the vibe of tax and we do tax differently. Hello, and welcome to TaxVibe, a podcast by the Tax Institute. We'll be chatting with some of the tax professions great thought leaders, who will share valuable insights and practical aspects you may not hear every day. I'm Scott Treatt, general manager for tax policy and advocacy at the Tax Institute, and your host of today's podcast. We hope you enjoy this episode of TaxVibe. I am joined by Annette Morgan, CTA and senior lecturer in taxation at Curtin University. Annette has over 30 years experience in tax and has been with the university for 11 years, and also has her own tax agent practice. She's the director and co-founder of the Curtin University Tax Clinic, and also the outgoing president of the Australasian Tax Teachers Association. Annette, welcome to TaxVibe, an in-person at the 34th annual Australian Tax Teachers Association Conference here in Brisbane, a bit of a mouthful.

It's now in its 34th year, and the conference itself provides an opportunity or an environment for tax academics in the industry, government professionals, et cetera, to come and share research, and develop teaching practice, and promote networking opportunities, and otherwise advance the discipline of tax. But not too many people will actually know about this Tax Teachers Association with the acronym out there for people of ATTA. So, tell us a bit about ATTA and what it is, what it does, how it achieves what it achieves.

Annette Morgan:

Okay, thanks for that, Scott. So, ATTA basically, as you say, is in its 34th year. So, it started out many years ago with a group of tax teachers who, unfortunately with tax in universities we either belong in law schools or accounting, and we seem to be that strange profession of tax. So, you often had one tax lecturer at a university who couldn't really share ideas or network with others in their university on the tax area. So, they started this small discussion group, I'd say, of basically people in tax disciplines around universities in Australia coming together just to have somebody to chat to about their research, their teaching, and stuff like that. And then it's incredibly grown over the years. As you say, this is our 34th year, and we started off with maybe five or so people getting together.

And on most conferences we have an excess of about 100 people attending, and there are people coming from Australasian means, basically Australia and New Zealand was the connection at first, and then that's grown. At the conference we have here we have Indonesian delegates from Hong Kong, we have people who've come from Italy, all to come together. Most are basically from the teaching academic side of taxation at universities. But we do have professions here. We have the tax representatives also coming and listening to the papers, because they take away from the ideas of academics who come from things a little bit differently at times from the way that the government organizations basically are thinking, so that they're looking for how is an academic reviewing that situation, and what can we take away from the learnings?

Scott Treatt:

Fantastic. And there's also a few students I've noticed around the hallways.

Annette Morgan:

Yes. So, we also encourage PhD students to attend and to discuss their PhD's research to the general audience so they can get feedback from the audience about where they should be taking their PhD. And that information that they receive from the delegates is really invaluable to PhD students, and a lot of the supervisors bring their PhD. But what we're really great also is that we've over the last few years are bringing in students who are working at universities, mainly in the tax clinics, to volunteer their time and help assist with administration of the running of the conferences. But it's great because they get to listen to the topics being discussed, they get to meet people, and a lot of academics are authors on tax staple books. So, they're actually saying, "Oh, that's the person on the book that I actually have prescribed in my class." So, it's like a superstar experience for students. But it's a great way of getting students to see what their teachers at university are really like in an atmosphere that is not a uni classroom.

Scott Treatt:

Yeah, absolutely. And touching on the uni classroom, and this is probably the piece that our listeners might not understand entirely is that academics and teachers here play a different role in the tax system than just teaching students.

Annette Morgan:

Oh yes. So, we're not actually just go in and teach students. We actually have a job actually, as I always say, of nurturing the youth of the tax profession. So, we have people who we nurture in classroom environments or other stuff, but we're nurturing that new profession. So, as I say to my students at Curtin, "I expect you to be a high court judge or one of your big commissioner by the end of my time." But you're encouraging that new profession, making them think about the profession. You're not just teaching from a book, you're using real life experiences and you're getting them to experience the profession as well. Like bringing in guest speakers, taking them out to places like the tax office. Some of us even do study tours, so we take them internationally or in domestically, and go and see that whole tax profession to let them see it.

But academics also play a vital role in providing information to government and professional organizations like yourself, by sitting on memberships, stewardship groups, and giving that academic perspective to topics. We also write books, so topics that are actually read by many people around the world. A lot of our academics in Australia are well known outside of Australia, and sit on things like the IBFD boards, the OECD, invited to participate in the whole global tax experience. So yeah, we're just not tax teachers. We actually play a major role in a lot of developments in tax.

Scott Treatt:

Almost like a custodian role for the system as well.

Annette Morgan:

Yes, and we've had members just recently, like the government was inquiring to whether we should continue with having the stage three tax cuts. And a couple of our members were actually approached by the Prime Minister to participate and give their views on should we continue with these tax cuts? So, often the academics are approached by the government or treasury, the tax office, to actually give a view more so from an academic point of view about a proposal or a project they might be having.

Scott Treatt:

Yeah, no. Fantastic. It has been an interesting couple of years globally, and as you know, Australia's not been immune to that. We've had our own issues and what have you. The theme for the conference, tax in a disrupted World, A great theme, very apt. And it'd be interesting what the thinking was behind the scenes of the organizing committee around what you hoped to achieve through this conference this year.

Annette Morgan:

Okay. So, our conferences are always sort of a two-prong effect. That one is looking at teaching, so getting tax teachers to come together and discuss teaching methods, what's worked, what doesn't work, how are you doing it in your class? So, we looked at it from two points. One being like we've had this disrupted teaching of university students for the last few years due to the COVID pandemic, and ways that students were basically face-to-face with us and all of a sudden were online. What have we been doing in these two years to make sure that we're still engaged with those students? Those students are still engaged with their learning, wanting to come to their universities? So, that was one aspect and we've had a couple of great papers in regards to that. It's great for [inaudible 00:08:11] academics to sit and listen, oh, they're doing it that way. Maybe I could try that and see if I can get my students to engage.

Because we want to bring the students back into the university environment, because not only are they learning the academic theory and stuff like that, but it's also learning about enjoying university life. We've all been to university, and we've enjoyed the coffees with mates, or the taverns, and the kebabs and stuff like that. We want them to enjoy that, not have an experience of just being taught something. You're making friends because connections and networks are very important at uni as well. The other side of it is, I think tax itself has been disrupted. We've had a lot of stuff thrown at us in the last few years and some really good concepts coming out from the government to help many people during the COVID pandemic, but we're now starting to see maybe the downside to that.

We don't have confirmation on particular things. Take for example, like working from home, we know it's changing but we have no guidance and things like that. It's also, as I said, so it's very disrupted the tax world. So, we wanted to hear from the academics and the tax profession as well, because [inaudible 00:09:24] we have everybody come, it's just not academics at times, to see basically their views on changes to tax legislation, and what's occurring, and putting forward their ideas. One of the great things that academics can do is put forward ideas through submissions to government when they're calling for information. We've had a lot of those recently, and academics, as I said. So, we wanted to understand what have people been working on in their downtime? Because remember, we've all been affected, and working from home and stuff. So, what have people been researching and looking into, and putting new ideas out there for helping get the tax system back up and going?

Scott Treatt:

Yeah, no. So, what are some of the, I guess, key themes that you are hearing? Or what are the main challenges that the academics then are seeing in the system at the moment?

Annette Morgan:

I think the main issues that they're seeing is that the law and legislation, and some of the ideas of the tax system, are a bit outdated. We need to see change. We very much about pushing. Well, we need to see tax reform as well. We are teaching stuff day in and day out and we're sort of thinking that just doesn't have any relevance anymore.

Scott Treatt:

It doesn't fit.

Annette Morgan:

It doesn't fit the model anymore. So, we're looking at saying, "Well, we need to be pushing to change ideas." As I said, we always, in our class at Curtin, we've got 125 taxes in Australia, we actually teach you five, the main ones, because the rest are just irrelevant. But we don't need a tax system like that. So, it's about seeing that we need to move forward, reform it, we need to get some rid of the nuisance taxes, just make it a better system altogether. And when you're teaching tax, you're dealing with two areas of legislation. You've got the 1936 Act, you've got the 1997 Act. So, poor students are like, "You're talking about one section and it's like flicking through '97, not year '36. So, go back." We need to make it simpler. And I think that's what academics are really pushing that concept of that doesn't fit anymore. We need to change that.

We've been researching into this. And a classic example that we've had is lately the section 100A issue.

Scott Treatt:

Yes. Big issue for our listeners.

Annette Morgan:

Big issue, and for many tax practitioners out there as well, and particularly smaller tax practitioners who really don't quite grasp how it's a huge change to what we've been doing for many, many years. But I know that we've got an academic who's presenting a paper basically, who is written about the family, what makes up an ordinary family transaction, because something the tax office has been doing is putting out this information through their rulings and stuff like that. But it doesn't reflect the true value of what a family transaction is, because it's different. Families aren't just what they used to be many years ago. And the transactions we have within our family groups are completely different. So, we've got a great academic who's written a paper presenting that, but that paper's actually being listened to by the government and the tax office who have taken an interest in that paper, and actually changed a little bit of the way they were going to go forth with their ruling and stuff like that.

Scott Treatt:

Which is fantastic. But I think it also then highlights a bit of the other challenge within the system, that is how do we get people to listen? How do we get the ATO, or how do we get government to listen to some of the messages that are out there? And it's probably more the government than it is the ATO, I think they consult quite well these days. I think the consultation processes have certainly improved. But the government. When you talk about reform, you talk about some of the work the academics are doing, but how do we get them to listen?

Annette Morgan:

Yeah, I think it's important that with academics, that we take our time actually to submit things. So, even like with ATTA as an organization, and it's something that we could look to for the future, it's actually when submissions come out and there's a topic that needs an even reform and stuff like that, that we as a voice of academics are putting our views forward. So, not probably each individual academic, we as an organization should be saying, "Well look, we believe reform is required-

Scott Treatt:

As a united view.

Annette Morgan:

And united view, and putting submissions through. So, we recently, we've had one on residencies and working from home, and the removal of, what's the other one? The ABN issue where basically you lose your ABN if you haven't lost your tax returns and stuff. So, we as a united voice should be making the government aware. And then once they're aware of this, organizations like ATTA, and I'm sure there's others out there as well in that academic space, starting to come and ask us, "What's your view on this? Do you want to put members on our consultative groups?" And stuff like that, so we can hear what academics are actually wanting to say in regards to all of this.

Scott Treatt:

Perfect. So, more broadly than where do you see the issues and opportunities within the system? Or what are some of the discussions over the last couple of days that the academics are putting forward is that the issues and opportunities?

Annette Morgan:

Yeah, I think that sort of goes on from what I was saying before is that the academics are looking maybe to be more of a collective body. So, rather than individual universities or individuals themselves, because in the academic world you have a lot of academics who have great profiles. They're well known, born from Australia to the government, to other international organizations, and they do great work. But I think it's ability with the new generations coming through of academics and stuff, that who have different views maybe to the older generation, that it needs to be more collective rather than basically being individualized and stuff like that. I think we would like to see, as you say, as I've mentioned before, we need to see reform because we don't want to be teaching kids old stuff that's irrelevant, because the generation of children, and teenagers, and young adults and everything has changed.

So, they're actually questioning stuff. So, "Why am I learning that? That's a stupid law," and they question it all. And you're there saying, "Well, I agree but I can't really do much about it," because they're the next professional levels coming through. They're the next partners at the big four, and mid-tiers, and lawyers, and stuff like that, and ATO officers. So, I think the main issue for ATTA, and other organization is to have a bigger voice and to use our voices, and I suppose use our high profile members who already have that profile to be speaking out a little bit more, and not be afraid to speak about reform.

Scott Treatt:

Well, thank you for that. We'll be back straight after this break.

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Scott Treatt:

Welcome back, I am joined today by Annette Morgan, senior lecturer at Curtin University, and director and co-founder of the Curtin University Tax Clinic. So, I think you broke up different sessions into some breakaway groups. What were some of the themes that you guys picked on? I know there was a lot discussed yesterday on gender equality, or sorry, wealth equality-

Annette Morgan:

Wealth equality, yeah.

Scott Treatt:

... and matters like that. What were some of the other themes that you put in this conference?

Annette Morgan:

Yeah. So, you're right Scott, we actually break it into categories. So, we do international tax. So, we've had two sessions on international tax, one yesterday and today on our second day of the conference. So, international tax is a big thing for academics, because as I said, we've got BEPS and all that bits and pieces, and there's always changes happening in the international tax world. Treaties, things like that. We also spent a lot of time with technology and cryptocurrency, digital AI sort of stuff, because that's also the future. Understanding basically the use of AI, both in the profession for tax professionals but also the teaching profession, and also the cryptocurrencies and all that type of thing, which in years to come there won't be cash. I unfortunately don't understand a lot about crypto, but-

Scott Treatt:

It is a minefield.

Annette Morgan:

Yeah, it is a minefield. But there is great experts in our organization who are really experts on basically crypto, and being asked to present to many different organizations. I know one of our members basically was asked to head over to the U.S. to talk about cryptocurrency, and stuff like that. We also have sessions on, as we've talked about teaching, so sharing teaching ideas and stuff like that. We have a lot of different sessions that fit different areas of research or interests. We also have a few talking about the tax clinic concepts. So, we have a few session on that where people have been talking about students in the clinic, and the people that the clinics are actually helping.

Scott Treatt:

I think that's great, Annette. Let's go back a little bit if we could, back into a little bit of the tax reform discussion that you are highlighting. Because yeah, it is a big issue that's out there at the moment. There's a lot of noise around tax reform, or the lack thereof. It's certainly a passionate topic of mine. But what do you see then as practical tips that we can give some of our listeners around tax reform? It's great to have a lot of talk, fantastic, but how do we get action here? What are some of the things listeners can do to participate in this? What are some of the things listeners can do to support students who might be learning tax at the moment? And maybe they are getting a bit frustrated around the ridiculous nature of different aspects of the law. But what are the things that people can take away to go, "Right, well I get it. I understand now how I can participate to actually make change here"?

Annette Morgan:

I think what people have to do is they have to speak up. So, we all read something and think that's ridiculous and stupid. Change that law, it's going to affect too many people of my practice if I'm a professional, or different organization. But rather than thinking things to yourself, or having a whinge to somebody getting a coffee, use your voice to reach out to your professional organizations, your organization, Scott, the Tax Institute, and voice your opinions. And if the tax institute come back, or your professionals come back and say, "Look, would you be willing to write a submission? Are you willing to be part of a government submission," or something, be that. Don't hide behind, "Oh, that's an issue," but not actually positively take steps to wanting to change it.

Scott Treatt:

So, get involved, don't just get frustrated.

Annette Morgan:

Yeah, that's right. And if you're at an event basically, and you've got an opportunity to speak to somebody who might be an ATO officer of quite high level, or you're actually at an event and you've got a government minister being there, whether state or federal, have a chat to them. And a lot of things I think is it's stories that make more of an impact than actually just a right out whinge. It's like this area here has affected a client in this way. I can see this affecting many other ways. So, it's taking opportunities and speaking out, and just providing things. And I know a lot of times we, as smaller practitioners, stuff like that, sometimes don't see information coming to us about submissions and stuff like that. So, even making sure that you're reading your weekly updates from the tax professional organization and seeing, oh, okay look, they've highlighted the government's doing this as a submission. I've got a couple of cases that I could do, and reach out and chapter somebody about it.

Scott Treatt:

I think the case studies and data is crucial. A lot of the challenge that we have throughout the tax discussion is government can feel at times it's more a motive, it's more high level, not detailed, and they don't know that they can do something about it. Whereas, if we can give more and more case studies and data that supports the underlying issues, we're heard more.

Annette Morgan:

That's right.

Scott Treatt:

It ceases being a one-off, and starts to being, oh look, it's a systemic issue.

Annette Morgan:

Yeah, that's right. There's many people having the clients with the same issue. And I mean, can people have taken the time to sit in parliaments and listen to question time, you often see the politicians telling about stories from the constituents. So, this lady has this issue, and what are you doing to fix that? So, if politicians are using stories in their own question times then we should be providing the stories to them to make the changes and stuff. And I think with the profession helping students, it's being open to coming and speaking to them, doing guest lectures, because the profession is at the cold front. They know what's happened and how it's affecting cases, and stuff like that. So, putting their hand up to unis and saying, "Look, I'd love to come in and give a guest lecture on topics," because for us, even like we say Section 100A, it's a big learning curve for us.

We've got to change our mindset from not really spending any time teaching that because it was this obscure piece of legislation, and we just knew how trust works to the best benefit, and then all of a sudden we're actually, oh, well hang on a minute, we've got to change the way we teach this. We've got to go and understand everything-

Scott Treatt:

Yeah, what actually happens out there in the real world.

Annette Morgan:

That's right. So, if we could also call on somebody and say, "Hey, we've noticed you're been doing lots of presentations on Section 100A, we're really impressed with you. Would you come and speak to the students about it? Give them that real life perspective, or record something for us?" So yeah, be open the profession to being approached by universities, academics, and helping. We even have, at times, we'll take students into offices so they get that experience of, look, this would be what it'd be like to work in the tax profession, meeting people, and also to mentoring some students.

Scott Treatt:

That's a big piece.

Annette Morgan:

Yeah, just offering some mentor while they're going through university, because tax is one of those things like it's not something that's pushed in high schools. Like, "I could be a tax lawyer or a tax accountant." It's like you fall into tax, I think.

Scott Treatt:

I think a lot of people do. I don't know that I ever envisaged I'll have ever been in tax.

Annette Morgan:

Yeah, no I didn't. And you just fall into it, and when you find it, you think, "This is home." But a lot of students just don't know about it. So, if they actually understand it from a mentored job, this is what you'd be doing, they might understand it a little bit more and we might have more people signing up to be tax professionals.

Scott Treatt:

Yeah. Indeed, indeed. It's the hidden profession.

Annette Morgan:

Yes, it is.

Scott Treatt:

It can be a bit scary for the students out there. So, what's your one highlight then from the last couple of days?

Annette Morgan:

I just really have enjoyed the fact that tax teachers to me, and I started my first journey here when I started university, Professor Dale Pinto from Curtin Uni basically, brought me to ATTA and said, "You've got to do a presentation." And he says, "It's okay because they're family." And that's the whole thing I've noticed about ATTA is it is a family. It's a very family community where everybody is nurturing. So, nobody is critical of you, especially new presenters and PhD students often are nervous, but then they get through it and they're getting advice and help.

Scott Treatt:

So, as the outgoing president then, what's your one hope for the future of ATTA?

Annette Morgan:

Oh, I think my one hope for ATTA is we'll continue. We survived COVID. I think I just would love to see us using our voice a little bit more. And also too, we are Australasian, so we are other parts of the world and as New Zealand. So yeah, getting our New Zealand counterparts to use their voice within their tax system, because I'm sure they've got the same headaches as we feel we have here in Australia. And I know we have a number of people here from Indonesia who are very interested with their government to look to expanding the concept of our tax clinic regime over there. So, helping them to create something as well. But yeah, no, we'll do well under the next president, and we'll just continue, and hopefully we'll be so celebrating our 50th.

Scott Treatt:

I do look forward to hearing more about the growth of ATTA, and its success throughout the industry. And hopefully this has helped our listeners understand a bit more about academics, and the association that's behind them. Coming together as a collaborative group to be able to do submissions, I think would be fantastic to see as well. To be able to be those custodians for the system that our members, but our listeners as well, can see, understand, and actually value in the role that it plays. So, thank you, Annette, for today, for joining me in this discussion. It's been great. And thank you listeners for joining us in this episode of TaxVibe. I've been chatting with Annette Morgan, senior lecturer at Curtin University, and director and co-founder of the Curtin University Tax Clinic. We recorded this TaxVibe live at the Australian Tax Teachers Association Conference here in Brisbane that we've been talking about.

And if you do want to keep up to date with TaxVibe, please be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, please follow the Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation also in our member only community forum at community.taxinstitute.com.au. Not a member of the Tex Institute? Join the collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing Taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 23 — Companies v Trusts – the victor

Release date: 4 November 2022

The showdown of companies versus trusts. In this episode of TaxVibe, Robyn chats with John Ioannou CTA, Principal Lawyer and National Head of Tax, Macpherson Kelley. Robyn and John discuss the benefits and drawbacks of both structures in a changing tax environment. But is there a victor?

They discuss:

What is a company and how does it differ to a trust?
Different outcomes for stakeholders
Division 7A, section 100A and lots of other tax rules
Do trusts still have a purpose?
Is it just too hard to run a trust these days?

Host: Robyn Jacobson, CTA

Guest: John Ioannou, CTA

Robyn Jacobson:

Hello and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax and here at the Tax Institute we do tax differently. I'll be chatting with some of the tax professions, great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by John Ioannou, CTA, principal lawyer and national head of tax at Macpherson Kelley in Brisbane. John has over 20 years legal experience with a focus on tax structuring, tax disputes and commercial advice.

John is respected within the industry, his expertise and knowledge. And in 2021 and 2022 was recommended as a tax lawyer in Queensland in Doyle's Guide. John has a Bachelor of Arts, Bachelor of Laws and a Master of Laws. John also sits on the Tax Institute's Strategic Advisory Committee and chairs the National Engagement Committee. John, firstly, welcome to TaxVibe, and secondly we are here in person at the tax summit. What a buzz.

John Ioannou:

I know. Thank you for having me. It's good to be back at an event in person.

Robyn Jacobson:

Look, it really is, and seeing well over 1000 people here and getting run back in person after two and a half years since we've been able to hold a proper tax summit in this manner. So this morning we've had some sessions that have looked at section 100A and Div 7A and there've been others relating to companies and trusts and I thought, let's just tackle that good old fashioned rivalry, the company versus the trust, which is better? Which one wins? And a question that I received after my session this morning, I trusted with everything going on, is there still a role for them?

John Ioannou:

Absolutely. Yeah. I can't subscribe to the theory that trusts are dead. I will concede though that I don't think they're the first go-to point if you're going to start advising clients on structuring. And that breaks my heart a little. When I started out in practice or fair to say, it would've boarded on negligence advising a client to go straight into a company instead of a trust, because people just covered that general discount and just assume that it applies to all things. But the world has definitely changed and in my mind, dropping corporate rate of tax, I think we're all better educated about how trusts work and interact with particular sections. And I just think a lot of the assumptions and myths that operated to prioritize the use of trusts have been disbanded. So I think there's still absolutely a place for them. But yeah, like I said, I don't think they're the first port of call anymore.

Robyn Jacobson:

I want to unpack all that with you a little more. But if we start even with the discount, if you are a trading business, then we're not really looking at a big capital gain at the end anyway potentially. It's really just about profits, in which case you probably did default to a company anyway. Once you start looking at access to, whether it be small business CGT concessions or the 50% discount or of course flexibility in how you distribute, we start to move into trust territory. But if I take you back, so let's go back to when you first started in practice and you said it could have been bordering or negligence had you not gone with a trust structure. What were the key factors or indicators that would lead you to choose one structure of another back then? And what I'd like to do is unpack, what's changed since then?

John Ioannou:

That's a really good question. And in my mind back in the day, I think there was a lot of assumption about what would constitute a capital asset. So I think that's one flag that that needs to go up, which we can talk about a little later. And then I guess I've always seen it from the perspective, if you are a small business, private business operator, you're constantly focused on building your business, making sure that you can get it to a point where it can operate without you. That automatically means most business owners don't superannuate themselves properly. They won't take away age, they're not thinking about that. They're trying to build a capital asset. And I think the mindset continues to be if we focus on producing a business that we can sell, the panacea is being able to do that and shelter everything from tax.

And that means being eligible for the discount capital gain, small business CGT concessions, but also having it in an environment where you can easily extract it. So if you oversimplify all of those considerations, trusts were a bit of a no-brainer back in the day. And I think the other important thing to appreciate, even if you accept having an entity that isn't able to retain profit, doesn't make a lot of sense. But back in the day, again, that was easily fixed with corporate beneficiary UPS were what they were, and properly advised you could have people build a capital asset in a magnificent environment in the sense it was easy to achieve a corporate rate of tax, they had maximum flexibility. And when realization event happened, it was easy to extract and deal with it.

Like I said, that was more than 20 years ago. A lot's changed since then. And it isn't just the ATO's attitude to UPS. I do think generally as a profession we're all better educated on the ins and outs of trusts, and that's definitely been influence when practitioners who enjoy deep diving into technical issues like me, when you start to look at jurisdictions like New Zealand or even England where trusts have been around for a lot longer and the jurisprudence is a lot more advanced, I think our choice of trusts as the first port of call was based on a lot of, I'll say assumption, naivety because we just haven't had the same rigor applied to trusts as other jurisdictions have.

And I say all of that because I still think they're a good thing. But given the change to what actually constitutes a capital asset as well as how trustees interact with particular beneficiaries in their profiles, that instantly detracts from the reasoning that you put clients into it in the first place, which was simplicity. They were simple then, the issues weren't complex, they were well managed. And you can't just say that anymore. There are issues, they can still be managed, but I don't think they're the vehicle of the people as they once were.

Robyn Jacobson:

You speak of naivety and I think also the last 20, 30 years of how knowledge has evolved. I think back to pre Bamford, which was in 2010, prior to that time, very few practitioners I think in practice were doing resolutions properly by June 30, I think that was well understood across the profession. And practice has definitely changed. And I think we've reached a point where it's understood that that's just the way it has to be done. Now when it comes to other rules, trust loss provisions, the trustee beneficiary reporting rules closely held trust reporting rules, there are 38 different sets of rules within the tax law dealing with the taxation of trust or how they relate to trust. Now there's a lot to navigate, but I'm looking at chicken and egg. Have these rules evolved because of practices and behavior that taxpayers have undertaken or if taxpayers undertaken that behavior because of the development of the tax rules?

John Ioannou:

Well, let's not talk about tax reform. And actually looking at the bigger picture, I definitely think some of the measures that we've been left to deal with are off the back of taxpayer behavior. I think other measures we have them because we just better understand the issues at play and the measures are required to ensure that all of those things are adequately addressed. But I guess my problem with that, having sat in a session earlier about structuring for professional practices and talking about a corporate vehicle, which is the other contender against a trust, but you start to think about capital management issues in dealing with the company. You have the Corporations Act, which overlays tax issues, duty issues. And if you thought the measures in relation to dealing with trusts were complex, have a look at the ones that deal with corporates, they're even more difficult.

And I just think we're in a world now where probably hesitate because I think as advisors we've got our work cut out for us already, but the world has become a bit harder because now what we actually have to do is better educate the clients on all these issues. And I think the hard bit in trying to get clients to make the choice, "Do you want to trust you want a company?" You almost have to bombard them with a bit of your crystal ball gazing to get them to understand there isn't a perfect structure. You might be perfectly suited based on what you're telling me and what you've got in your line of sight to be in a company or in a trust. But I almost feel like we're in this scenario now where they make a decision based on that, something changes that they didn't contemplate or the advisor didn't contemplate. And it's, "Well, why didn't you foresee that? If that had happened I probably should have started in a different structure."

And I just say that because you use a company or a trust, I don't know anymore, I don't think there's just a go-to startup vehicle other than I'll concede if you're talking about startup business rather than passive investment, the tax world is definitely geared up towards corporate environment and not a trust one.

Robyn Jacobson:

Do you think complacency has played a role here? In other words, we can all joke about the lost trusted that you got to read it first, but before you read it you actually got to locate it. It's been very tongue in cheek that there's been of course a serious undertone there. So over the years I feel like there's been a much greater respect for trust law. We don't have federal regulation of trust. It's all of course done by state law and by the trustee. And I just wonder whether that has played a role in perhaps companies being regarded as a much more regulated vehicle. There's no national register of trust and that has been tossed around over the years.

John Ioannou:

Yeah, I think that's right. And I mean, if I was going to be the advocate for a trust, I think the lack of regulation is a good thing. I've just presented on partnerships, and why do they remain popular? Because they're easy, they're flexible, they're not regulated like a corporate environment. And for people who are just focused on making money by delivering professional services, that's really good. Life's easier. And I think trusts fit into the same box.

If I'm going to play devil's advocate and think, "Well, why is a company better?" Well, I just think from a regulation and regulator's perspective, because there's so much visibility on what they are, how they operate, what you've got to deal with them and you're not so much dependent on the controllers of the entity, that makes a lot of sense as well. So a lot of the practical issues you have to deal with when you've got too much flexibility disappear when you're in a regulated environment. And the only downside of that is sometimes they can be so regulated and so prescriptive that they kill the thing that they were designed to help, which is business development and entrepreneurship.

Robyn Jacobson:

If we also look at, there are certain needs that companies will satisfy. So if you're wanting to get into R&D and you want the benefits of the tax incentive, if you want to list publicly, revenue is obviously taxed at a corporate rate or lower. And it's interesting with the base rate entity position we're now in, where 25% at a base rate entity level is looking pretty similar to capital gain with CGT discount. Now I acknowledge that it's still in the entity and you need to extract it, but at a simple number crunching exercise, we're nearly in the same place, certainly with the capital gain.

John Ioannou:

And I've had that thinking for a little while now because I mean we all know the classic disaster situation where someone's been advised to start up business in a company, it's very profitable. They start to think, "Well what can we do with the excess money?" And the go-to places, get a trust that should acquire the investment. Money goes from company to trust, if 7A issues, they don't understand it. But I do think now there's a lot of value to get people to understand because of division 7A, because the inability for a trust to retain profit effectively, why wouldn't you just use a corporate. If you're paying 25% on your working capital and you can buy investments in another corporate and they're going to pay 25% tax on any profit, and you don't have a division 7A issue, do that.

Life's simple because access to the discount capital gain is a fallacy in my mind if you are relying on it by use of corporate money. You've got after tax money because you've made a [inaudible 00:14:16] somewhere and it's sitting in your personal bank account, absolutely go establish a trust, put it in as a loan or gift and knock yourself out. But if your primary income producing activities originate from a company, in my mind it makes sense your investments should be in a corporate environment as well if you're not wanting to deal with the dreaded top up tax.

Robyn Jacobson:

Another aspect is how do we fund retirement? Now I see that there are three main ways we do this. One is the family home where you may downsize later in life and sell off the big property and move to a smaller one or to a retirement home. The second one is the superannuation environment. And there's so much more we could say about radiation guarantee and the whole super system, but let's leave that for another day. And the third one I see is investments held outside super. And it's a really interesting question. If you start building up investments in a company income taxed at 25% if it's a base rate entity, and then depending on the type of income you are deriving, you could end up with some decent franking credits in there. So it becomes an attractive way of funding retirement.

John Ioannou:

It does, and I've often described corporates that are used for investments as de facto super funds. People can have the discipline to leave the money in there, let it accumulate, pay tax at the corporate rate. Depending what else you're doing with superannuation and the like, it would make sense that that should be pseudo super fund. So when you're not earning other income, you're able to draw down on those profits. I don't want to delve into tax reform because I think you're talking about how to deal with retirement. I think there's some work to be done generally in respect of how people are able to retire with the limits on what you can put into super. And that I think mixes in with refundability of tax credits, which were introduced at a time where the tax landscape was a little bit different in respect of how super funds were taxed and tax free threshold. Those things have changed. Refundability of franking credits haven't-

Robyn Jacobson:

Transfer balance cap.

John Ioannou:

Yep. So I think broadly that retirement discussion is a juicy one. But I think if it gets tackled, it needs to be tackled with proper reform because I, in my mind, see a number of moving parts that need to change. And I think you can only have reform if you get people to understand what the actual big picture is, what all the moving parts are that need to change, why they need to change, and get them to understand if you only change a couple, that's not enough. And I think tax reform generally that's been our problem. There's nobody there who's able to tell people, "This is the whole picture. This is where we were, this is where we currently are. This is how we got there, this is where we need to be, and this is how we need to do it." I just think we keep talking about tax reform in piece mill context and tackling it. And that's why it's hard because nobody understands what the big picture is.

Robyn Jacobson:

John, it's music to my ears because of course at the Tax Institute we are so supportive of and committed to holistic tax reform, not tinkering, not playing with little provisions on the edges, but actually getting into the thrust of the core design of the system and how it works. There is so much we could do with tax reform and maybe we'll get you back another time to chat about that. Can I focus back on retirement?

John Ioannou:

Yes.

Robyn Jacobson:

If we are looking generational passage of wealth, we've got our vesting periods with trust, we've got perpetual life with companies. So there's another fundamental difference there between them. And while we set these things up, I've done my basic maths, there's a whole chunk of trust that was set up back in the '70s and '80s, assuming they actually do have an 80 year vesting period and some of them actually have shorter periods than that. There are going to be hundreds of thousands of trust investing in the next 20, 30, 40 years.

John Ioannou:

Absolutely. What do you do about that? I don't know. I think we're better educated on the actual consequences of vesting. So whilst there may be some tax consequences for particular trusts that vest, for others, there won't be. Does that create a problem? I don't know. I mean if all that happens is a discretionary trust stops being discretionary and instead requires the trustee to send amounts to particular beneficiaries, I don't know, where's the evil in that?

Robyn Jacobson:

Because it doesn't necessarily mean that the trust has to end of course, you don't need to pull the wealth out of the trust. It just means you haven't got the discretion as to where you send it anymore.

John Ioannou:

Correct. There's no easy answer. I think even just if each state followed South Australia and just said, "Hey, no more perpetuity period," or it may not necessarily help all deeds that are in existence, they may not be able to deal with that as easily. Most people also forget. I think South Australia, even in eliminating its perpetuity period, has provisions in its property law act that still allow beneficiaries of trusts that'll never vest to go and call for real estate after a perpetuity period expires. But again, it's probably just getting people understand the whole picture and knowing that there is no quick fix for any of the issues we have to deal with.

Robyn Jacobson:

Let's go down another rabbit hole. You've got one structure you like to be in another. There are various forms of rollover, so you're not necessarily wedded to the original structure you're set up with, but of course there are a lot of hurdles you need to jump over to get to that other structure.

John Ioannou:

Yes, I mean the majority of rollovers are all aimed at getting into a corporate environment. We've only got the small business restructure, which should have been the panacea. But again, trusts have caused a little bit of an issue in respect of the interplay of how that rollover works when you have a non-fixed trust. But in theory, if we had true reform, you'd preferably want to get to a point where you structure agnostic so that you're not penalized or disadvantaged by virtue of being in a particular restructure.

Robyn Jacobson:

We certainly raised that issue or concept in our case for change report in July last year. The idea that you tax the type of income, not the structure that it happens to be derived in.

John Ioannou:

Yep.

Robyn Jacobson:

Another fundamental difference between the two is whether or not there's a separate legal entity in existence. We're all taught in uni that the company is a separate legal entity and a trust is more like a relationship or a marriage. And John, it just reminds me of a story that I heard on radio some years ago. A fellow was driving down the LA freeway in the transit lane, but it was one of those transit lanes where you have to have two persons in the vehicle and the police pulled him over and they fined him, and he objected to the fine and was so insistent that he took his matter to court.

Now I'm not familiar with the particular LA Freeway Law Act or whatever is applicable in that particular city, but let's just say it needed two legal persons in the car. And his argument was there was another legal person in the car because his corporate register was sitting on the passenger seat next to him. Now I'm going to surmise that in that particular piece of legislation, it required a breathing human being to be in the car with him, not merely another legal entity. But I love the story, he lost the case. But I think it just goes to the legal framework within which we operate. It is a person.

John Ioannou:

That is such a good example, and I did touch on it in my session where it's no one's fault, but there's clear confusion between a person, a legal entity that exists at law and then an entity for taxation purposes. They're all three different things and being one doesn't make you another, but it's amazing. Our world is so complex how people latch onto a concept for one context and then use that to make sense of others and it goes horribly wrong.

Recent case of RCF where I touched on a limited partnerships, that limited partnerships are supposed... Well they are corporate tax entities for taxation purposes, general law partnerships, which as you say isn't an entity, it's just a relationship between partners and their property deemed to be a corporate tax entity for income tax purposes. Great for limited liability in the context of limited partners being shareholders in a company. But people forgetting, being deemed a corporate tax entity doesn't mean you're actually a body corporate like a company. So partners in a limited partnership still being jointly and severally liable for tax obligations. And again, I feel bad for people because our world's hard. How are you supposed to get structuring right when structures mean different things for different purposes and people getting caught out when they use a meaning for one purpose for another and it doesn't work?

Robyn Jacobson:

Little tip for first timers reading tax law, if it uses the word person, it means any type of taxpayer. If it uses the word individual, it means a breathing human being.

John Ioannou:

Good point.

Robyn Jacobson:

So when we've got all these different structures and then we start layering it, we just start doing partnerships of trust and we start putting in trustee companies and corporate beneficiaries, and hopefully you haven't got the trustee also being the corporate beneficiary. I'd prefer that it's always separate. But it just adds so much more complexity and then we add in new developments. 100A of course is a really significant view that's being put forward by the ATO in their draft guidance. And we've had a good chat about that this morning, but it's making people rethink how they're using trusts and are they better off using companies. So as we draw this discussion to a close, John, if I can put you as an advocate wearing two hats at the same time. One is fighting for trusts and one is fighting for companies, which one's going to knock the other one out?

John Ioannou:

Don't make me choose. I go back to my lawyer response and say it depends.

Robyn Jacobson:

Absolutely. It does depend though on all seriousness.

John Ioannou:

It does. But if you're going to... Well, I'll give you an answer, but it's a qualified answer. If we're talking about business enterprise, I'd be inclined to go a corporate, will be one that's owned in the trust. And if I go back to my simple example, if you've got excess cash that's after tax and you're looking to invest, go down the trust. I don't think we're at a point where we can say avoid trusts at all costs-

Robyn Jacobson:

And they're certainly not dead.

John Ioannou:

No.

Robyn Jacobson:

John, thank you so much for your time.

John Ioannou:

Pleasure. Thanks for having me.

Robyn Jacobson:

Thanks for listening to this episode of TaxVibe. I've been chatting with John Ioannou, CTA, principal lawyer, and national head of tax commercial at Macpherson Kelley. We recorded this episode of TaxVibe live at the biggest tax event of the year, The Tax Summit in Sydney. The Tax Summit is three days of tax, technical insights, thought leadership, and world class networking opportunities where the professions best and brightest come together. Next year, The Tax Summit will be coming to Melbourne. We hope to see you there.

To keep up to date with TaxVibe, be sure to subscribe, write and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum @community.taxinstitute.com.au. Not a member of the Tax Institute, join a collective voice of 15,000 practitioners at the heart of the tax profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing TaxVibe @taxinstitute.com.au. We look forward to you joining us next time.

Episode 22 — Superannuation Guarantee landscape: an ATO perspective

Release date: 19 August 2022

In this episode of TaxVibe, Robyn chats with Emma Rosenzweig, Deputy Commissioner, Superannuation & Employer Obligations, ATO, about the current landscape of the Superannuation Guarantee regime. They discuss:

The top issues and challenges for employers in 2022–23
What the ATO is doing to reduce the SG gap
Commercial clearing houses
What happens if employers get it wrong
Recent changes from 1 July 2022
How the ATO is supporting employers and employees, & more

Host: Robyn Jacobson
Guest: Emma Rosenzweig

Robyn Jacobson:
Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute, and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by Emma Rosenzweig, deputy commissioner, superannuation and employer obligations at the ATO. Emma is responsible for ensuring a complex ecosystem of employers, workers, and retirees, and superannuation funds operates efficiently, supporting willing participation, and safeguards entitlements. Emma has worked for the ATO for 23 years in a range of roles, across nearly all areas of the organization, including client engagement roles focused on small business and employers, law roles, including the design and drafting of legislation, and leadership of the ATO's service strategy design and implementation. Emma is passionate about developing leaders of the future, and invests time in mentoring and coaching individuals and groups. She holds a bachelor of laws, a bachelor of commerce, and a masters of tax. Emma, warm welcome to TaxVibe.

Emma Rosenzweig:
Thanks so much Robyn, I'm pleased to be here.

Robyn Jacobson:
So today, we're going to have a chat about the superannuation guarantee regime which amazingly is 30 years old this year.

Emma Rosenzweig:
It makes me feel old.

Robyn Jacobson:
It makes us all feel old. So this is a very complex area, and it remains challenging in terms of law and practice for employers and employees, and dare I even say, the ATO. So if we just start with the general landscape, and I had a bit of a hunch around what is referred to as the SG gap. Now this is essentially what the ATO estimates is the amount of super that is not being paid for employees, and if we look at the '18/'19 estimate, we're talking 3.8%, nearly 4%, or two and a half billion dollars. Now, I've heard figures that range anywhere between two to three billion, depending which year and which report you're looking at and who's running it.

Robyn Jacobson:
We also know that total employer contributions in 2021 according to the Australian National Audit Office Report, was issues recently, was just over 74 billion. So we're talking huge dollars. That's a huge amount going in every year, and most employers get it right; but we've still got ongoing challenges with the employees who are not getting their proper entitlements.

Emma Rosenzweig:
That's right, and I think many of your listeners would be really familiar with the tax gap that we do, and so the super guarantee works similar, where we're trying to look at the system at a really high level and see how well it's working. So one angle you'd say a 3.8% gap is a pretty effective system. As you said, most people are doing it right. Unfortunately with superannuation, those 3.8% of people or two and a half billion dollars are actually people who haven't had super paid for them. And so we take that very seriously, and think about that quite differently to how we think about the tax gap. Because we're really conscious that we have a role in actually ensuring that employees get money into supers, so we're working for them in a sense, which is quite different in a tax context.

Emma Rosenzweig:
So it is a lot of money still. There are a range of reasons why we know that employers get it wrong, and haven't paid those amounts, and they range from everything from simple errors with payroll; payroll as you know is very complicated, so getting it wrong slightly in payroll, through to having cashflow issues and finding it hard to pay, right through to deliberate nonpayment of super, and into things like shadow economy and cash wages and those sorts of issues. So there's a real spectrum of reasons why employers might not have paid the right amount of super for their workers.

Robyn Jacobson:
And the way you just described that then Emma is how I've always described the three categories of employers who don't get it right. Some are the honest mistakes, some are just business challenges, and the third one is the more egregious. The issue with the system is that regardless of the reason why it wasn't paid or the best intent of the employer or otherwise, if someone is just one day late, someone who pays it a day late or got an arithmetic calculation wrong is treated the same way under the system as someone who effectively never pays it for their employer, assuming of course that the ATO is never advised of this.

Emma Rosenzweig:
Well to a degree they are, yes. So the super guarantee rating is pretty strict, because it's employee entitlement. So it is designed fairly strictly for that reason. The scope the ATO does have though is in penalty rating. So the law imposes penalties at 200%, which is a huge amount, and then we have the scope to remit those penalties down. Where we can make a difference is actually looking at exactly what we've just been talking about: what has the behavior of the employer been? Have they tried to get things right? Are they engaging with us when we come and talk to them, and ask them about this? Have they voluntarily disclosed, have they come forward and said, "We've got it wrong." And also what's their compliance history? Are they regularly someone who doesn't pay, or is this a one off and generally they're really good at getting it right?

Emma Rosenzweig:
So our practice statement on this actually really tries to reflect that, but to the extent we've got scope in the super guarantee regime to consider an employer's behavior and where they sit in that spectrum, we will. And so really encourage those people who are at that honest mistake end to come forward, to be really proactive about fixing it up and working with us. And in those cases, those penalties go right down, people who come forward and voluntarily disclose in time have a zero penalty, [inaudible 00:06:26] penalty usually. So that's where we have some scope within the law we're given to work with to reflect what we've just been talking about.

Robyn Jacobson:
The difficulty in that respect, and I think there's still a lot of confusion about what the ATO has the power to do, and on many occasions there are unrealistic expectations that you can, because it's reasonable to do so, you can just get rid of the SG charge. That of course is the shortfall plus the interest plus the admin component, and there's no discretion whatsoever. But in terms of the amnesty period, and I don't propose that you go and unpack all of that here, but the ATO is unable to remit below 100% where the shortfall relates to a quarter that fell within that amnesty period. And that can really be an issue where, for example you've got a closely held payee arrangement, so it's the owner of the business who may not have paid super for themselves, didn't realize they had to, didn't think that it was a priority, were happy to forgo paying salaries and wages or directors' fees. They still have an obligation, so there are still some ongoing challenges with limited discretion in that respect.

Emma Rosenzweig:
That is right. So we are limited in how much we can remit as you said for those amnesty periods. And the amnesty was available for quite some time, and there's a sense that employers had a chance to come forward. I would say in relationship to those closely held, tight arrangements you're talking about, we'd really encourage people to get things right, but they're not the highest risk cases that we are out looking for either. So in that sense, I hope people get that right for themselves, but they're not probably the ones we're actively out looking for in terms of our ability to chase people up.

Robyn Jacobson:
Can you comment briefly on the visibility and the sort of data [inaudible 00:08:11] connects us now? There've been some major changes in the way that information is reported to the ATO or otherwise. I'm interested in your thoughts on that.

Emma Rosenzweig:
Well look, it's something we've been really passionate about, trying to make sure people can access information about their super. We know a lot of people often put their head in the sand a bit about super; it feels like a long way off, especially for young people who can't imagine ever being old. And so one of the things we try to do is make sure it is really easy to see all that information in one spot. So what people can see now as they're logging in through ATO online, if they do their own tax return that's a great time to check while you're in there doing your tax return. If not, I would encourage people to go on once a year and have a look. You log in through ATO online, you can see the latest total super balances for all your super accounts that was reported to the ATO.

Emma Rosenzweig:
Now, we get the total balance only once a year, so obviously that's not always the most current, but it's the last one that we had. But then we also display the regular contributions that are coming into your super account, so you can see those contributions as well. And so it's a great way for people to double check whether their employer is actually making contributions to their super for them, and we would encourage people to go and check that before they come and report to us that their employer hasn't been paying. So obviously as I said, those balances are only, the total balance is only updated once a year, because that can be impacted by investment returns and all of that [inaudible 00:09:40]. So as long as people understand that, they can also use tools to compare their super fund. We now have the MySuper Comparison Tool on the site as well, so you can compare how your fund has performed against others if you're in a MySuper product. And so I think there's some really good tools there to help people sort of get that macro picture of what they've got, see how many accounts they've got and how they're going.

Robyn Jacobson:
So while you're lodging your tax return, check your tax and then check your super.

Emma Rosenzweig:
That's right, if you're doing it yourself. Obviously if you're using an accountant or a tax agent, something that's perhaps a bit more out of patent because you're not going in and doing it yourself, but it would be a great for your listeners who might all be tax agents to encourage their clients to go and check their super as well at that time.

Robyn Jacobson:
A lot of employees now, or members of funds receive monthly notifications from their fund to say when contributions are turning up if they're paid monthly, and often there are required [inaudible 00:10:35] changes, so that's another good reason to go into these member portals and have a look at the super balance at the same time.

Emma Rosenzweig:
That's right. Well, a lot of funds have really invested in that as well. So not only can you go in through the ATO and see; you can obviously go in through the super fund and see it there, so I think that's great.

Robyn Jacobson:
And single touch payroll reporting is also assisting in this respect?

Emma Rosenzweig:
That's right, so people can now see as well as their super, they can see their regular payments from their employer. So back in the old days, not that long ago, but you'd get once a year, you'd get your payment summary from your employer. Now you can actually see live what your employer has reported to us through single touch payroll earnings, and what they've withheld for you, so people can keep track of that so you can do a bit of comparison of what have I been paid, and what sort of contributions have gone in. So yes, STP is really creating much more regular visibility of those amounts for people.

Robyn Jacobson:
I want to turn to some of the ongoing challenges that are inherent in the system, and these fall into different categories. So we've already acknowledged that most employers try to do the right thing, but there are still some ongoing challenges. The employee versus contractor, I don't think in the brief time we have available we are going to possibly solve that one, but it does remain an area of contention for both workers and businesses alike.

Emma Rosenzweig:
It sure does. We're definitely not going to solve that in half an hour, Robyn. It is a complex issue; it's based on common law, so there's a range of criteria, and it's very, very dependent on the actual facts and circumstances of the arrangement people have in place. So it's one where we can give guidance about our interpretation of that, but we can't give black and white answers about if you do it like this, the outcome will be... because often it's so dependent on those unique circumstances that people have. So we've even seen a couple of cases recently at the High Court on this issue, so still despite being a very, it's a longstanding issue, there are still cases that are getting to the High Court which are really fundamentally about these questions, and I think that just shows how complex it is.

Emma Rosenzweig:
One of the things we try to do, we have an Employee Contractor Decision Tool on our website that people can use. They don't have to, it can just be treated as guidance, but it is trying to help people to navigate that decision making. And I would say if you try and use that tool and perhaps you aren't clear on some of the answers to some of the questions because they're a bit gray, your circumstances, you're not quite sure, it really is a scenario where I would recommend people get some good advice on this, because it is so complex.

Robyn Jacobson:
And also the issue that if you do get it wrong and you have to unwind the arrangement from a tax perspective as well as a commercial perspective, of course the penalties, which we'll get into shortly, can be quite severe. I also wanted to talk to you about the ATO's Small Business Superannuation Clearinghouse. This operates in terms of timing quite differently from the commercial clearinghouses that are available to employers, and it's essentially that you can make your obligations by paying the clearinghouse run by the ATO by the 28th day following the end of the quarter. But through commercial clearinghouses, you actually have to make sure it goes through the clearinghouse into the fund by that date. Why the difference, and what concerns does that cause employers in practice?

Emma Rosenzweig:
Yeah, well so obviously the ATO's Small Business Clearinghouse has got some rules about who can use it. So it is designed to be a very simple service for small employers, and it was created at a time when choice was first brought in, and we wanted to give employers the opportunity to have a basic and simple free service to use. I think since then, there are a lot more clearinghouse services in the market, and lots of different offerings now, and so employers have a really wide variety of options.

Emma Rosenzweig:
The ATO's clearinghouse specifically in law has that exemption you talked about, so if employers pay to use the Small Business Clearinghouse we run, it's treated as having been received at that point in time, and that was specifically put into the legislation. So I often get asked the question of, can't you make the other clearinghouses have the same rule? That would require legislative change. It goes back to making sure, ultimately it's the employer that has that responsibility to get their money into super for their employees, so it really ties back to that fundamental obligation of making sure the money goes in, and making sure the ATO I guess has tools to follow it up if it hasn't. So it is a big difference.

Emma Rosenzweig:
It is a question we get asked a lot. I would really encourage employers who aren't using that service, who might be using a commercial service or one as part of the funds that they use. Often where we see people have problems is where there's been some change to the data that they're providing a clearinghouse, so a lot of employers know the sort of timeframe they need to make sure the money gets into a super fund in time. I'd encourage you not to leave it to the last minute. That would be my first tip, don't make payments at the last minute. Make sure there is that time and you understand what those service standards are with the clearinghouses.

Emma Rosenzweig:
But if you've got a change in your data, so if you've got a new employee that you've brought on or if one of the super funds has changed, that's where often data errors can occur and things bounce back, and issues arise. And they're the sorts of scenarios I would make sure people have even more time. If you're taking on a new employee, maybe make an out of pattern payment to their super fund through the clearinghouse so that you can just check that it's all gone through smoothly and you've got the data right. So I'd just think about making sure you've got plenty of time to get those payments in.

Robyn Jacobson:
In my travels around the accounting profession and the tax profession for many years, there still seems to be a lack of awareness by employers in particular as to the severity of the penalties under this regime. It's not simply a case of a bit of interest if you don't pay tax on time, and of course we'd never condone you not paying tax on time, but it is a far greater penalty or outcome that you can experience as an employer by not doing the right thing here. And I'm not trying to do all the doom and gloom, but when you run through this list of what the ATO has been given the power to do under the law, it clearly indicates a policy intent from various governments over the years to address the nonpayment of super. So of course you've got the shortfall itself with the interest and the admin, which is our SGC. You've talked about the 200% penalty, the Part 7 penalty, which can be remitted down to zero in most cases.

Robyn Jacobson:
Then if you don't pay the SGC on time, you've got the general interest charge. There is a separate 75% admin penalty, which we tend not to see it very often because the rest of it's bad enough. The ATO can issue an entity with an estimate to pay the super if they think it hasn't been paid. Directive penalty notices can be issued, and I'm going to look back to it in a moment, because I know there's been some increased activity there. You lose the deductibility of the contribution once it's SGC. There can be a direction to pay it, and noncompliance with that then becomes a criminal offense. There can be a direction to undertake a course to be a better employer, garnishing notices, and if all that wasn't enough, there's the moral obligation of doing the right thing by your staff. So that's an awful lot of arsenal in your toolbox.

Emma Rosenzweig:
It sure is, and I think if people would've seen the last couple of years like all of our debt collection and our enforcement, we have had a bit of a pause on certainly some of the firmer action things you've talked about, so garnishing and directive penalty notices. So some of those much more serious type actions. We've still continued to collect super guarantee, but we probably haven't used all those tools in our kit to their full extent over the last couple of years. And a couple of them were actually reasonably new when the pandemic started; so some of them we actually haven't much of a chance to really test out yet and see how well they work in different scenarios.

Emma Rosenzweig:
It's something that we are really thinking very seriously about now as we're starting to normalize ordinary debt collection arrangements, but also how we make sure that we think about what are the right tools to use in the right circumstances, ultimately with a view to getting super into accounts for these employees. That's the ultimate goal we want. We're not here looking to penalize people, looking to put businesses in a really difficult position. That's not something that we take any pleasure in at all. But sometimes, those tools give us different ways of getting those outcomes. So you mentioned directive penalty notices; we have really ramped up our activity on that generally, but they are a key tool in the superannuation context where directors can be held personally liable for those amounts, and it gives us the capacity to go behind and then actually potentially collect. We're issuing about 120 of those a day at the moment, so that's a significant increase in that activity.

Robyn Jacobson:
And it's not just SCG. Of course that includes PAYG withholding and GST?

Emma Rosenzweig:
That's right.

Robyn Jacobson:
I'm going to hesitate; I think it's luxury car tax was also included in [inaudible 00:20:02].

Emma Rosenzweig:
You might test me on the luxury car tax one, but yes. It's a range of those liabilities that we can issue directive penalty notices for. Don't quote me on the luxury car tax one. So yes, 120 of those a day is a really huge ramp up in activity for those, and obviously they are very serious. They don't get issued without warning, so directors are certainly advised, and they don't get issued without attempts to collect from the entity itself as well. So they're definitely not a first step. We're quite a few steps into trying to engage with a business before we get to a directive penalty notice.

Robyn Jacobson:
So these would generally start to appear when there's been a lack of engagement by the taxpayer, in this case being the employer?

Emma Rosenzweig:
That's exactly right. And as I said before, the easiest way to work with us if you've got any liability, but particularly super guarantee ones, to come forward, talk to us. We've got lots of scope to enter payment plans. We're really keen to work with people to make sure this money comes in, in as easy a way for them as for us. And so that's our message across the board; to come and work with us. We can't help you if you don't come and work with us.

Robyn Jacobson:
So there are some recent changes that kicked in from 1 July this year, and these are legislative changes that moved through the Parliament prior to this year's election. Can you run us through the two major changes that employers will now need to be dealing with?

Emma Rosenzweig:
Sure. So for super guarantee there were two big changes. So there is a bit of a program for super guarantees increasing the rate year on year until it gets to 12%, so that's the ultimate point at which that would stop. So this year on 1 July, the rate of super guarantee went to 10 and a half percent from 10, so it's gone up a half a percent. And the other big change is that there used to be, used to have to earn $450 a month from your employer before you were entitled to super guarantee, and that's been removed. So you are now entitled to super guarantee from every dollar you earn right from the beginning. So the only caveat is, just because super's never easy and simple, is if you are under 18 you still have to work the 30 hours a week to be entitled to super. So while the $450 has gone, under 18 still have to work their 30 hours before they're entitled to super.

Robyn Jacobson:
I think that's important to note, because I have heard of the two rules being conflated, and the 450 monthly income threshold was quite a different rule to the under 18s rule.

Emma Rosenzweig:
Absolutely, and so that's why I mentioned it, because I know it's something that people are getting a bit confused about.

Robyn Jacobson:
So what does an employer do if, let's say you're employing me and I've been working for you for several years. And I did some work for you in June this year which actually fell into a pay period where I received my salary wages in let's say early July. Does that amount of salary and wages attract the old rate, or the higher rate of 10 and a half percent?

Emma Rosenzweig:
I'm glad you asked this, because this is a question that we're getting a lot, and it is really confusing. So you work out your entitlement to super guarantee at the point in time I pay you for the work. So not based on when the work was done, but at the point in time I pay you, that's when I have to work out [inaudible 00:23:21] entitled to super. And so if I pay you in July and you are entitled to super, you're entitled to 10 and a half percent even if some of that work was done in June.

Robyn Jacobson:
But conversely, there was a pay period in late June that actually took a couple of weeks of July into account, just because the work's being done in July doesn't mean that attracts 10 and a half percent. That would still be paid at 10%.

Emma Rosenzweig:
10%, that is exactly right. So it's at the point in time you are paying the salary and wages, not at the time you're paying the super contribution. So in your example there, if I paid you in June, your salary and wages in June for work that was done say in May and June but I didn't make your super contribution to your fund until late July, it's at the point in time I've paid you the salary and wages that you calculate the entitlement to super. So when I go and pay the extra super contributions to your fund in July, I'm paying at the 10% amount. So it is a bit confusing about timing. I just think remember, work it out at the point in time you're paying the salary and wages and you should be right.

Robyn Jacobson:
I feel like over the next few years employees are going to get really good at this, because it'll be going up every year by half a percent until 2025. But because we sat at nine and a half percent for so long, it's a bit of an adjustment to change the way it's worked out.

Emma Rosenzweig:
I think that's right.

Robyn Jacobson:
Also I think worth noting, and this is outside your policy space of course, but the current government has indicated they would like to have a conversation in this current term of Parliament about potentially increasing it beyond 12% even up to 15% in a future term of Parliament. Now, that's obviously on the agenda right now, but it's going to be really interesting to see how that plays out, and ultimately when we keep getting these increases in the rate of SG, in some cases it's borne by the employee if they happen to be on a salary package. But in other cases, the employer takes that burden, if for example it's wages plus super. So you're not going to have a one-size-fits-all as to who's ultimately paying for these increases.

Emma Rosenzweig:
No, that's right, and if that happens, I would just get even better at explaining it I think Robyn, I'll be really well practiced by then. That's my way of not answering your policy question.

Robyn Jacobson:
No, that's fine. So in terms of moving forward from here, you'd talked about the ATO returning to normal debt collection practices. We acknowledge still that many businesses have some cashflow challenges. We know supply chains are taking a bit of disruption at the moment. We know that there are still huge pressures on labor forces, with people being ill and therefore revenues are affected. That in turn affects cashflow. So the main message from the ATO in terms of how you can support the employers through this difficult period?

Emma Rosenzweig:
Look, we do know it is still difficult. As I said before, we can't support you if we can't engage with you, so my best advice would be if you are struggling to come forward and work with us. The other challenges though in the super guarantee context, we do take this quite seriously, and we treat it differently to other debts as well. We prioritize it differently, and when we're looking to collect we certainly don't have minimum amounts or anything like that, minimum levels where we don't look at. So we do really take the collection of super guarantee seriously, because as I said right at the beginning, it is contributions to future retirement for workers, and so we feel very responsible for that.

Emma Rosenzweig:
So I would encourage businesses not to treat those amounts as easy cashflow, because ultimately while you deal with the ATO if you haven't paid it, ultimately it is your employee's money that you are using, and if you can't pay it it's your employees that are missing out. So I would really encourage businesses to make sure that it's part of their thinking about how do they get through tough times. Payroll, so thinking about the people who are working in their businesses and the importance of making sure that they get what they're entitled to.

Robyn Jacobson:
I really like that messaging Emma, because we can debate the merit or otherwise of paying withholding on time or at all, or paying payroll tax or work cover premiums. Essentially they are more regarded as taxes or employment costs by the business. But when you're not paying super, it's like not paying wages.

Emma Rosenzweig:
That's exactly right Robyn, it is like not paying wages. That's the money that your employees are going to have to live on in their time, and it's what they're entitled to, and I would encourage businesses just to really think about that and think about that as they're managing the priority of all those other pressures that you've just talked about that they have.

Robyn Jacobson:
And unfortunately it can effect younger employees to a greater extent, partly because they're often more heavily involved in casual labor. So whether it be hospitality or construction, which tend to be some of the main industries that are typically in the gap, but the second reason is if you don't pay a thousand dollars of super when someone's 20 years old, I'm not going to quickly do the compounding maths, but that's going to be worth significantly more 40 years from now. So they're missing out not just on the contribution going in, but the benefit of the compounding earnings over the period that it should be in the fund.

Emma Rosenzweig:
That's absolutely right. I mean, super is all about time value of money, and it's really important, and you often hear advisors recommending even if you can contribute small amount yourself from a very early stage, they add up, so it's absolutely right. I think one of the challenges we often see too is that younger people or people who have multiple jobs or casual jobs perhaps aren't as engaged about checking up on their super and whether they're being paid the right amounts, or perhaps scared to raise those issues with their employer if they haven't been and they're worried they won't get to. And I understand that that's a really hard... there's not an easy answer to that one. That is a really hard position. I would encourage people to think of this as money. They are entitled to it. It is like unpaid wages. It's almost unpaid future wages if you think about it like that. And if they do find that they're not being paid the right amounts, please come and tell us. We review every single complaint we get about unpaid super, and we take them very seriously.

Robyn Jacobson:
That's really good to hear. Final comment. Can you remark on what's happening with STP phase two, which is the next rollout of STP reporting for employers?

Emma Rosenzweig:
Sure. So this is, we've got most employers now reporting through STP, which is fantastic. So it is the primary way we now pre-fill individuals' tax returns. STP phase two is about breaking that reporting up into more granular detail, and we're sharing that data with Services Australia so they can use it to do things like pre-fill claim amounts for their clients, or to support their clients getting the right amount of payments throughout the year. So it's really important from that respect that employers get this right.

Emma Rosenzweig:
Where we're at too is employers are reliant on their software being updated to be able to report like this, so employers should know from their software provider when their package will be ready to go. We've got a bunch of them that already are, and a bunch of employers that are already reporting through STP2, but there are some that still aren't, so we've been working with software providers to make sure over the course of the year that they're updating their products. So first step is know when your software is going to be ready, but I have heard comments, a lot of employers saying, "Oh, this is all just something the software would do, isn't it? I don't need to worry." But actually there are things that an employer can do in advance to be ready. So making sure that you understand the right pay codes to report, or the different bits of pay in. So allowances and those sorts of things, different types of leave, getting that right.

Emma Rosenzweig:
So making sure at the backend your record keeping is really good, and is going to meet the needs of putting the information into the software. So quality data in, means quality reporting to us, means accurate information to services Australia to support your employees. Check the date your software's ready, and most software providers have got information up about what do you need to do in advance to be ready, so that when the software's ready to go, you're ready to transition. So I'd encourage employers to do those two things.

Robyn Jacobson:
Emma, you have an enormous responsibility looking after all these employer applications, and of course superannuation, so thank you so much for your time.

Emma Rosenzweig:
You're very welcome Robyn, thank you for having me.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Emma Rosenzweig, deputy commissioner, superannuation and employer obligations at the ATO. Have you heard about the tax summit? In case you're not aware, our flagship event is coming up from 19-21 October at the ICC Sydney. Join us for a unique three day experience, and the best tax event of the year. Check out the full program featuring more than 100 presenters across more than 65 sessions on our website. We've also got some great discounts available if you purchase your ticket now, so head over to our website to find out more.

Robyn Jacobson:
To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 21 — Top Tax Time tips for 2022

Release date: 8 July 2022

In this episode of TaxVibe, Robyn chats with Tim Loh, Assistant Commissioner, Experience and Government, Individuals and Intermediaries and Tax Time spokesperson for 2022, ATO, about the annual Tax Time program. They discuss:

The top issues for 2021-22 including lodging early in July, record keeping & more.
The 3 golden rules for claiming work-related experience
Rental income and deductions (including Airbnb)

Host: Robyn Jacobson
Guest: Tim Loh

Robyn Jacobson:
Hello, and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax professions, great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by Tim Loh, assistant commissioner experience and government individuals and intermediaries at the Australian Taxation Office. Tim's role is focused on improving the client experience for individuals, to make it easier for individuals to comply with their tax obligations, whether they choose to lodge themselves or through a registered tax agent. Tim is the ATO's tax time spokesperson for 2022 and is also the ATO's steering committee member for the Women in Law Enforcement Strategy Formal Mentoring Program, which works to promote women in senior leadership positions across a number of Commonwealth law enforcement agencies.

Robyn Jacobson:
Prior to joining the ATO, Tim worked at one of the world's largest mining companies, two international law firms, and a big four accounting firm. Tim holds a master of law, a bachelor of law, and a bachelor of commerce. Tim is a chartered tax advisor and admitted to practice in Victoria. Tim, welcome back to TaxVibe. We had a chat this time a year ago.

Tim Loh:
Hi, Robyn. Thanks for having me again.

Robyn Jacobson:
Our pleasure. Look, you've been doing the rounds of late. It is that time of the year. We've ticked over one July and we are into the official season called tax time. So excited once again to be able to have a chat to you, look at the priorities, how the ATO is going into this compliance season, and what are the top tax tips for taxpayers as they're preparing the tax returns this year.

Tim Loh:
Yeah, we're really looking forward to having a chat with you, Robyn. And yeah, helping out your listeners at tax time this year.

Robyn Jacobson:
So look, the question in tax time, many would say that it actually runs 11, 12 months of the year now. But what does the ATO regard as the official tax time season?

Tim Loh:
Yeah. Look, for self preparers, we obviously need to lodge your tax return between or 1st of July and 31st of October. But like you said, Robyn, tax time is really all year round tax agents. As many tax agents will know, they've got the lodgement program which means their clients are on the lodgement program and they have often longer to lodge, so typically until 15 May the following year.

Tim Loh:
So for anyone who's listening and is new to the industry, the lodgement program is designed to help registered tax professionals manage their workload with progressive lodgements over a 12 month period. Now the framework recognizes agents who have good practice management, lodge electronically, and are consistently on time. Now, something to note is that if your client has one or more prior year tax returns overdue as at 30 June, their current year tax return due date is 31st of October. However, if all overdue prior year tax returns are lodged by 31st of October 2022, the 2022 tax return will be due according to your normal lodgement program.

Tim Loh:
Now, if you or your clients feel overwhelmed or you're behind with your lodgement program, we're here at the ATO, we're here to help. So contact us as early as possible so we can work with you to find a solution. Now we understand that there are a range of factors that can affect you and your clients, and we have services to support you.

Robyn Jacobson:
Tim, a couple of observations about these opening comments. You talk about the typical lodgement date often being 15 May, where an agent lodges the return for you. But it's really important for everyone to understand that is the agent's lodgement date. IN other words, if you show up at your tax agent on the 14th of May, it's a bit unrealistic to expect them, along with all of their other clients, to have it all lodged by the 15th of May.

Robyn Jacobson:
So it's important for clients to understand when they're working with an agent, don't leave it to the last minute to dump it on their doorstep. Work with them and stagger their workload because that's what that lodgement program is designed for.

Tim Loh:
That's spot on, Robyn. Yeah, exactly right. It's really important, if you're a client, to make sure you really organized, you've got those records, and work with your registered tax agent, find a good time to get your tax return lodged.

Robyn Jacobson:
The other point you made was about some agents feeling potentially overwhelmed. Now, we are recording this amidst the fourth major flood crisis that New south Wales has seen this year. So once again, natural disasters continue to wreak havoc in parts of the country. But even beyond that, the pandemic, two years, there are still some agents who are behind in their '21 lodgement program. And yet now, the '22 lodgement program is upon them. So there are a range of support services available, but it's just so important to bear in mind that many have not had a break in such a long time, and they really are doing their best.

Tim Loh:
And our advice is, we understand that but it's also really important that you get in contact with us so we can work something out and find a solution that helps registered tax agents and their clients.

Robyn Jacobson:
All right. So let's turn to those taxpayers who are really keen to get their refunds. So keen in fact, that they don't wait for the pre-fill information to come through from the ATO, which typically takes a few weeks. What's your message for those who perhaps have even lodged their tax returns already in the opening days of July?

Tim Loh:
We always say lodging at the end of July is better because all of the prefill information is already included in your tax return. And that information's from banks, financial institution, government agencies, and health funds. And that really makes the job for the tax agent and the client easy and simple. All you need to do is effectively make sure you've got all your income included in your tax return, as well as making sure that all the deductions that you're entitled to as a client is claimed by your registered tax agent.

Tim Loh:
And what we see at the ATO is, when people do lodge early, we have twice as many returns that get stopped in July versus August. So that means that the return's reviewed because typically some income's been missing. That's why we always suggest that lodging at the end of July is better than lodging at the start of July.

Robyn Jacobson:
And also employers typically have until the middle of July to finalize their Single Touch Payroll reporting. And this is known as the income statement. So look, some employees may be very organized and they've already made their income statements tax ready, but employees don't necessarily have to do that this week. They've got you another week-and-a-half or so.

Tim Loh:
That's right, Robyn. Yeah, typically until the 14th July to have their income statements tax ready, as you said.

Robyn Jacobson:
So turning to the top issues for 21/22, you often speak of three golden rules. And the ATO has spoken of these rules for many years, in fact, so it's not new this year. But could you reiterate what you describe as the three golden rules for claiming work-related expenses?

Tim Loh:
Yeah. So in terms of work-related expenses, around 8.6 million Aussies claimed nearly 20 billion in work-related expenses last year. So that's a lot of deductions. We want to make sure your clients get it right the first time. And as you said, Robyn, we do have three golden rules that we want people to adhere to when claiming deductions for workload expenses. And that's, you spent the money yourselves and didn't get reimbursed. The expense is directly related to clients income-earning activities. And finally, and most importantly in my view, client has a record to prove it. So, digital invoice or receipts are normally the best form of record to have for your client.

Robyn Jacobson:
I think of those three golden rules, the one about expense must be incurred in deriving or in gaining or producing their assessable income. That concept is one that of course has gone to the high court on numerous occasions. In other words, it sounds simple enough but it's actually quite complex in understanding when an expense is related. How are individual taxpayers, particularly self lodgers, expected to understand when something's related?

Robyn Jacobson:
Because many taxpayers will say, "Well, I had to incur my transport costs to get to the office." And we know a lot of people are working from home and we will get to that. Or, "I had to wear these clothes because I had to wear work clothes." Or, "Because I had to incur car parking in order to get to the office and spend the day there." We all know that those sorts of claims generally aren't available. So how do we break down that message about when it's incurred in gaining or producing assessable income? And when people say, "Oh, but I wouldn't have incurred it if not for going to work." It doesn't necessarily make it deductible.

Tim Loh:
Yeah. Look, that's a really difficult question, Robyn, and that's why fantastic registered tax agents are there to help their clients resolve that. Obviously we've got some information on our website to try and provide, I guess, some common examples for people to determine. But as you say, a lot of these, the question about eight one has been decided by numerous high court decisions many years ago in fact. As you said, it's not an easy issue and that's why tax is difficult. And that's why registered tax agents are so important to the Australian tax system and will continue to be important in terms of advising their clients.

Robyn Jacobson:
So let's do a bit of a deeper dive into the working from home. It is a practice that has changed the way we work, primarily because of COVID. But now that offices are open again, we still find millions of employees continuing to work from home. So what does this look like in terms of the number of employees or the sorts of claims? And what methods are available both this year, that is 22/23, as well as when you're completing the 22 returns?

Robyn Jacobson:
So let's be clear when we're having our conversation around which year, because of course we're into 22/23, but we're now preparing our 22 tax return.

Tim Loh:
Let's talk stats and then we'll talk about the 22 return. And then we'll talk about the 23 return. But in terms of working from home deductions, they continue to be very relevant to millions of Aussies this 2022 year. Last year, for the 2021 tax return, one in three Aussies claimed working from home expenses, about 4.5 mil Aussies claiming those working for home expenses.

Tim Loh:
For the 2022 tax return, we expect very similar numbers in terms of people claiming their working from home expenses. And look, with people transitioning back to the office or continuing to work from home, it's really important that tax agents assist their clients to correctly claim their working from home expenses. As you know, there's three methods available to calculate the deductions and each of those methods have different eligibility and record-keeping requirements. And obviously give different outcomes for the client.

Tim Loh:
Now for the 2022 tax return, when you're claiming working from home expenses on behalf of your client, there's effectively three methods. I think everyone's heard me talk about the 80 cents per hour shortcut method numerous times. It's really the easiest and simplest method. We're not saying it's going to give you the best result for your client, but it's the one that requires the least in terms of record-keeping. You only need a diary or time sheet entries to prove the number of hours you've worked from home. And typically if you've been working full time, a client can claim about $1,500 in working for home deductions.

Tim Loh:
Now we've got two other methods, the 52 cents per hour fixed-rate method, which requires a dedicated home office space. And you can claim things like your phone and internet expenses separately, as well as laptops and iPads and the like, provided it's used for work-related purposes. And then there's obviously the actual cost method and that requires quite detailed record-keeping in order in use that particular method.

Tim Loh:
In terms of the methods available for the 2023 year. As many as people would know, the shortcut method ends on the 30th of June 22, but you can use it for the 2022 tax returns. Now, if your clients have been using the shortcut method for that 2022 tax return, as I said before, that method ends for the 2023 tax return. And you'll need to keep good records in order to utilize one of the two methods that will be available for 2023.

Tim Loh:
Now, when it comes to the 2023 tax return and the working from home methods that are going to be available, we're looking to modernize the working from home methods for the 2023 financial year. And we're going to be able to provide some more information about this later in the calendar year. And obviously we'll be consulting with key stakeholders to make sure we get that right. But in the interim, it's really important that if you're having your discussions or your meetings with your clients for this year's tax return, it's important to stress the message of keeping good records.

Tim Loh:
So our advice is to keep a record of all the hours that you're working at home, the receipts for all depreciating assets and equipment used when working at home. And records of the personal and work-related use of assets and working from home expenses.

Robyn Jacobson:
Yeah, Tim, on that point, I've made some comments recently in a few media outlets. Even though the ATOs looking at the fixed rate method, and I have no insight at the moment where this is going to land so even in consultation that's not been discussed yet, but where the rate may land or whether we will continue to have a dedicated office, I think these are things that should be reviewed. We've got increased costs of living. We've got far more people working from home and whether the dedicated office is still appropriate in the modern housing, that's all to be looked at.

Robyn Jacobson:
But regardless of where that lands, people should still keep a record now of the hours they're working from home. Because the deduction itself can be worked out later, what's needed is the actual record of the hours that are worked. And the reason you should keep receipts, you may say, "Well hold on, the fixed rate method's supposed to remove some of that record-keeping." If you keep receipt, you keep your options open. And this way you're in a position to later decide, not at the time the hours are worked, but when you actually lodge your return, which method's going to give you the better outcome.

Tim Loh:
Spot on, Robyn. You couldn't say it any better really. Look, it's one of those things, it doesn't matter what the method is, if you don't have records you're not entitled to any of the methods. So like you said, you need the record and it gives you the most flexibility to work out what gives you the best result come tax time next year.

Robyn Jacobson:
Now what about travel expenses? Because you're saying that we had roughly one in three employees were working from home or claiming working from home expenses. I assume that we're working from home as part of that. Then you would expect an inverse relationship, that car and travel expenses should be down because if they're working from home, they shouldn't be traveling as much. But having said that, business travel has certainly picked up this calendar year. So we might see a bit of an interesting relationship between working from home expenses and travel expenses.

Tim Loh:
Look, we do expect claims with car and travel expenses to reduce significantly this year, even though border restrictions have opened up. Because based on the data we saw last year, and I know things have changed a little bit, but people just weren't traveling as much because of those broader restrictions in the early part of last financial year. So, if you are claiming for your client's car and travel expenses at pre-pandemic levels and also claiming significant working from home expenses, look, we'll be closely looking at these returns. Because Superman can't be in two places at once, how can a client be?

Robyn Jacobson:
Also on the car expenses, Tim. I just want to remind some of our listeners, since I have seen this done at times, we have something called, for cars, either the log book method or the set rate method. Now those methods are only available to individual taxpayers or individuals who are in partnership. I have seen them applied in a company or a trust. So I did just want to remind everyone that if you've got a car that is designed by a company or a trust, it cannot have any private use.

Robyn Jacobson:
A car cannot be driven by a company or by a trust for a private purpose. In other words, it's only ever a business purpose and we have a whole separate bit of legislation called the FBT Act that deals with that private use. So I just want stress that, within a structure being a company or a trust, you claim 100% of the car expense and then apply FBT to any private use.

Tim Loh:
That's spot on, Robyn. And that's a great reminder for listeners to make sure that they're following that procedure.

Robyn Jacobson:
Clothing, laundry, and dry cleaning expenses. Now, with people working from home, I would expect to see less uniforms being claimed on this basis?

Tim Loh:
I think you're right, Robyn. That's what we will be expecting. And as many probably know, there isn't a deduction available for buying, hiring, repairing, or cleaning conventional clothing. So we are expecting to see a reduction because people have been working from home and haven't been wearing a uniform, especially with all the lockdowns that we've had, particularly on the Eastern seaboard.

Tim Loh:
So if you have had clients in industries that have ceased trading during the lockdowns this financial year, make sure you count for the time the industry was closed down when calculating deductions like laundry expenses for their compulsory uniform. One thing to note, because sometimes we often have to give this reminder, is that you can't claim things like active wear, your trackies, your PJs, or even your dog, just because you had to have one to keep your company during working from home.

Robyn Jacobson:
Absolutely. I mean, we've heard of people packaging up all sorts of things through deductions, like cost of buying a car for their mother or claiming a wedding. And you've really got to scratch your head as to how some of these are in any way deductible. And of course, they're not. All right, onto rental properties. There's a lot to unpack in terms of all the issues here. But what we'll start with is declaring on your income. And that sounds like a really basic point to make but any income you earn from a rental property has to be included.

Robyn Jacobson:
I did hear many years ago, people will often let out their holiday houses over the summer period. And I came back from a summer break many, many years ago, I'm probably going back 15, 20 years. And apparently there were some real estate agents who were suggesting if the rent was under $20,000, you didn't need to declare it because it was non-commercial. Now that's really blending in a really bad way, rental income which has to be declared regardless of dollar amounts with the non-commercial losses when you're in business, which is a totally different set of rules. So if anyone has any ideas that if it's a really small amount of rent, you don't have to declare it, that is not the case. So what does the ATO say on this?

Tim Loh:
From our perspective, it's really important that you include all your income from your rental property. And that includes short-term rental arrangements, insurance payouts and rental bond money that you retain as a landlord. One thing to note on your rental income, and I can't emphasize this enough, is really the importance of asking extra questions of your clients.

Tim Loh:
We understand that 84% of tax payers with a rental property lodge via registered tax agent. And when we do our random inquiry program, we do find a lot of mistakes that require adjustments in those tax returns. We heavily reliant registered tax agents to help us get this right. And it's really important, as I said before, and I'm going to sound like a broken record, but it is really about asking extra questions of your clients.

Tim Loh:
So for example, last week, I was on a ATO webcast for tax professionals, where we had an external tax agent as a guest. And the agent mentioned to me and the seminar that they always ask probing questions with their clients, particularly rental property owners. And one example that she used was where the client purchased an air conditioner and the delivery address on the invoice was to their home or principal place of residence in New South Wales, while the rental was in Queensland. Taking the time to ask that extra question and looking a little deeper can help your clients get their tax return right the first time. And at the same time, it also fulfills your obligations as a registered tax agent.

Tim Loh:
I guess what we're saying at the ATO is we're not asking you to be like Sherlock Holmes here. We just want you to ask those extra questions. And from our perspective, add value to your clients. And as I said before, get the tax return, right.

Robyn Jacobson:
Tim, I mentioned earlier the natural disasters we've had in the last 12 months. And they just seem to be recurring with unfortunately more frequency at the moment. That will, of course, lead to insurance payouts in many cases. So it might be perhaps for some rental property owners an unfamiliar situation where they've actually got a payout or they've received a benefit from an insurance policy. So it'll be very important for them to understand the tax treatment of that.

Robyn Jacobson:
And of course the benefit could be a cash payout, it could be paying a supplier to come and repair the premises. So you've really got to look at the nature of what's being paid out. Because is it assessable? Is it covering the cost of a new depreciating asset? There are going to be all sorts of different ways this is treated.

Tim Loh:
As I said before, it's about asking the question of your client and getting that information so you can make the correct assessment on behalf of your client.

Robyn Jacobson:
We've also got fairly complex rules now around claiming travel expenses. In other words, you generally can't claim travel expenses for rental properties that are residential. And there are also some new rules, and I'm going back a couple of years now, they started around 2018 I think that was, in respective claiming depreciation.

Tim Loh:
Yeah, that's right. Obviously, when it comes to travel expenses, you can't claim travel expenses in relation to inspecting residential premises. But there are a couple of exceptions if you're in the business of letting rental properties or you're [inaudible 00:21:21], got a Law Companion Ruling 2018/7, which runs through how we at the ATO interpret section 26/31. I'm not going to go into detail in this podcast about how that works, but leave that with your listeners to have a look at.

Tim Loh:
But in terms of deductions for property expenses, it's really important that you get that right on behalf of your clients. And some of the mistakes that we see at the ATO, and we see these every year and that's why we keep harping on about it, but there are a few things that we see people get wrong. And one of those is around the deduction space.

Tim Loh:
For example, a situation that we have is where your client borrows money or redraws on their loan for uses other than the investment property. So for example, like a new car or a holiday to Nusa, or a boat for example. Anything that's related to a private expense, you can't deduct interest related to that refinance.

Tim Loh:
Now, another issue that we see is where your client's property was rented out only for a part of the year, or only part of the property was rented out. You have to, again, put apportion of the interest component for the period that it wasn't rented out, or for the part of the property that is rented out.

Tim Loh:
And the other situation, which is becoming more frequent, is where clients have used a property or reserved it for themselves. So for example, letting friends or family use it for no cost or at mates rates, or place unreasonable conditions that restrict the likelihood of the property being rented. So to use an example like Airbnb, if you're customizing your rent upwards and overriding the Airbnb algorithm, say at Christmas, so you can use it yourself or your family can use it. That's going to be an example when your property isn't generally available for rent. And in that situation, your deductions are going to have to be apportioned.

Robyn Jacobson:
With Airbnb also, Tim, there is an issue that people sometimes get wrong. Obviously, when a property is fully rented, it's going to be subject to capital gains tax when you sell it. But often with Airbnb, it can be your own home that you make available for a period of time, or you make a room available in your home while you're still living in it. And some people seem to think that, "Oh, if it's less than six years, we don't need to worry about any of the CGT issues." In other words, the partial loss of the main residence exemption.

Robyn Jacobson:
Now not only is the rent always assessable, there's never a time when you don't pay tax on rent. But the ability to retain your full main residence exemption for up to six years when you rent it is only where you cease to treat the property as your main residence. So in other words, if you don't move your belongings out and you're still on the electoral role and the utilities are still connected and your clothes are still hanging up in the wardrobe, but you let it out for six weeks over the summer period because you could get some really great income from it, you are going to have a partial CGT liability when you come to sell it. And I think people don't fully understand the CGT implications for using Airbnb with their homes.

Tim Loh:
Yeah. That's spot on, Robyn. It's a trap for young players and it's something that we do see tax agents not get right sometimes for their clients. So yeah, spot on. It's something that you've got to really look at closely. And again, it goes back to asking those questions of your client, making sure you've asked those questions to make sure you can get their tax return right.

Robyn Jacobson:
Another one that people forget about from time to time, if you get to claim a deduction for the capital works. So you've done some capital improvements to the property and you can deduct those at 2.5% a year generally, then you don't get a double dip. You can't claim your deduction and then also keep that improvement in your cost base. So you have to reduce the division 43 amount that you've claimed off your cost base, which obviously increases your capital gain at the end. So do keep detailed records around that cost base reduction as you go. And that's for properties that are bought after May of 1997.

Robyn Jacobson:
Now crypto, I'll say emerging, I think it's emerged. Certainly around last year or the year before. So what are the main issues you're seeing at the ATO when it comes to people and gains and losses made in relation to crypto assets? Noting that particularly in the last few weeks, we've seen some quite significant falls in that market and people will have made some losses.

Tim Loh:
Yeah. Look, Robyn, I want to run through old terrain that you might have chatted with Tracy Dunn about in terms of an earlier TaxVibe podcast. But just generally speaking from our perspective at the ATO, crypto assets we look at is treated as any other investment asset. And for most people, crypto is going to be held as an investment and it's going to be held on capital account. Obviously we're aware of certain exceptions to that general rule. And that's obviously where registered tax agents come into play and they can help their clients work out if that's a scenario that they're in.

Tim Loh:
But for example, if your clients are receiving staking rewards or have DeFi arrangements and air drops, they're going to need to declare that as income. And to do this, make sure you add that on behalf of your client to other income on the tax return in the year that they receive it.

Tim Loh:
Now, when it comes to crypto and holding crypto as an investor, it's really important that you ask clients if they have disposed of any investment assets this year, not just whether they've invested in crypto. And I'll come back to that a little bit later, because it's only when a capital gain tax then occurs, as you'll know, that you need to include capital gains or capital losses in the client's tax return.

Tim Loh:
As you can appreciate, investments come in all shapes and sizes, and crypto's one of those investments. And if client has bought that crypto as an investment, if they've sold, swapped, or exchanged that crypto, that typically results in CGT event. And it's really important that your clients know that when there is a CGT event, they need to declare that capital gain or capital loss in their tax return.

Tim Loh:
Goes without saying that any capital losses that have been incurred during the year can be offset against other crypto gains or other investment gains that have been made, whether it's shares, ETFs, or property. And to the extent that crypto losses, capital losses, can't be offset in the current year, they can be carried forward into future income years.

Robyn Jacobson:
Tim, I noticed last week there was a media release issued by the treasurer and the assistant treasurer. It was a joint media release confirming the law will be amended to clarify the tax treatment. I think this is a really important point. A few years ago, the ATO issued some guidance around cryptocurrency and in particular Bitcoin. And the view formed by the ATO is that when you have currency, it must either be our legal tender in Australia, or it must be the recognized legal tender of another foreign country. And at the time, that was certainly not the case.

Robyn Jacobson:
But since then, the government of El Salvador has formally recognized Bitcoin as legal tender. So I know the ATO's been considering this, and a no doubt treasury, for the last little while. But last week, the government confirmed that the law will be amended to confirm that Bitcoin and other types of cryptocurrencies are not considered foreign currencies. And that means the treatment that you've just been describing will continue.

Robyn Jacobson:
They will still be predominantly CGT assets. There may be the rare circumstance that it can be a trader or a miner, and they can apply losses against their ordinary income. But in most cases, it's going be a capital gain or a capital loss made. So I think to provide certainty to all taxpayers, it will be good to see that clarification made in the law.

Tim Loh:
That's right, Robyn. And as you quite rightly point out, that clarification ensures that division 775 doesn't apply to Bitcoin. So yeah, spot on. Yeah. And I think that clarification just helps make it really clear to everyone and anyone advising their clients that crypto are treated in the way we've described over the past few years.

Robyn Jacobson:
So to some final comments in relation to the really sexy part of tax, and that is record-keeping. How do we get people excited about keeping records so that if they ever get a knock on the door from the commissioner, they can remove all doubt and say, "Here, ATO, I've got everything you need here."

Tim Loh:
It's a really tricky one, Robyn. Because it's not exciting in the media. No one wants to hear about record-keeping, right? Because it's considered to be boring. They want to hear about crypto and all the exciting sexier topics that us tax nerds love. But look, from our perspective, it's really important that you have those records because... And I look at it from perspective of at the ATO we actually want people to get deductions they're entitled to, nothing more, nothing less. And we want people to get the right deductions.

Tim Loh:
If you don't have a record or incorrect records, you just can't get the deduction. And if you are trying to claim it, it's considered to be stealing from each of us in the Australian community. So it's really important you've got those records, digital invoices and receipts are the best form of record. And if you have that, that's going to really help you maximize your tax return.

Tim Loh:
And it goes back to the point you raised before, Robyn, about when it came to working from home methods. When you've got really good records, it gives you the flexibility to choose what gives you the best result for your client. And when you talk about adding value for your client, being able to say, "Hey, you could use this method. But if you use this method with the records that you've got, I can give you a better tax return." That's a great opportunity to sell the value that you are adding as a registered tax agent. So that's, from our perspective, a really important thing.

Tim Loh:
And the other thing that we should say is that, when it comes to people claiming, we've got sophisticated data analytics, flags any taxpayer claims that stand out amongst their peers in the same industry and income level. So it sticks out like a sore thumb. Again, it goes back to the records. If you've got records, there's really nothing to worry about.

Robyn Jacobson:
From a practitioner perspective, I can point to dozens of cases that I've seen over the years, particularly through the tribunal and some that have even gone to the federal court, where the taxpayer became unstuck because of a lack of substantiation, a lack of record-keeping. And whilst it's not the really fun part of preparing your tax return each year and digging out all those receipts, and the more you store them digitally, the easier it is to be able to store them. But it's the first thing that the tribunal and the commission will look at when it comes to a tax dispute, when it comes to reviewing your affairs.

Robyn Jacobson:
So I'm a big advocate for removing doubt. And if there's a way that you can prove your situation, evidence what you've done and why you've done it, it's going to make it so much easier if you ever get that tap on the shoulder.

Tim Loh:
Exactly right.

Robyn Jacobson:
So in closing comments, it's this time of the year where the scams unfortunately prey on those who are vulnerable, perhaps ignorant, unaware, and don't have the awareness of what to expect from the ATO and even from their tax agents. So can you run us through, to wrap up, what the ATO will and won't do? Personally, I've had phone calls to say that there's a warrant for my arrest for all sorts of things, and it's all completely scam-related and of course I don't follow through.

Robyn Jacobson:
But for those who can't identify a scam, text, a scam phone call, or a scam email, and the ATOs competing with a lot of people who are trying to do the wrong thing here, how can someone identify if it really is the ATO contractor contact them?

Tim Loh:
Yeah, it's a good question, Robyn. I also get the same calls as well. So it's interesting when you get one of those calls.

Robyn Jacobson:
So you and I are going to share a jail cell?

Tim Loh:
That's right, that's right. But look, if you get a phone call saying it's from the ATO and it doesn't sound right, look, our advice is to hang up. We're not going to take offense to it. What we would suggest is you go to the ATO's website where we have a listing of all the current ATO scams. Or you could call us on our dedicated scam hotline, which is 1-800-008-540. And we can confirm whether or not that's a legitimate call from the ATO.

Tim Loh:
I think when it comes to emails and SMSs, typically at the ATO we won't include links to our ATO online services or to a myGov website. We'll typically ask you to do that manually, or directly go to that website. So from our perspective, our advice is to strongly not click on any links, even if it looks like a message that seems to come from a legitimate source. My strong advice is this, we want to make sure you get it right. And by doing that, it's really important that if you're unsure, just hang up or just delete the message if you've received one of these messages or calls from the scammers.

Robyn Jacobson:
So the ATO would never threaten the taxpayer?

Tim Loh:
No, we're quite friendly at the ATO. Look, we're never going to threaten jail, arrest, or deportation to anyone who we call. So that's a dead giveaway from our perspective that it is a scammer. In terms of how to protect yourself, it's really important that you know your tax affairs.

Tim Loh:
Sometimes for example, you might get the fake tax debt call from a scammer. But what we'd say to this is this, four out of five people actually get a refund so it's unlikely that you do have a tax debt. But the best way to check is to go onto the myGov web page, log into ATO online services and actually check for yourself what your tax affairs are. Or speak to a registered tax agent.

Tim Loh:
The other thing we say is, if you do see some of these scams, it's really important you tell your family and friends about it. Because it's really important that they stay safe from scammers.

Robyn Jacobson:
Thank you. And also to mention the ATO does not charge anyone to apply for an ABN or a TFN. Now, your tax agent may charge for their time in assisting you with that but that is separate. The ATO itself does not charge for either of those

Tim Loh:
That's right, Robyn. And if you do need to apply for a tax file number, you can do that on the ATO's website. It's absolutely free. It's as easy as making a cup of coffee. But like you said, if you want someone to help you, get a registered tax agent to help you with that.

Robyn Jacobson:
So it's early days in July, Tim. Throughout the weeks and months ahead, there'll be more information being made available by the ATO to assist people, prepare their returns?

Tim Loh:
That's right, Robyn. So, yeah, we're kicking off tax time this year. And yeah, look, we'll be looking to provide as much information as we can to registered tax agents, to help them with their client's tax returns. So yeah, stay tuned. We've got heaps of information coming onto our website and obviously be out in the media, talking more about tax time this year.

Robyn Jacobson:
And just to provide extra information for members of the Tax Institute, in our weekly TaxVibe newsletter from this week onwards, we expect to be providing you with weekly updates. The ATO does meet with the Tax Practitioner Stewardship Group every week, we're just waiting for the first lot of key messages to come through from the first meeting. But basically, this will summarize the key points, how the systems are going, and of course how lodgements are tracking. So we'll be sharing that information with you, week-by-week, for the next three to four months.

Robyn Jacobson:
So thank you so much, Tim. Great to chat to you again. No doubt we'll chat to you before this time next year, but I wish you on the ATO all the best over the next few months. And same to the profession as we launch into another busy period.

Tim Loh:
Thanks so much, Robyn. Appreciate the time.

Robyn Jacobson:
Thank you.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Tim Lowe, assistant commissioner experience and government individuals and intermediaries, and the tax time spokesperson for 2022 at the ATO. To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au.

Robyn Jacobson:
Not a member of the Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 20 — The latest changes in superannuation

Release date: 1 July 2022

In this episode of TaxVibe, Robyn chats with superannuation expert, Jemma Sanderson, CTA, Coopers Partners about the latest changes in superannuation. They discuss:

Reminders about FY 2021–22
Changes coming into effect from 1 July 2022
Superannuation changes currently in the pipeline and what to expect from the updated Federal Budget 2022–23 in October.

Host: Robyn Jacobson
Guest: Jemma Sanderson

Robyn Jacobson:
Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by Jemma Sanderson, CTA, who is the director of Cooper Partners Financial Services in Perth and heads up their SMSF specialist services. Jemma provides strategic advice on SMSFs, estate planning and wealth management to clients, as well as technical support and consultancy to accounting, legal and financial planning groups.

Robyn Jacobson:
Jemma has over 20 years experience in developing complex strategies for high net worth clients. Jemma has a bachelor of commerce and is a certified financial planner, a specialist member of the SMSF Association, a charter tax advisor and trust and estate practitioner. Jemma is a regular presenter and author on Superannuation Mmatters. Jemma was named the SMSF advisor of the year at the 2019 National Women in Finance Awards for the third year in a row and received the SMSF Association Chairman's award in 2018 for her contribution to the industry. Jemma, welcome back to TaxVibe.

Jemma Sanderson:
Thanks very much for having me Robyn.

Robyn Jacobson:
Look, it's great to have you back again. We last spoke in March of 2021 and a lot has changed since then, although you're still based in Perth and I'm still based in Melbourne, and borders thankfully have now opened up.

Jemma Sanderson:
Correct, yes. Especially for us. We were trapped over here for a while.

Robyn Jacobson:
Absolutely. Now, when we last spoke, we discussed contributions and today I'd like to discuss with you the latest changes in superannuation. It's a complex area, it's highly regulated and we've become accustomed over the decades to constant changes. Yet in this year's budget, there was barely a mention. So just your initial thoughts on people's appetite for change. Are we weary of it all? What's the future looking like for superannuation in this country, particularly with all the global instability we've got at the moment?

Jemma Sanderson:
Well, it's a really, really good question. I think that with the changes that come into play from 1 July, 2022, there have been positive to do with contributions, the extension, or the sort of removal of the work test up to age 75, those sorts of things, which no doubt we'll discuss later. However, because of this ongoing change, though we had a big lick of changes happening in 2017 with the introduction of the transfer balance cap, total super balances and things like that, and then of course, with COVID hitting us and JobKeeper and the like coming through and that's been a substantial cost to the bottom line for the country and then a new government coming through, all those sorts of things, I'm actually dealing with quite a few clients who are uncertain about super.

Jemma Sanderson:
They're really getting concerned with more and more changes coming through, and sure, there are little tweaks around the edges and so far they've been reasonably positive, but they're just waiting in the background for someone to come through and reach into their super, pull it out and benchmark them back to a particular amount and make them more restrictive. So I have got clients that are becoming more and more cautious about actually adding money to their super because of that uncertainty. So it would be nice to see a bit of certainty coming through from that perspective, and hopefully with a new government, perhaps we can get some certainty coming through.

Jemma Sanderson:
Again, the latest changes have been positive, so that's great for everyone from that perspective, but how do we then increase that confidence in the superannuation system, which I think has certainly waned a bit since particularly 2017. Recent tweaking around the edges and just that uncertainty about who's going to pay for all of this deficit that's sitting there, how are we going to pay for that? Superannuation is an enormous pot of money that is probably very tempting for people to reach into and try and grab. So how do we protect that and make sure that confidence remains in the system?

Robyn Jacobson:
Jemma, something that is certainly not on the table at the moment, I'm not suggesting that it is, but it often comes up in conversation. You and I and millions of other Australians are still some years off retirement and there's always been this question hanging over the profession and the balances and superannuation funds as to whether tax free super after age 60 will remain. Now, of course, Howard changed that in 2007. There is a perception among many practitioners that it is too generous, not withstanding it does benefit clients at the moment who are over age 60. But I just wondered about your thoughts on whether we're likely to see that change in the decades ahead. So by the time we get there, it may not be tax free.

Jemma Sanderson:
Well, there's two elements to this that I talked to clients about. One is that by the time we get there, it probably won't be 60, it'll be 65. So bit like the preservation age ratcheting itself up at the moment, whether that age itself also starts being phased up to age 65 to perhaps align better with the condition of release that's got the new caching restriction of retirement, so whether that works. Now, the retirement age may well ratchet itself up as well just as people are working longer. So that's one element. At the moment, really it's age 60 where we're getting to from that preservation age at the moment, it's very close to age 60 in any event.

Jemma Sanderson:
The other thing is some of the strategies that people put in place and are putting in place is to hedge against that legislative risk. I do talk to some practitioners out there and I talk about pre-2007 when you had annual deductible amounts from your super account, which was based on undeducted purchase prices and everything else was taxable when it came out, but you got a 15% rebate. If you're over your RBL, the pension income from that was fully taxable and people are saying, "What do you mean if you're over 60, that you paid tax on what you took out of super?" I was like, "Yes, that's how the rules worked back in the day."

Jemma Sanderson:
So particularly some of the younger practitioners, that was 2007, so it was pre 2007, that those were the rules, and so for anyone who's been in the industry for sort of 15 years or less, they have no familiarity with that sort of concept. That's certainly one of the areas where I know The Tax Institute has been talking about advocacy, at what point do you tax the money. So we're very different to other jurisdictions where we tax the money on the way in and on the way through, but not on the way out when people draw down. Now, on death is a little bit different. Whereas other jurisdictions, they don't tax you on the way in or on the way, but on the way out, it's taxed like normal income effectively. So that's oversimplifying it.

Jemma Sanderson:
So whether we end up aligning ourselves with other international jurisdictions on that front, it's again goes back to that comment about that uncertainty. So 2007 was a lot of big changes. 2017, are we just five years off another round of big changes that are the same and going back to my previous point about that uncertainty.

Robyn Jacobson:
Your comment about it being taxable on the way out instead of on the way in, yes, it used to be like that, but Paul Keating changed that policy. That was essentially because the government was having to wait for people to retire and start pulling money out of their super before the government got revenue from the super. So it was all turned on its head and that's why we have today what's called the contributions tax and Div 293 tax for those who are slightly higher income earners. On that basis, it's essentially tax on the way in and no tax on the way out.

Jemma Sanderson:
Exactly. So it's just the modeling and all those sorts of things. It's very interesting. Now, of course, it all keeps us in a job, which is marvelous, all these changes. But the uncertainty that it does create, at the moment, I'm not a bad news bearer to a lot of clients in terms of the contribution changes and things like that. But when things like the transfer balance cap was introduced, and sorry, you can't contribute to super anymore because you're total super balance. So you are having to restructure things in order to accord with the new rules. So clients are getting a bit sick of that as well.

Jemma Sanderson:
So they've structure their affairs in light of the rules at the time. They've been maximizing their super, building that up because the incentives were there to do that and they were sort of told that they needed to build their super and be self-sufficient so that they weren't on the public purse. So that's what a lot of them did. Then they traveled along quite happily on that way, and then all of a sudden in 2017, right, well, you can't have that much that you're getting exempt from tax. We'll pull that down to your transfer balance cap. Then of course that involves getting that right and it was so many different things.

Jemma Sanderson:
The CGT relief, benchmarking that down, the reporting that needs to happen, not just then, but perhaps on an ongoing basis. All those sorts of things has increased the I'll say red tape and the cost of compliance for a lot of people as well, and dare I say it, for the industry, it's again, kept us in a job, but we are having to do more and more in order to remain compliant. Yes, superannuation is that fantastic structure. It's our own little tax Haven within the Australian tax system, but it's just becoming, the cost of maintaining that is also becoming a bit prohibitive for some people as well and they're thinking, "Oh, it has to be audited, got to do financials."

Jemma Sanderson:
The different types of investments that a lot of people have in their self-managed super fund, for example, have got additional reporting considerations for the auditors, which I'm not disputing that as the auditors going above and beyond. I think that they absolutely have to because of the nature of some of these investments, but if those investments were in the individual's own name, they wouldn't necessarily be having to go through that sort of process. So again, back to some people are just losing a bit of confidence in the superannuation system because of the extra compliance and the extra cost that goes along with that.

Robyn Jacobson:
All right. Well, let's have a look at some issues regarding '21, '22. Now we're sitting here on the cusp of the end of the '22 financial year. By the time some of our listeners do sit down and listen to this conversation, we may well be sitting into July. So there's little that can be done in the closing days of June, or of course once 30 June has passed. But let's just touch on some things that are needing to be considered. Firstly, the minimum pension draw down rate. So for those who are drawing or accessing an income stream from their super fund, what's happened with the minimum amount that they have to withdraw?

Jemma Sanderson:
Well, thankfully for a lot of people, it's remaining at 50% for the '22, '23 year due to COVID. I was actually a bit surprised at that. However, with the international landscape from an economics sort of perspective, it does make sense. So I think for a lot of people, they have been quite cautious on their draw downs and not taking too much out. I guess in the last couple of years, people's inability to travel and things like that have meant that they haven't had to spend as much necessarily. So that has been again extended for another year. So it's only a 50% draw down for the '22, '23 year. That applies to all pensions saved for those legacy lifetime pensions.

Robyn Jacobson:
Next, Div 293 tax. So this is the extra 15% contributions tax that is effectively paid when you are I'll call it income loosely, but there's a certain calculation as to how you work it out is more than $250,000.

Jemma Sanderson:
Yeah. So a lot of people forget about that. So yes, it's completely unavoidable if you earn over that threshold and then you have to add back your super contributions as well. So if you end up being over that threshold, that 15% tax gets imposed. From a timing perspective, a lot of people, they make their contributions in the lead up to 30 June, the super fund withholds that tax depending on which sort of fund they're making those contributions to. If it's a self-managed, that tax doesn't get paid until the fund does its tax return. So a lot of people think, "Oh, well, if there is more tax to pay on my super contributions, then it would come out of the super fund."

Jemma Sanderson:
But that's not necessarily how it works and the timing can be a bit skewed as well. So sometimes you won't get the notice from the tax office until sometime later, and then people are thinking, "Oh, what on earth is this about, a 293 notice?" They don't understand that they can pay that tax or they can request that their super fund pays it. So people are unaware of that particular fact.

Jemma Sanderson:
The other thing that we're also seeing is in the lead up to 30 June, 2020, the carry forward concession contributions are starting to be a bit meatier. So people who perhaps haven't done those contributions because they had a startup business or they weren't even in the country in the '18, '19 or '19, '20 year, and all of a sudden they've got this extra money that they can put into super and claim a tax reduction for, those are subject to Div 293 tax if the person is over the threshold. So those could be some quite substantial amounts that people might be unaware of.

Jemma Sanderson:
It's again just that education process, letting your clients know now, again, you're over this threshold, this notice of assessment is going to come through, but you can request that the money gets paid from your super fund rather than you paying it yourselves. Because I think that can be a bit of a confrontational thing to think, "Oh goodness, I've got to come up with this 15% tax myself." So just to again just make your clients aware that that may come through.

Robyn Jacobson:
So as far as employers are concerned, what are their obligations and commitments in terms of SG, because let's assume we're at the other side of June 30, there is still time to meet the SG obligations.

Jemma Sanderson:
Yes. So for the June quarter, they've got until the 28th of July to meet those obligations. So that's quite handy for a lot of those businesses from that perspective. It's worthwhile that they meet that timeline.

Robyn Jacobson:
What I've found Jemma is that most accountants, in fact just about every accountant I've ever spoken to can tell me when the super has to be paid by into the complying fund to meet their obligations. Very few seem to be able to articulate the date by which the SG statement and the SG charge must be lodged and paid if indeed the 28 July deadline isn't met.

Jemma Sanderson:
Yes. I probably am one of those people that couldn't tell you that date either at this point in time. But certainly you've got another 28 days to do that as well. Again, it's just so much easier to avoid anything to do with super guarantee charge because the penalties are horrible.

Robyn Jacobson:
They are.

Jemma Sanderson:
So it's a lot of employers make those contributions when they pay people. So I think that's the way to go. But again, if it is a quarterly payment, you just make sure it's done by the 28th of July, please.

Robyn Jacobson:
So the SG statement is actually the 28th day, the second month following the end of the quarter if you don't pay it by the 28th day of the first month following end of the quarter.

Jemma Sanderson:
Yes.

Robyn Jacobson:
Another misconception I've come across is some people seem to think that just because super is paid late, it's automatically nondeductible. Now, it may surprise people to know that there is nothing in the tax or the super laws that says the contribution is nondeductible to an employer just because it's paid late. It's nondeductible when it's part of the superannuation guarantee charge. Now what that involves is of course making a disclosure to the ATO, telling them that you didn't meet your deadline or you didn't pay enough or you didn't pay it for the person and paying the charge, lodging the SG statement. Now, it's SGC and now it's nondeductible.

Robyn Jacobson:
So there has been this misconception that, "Oh, as long as I treat it as nondeductible, then morally I've fixed up the problem." But it's a bit like saying, "I'll just treat an expense as being nondeductible. so I don't have an FBT problem." It's a totally separate piece of legislation and you can't get rid of an SGC problem by treating the contribution as nondeductible. It takes more than that.

Jemma Sanderson:
Yeah, absolutely. SGC is complex. Again, it's just makes sense just to meet the timing. I can't emphasize that enough because if you don't, just the flow on effects are horrendous. So it's not worth it.

Robyn Jacobson:
Agreed. Now, individuals and employees, can you give us a recap, pun intended, of where the superannuation caps are sitting because there has been some movement this year and what an individual needs to do if they want to claim a deduction for a personal contribution?

Jemma Sanderson:
So the caps from 1 July '21 increased, so it went up to 27 and a half thousand for the concession cap and the non-concession cap is four times that, so 110,000. With respect to claiming a tax deduction, so what you need to make sure is you're doing your 290-170 notice. A lot of super funds, if they're the APRA funds, they might have their own form to complete with respect to that. So it's worthwhile doing that, but there is one on the tax office's website that you can just download, fill in and send off to the fund. In order to claim the deduction, you need to complete that form and it needs to be acknowledged by the fund in order to claim that deduction. So if that's the intention, it's worthwhile doing it as soon as possible.

Robyn Jacobson:
What's your timing? Because there is a deadline of it has to be provided to the trustee at the earlier of lodging your tax return for, in this case, the '22 income year or June 30th, 2023. So in other words, you've got at the longest 12 months, but shorter if you lodge your tax return before then. But also, you can have an invalid notice if you commence an income stream or you move those benefits out of the fund as in the contribution sitting within the benefits to another fund, or you cease to be a member of the fund. I have seen people who have made their contribution, left it until lodgement day or their compliance time to prepare the notice and give it to the trustee, but in the meantime, they've commenced an income stream and not understood that that has turned it into a nondeductible contribution. Then also your concessional, which you thought it was, has now become non-concessional and that can play havoc with your caps.

Jemma Sanderson:
Absolutely. Certainly you don't want to do anything in the fund that might then limit your ability to claim it as a tax deduction. A lot of people may well make the contribution and not know at that particular time how much they'll be claiming because it depends on what their ultimate income may well be for the year. So it's a fine line, absolutely. So particularly for those people, like you mentioned, if they're starting a pension or a lot of people I'll say throw the money into a public offer fund in the lead up to 30 June, and then they look to roll it over to a self-managed or another fund early on in July or early on in the new year, and those ones can be the worst ones if you haven't actually gone through the procedure correctly to claim it. So again, it's worthwhile making sure that you're ticking all of those boxes.

Robyn Jacobson:
Also just a final tip on this point, making a contribution is based on when the fund receives it, not when you pay it. So Jemma we're sitting here on the 24th of June recording this. By the time the episode is released or by the time someone hears, it could well be sitting right on June 30, and that really is too late to start getting the money into super at that point.

Jemma Sanderson:
Absolutely. So that ship's sailed.

Robyn Jacobson:
All right. So let's look for it. What do we need to be thinking about regarding changes from 1 July this year? There are quite a number of them.

Jemma Sanderson:
So some of the big ones for our employers is that the super guarantee rate is increasing to 10 and a half percent. So just to watch out for that. It's a bit annoying, because 10% was just so easy to do that calculation in your head. So 10 and a half percent. We've got the removal of the $450 threshold from that perspective when you're paying people. So for some employers, particularly the small businesses that have got large workforces of I'll call them younger workers, university students, those sorts of people that are over 18, they might have to start paying some super. So just being aware if you are one of those people that you do get super, but if you're an employer, that you do need to have the fund offering for those employees.

Robyn Jacobson:
So Jemma, there may be some employers who are confused about the timing of the increase in the rate. For example, they may have an employee who does the work in the last week of June, but they're not paid for that work until the first week of July. So would that payment be subject to the increased rate?

Jemma Sanderson:
So it is when the payment is made. So they need to be really mindful of how that works as well.

Robyn Jacobson:
What else is changing 1 July?

Jemma Sanderson:
So one of the bigger changes is the removal of the work test for non-concessional contributions and salary sacrifice up to age 75. What it does mean is that if you are under 75 on the 1st of July in a particular year, you can use the three year bring forward period with respect to the non-concessional contributions. So will open up a lot of contribution planning for those people aged between 67 and 75 over the next few years, obviously still subject to our total super balance thresholds coming through. So that was one of the very positive changes that has come through recently for a lot of people.

Jemma Sanderson:
There's the downsize of contribution limit, well, not limit, the age limit is reducing to age 60. So that's one for some people to be aware of. There's no total super balance threshold applicable to that. So that's quite good. So you could be 100 years old maybe and have $100 million in your super fund and you can use the downsize of provisions if that's what you want. We've got changes to the segregation methodology for the calculation of the exempt current pension income is probably a better way to phrase it. So that actually applies from 1 July, 2021.

Jemma Sanderson:
So when the tax agent for the super funds is doing the 2022 financials, there's a different approach that they can take where there's segregated or deemed segregated accounts because 100% of the fund is in pension phase for the particular year. If there's any instances throughout the year where there's some accumulation accounts, et cetera, they've got a different approach, making it a lot easier for many funds to run from that perspective. So they are some of the bigger ones to come through.

Jemma Sanderson:
We've got non-arm's length income, the practical compliance guideline, the cans been kicked down the road another year just enabling people another year before they have to, the big ticket item here is those general expenses of a fund that may well taint all of the income of the fund and the consideration there is with the previous government had indicated that they would look at those particular rules and apply it as intended or look to amend the law so that these unintended consequences that I know The Tax Institute has been certainly lobbying to the tax office about those unintended consequences, not just for the small funds, but for the big funds as well, these general expenses.

Jemma Sanderson:
So we've got another year whereby we don't have to abide by that for want of a better phrase. Hopefully, again, part of The Tax Institute's submission to the Labor government was to make sure that that was remained on the agenda to have a look at, so hopefully we do get an outcome there because that's been something on everyone's radar and concern since those rules were introduced.

Robyn Jacobson:
Look, certainly Jemma, it's something that for I would say a couple of years, The Tax Institute has been working with all the other professional bodies in the superannuation space. So we're obviously a tax body. We've got accounting bodies. We've got those who are in the big super funds space, self-managed space, financial planning, et cetera. So there's been a lot of interest in this across the whole superannuation sector. Certainly, the former government had agreed that they would amend the law to make sure the provisions work as envisaged. The Tax Institute continues to advocate for legislative certainty on this. Just recently, we've provided the new government with an incoming government brief that is available on our website. One of the priorities is indeed to progress those legislative amendments that are needed to remove the unintended impact of the NALI provisions.

Jemma Sanderson:
One of the things with those NALI provisions that I think some people might misunderstand, whilst we're on the topic, is that what has been I'll say kicked down the road for another year, that PCG, is about those general expenses that might taint the whole income. It's not about a particular asset where you might have paid less than market value. That is still the non-arm's length expense rules that apply to those sorts of transactions have applied since 1, July '18. So that hasn't been postponed. So people sort of need to be aware of those issues are still absolutely current and need to be addressed. It's the general expenses that we are awaiting. Hopefully, fingers crossed, that brief, the Labor government does come through with the goods on that front.

Robyn Jacobson:
Agreed. Now, there's another outstanding measure now that we're moving into what's in the pipeline. Self-managed funds residency requirements. So all these years we've had a rule that if the trustee was temporarily outside Australia, there was a possibility that they could have contravened or breached what's called the central management and control test, which determines whether the fund is resident in Australia, because that's where the decisions are made. We've got a two year rule, which allows you to be outside the country and not result in the fund becoming non-resident.

Robyn Jacobson:
The former government said they would extend that to five years primarily in response to those being tracked outside Australia during the pandemic that it's a reasonable proposed amendment in any case. Also, for both self-managed funds and small APRA regulated funds, we have something called the active member test, which broadly says that if more than half of your member balances are represented by active members, those who are contributing to the fund who are non-residents, then there's no temporary absence period that they can be outside the country.

Robyn Jacobson:
If you have more than half the balances effectively represented by non-resident members, you've got a non-compliant fund. The former government indicated they would remove the active member test for all these funds, other than large APRA managed funds. We're waiting to see what the new government's position on both of these measures is. We don't have clarification at this point.

Jemma Sanderson:
That's right. Even the first one regarding the increase in time from two years to five years, the way that the rules are currently drafted and the tax office did respond to that, they released a ruling back in 2009 about what is an Australian superannuation fund under those particular provisions. You nailed it earlier when you said that temporary absence. So the outcome of the ruling was that the tax office indicated that it was the temporary absence that was the key. The two years was almost irrelevant. So if there's just a repeal of two and an insertion of five into that particular legislation, it will have no impact at all on the way that it's intended to operate.

Jemma Sanderson:
So under the previous rules, there was that safe harbor where you could come back into the country and then it would reset the two year timeframe. But then the rules changed back in 2007 it was, I think it was 2017. Anyway, can't keep track. So I await the actual legislation whether that change will occur. The active member thing I think will be a game changer for a lot of people who are non-residents overseas, and they want to have that small super fund. So you can manage the central management and control issues with an enduring power of attorney. But with that active member, you can't manage that at all.

Jemma Sanderson:
It's very black and white. If you fall into those rules, there's zero discretion for the commissioner to say, "Oh, well it was $1.50 as a contribution." Now, if you fall foul of those rules, it's a non-complying fund and the outcome can be horrendous. So I think that it will be a game changer for a lot of people being able to contribute to super whilst they are overseas and not be concerned about it and have that investment freedom that is available through a self-managed super fund as an example.

Robyn Jacobson:
[inaudible 00:28:36] the need for them to be forced to contribute to a large APRA regulated fund to make a contribution, because at the moment they can't make it as you say to a small fund. So it would give them the flexibility and surely it would be more efficient to have a contribution going where you want it to go, rather than having to make it to a large fund to satisfy the rules and then move it across by way of a rollover some time later when you become a resident again.

Jemma Sanderson:
100%, that's exactly right. Yes.

Robyn Jacobson:
So legacy retirement product conversions, another outstanding announcement.

Jemma Sanderson:
So this was again a positive when it came through. It's been one of those areas that since 2017, and even earlier than that, people have been talking about these sorts of pensions are ones that were put in place. From 2005 was with the legacy pensions, the lifetime pensions is where they stopped being available within a self-managed fund. In 2004, changes were made from an assets test exempt perspective. So very, very many years ago. In RBL time, a lot of people did put a market link pension or these complying pensions in place.

Jemma Sanderson:
Then of course, 2007 came along and the requirement to have these sorts of pensions in place just wasn't there anymore. However, they've just sort of been ticking over. Now, the issue that we're starting to encounter with these is a lot of people put these in place in the early nineties, and they are starting to get quite old, some of these people, and they're concerned about the estate planning impact of them. They're also looking at the fact that they've got these pensions in place that are no longer really relevant to the current rules. So it was quite helpful that this came out, allowing people to stop their pensions, transfer the money back into accumulation effectively, and then have a standard account based pension going forward.

Jemma Sanderson:
Now, what has been introduced is the ability for people to commute one of these lifetime pensions and not have an excess to their transfer balance cap, but it hasn't enabled people to then be able to just remove that whole pension entirely out of the complying lifetime into accumulation. So we await that legislation. One of the areas that I'm not too keen on is that if you have a pension reserve in there and you allocate that to your accumulation account, it will be hit with a 15% tax rate. I think that's unnecessary because the reserve by its nature would've been treated as an accumulation account and taxed at 15% over that period of time. So we await what that looks like.

Jemma Sanderson:
Also looking from that perspective that the expectation and all of the guidance and announcements were that the transfer balance cap and assets test exempt nature of these restructures, there won't be any concessions on that front if that restructure happens. So again, we'll just have to wait and see. The devil will be in the detail if we end up seeing that coming through.

Robyn Jacobson:
Another announcement from 2018 that remains outstanding and I'm not sure that many in the profession would be unhappy about that at the moment, and that was the proposal to move from annual audits for certain self-managed funds that have a good compliance history and no prescribed events. So it was actually going to quite narrow the population of eligible self-managed funds to a three year audit cycle rather than annual. Now, whilst on the face of it, it seems like a good idea because you don't need to do it as often, there is actually a risk that there would be more difficulty in locating paperwork. There would be more opportunity for breaches of the superannuation rules. Certainly, in my travels around the country, I found almost no practitioner or superannuation expert who actually supported this proposal. What are your thoughts?

Jemma Sanderson:
It was a very strange proposal at the time, as if someone had an epiphany about it and then didn't consult anyone. The industry has been scathing ever since. That sort of did get dropped. So hopefully it stays dropped. All of those points you've just made would be horrendous. We struggle for clients to get the information, to do it yearly, let alone three yearly. I can just see the cost of audit actually going up because trying to get and verify all of that information historically, and if it was three years, then you're probably picking up the fund sort of in its fourth year. That's a long period of time where a lot of things can go down in that super fund, like you said.

Jemma Sanderson:
So you've got a great clean compliance history to this point, and then all of a sudden you don't. The other thing with that is these prescribed events. So you're just adding another layer of is it a three year audit or a one year audit for any particular super fund. Oh, it meets these criteria, but does it meet that one? So how do we know if it's three years or one year? Just blanket every year, it's worked fine. I just don't understand why it was even broached as a thing. So I'm quite happy for that to remain on the cutting room floor, to be perfectly honest.

Robyn Jacobson:
Most auditors that I spoke to about this said, "Don't think that just because we're doing it once every three years, instead of every year, that it would be cheaper or the same price as three lots of an annual audit fee. It would actually be more expensive because there would be more work involved in going through three years worth in one year and digging out old paperwork and verifying and the inefficiencies that would result." So it really doesn't seem to be able to achieve what someone in government thought it possibly could.

Jemma Sanderson:
Yeah. I just don't know what happened there.

Robyn Jacobson:
Now, the new government has already identified that they are keen before the end of the current parliamentary term. So just to explain what I mean by that, we're obviously at the beginning of a three year parliamentary term for this new government. So by the end of this current parliamentary term being three years, they would like to identify a pathway to an increased SG rate of 15%. Now, that's not to say the rate would go to 15% within three years, but by the end of the term, they would examine how that might be possible, for example, in the next parliamentary term. Your thoughts on SG, because it's already to go to 12% by 2025. What would another 3% do?

Jemma Sanderson:
One of the things with SG is I think that the marketing of it and the PR on it has been misinterpreted or misconstrued, and a lot of people, the general population. Now, it does depend on what their employment contracts do say, but a lot of people think, "Oh, well, if we don't increase it, then I'm missing out on pay." But a lot of employment contracts are drafted on the basis of a total package. So when the SG rate goes up, it means that you're still getting paid the same, but your super contributions form a higher part of that total pay.

Jemma Sanderson:
So for a lot of people, they then end up with less in their back pocket. So I think that that is very misconstrued out there. People think, "Oh, well, my employer is getting a free ride because it hasn't gone up," or whatever that might look like. So I'm all for people building up their super to provide for their retirement in the future. But I think it needs to be targeted well. If you're in the younger generations, then you want money in your back pocket more so. I'm not saying don't put money into super at all, but you won't be able to access it for decades. So you need to balance that with sure, if you have that extra 3% in super, that's going to grow and that's going to be fantastic in 40 or 50 or however many years time.

Jemma Sanderson:
But we also need to look at things like it's very expensive for the kids these days to try and get into to the housing market. Yes, there's the first home savers scheme that they could use through their super and other avenues there. They're paying off perhaps student loans. They're having families and dealing with the cost of having children, all those sorts of things. You can elect to put in more super. So if you want 15%, you can make that happen yourself.

Jemma Sanderson:
So I think it's an education process there. Compulsory super has served the country very, very well since it was introduced. What a great policy. Those increases, particularly when it was at the nice 10%, nice and easy. So I'm not disputing that people putting in more super, it is a good thing, but I think the target of it needs to be that education process of you can put in more if you want to, but not being forced to do that. That's really where my view lands on it.

Robyn Jacobson:
Now, the new treasurer, Dr. Jim Chalmers has undertaken to deliver a budget to update the '22, '23 federal budget that was of course announced by the former government on the 29 of March. We are expecting this on or around the 25th of October. Would you expect from this? Is it too early to think there might be significant superannuation changes? Do you think they'll leave it alone?

Jemma Sanderson:
Well, given my opening comments, I hope that they leave it alone. What I would like to see is the objectives of superannuation actually coming through. So that was something that no one seems to be able to agree on what that looks like. The whole basis of that was so that we wouldn't get these substantial changes coming through so that confidence could be in the system, but no one can agree on what that might look like. So I'd like to see nothing almost coming through in that budget. Everything recently has been positive. So it's probably not nothing.

Jemma Sanderson:
It's confirming some of the things that the previous government, the good things that we wanted, like the NALI change, the legacy pension confirmation, the active member and the residency. I think all of those things would be great to see, that confirmation of those and some legislation there, and just a representation that there'll be no big tweaks to super just to really come back to building that confidence in the system going forward.

Robyn Jacobson:
Look, Jemma, I know over the last 20 years, you have had more than enough to keep you occupied in the superannuation space. I don't see that changing anytime soon.

Jemma Sanderson:
Agree, agree. I just don't want more things to do, Robyn. It's hard enough to keep up with all the other things that are already there.

Robyn Jacobson:
Your time and your insights and it's always great chatting with you.

Jemma Sanderson:
Thanks very much for having me, Robyn.

Robyn Jacobson:
Thanks, Jemma. Thank you for listening to this episode of TaxVibe. I've been chatting with Jemma Sanderson, CTA at Cooper Partners. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au.

Robyn Jacobson:
Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Bonus Episode — Post-election reflections

Release date: 3 June 2022

In this episode of TaxVibe, Robyn chats with Julie Abdalla, FTI, Tax Counsel at The Tax Institute about what the recent Federal election outcome means for you and your clients. They discuss:

The state of the new Parliament
What we can expect for tax policy under the new Government
What The Tax Institute sees as the priority issues ahead of the updated Budget expected in October
Can the independents put tax reform on the agenda?

Host: Robyn Jacobson, CTA

Guests: Julie Abdalla, FTI

Robyn Jacobson:
Welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Julie Abdalla, who is the tax council at The Tax Institute. Julie is an experienced tax lawyer and emerging leader. She has practiced in the corporate tax teams of Big Four and top tier law firms in Sydney and Melbourne.

Robyn Jacobson:
Julie also gained experience across the spectrum of UK taxes while working at an international law firm in London. Julie has a strong passion for tax policy and reform, and the depth of knowledge to advocate for members. She's been recognized among her peers and throughout the profession for her leadership and excellence in tax. Julie holds a bachelor of arts and a Juris Doctor from the University of Sydney, and a master of laws from the University of Melbourne, part of which was completed at the University of Oxford. Julie, welcome once again, back to TaxVibe.

Julie Abdalla:
Thank you, Robyn. It's a pleasure to be back here on TaxVibe and in person too.

Robyn Jacobson:
Absolutely. So we are recording this episode live and in person at the Victorian Tax Forum. And to also let our listeners know that the conversation that Julie and I are going to have today is in part drawn from a session that we ran earlier today with our colleagues, Scott Treatt and Andrew Mills at the Victorian Tax Forum, and a recording of that session will be made available to all Tax Institute members.

Robyn Jacobson:
So Julie we're here today to talk about the election, it was last Saturday, and whilst the dust is still settling it's becoming very clear of certain ways the chambers are shaping up. So we're going to talk through what the House of Reps looks like and the Senate, and what this means for tax policy and for all the practitioners out there that are trying to advise clients when there is still some uncertainty in relation to some measures. So to make the point that The Tax Institute has always been apolitical and we will continue to be so, and it's important that we be able to work with any party that is in government and across all of the government agencies. But Julie, with the change in government, and we, of course, now know that Anthony Albanese has now been sworn in as the 31st prime minister of Australia. This does create new opportunities.

Julie Abdalla:
That's right, Robyn. There is an opportunity for us to develop new relationships with politicians and ministers that we haven't had relationships with before. What we have seen is that it's quite an interesting House of Reps and Senate, which we'll get into in a bit of detail shortly, but it's certainly more diverse than we've seen before, but it actually remains to be seen how things play out.

Robyn Jacobson:
And how effective it's going to be in terms of governing.

Julie Abdalla:
Absolutely.

Robyn Jacobson:
So it is yet to be determined whether the Labor Party will be able to form what's called a majority government or a minority government. So this, of course, focuses on the House of Reps, where there are 151 seats. So to have a majority government, you need to have a majority of the seats in the lower house, that would be 76 seats. Now we're following a combination of the ABCT outcome and also the Australian electoral commission.

Robyn Jacobson:
At the moment they're placing Labor on 75 seats, so we're still not sure whether they'll make it to 76, which would mean they would govern in their own right. If they remain at 75, they have certainly been assured of what is called supply and also confidence from cross benches. In other words, if a no confidence motion was put up, then the cross benches would vote against that but if they do stay put at 75 and don't get to 76, they would need the support of at least one green or one cross venture, or let me say it, one member of the liberal party or the Coalition, which is unlikely, in order to get their particular measure through. So it remains to see exactly where we land in terms of the lower house.

Robyn Jacobson:
Julie and I are also going to have a chat about the role of independence and smaller parties in terms of getting policy through and what that looks like. So let's take a slightly closer look at the lower house, as I said, Labor is sitting on 75, we know there's been a swing against, not just the Coalition, Julie, but also Labor itself. So in other words, both the major parties have had a swing against them in favor of the Greens and also the independence. So what does this mean?

Julie Abdalla:
So we've seen an increase from about six to 16 cross benches, which is interesting, I touched on there being a more diverse makeup, but it's going to be interesting to see how this actually plays out in practice in terms of developing policies and getting legislation put through, and even more so in the Senate, we will come to that shortly.

Robyn Jacobson:
So we've got increased diversity, Julie, but how workable, that is, what that looks like and how they're going to come together will be really interesting to watch, but what is more interesting is the look of the Senate. So can you talk us through where we are landing based on current count?

Julie Abdalla:
Yeah. So in the Senate, there's 76 seats and the key number is 39, so we need 39 to form a majority. Right now it's looking like the Coalition's got 31 seats, Labor has 26 and the Greens have 12. So there are still two in doubt yet to be confirmed, but if you think about Labor and the Greens, even together that only forms 38, and so they'll need at least one cross venture to get things through. The challenge here is, where you've got the Coalition 31 seats, so it's not a majority either, but there is a risk posed by the ability to block measures, and that actually creates influence in terms of the independence.

Robyn Jacobson:
We know the new treasurer is Jim Chalmers, and he's indicating that they will deliver a revised budget because of course we have the 22-23 federal budget delivered on the 29th of March by the Coalition, but with a changing government, it looks like we'll have an October budget, and that will be an opportunity to potentially reset but at least revisit policies that have been announced and hopefully get some certainty on where the new government stands on on each of those policies.

Robyn Jacobson:
Certainly in terms of the way Jim Chalmers is talking up the economic situation, don't be surprised if we see deficits that could even be larger than what have been forecast. It is often the case of either side of politics that an incoming government will say that the books are in a worse state than we thought and we also know that there may be a priority over certain spending measures to boost productivity and get the economy going again, and of course, to curb rising inflation, as opposed to the priority being to make sure that deficits are brought down, and they're going to be reasonably high in the short to medium term, at least.

Robyn Jacobson:
So moving onto, what can we expect for tax policy under a Labor government? Well, I'm going to start with personal income tax cuts and the lay of the land there. Labor has indicated that they have committed to delivering the already legislated stage three income tax cuts that are due to start on the 1st of July, 2024. And this will provide tax relief for more than 9 million Australians earning over $45,000 a year. Now, Julie, it remains to be seen whether in fact that already legislated series of tax cuts does proceed, or whether in fact, given dynamic environment and anything can change between now and then, whether in fact, we do see that come to fruition, so it will be interesting to watch.

Julie Abdalla:
That's right, it might not necessarily be the best policy to stick to what has been announced when things are changing so quickly. If the government's getting advice from treasury external economists, that this is going to exacerbate a problem, then it may actually be prudent to step away from it and consider other measures that might be more suitable in changing economic climate.

Robyn Jacobson:
Still on the personal tax front, Labor government has also committed to supporting the increase in the low and middle income tax offset. So in the budget, this was called the cost of living tax offset, but it's actually just an increase in the LMITO by $420 for 21-22. Now that is expected to conclude after the end of this financial year, you'll still be claiming it or of course the ATO will be processing it through 22 tax returns but it won't apply beyond June 30 this year. So I also wonder whether that's a policy that Labor would question or revisit its effective removal is going to result in a tax increase for millions of Australians who for four years now have become very accustomed to seeing that being built into their tax liability as a reduction thereof.

Robyn Jacobson:
Julie, on the main tax policies and platforms that were put forward by Labor. There really wasn't much that they spoke of, and maybe that's a result of the policies they put forward in 2019 that they didn't want to revisit necessarily in this election campaign. But there was certainly talk about their intention to target multinationals and whether there is any more revenue that if you like, or lemon juice that could be squeezed out of that lemon, what are your thoughts on this?

Julie Abdalla:
That's right. So we know that both major parties declined to put any sort of holistic or significant tax reform on the table, but multinationals did get quite a bit of attention from the incoming government and in a few different measures they've looked to target the way that multinationals could avoid their tax obligations. So one way the government is looking to target this is by supporting the adoption of the OECD/G20 Inclusive Framework on BEPS 2.0 proposals, including global minimum tax rate or 15%, and other ways, a proposed modification of the thin cap rules, to reduce a safe harbor, to a cap of 30% of EBITDA, which is earnings before interest tax depreciation and amortization, and that's really to limit debt related deductions by multinationals.

Julie Abdalla:
We would still be maintaining the arms length test and the worldwide gearing ratio, which allow a taxpayer to justify a higher interest deduction than the safe harbor. I won't get too much into the detail, as Robyn mentioned earlier, we did speak about these measures at length in the earlier session today, but this is really consistent with the OECDs recommendations from the 2015 BEBS action for limitation on interest reductions report, and it would be not inconsistent with what other countries have implemented, where they've taken on board these recommendations.

Julie Abdalla:
Another measure is about treaty shopping, and it's really trying to target royalty payments where they're made to a jurisdiction with a favorable tax system, but that only applies to quite a limited group of significant global entities. Finally, there were measures that were announced in relation to transparency, which relate to country by country reporting data being made public, a potential beneficial ownership registry, as well as exposure to tax havens and dealings with tax havens, and finally, in relation to government tenders.

Robyn Jacobson:
Julie, how does this align or otherwise with the Greens position, because they've also talked about targeting multinationals and certain multi-individuals. So how does that align?

Julie Abdalla:
That's right. So the Greens have looked to put forward policies, which target essentially rich companies and rich individuals. So there is a proposed billionaires tax, and also a 40% super profits tax on large corporations, which has actually got a lower threshold than the significant global entity concept.

Julie Abdalla:
Given the policies announced by the Greens in relation to multinationals and wealthy individuals, it'll be easier for Labor to garner some support from them in terms of its policies in relation to multinationals, but there is always the question of what the Greens will be getting in return in making those alliances.

Robyn Jacobson:
And this billionaires tax, Julie, where is it going to kick in or what's the rate that would be applied?

Julie Abdalla:
It's a rate of 6% and I think initially it was targeting about 110 billionaires, although it's looking now to be about 122 or so. It would be a tax of about 60 million per year, assuming each of them had a billion each, but obviously that's just the minimum, that's just the starting point.

Robyn Jacobson:
So if you are worth 10 billion dollars, it would be 600 million?

Julie Abdalla:
600 million dollars, that's right. Which seems astronomical, but I suppose relative to a billion, that's another story.

Robyn Jacobson:
All right, so another policy that the Labor party has been putting forward during the election campaign is what's called their electric car discount. Now, it's interesting when we look at climate policies, and of course there's been a huge push through particularly the independence about ensuring that there are better policies that target climate change and environmental impact. So this one is designed to encourage greater use of electric vehicles, and the way this would work is that the government would remove or exempt from the 5% import tariff and from FBT, electric vehicles that cost less than the fuel efficient luxury car tax threshold, and that's sitting just below $80,000 for this income year.

Robyn Jacobson:
So if you buy a 70 or $75,000 electric car, then under this policy there would be no FBT and no 5% import tariff. It's not just a case of eliminating the tariff and FBT on this, which immediately you would think would favor businesses and employers, but as an employee, anyone who can access exempt benefits through salary packaging is going to benefit as well. So it certainly would involve a rethink of what benefits could be packaged up and this would be another one you could add to that collection, where employees who would like to drive a fuel efficient car and be able to do so tax effectively through salary packaging may also benefit from this policy so we need to see a bit of detail around that one. While we're still on the idea of transport, Julie, the reduction in the fuel excise.

Julie Abdalla:
Well, that's only a temporary measure, that's due to come to an end on the 28th of September. So it will be interesting to see what happens then, but actually, if you think about it now, the price of petrol is creeping up quite quickly, and it's almost back to where it was even with the fuel excised reduction.

Robyn Jacobson:
I filled up on the weekend and it was $2.25 a liter. Goodness, if that had the additional 22.1 cents reduction not built in, it would be a $2,50.

Julie Abdalla:
It does come back to that bigger challenge of the cost of living on the impact of inflation as well.

Robyn Jacobson:
And if you look at the inflationary impact, we know the reserve bank is forecasting a peak in inflation, which of course recently hit the headlines at 5.1% for the 12 months to March, could well peak at 6%, by the end of the year. Now, the timing of this increase in the fuel excise when the temporary reduction ceases, would mean an automatic increase of 22 cents after the 28th of September. So firstly, you're going to have an inflationary impact, which we know has already contributed to the inflationary figures at 5.1%. So what would it do to take it even further towards six or beyond?

Robyn Jacobson:
And secondly, when you've got the price of fuel being advertised every few kilometers, driving around the suburbs, it's a very visible reminder of the cost of living, and when not just fuel for cars is going up, but transportation generally. So if you think about all the deliveries of goods and services, and how that impacts ultimately what hits our supermarket shelves and the prices there, it's going to be really interesting to watch this politically play out as well as from an inflationary perspective.

Robyn Jacobson:
So Julie let's return to a closer look at the independence who now make up what looks like to be 16 seats in a long house, we've never seen this many, previously six and now we're looking at 16. We know that the media has focused on primarily three aspects to their collective platforms. Most of the independence and many of them indeed are women, have been looking at policies that focus on climate change, greater equality for women and establishing a federal integrity commission, and certainly on that last one, it looks as though that may well be progressed in the next three to six months so this calendar year. But that was the media focus, if we actually peel back some layers and dig a bit deeper, what else have the independence been looking at and does any of it relate to what we would love to see on the agenda tax reform?

Julie Abdalla:
Yes, actually. So if you dig a bit deeper, you'll see that quite a few of the independents have a strong interest in RND, innovation and supporting small businesses. And indeed two of the new independence, Kate Chaney for Curtin and Allegra Spender for Wentworth, have both come out and made comments about the need for tax reform and to revisit our system.

Robyn Jacobson:
And indeed Allegra Spender has suggested a formal tax review to be concluded or reporting back by September of 2023. Now it's music to our ears, but perhaps too ambitious?

Julie Abdalla:
It could be challenging with everything else going on at the moment. It could be challenging to get that through in the timeframe she suggested, but it's really great to see them putting tax reform on the agenda and prioritizing that. And then if you think about the independence, you made a comment earlier that really the sum of their paths worth more. Together they can have such significant influence in the way government operates, they'll be making noise in public and bringing attention and drawing light to these issues, which is great.

Julie Abdalla:
And we talked about earlier the opportunity to build new relationships with different ministers and politicians, and certainly with the independence, that's what The Tax Institute will be looking to do.

Robyn Jacobson:
So regardless of the lower house, it's certainly looking like Labor would need all of the Greens and at least one independent to be able to get anything through. So there may be opportunities for an independent to say, "Well, yes, I'm happy to give you my vote on X, as long as you can provide Y." And that does create enormous opportunities. So yeah, that's why I say potentially the sum of the parts is greater than the whole, that individually there might be just one vote, but they may collectively be able to have a much greater voice in the parliament.

Robyn Jacobson:
Julie, what is The Tax Institute doing in terms of activities? And now that we effectively know the election outcome, what happens from here and what are our top priorities?

Julie Abdalla:
The team has been working hard on is preparing an incoming government brief, which will be provided to the new treasurer, Jim Chalmers. And that's drawn from our state of tax policy report, which many members will recall, we recently put out a federal budget, election special edition, and this incoming government brief will set out what we think are the priorities in terms of announce, but unenacted measures from a tax perspective, that we think should be at the forefront.

Robyn Jacobson:
So can you provide some examples of what we are considering are some of those key priorities?

Julie Abdalla:
Yeah. So one of the first that I would suggest is the corporate tax residency changes, we're a few years into it now, and we haven't seen draft legislation yet. So as many listeners would know, there was an announcement in the 2021, 2022 federal budget, which proposed technical amendments to the corporate residency test. And this follows on from the decision in, by water and the board of tax review. And essentially the law is proposed to be amended to provide that a company that's incorporated offshore will be treated as Australian tax resident if it has a significant economic connection to Australia. That of course will be where it's the company's central management and control is in Australia and its core commercial activities are also undertaken in Australia.

Robyn Jacobson:
So to be clear, Julie, we're only talking about companies that are not incorporated in Australia, because if they're incorporated here, they're automatically a tax resident?

Julie Abdalla:
That's right. So public consultation, as I said, hasn't occurred yet, but treasurer will need to consult on a workable definition of core commercial activities to give taxpayer certainty in this regard. One other measure that I would like to mention as a priority is the patent box regime. So the original measure related to medical and biotechnology innovations, although that bill has since lapsed, there was a subsequent announcement which expanded the patent box regime to agricultural businesses and low emissions technology innovations, although that has not yet been introduced. So we would like to see the original measure reintroduced and the expanded version introduced into legislation.

Robyn Jacobson:
So have to pick up the original measure plus the additional one and both effectively, still in limbo.

Julie Abdalla:
That's right, yeah.

Robyn Jacobson:
Now, another measure that has been of interest to a number of practitioners is what is known as NALI, this is non-arm's length income. So this is where you have a superannuation fund that has incurred a non-arms length expense, and that can effectively taint or change the tax character of income derived by the fund where it's taxed at the top rate, rather than the 15% concessional rate. Now, around April the former minister for superannuation, Senator Jane Hume advised that they would amend the law, they would consider looking at what was necessary to make the provision work as intended.

Robyn Jacobson:
Now, given that she's no longer the minister for superannuation. And of course, we're still waiting to see who is going to be sworn in as that relevant minister, but certainly The Tax Institute will continue to engage, and has been with both the now opposition and the now new government so that we can ensure that tax law works as they're supposed to. And this isn't just about self-managed funds with a small property that's not being treated concessionally, this can affect really big funds as well and unintentionally so. So we hope that we can get some resolution and some legislative clarity on that one very soon.

Robyn Jacobson:
Probably the biggest measure that is of interest to the small business sector at the moment is the small business boost. In fact, there are two of them, the small business skills and training boost and the small business investment in digital technology boost was announced in this year's budget. And this provides an additional or a bonus 20% deduction for eligible expenditure where the entity has an aggregated turnover of less than 50 million. Now, the skills and training boost started on budget night, 29th of March this year, and will end on the 30th of June, 2024, whereas the investment in digital technology boost, while also starting on budget night this year, will end on June 30, 2023, a year earlier.

Robyn Jacobson:
The problem is, Julie, that these two measures did not make their way into parliament before it was prorode back in March following the budget. So neither of these booths are law and we yet to understand exactly where Labor sits on both of these. I'd like to think that they would support them and that this will be a fairly swift passage of legislation but until parliament resumes, and we're unclear whether that will be at the end of June or perhaps not until the 9th of August, and whether or not in fact, we could be waiting until October in this so-called budget that's going to be handed down, to gain some certainty around this, but it makes it very difficult for advisors in the meantime.

Julie Abdalla:
That's right. The difficulty is with these kinds of measures they're designed to incentivize spending on these kind of categories. The difficulty with these kind of measures is that they're designed to incentivize spending, but the challenge is, where they're not legislated businesses don't have enough certainty, and this is the challenge for the businesses and their advisors. It's not law yet and so it's not clear whether it will be legislated, whether it will be legislated in the form that it was announced, we just don't know. So it's hard to encourage that spending to take place now.

Robyn Jacobson:
That said, Julie, remember that these measures while starting budget night, we're never going to permit the boost to be claimed in the 22 tax return. So whilst you may have eligible expenditure now, assuming this does become more, the first time you would actually claim this would be through the 23 and 24 tax returns. And to go a step further, I'm expecting to see that your basic expenditure, let's call it the base amount, so let's say spend a hundred dollars that would still be deductible in the year you've incurred or spent it, but the boost component would not be claimable until the 23 and or the 24 tax return, depending on which particular boost you're looking at. So I just want to assure our listeners that it's not as if this is going to impact on the preparation of 22 tax returns, because we're about to go into that compliance season.

Julie Abdalla:
No, that's right, and there might need to be some new labels on the tax returns to be able to distinguish between the different categories.

Robyn Jacobson:
The other elephant in the corner of the room, and I call it an elephant because I know there's been a lot of talk in recent months about Division 7A and Section 100A, and whether there would be any legislative reform or push for legislative change. So let me take each of these in turn. The Division 7A legislative reforms... Look, Julie, we've hit 10 years, it was 2012 when the then Labor government commissioned a review by the board of taxation, and it was 2016 when the Coalition government said that they would amend the law. We've not seen those changes beyond a discussion paper released back in 2018, nothing since. So we know we've got a draft position from the commissioner to do with unpaid present entitlements, but that doesn't address the other aspects that were proposed in the discussion paper to reform Division 7A more generally.

Robyn Jacobson:
So we've got to be careful what we wish for as a profession, and while many would still like to see legislative reform and there were some good measures proposed, there were others that greatly concerned the profession. There's no mention, as far as we're aware that this is a priority for the government, certainly there's been no mention of legislative change since the measures were last deferred at the end of 2020, to start on the first one, July following enable in legislation being enacted and goodness knows when that's going to be. On Section 100A, this is not the time or the place to get into a big discussion on all the draft guidance issued by the commissioner, and we've had other discussions on that separately and I refer you to a previous podcast where I spoke with Jonathan Ortner about these issues.

Robyn Jacobson:
But there's certainly been a push by the profession to remove the unlimited amendment period that applies when 100A assessments are raised, and I just think this is something that the government should think about. If you look to the late seventies, when the provision was introduced, it was amidst the bottom of the Harbor schemes and trust stripping schemes and arrangements, and maybe there was an argument for it being unlimited, particularly in those days where access to information is not what it is today. But if you consider the fraud innovation provisions that are unlimited versus Part 4A which is only a four year amendment period, is it still appropriate that 100A is an unlimited amendment period?

Robyn Jacobson:
So we know both the former assistant treasurer, Michael Sukkar and his counterpart at the time, the shadow assistant treasurer, Steven Jones, undertook that they would be prepared to look at the legislation if legislative change is warranted. That it would be interesting too, to see whether an administrative approach can be the most suitable pathway to handle this rather than amending the law. So all of this still to play out but it's a really interesting period in terms of guidance from the ATO, potential policy changes at a treasury and in parliamentary level, and in the meantime you've got all the practitioners who are just trying to carry on and advise their clients.

Robyn Jacobson:
So in terms of where we go to from here, The Tax Institute will continue to engage with the incoming Labor government and the independence and the minor parties in relation to tax policy and continue to push, as far as our commitment is concerned, to genuine and holistic tax reform, there was talk from one of the independence Kate Chaney, and this is the new member for Curtin in WA, about a tax system that is future fit. It's a great expression, and we often talk about whether the tax system is sustainable or able to encourage growth and productivity and investment in businesses, et cetera, but I think that all boils down to it being future fit and we need a system that can carry us through the decades ahead.

Julie Abdalla:
While major tax reform wasn't on the agenda this election, there is hope for the next election, and it's really something that we need to make a mom and dad issue. Tax effects everybody directly and indirectly and we have a role to play in educating government on its impacts and on the importance of tax reform.

Robyn Jacobson:
Julie, I think we've covered so much ground today, but there is so much more we could say about the election. Look, more to discuss in the future, and I'm sure you'll be invited back onto TaxVibe, after the budget, and we can have another chat and break down what all this looks like with a bit more information from the government.

Julie Abdalla:
I look forward to joining you again, thank you for having me.

Robyn Jacobson:
Thanks, Julie. Thank you for listening to this episode of TaxVibe. I've been chatting with Julie Abdalla, FTI tax council at The Tax Institution. To keep up to date with tax five, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit tax institute.com.au/membership, you can also contact us by emailing tax vibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 19 — Bitcoin, NFTs and crypto assets: tax treatment explained

Release date: 20 May 2022

In this episode of TaxVibe, Robyn chats with Tracey Dunn, Associate Director, Tax Services, RSM Australia, about the tax implications of acquiring, holding and disposing of digital and crypto assets, including Bitcoin and non-fungible tokens (NFTs). They cover:

The basics you should be across in the constantly evolving world of digital assets
Legal and tax frameworks surrounding these assets (or lack thereof)
The tax treatment of cryptocurrency

Host: Robyn Jacobson, CTA
Guest: Tracey Dunn, ATI

Robyn Jacobson:
Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute, and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by Tracey Dunn. Tracey is an associate director in the tax services division of RSM in Perth, and has worked in public practice for over 20 years. Prior to commencing a career in public practice, Tracey worked in commerce in various roles, including banking, logistics management, and international trade. She has significant experience in advising on the application of fringe benefits tax, division 7A and trusts, and regularly presents on taxation topics.

Robyn Jacobson:
Tracey writes extensively on the interpretation of tax legislation for businesses and has been published in a number of publications, including the Australian Financial Review, ABC News, Accountants Daily, Public Accountant Magazine, and Thompson Reuters Weekly Tax Bulletin. Tracey has a bachelor of business accounting, a graduate certificate in commercial law, and a bachelor of laws. I recently saw Tracey in person at our WA Tax Forum in Perth, as she presented on the world of digital assets, Are you ready? Her practical explanations prompted me to invite her to be a guest on TaxVibe. So Tracey, a very well welcome to you.

Tracey Dunn:
Thank you so much for extending the invitation to talk with you on TaxVibe.

Robyn Jacobson:
Pleasure. Look, I've known you for some years now, but when I saw this topic being presented, and it's so topical at the moment, there'd be few accountants in the country that aren't seeing some form of crypto come across their desk. I thought it really is a good opportunity to unpack this and understand it and peel back the layers for people who don't understand cryptocurrency, digital assets, blockchain, and these extraordinary new things called NFTs. So from the original use of blockchain, which, of course, was what launched Bitcoin, and gave it the underlying framework, and we've had this massive avalanche of cryptocurrencies emerging all over the world. And we've now got these NFTs, non-fungible tokens. And I know you got to explain this to us in more detail.

Robyn Jacobson:
We know that these continue to flood the market at an exponential rate. They're incredibly volatile. And I also think back to the way you were describing these in your session, the incomprehensible meets the incomprehensible, being tax law and crypto. And I think that's a great way to describe these two. So I thought we could kick off just by unpacking some of the key terminology that you and I are going to be referring to, because if we get too far into this by using terminology that isn't understood, we're going to lose them straight away. So what is blockchain? What is Bitcoin? What is cryptocurrency? And what are NFTs?

Tracey Dunn:
Okay. So Robyn, I think your analogy about peeling back the layers, blockchain and cryptocurrency in digital assets, you need to approach like an onion and actually peel back each of the layers to work out what it is. So, one of the things that I talked about in my session that you were at was the language. So the distinct language that is used around digital assets, that is quite confusing. It's unique. It's a lot of jargon. So we have blockchain, we have Bitcoin, we have cryptocurrency, and then we have O-coins, and we have stablecoins and we have staking and mining and gas fees and people get overwhelmed and go, well, I'll just switch off. But realistically, if we break things down, we can identify, or we can relate to these digital asset concepts to the everyday concepts that we see with clients who have shares or general banking transactions.

Tracey Dunn:
So blockchain, to try and simplify blockchain, it's distributed ledger technology, which in itself sounds confusing, basically means that the information is stored on multiple computers called nodes, which exist in multiple jurisdictions. And the information exists at the same point in time on every single one of those computers that happens to be on the network. And that's the beauty of blockchain, is that when a transaction occurs on blockchain, the information is gathered together by the nodes and they compete to solve these mathematical equations. So think of it as a game, or a competition to see who wins first, because there is a monetary reward for them if they solve the puzzle first. And when it's solved, that solved puzzle is broadcast to the entire network. So it exists everywhere, which creates jurisdictional issues for those that are using blockchain technology. But we'll set that aside. So basically peer to peer network. So I can transact with you, although I might not know that I'm transacting with you. And the information that relates to our transaction could exist in multiple nodes around the network. But once that information exists, it can't be changed.

Robyn Jacobson:
So in a very crude form, if I could use the analogy of a word document that we have up on, say Office 365, and you and I both have it open, and I make a change to it and it's permanently in markup. So you see my change and I can't undo my change, but we both agree the change is made and the change can only be made if you and I both agree to it?

Tracey Dunn:
Essentially. And if we were entered into a dispute down the track, or somebody wanted to dispute what happened in that very first version, we've got this single source of truth. That information can't be changed. So we could go back to that original transaction and whatever existed at that time will still be there.

Robyn Jacobson:
So whilst this technology underpinned the introduction of the ability for Bitcoin to evolve and all the other cryptocurrencies, it has enormous commercial potential for, I'm thinking of property and insurance and health records and passenger movements and all the dealings we have right across industry.

Tracey Dunn:
Absolutely. And personally, I see where that is where the future is. There's lots of interesting things happening now, but in the future that even using government. So with protecting tax file numbers and unique information that relates to a person's identity, if it's stored in blockchain and can't be changed, then it reduces the risk of identity fraud. So there's some real exciting things that could happen in that space, or that the technology can be used for, as it continues to develop.

Robyn Jacobson:
When you think about people who put forward academic qualifications, or university qualifications, to say that they have a doctorate, or they have a particular interest, or skill in some place, and you've always had to go back and verify that with the issuer of that qualification, with that institution, with blockchain, you would just know that to be true.

Tracey Dunn:
Yeah, absolutely. And that's what is really exciting about it. And you think from a perspective of, you mentioned property. So property records, we went through a period of time where there was fraud where people were claiming to be the owner of property. The actual owner might be overseas. Somebody was able to come in and pretend to be the owner, sell the property. The original owner actually comes back and finds that their property's been sold and there's nothing that they can do about it. So if you have records that are recorded on blockchain, then it makes it far more difficult for people to engage in that kind of fraudulent activity, which I think is really exciting.

Robyn Jacobson:
And I want to, of course, get us back to our core topic today, being crypto and NFTs. But from the perspective of the accounting profession, I think it really raises interesting questions about the future of the auditors, because I can see them in the future transitioning to becoming experts in all of this, where they're no longer verifying records, because the records are known to be true, but they become experts in helping to administer these sorts of systems.

Tracey Dunn:
Definitely. I think that this is a game changer for the industry. And one of the really important things, if we go back to the fundamentals is that we are now in a situation where at least one in four Australians, they either have crypto, or they have had crypto, and those numbers are going to continue to increase. So for agents, that means one in four of your clients will have a crypto transaction. So unless you build your skills and you understand the technology and the tax issues that impact on the use of that technology, you could find that you can't actually service your client base.

Robyn Jacobson:
So let's move into what is Bitcoin and cryptocurrency, and how is it different from blockchain?

Tracey Dunn:
So blockchain is that technology that underpins cryptocurrency. So blockchain was the technology that the original developers introduced to be the foundation for Bitcoin. In 2014, we had Ethereum come into the market. And Ethereum was really exciting because not only was Ethereum an alternative form of cryptocurrency, it was a platform that also allowed advanced applications to run on top of the Ethereum platform. So this is where the exciting things for more exciting developments come in, where we've got NFTs, non-fungible tokens, we've got decentralized autonomous organizations, we've got smart contracts, we've got all of these other exciting things and these amazing minds out there in the world that are creating things that faster than we can keep up with.

Robyn Jacobson:
Two questions come to mind immediately on this, Tracey, the first is, can you explain why they're so volatile? And secondly, how can anyone trust what's real? It's all virtual and intangible anyway, but how do we know what's real and what's a scam?

Tracey Dunn:
Well, that's a really good question, Robyn, and I'm not sure that I can answer it, because it's not regulated. There's no regulation in Australia, and there's no consistent regulations throughout the world. We have jurisdictions globally that they realize the potential of blockchain and the risks that are involved, and all of these different jurisdictions are working towards bringing in their own rules and regulations around cryptocurrency, because one of those real risks is scams, and the market is extremely volatile. So I'm sure we'll discuss this later, but cryptocurrency currently isn't recognized as a currency. So it's not something that generally people will transact with. But if I was to transact with you in cryptocurrency, there's still value there, because if you wanted the cryptocurrency that I had, it's value is in what you are prepared to pay for it. So it's an unregulated market. The value is in what another person wants to exchange at the time. And it's very volatile.

Robyn Jacobson:
And if we think about property, if I'm going to engage an agent to sell my property for me to you, the buyer, the agent has to be registered and hold a real estate license. If I'm going to engage a broker, or a financial advisor to assist me to move in or out of the share market, that person needs to hold an Australian financial services license, but in the world of crypto, none of that exists.

Tracey Dunn:
No, there are some rules. So if you are going to issue cryptocurrency in Australia, then you are required to have an AFSL. If you operate a digital exchange in Australia and you are going to advise or transact or offer a platform to exchange cryptocurrency and digital assets in Australia, then you may be required to have an AFSL, but it's unregulated. And there is nothing preventing you from transacting on a platform that exists in another jurisdiction. So you just google cryptocurrency, or download an app onto your phone, and nobody is required to give you advice. So there's very few barriers to people actually buying, selling, exchanging in cryptocurrency. And there's a real lack of information for consumers and investors.

Robyn Jacobson:
This volatility, we've all seen the prices skyrocket and then plummet almost to the same extent, and then they skyrocket again. We've heard of people that have made extraordinary wealth out of particularly low entry points. So they happened to enter when the market was right down, or they'd held it since the very early days and their wealth has just blossomed out of this. So we are starting to hear stories now of people that are experiencing those extreme highs and lows, much more volatile than the Australian share market. And I also think of the stories we've heard about people that have lost their digital passwords. And there was a report out of the UK where a fellow had lost his digital password. It was on the hard disc of a computer, which he threw out. It was years old. And he had long forgotten that the password was sitting on that computer.

Robyn Jacobson:
It ended up in landfill, his local tip. And for quite some time, I think he was ultimately unsuccessful, was trying to get court orders to order the tip to allow him to basically dig this entire physical area up so that he could try and retrieve this computer. Because of course, in the meantime, his wealth had astronomically blossomed. So we are going to continue to hear stories like this.

Tracey Dunn:
Absolutely. And that is a real risk. I think that there's a lot of people that aren't aware of that. So you keep your cryptocurrency, you can keep it on a hard wallet or a soft wallet. So your soft wallet might be an app on your phone. A hard wallet might look like a credit card, or there's lots of different providers. I have one that looks like a USB. And if I put that in my bag, I would probably never find it again. And when you use a wallet, this is one of the really interesting things, is that not only do you have your password or your pin to get into your wallet, and if you put your cryptocurrency on your wallet, that's where it's stored.

Tracey Dunn:
And if you set up an account on a wallet, it will give you multiple warnings saying, you must ensure you retain your password and your seed phrase in a secure spot where you know where to find it, because if you lose it and you don't have access to either your password or your seed phrase, you will lose everything that's on your wallet. It will not be able to be recovered. And a seed phrase, so you have your initial password and then you have your seed phrase, which is your backup. So if you forget your password, you can use your seed phrase. Well, a seed phrase is, I have one that's 12 words in sequence. So it gives you 12 words in sequence that you have to write down. And then it shows you on the screen, you have to verify in order each of those words, and you have to keep that little piece of paper somewhere safe.

Robyn Jacobson:
So this isn't okay. So popping down to your local bank branch, if you happen to forget your account number and saying, can I have access to my funds, please?

Tracey Dunn:
No. So if you lose it, or the dog eats it, or your house burns down, it's gone.

Robyn Jacobson:
So you want to have secure storage and backups in multiple places, but obviously very secure.

Tracey Dunn:
Absolutely.

Robyn Jacobson:
So let's move now to the legal and the regulatory framework around this. You've explained, at least within the Australian exchanges, you need to have an Australian financial services license to advise on these types of assets, or to run the exchanges themselves, but that doesn't extend to overseas exchanges. And that wouldn't apply if you and I are dealing privately with each other outside someone who is providing advice to us. So in terms of the protection for consumers, there's an old adage, it looks too good to be true. Is this one of those cases?

Tracey Dunn:
Pretty much. In very simple terms, yes. There's a huge amount of risk involved. So if people are not getting advice, there are limited protections unless the Australian consumer law applies as this being, say misleading a deceptive conduct, but for your average consumer, how are they going to be able to... There'll be challenges in actually bringing an action under the Australian consumer law, especially if they can't even identify who they're transacting with.

Robyn Jacobson:
We'll get onto the ATO properly in a moment, but we've also had many stories and reports about ATO concerns around self-manage superannuation funds, holding crypto or holding too high proportion of their assets in crypto. What are your thoughts around that?

Tracey Dunn:
I think that would be a question that I would throw for a financial advisor as to who was advising the self-managed super fund trustee. Now, I believe I don't work with self-managed super funds, but I believe that there are now caps on the percentage of assets, a self-managed super fund can hold in cryptocurrency, which is, for me personally, just from my own personal perspective, I think that having caps is a good thing because this is somebody's retirement and the crypto markets are so volatile. Now I play around with crypto, just for my own personal fun and knowledge. I have some crypto, not much, it's dropped 10% in the last two days. So, when you're talking about your retirement, to have that kind of volatility, and some of the crypto I've seen drop 40% in the space of two weeks.

Robyn Jacobson:
And yet if the share market did that, and it has done that at times through the GFC and the pandemic and so on, that would be front page headlines.

Tracey Dunn:
Absolutely.

Robyn Jacobson:
Okay. We're also seeing quite an increased use commercially. So when it first came on the market, there were people who were mining it. So these are the people who were solving the mathematical puzzles and basically creating these solutions, which became the Bitcoin. And then we had people who were trading in it and buying it and selling it, or people who were holding it for investment. But we're now seeing, you can buy things with it. You can pay for professional services, you can buy property, and we certainly, you can buy cars with it because we've seen that in one of the particular car manufacturers. So increasingly this is starting to become much more commonplace.

Tracey Dunn:
Absolutely, it is quite mainstream now. And I expect that it will continue to. There's a lot of businesses and organizations that realize that people have cryptocurrency and want to be able to transact in cryptocurrency. So they're providing that as a option.

Robyn Jacobson:
What the market wants, the market responds to.

Tracey Dunn:
Yeah. And there's no regulations preventing them from doing so.

Robyn Jacobson:
So let's talk about the ATO. They've put out some guidance, and that's been in the form of some taxation determinations, as well as informal web guidance. And back in 2014, they did issue four determinations, basically setting out their views on what they thought of Bitcoin and similar cryptocurrencies and digital assets. In terms of where the ATO sits on this, and also whether or not we can treat this as currency, is we know that many people would like to think of it as a form of currency, but what is it from a taxation perspective? Is it money or is it more akin to shares like a CGT asset?

Tracey Dunn:
So the ATO take the view that it is a CGT asset. And I would agree with that view. Essentially cryptocurrency is property. And whilst there hasn't been any judicial guidance in Australia on that question, there has been now I believe around four cases in international jurisdictions, the UK, Singapore, the New Zealand that have all landed at the same spot that cryptocurrency is property. So therefore if it's property, CGT asset not a currency. And if you look at an AAT case in 2020, Seribu Pty Ltd and the commissioner of taxation, that case dealt with the question of whether or not cryptocurrency was foreign currency. And the AAT, and whilst it's only an administrative appeals tribunal decision, held that it was not foreign currency. It was a CTT asset.

Robyn Jacobson:
In the ATO's original reasoning, one of the things they set out was it couldn't be a form of currency because there are only two forms of currency. We've either got Australian local currency, or we have foreign currency. And it can't be Australian currency because our official currency is the Australian dollar. And for it to be a foreign currency, it would need to be recognized as the country's currency, or a form of currency by a sovereign state. And back in 2014, there was no country in the world that was recognizing Bitcoin, or any other cryptocurrency as a form of currency for that sovereign state. Now in September, of 2021, El Salvador became the first country in the world, and I'm not sure that there are too many others that have joined them since, to recognize Bitcoin as a currency. And just looking at some media reports on this, they've spent hundreds of millions of dollars rolling out Bitcoin ATMs.

Robyn Jacobson:
You think of walking down the street and arranging money to be transferred through an ATM on the wall. They've bought Bitcoin at a government level on the basis that it's going to increase. And they're looking at rolling this out across their community and amongst their traders who have to get on board. And it is something that the ATO I imagine will need to consider as part of this, that as countries do start to recognize it, does that change the ATO's position, which is currently that it is not foreign currency, and it's certainly not Australian currency. Now, I don't know that the ATO position's going to change in a hurry and that's, of course, for them to set out any views on that, but it raises very interesting questions if more and more countries do get on board.

Tracey Dunn:
It certainly does. And I did hear quite a bit of chatter around that issue when El Salvador did make the decision to have Bitcoin as a currency, but there hasn't really been any discussion that I've seen that's substantive since then. And there's been nothing from the ATO. And when I look at what's happening on an international basis, the larger countries are still looking at cryptocurrency as a form of property. They're not recognizing it as a form of currency. I suspect that we won't have any clear position on that until either the ATO provides formal guidance, or somebody challenges it in a court.

Robyn Jacobson:
And it's not as though we've got dozens of OCD countries jumping on board, saying we are doing the same as El Salvador. They seem to be taking a quite cautionary approach as well.

Tracey Dunn:
Absolutely. I have not seen any other country that has made a declaration that cryptocurrency is foreign currency under their legislation.

Robyn Jacobson:
So let's now turn to the tax treatment. If I go out and I buy some Bitcoin today and I hold it for a period of time, it goes up in value. And then I sell it because I either want to exchange it for another form of cryptocurrency, or because I want to cash it out and buy something with it. What's my tax position?

Tracey Dunn:
Well, generally, and this is one of these circumstances that we need to peel back the layers. We need to have a look at how did you acquire that cryptocurrency and what was your intent? So if your intent was to hold the currency, to exchange it in the future for something of value and, or to hold it with the intent that it would increase in value, so you could eventually exchange it, then it's more than likely of, I'll just say it is a CGT asset. And the implications for you is that you will have a accessible capital gain on the disposal.

Tracey Dunn:
So it will be like any other CGT asset. And you'll have a look at, do I have a CGT asset? Yes, it's been disposed of, is the disposal value less than the cost base? Yes. I've made an accessible capital gain. Do I have any capital losses that I can offset? How long have I held it for? Have I held that CGT asset for longer than 12 months? Because if it's a CGT asset, if you've held it for longer than 12 months, and it's on an investment account, capital account, then you're going to be eligible for your 50% CGT discount.

Robyn Jacobson:
The personal use asset is an interesting one because I've often heard people say, oh, yes, I can disregard the capital gain, or the capital losses, the case may be, depending which way you've gone, because it's a personal use asset, and I only bought it for a very small amount, but we've got to remember that the personal use asset rule is where you are holding onto the asset for your personal use and enjoyment. So it's one thing if you bought the crypto with the intent that you are going to hang onto it and the gain that you've made, you are going to go out and buy a holiday with it, or pay for your wedding, or do something, I don't think your wedding's probably more expensive for a crypto, but you know what I mean?

Robyn Jacobson:
But if instead it was a case of buying an asset, waiting for it to go up in value, cashing it out and then spending it on your personal use item, why is it any different to buying some shares that have gone up in value and then using the profit from the shares to pay for the holiday, or the wedding, or the private expenditure that you wanted? So, I think consider there are often misunderstandings about exactly how broad or narrow this personal use asset exemption can be.

Tracey Dunn:
Absolutely. I think there's this misunderstanding that people look at cryptocurrency and think of it, that it is the same as their bank account, if they can buy and sell things, which is actually quite limited in Australia at the moment, then it looks and smells like a bank account. So maybe it is a bank account, but in reality, it's not. It's no different than buying shares. If you are buying the cryptocurrency because you can see how volatile the market is, and you're hoping that you're going to have a 2000% increase on what your purchase price was. Then your intention is no different than buying a share or another investment asset. You buy it with the speculative intention that you're going to make money. And once you've converted it to fiat currency, then you've got your personal use asset because it's just your cash in a bank that you then go and spend on personal use items.

Tracey Dunn:
That said, there may still be occasions where cryptocurrency is a personal use asset, very limited. But if I think of an example that if say a cryptocurrency is minted and it's specifically for use in an online gain. So for you to be able to get into, and use that platform, but you can't then convert it back to fiat currency or any other form of currency, and it's used to play a game. Then that might be a personal use asset, because the reason that you purchase that particular coin is for your personal use and enjoyment, and you can't exchange it for something else of value.

Robyn Jacobson:
You've been referring to this concept called fiat currency. Some people may not be familiar with what that means.

Tracey Dunn:
Australian dollars.

Robyn Jacobson:
So our local currency.

Tracey Dunn:
Our local currency. Yes, apologies.

Robyn Jacobson:
No, that's okay. Now there'll also be some people who are what we call miners or traders, and it's still a CGT asset because, of course, trading stock is a CGT asset, but we have a different set of tax rules that may apply to them.

Tracey Dunn:
Yes we do. And that takes us into a whole new area. So you touched before on miners, and miners are different to traders. So if I start with traders, because we started with a CTG asset and we've got the different concepts between capital and revenue. So if you had shares, you might hold them on capital account, you might hold them on revenue account. If they're on revenue account and you are trading, you are looking at the volume of your transactions. So same thing with cryptocurrency, you would need to go through that. And [inaudible 00:29:01] of, are you carrying on a business to see whether you are trading?

Tracey Dunn:
Mining is different. So mining is a reward for a service. So not necessarily trading stock, but might be once you have received the reward, again, you have to look at what the underlying transaction is. You could have a miner that's just a person that just happens to have a really sophisticated computer that happens to be lucky enough to solve the mathematical equation, or you could have a mining pool where a number of large organizations that have a massive amount of computational power use their power, they pull it to get the rewards of solving these mathematical problems, because when they solve the problems, they get a reward of cryptocurrency. So that initial reward is a reward for service and it's revenue, but then they've got their underlying asset that is either going to be a CGT asset, or it's going to be held on capital account, or it's going to be trading stock depending on how they use it.

Robyn Jacobson:
I don't think we can get our heads around the computational power that's required. I remember the early days there was talk that all the low hanging fruit was essentially being taken. So the easy solutions it's like getting the first 50% in an exam, it's always easier than the second 50%. And so a home computer in the very early days was capable of being able to generate Bitcoin to mine it and find those mathematical solutions to the puzzles. But it's got to the point now where the power needed, there was talk about it consuming more electricity than the whole of New Zealand consumes an entire year. It's extraordinary.

Tracey Dunn:
Yes it is. And that's absolutely correct, is the amount of power that is required to mine Bitcoin in 12 months is more than many small countries consume in a whole year. So it's not very environmentally friendly.

Robyn Jacobson:
I have to say, this will not be of great attraction to people that are very mindful of the environmental impact.

Tracey Dunn:
Well, this is where the proof of stake, which is a new method of authentication, which uses holdings of coins is coming into play. So it's a different verification method that is more environmentally friendly, and we are starting to see, and it was one of the topics in the Senate inquiry into Australia as a innovation hub, was potentially providing a tax incentive to miners, to develop more environmentally friendly methods of verifying cryptocurrency transactions.

Robyn Jacobson:
I want to discuss with you the way the ATO approaches this, because perhaps for a long time, there was a perception that the ATO couldn't possibly see this, it's off their radar, how do they know what I'm up to? I can make profits. And as long as I'm not getting back into Australian dollars, how would the ATO know? I attended a conference many years ago where someone from the ATO was speaking about this, and it was the early days of Bitcoin being rolled out. And the way they described it was, imagine you have a highway and on every major, or even a freeway, probably a better analogy, but on your freeway or your highway, you have entrances and exit points. So there's the entry ramp and the exit ramp. And back then the ATO was saying that they couldn't always have visibility over who was on the highway itself, that they could see when people were jumping on or jumping off it.

Robyn Jacobson:
So for example, if I take money out of my Australian bank account, and we're talking about Aussie dollars, and I go and buy a cryptocurrency with it, they will see the withdrawal from the bank account. They may not know what I do with the crypto once I'm in crypto world, particularly where I'm in foreign exchanges now, as opposed to the Australian ones, but they may well see what I'm doing if I then cash it out and go and buy property with it, or buy a car with it in Australia. So again, I'm interested in your thoughts about how's the ATO going with all this? And it's not that you're, of course, representing the ATO, but they're getting better at identifying when people are engaged in these transactions. And anyone who thinks that, oh, don't worry, the ATO won't see it. I think they need to think twice about this.

Tracey Dunn:
I agree completely. That ATO have extremely sophisticated data matching and data accumulation programs. So anyone who thinks that they're going to fly under the radar with cryptocurrency transactions, good luck to you. Well, you've probably going to need more than good luck. So in Australia, we have laws now that give the ATO powers with their data matching. So I'll take a step back with that, or say that with digital service providers and digital currency exchanges, now if they have a presence in Australia, so they operate a business in Australia, or they have a permanent establishment here, they're required to register with ASIC as a digital service provider.

Tracey Dunn:
The ATO's data matching program requires digital service providers to provide information to the ATO in relation to cryptocurrency and digital asset transactions. There's a lot of digital service providers in Australia, and that might not just be limited to a digital currency exchange, but also accounting platforms that are tracking information between banks and reporting accounting information, or there's bank transactions as you mentioned about the highway analogy. So it still allows the ATO if you have a taxpayer who is dealing with a digital currency exchange in an offshore jurisdiction, that the ATO still has visibility of where the money is transferred from Australian bank account to this offshore digital currency exchange. I see on many pre-filled reports, quite a lot of them these days, says the ATO has information that you have had a cryptocurrency transaction this year.

Robyn Jacobson:
And I think it's important to call out that where you have someone who swaps one form of cryptocurrency for another, this is no different to say selling the HP shares and buying Telstra shares. You may still be in the crypto environment, but you have exchanged one CGT asset for another. So at a tax level, you've had a CGT event, it creates a taxing point.

Tracey Dunn:
Yes it does. And because of the volatility of the crypto markets, you might find that people have multiple transactions, and you might have people who are not only doing these exchanges between one form of cryptocurrency and another, but they might also be staking their currency and getting staking or rewards, which is like interest. They might be using decentralized finance platforms and investing, or purchasing these financial products in cryptocurrency. And they can have multiple CTG events that are going on, because it's on a platform they may not actually be aware that they may have multiple transactions that are going on. And that then leads us to an issue with record keeping and working out what is the actual tax position? What is the net capital gain or loss?

Robyn Jacobson:
Final discussion, because there's so much for everyone to think about as they're getting into tax time again for 2022, not far away now. NFTs, that's just a whole new layer, whole new set of rules. So what's going on with these?

Tracey Dunn:
Okay. So a non-fungible token, NFT, it's non-fungible. So it's not like crypto, but it's an asset that you own. So it does relate to you and it can relate to digital art, music, it can relate to an actual physical, underlying asset. It might represent membership to an online community, and it might have then further rights that are attached because of your membership to that online community. So in a very basic form, now I've mentored my own NFTs. It wasn't hard. I used a platform and I connected a wallet, and that might sound like strange language, but it was actually really easy. And I uploaded a photo and then I pressed a button that said mint NFT. And there it was, it was created.

Tracey Dunn:
So my image, that was actually a drawing that I did in 1987, is out there on blockchain. And if I want to sell it, then I can set up in that account a base price, so a floor price for my NFT, and I can attach conditions. So I can say, well, if somebody buys it and then continues to trade in that NFT me as the original artist receives a 2.5% commission on every trade.

Robyn Jacobson:
Are you trading the right to the drawing you made, or the right to be able to access the drawing that you made?

Tracey Dunn:
Well, it depends. It depends on what rights that you attach to that NFT.

Robyn Jacobson:
So you can create whatever rights you want?

Tracey Dunn:
Absolutely.

Robyn Jacobson:
Now the tax treatment of these, because they [inaudible 00:38:27] grow in popularity, again, we seem to have volatility. We seem to have an attraction to NFTs because someone famous has one, or is a member of one of these exclusive communities, and that can push the price up.

Tracey Dunn:
Yes. And this is one of the exciting things that I've spoken with you about before, and it's these multiple layers that can attach to an NFT. And to work out the tax treatment, you actually have to strip back those layers and look at what is the original underlying NFT? So what were the rights that were attached to that? And I'll use the example that I used in my presentation. It was an NFT that on the purchase, you had exclusive rights to the digital artwork that was represented by that NFT. So once it was yours, it was yours to deal with as you please. And with that, it gave you an exclusive right to a rather exclusive club. And that's really where the value came. So if you traded that NFT with another person for value, then you've got a potential disposal of a CGT asset.

Tracey Dunn:
But if you held onto that asset, there was additional rights that came with that. And it might be that you were entitled to an airdrop of this new currency that was minted, that was exclusive to your club. It might give you rights to exclusive club membership that has other rights. So it might be something that is of an income nature. It might give you the rights to obtain another CTG asset for no cost. So you've then got to have a look at what is the underlying asset and what are the assets, or revenue items that I've received, because I own that original non-fungible token. And that to me is really, really interesting, because you have multiple layers that you have to peel away and then try and identify it, match it up to something that is in the old tax world that might be a right to income, the right to a share issue and things like that.

Robyn Jacobson:
Can we turn now as a final discussion, inheriting these sorts of assets. So someone passes away, they've got wealth in these, let's assume that we do have the passwords or the details of the digital wallets and so on. So it's not as though they're lost and we can just ignore it. And I'm not even sure what we do if we can't locate those things. Arguably there's perhaps a capital loss that happens on the passing, but we know we disregard capital losses on death. So it's an interesting one. They probably just go to the grave with them, but let's assume we do have all the ability to access the information. It's an interesting question as to how beneficiaries or estates then have to deal with these sorts of assets, because there's going to be enormous wealth in them.

Tracey Dunn:
Potentially. And it's a really interesting area because how do you, if there's no centralized register where you can search to see if somebody actually holds these assets, how do you identify where the wallets are? And assuming somebody has left the passwords and you can access them, then yes, an executor of an estate is then going to have to work out, how do you deal with that within the estate? What does a will say? Was the cryptocurrency left to a specific beneficiary, or does it just form part of the estate? Are you required to realize it to meet estate costs? And then if you've realize it's not cryptocurrency anymore, it's just normal currency. So some really interesting issues there. And then you might have recipient beneficiaries under a will. How do you transfer the cryptocurrency to them?

Robyn Jacobson:
Particularly if that beneficiary is not particularly interested in the crypto world.

Tracey Dunn:
Yeah.

Robyn Jacobson:
Which case it potentially does need to be crystallized and converted back into fiat currency again.

Tracey Dunn:
Yeah.

Robyn Jacobson:
Look, Tracey. I don't think we've even scraped the surface of all these issues, but it's been fascinating to take a walk with you through this amazing new world. Thank you so much for your time.

Tracey Dunn:
Thank you so much again, Robyn.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Tracey Dunn of RSM Australia in Perth. To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best of tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 18 — Unpacking the ATO’s section 100A draft guidance

Release date: 6 May 2022

In this episode of TaxVibe, Robyn chats with Jonathan Ortner, Tax Director, Arnold Bloch Liebler, about section 100A of the Income Tax Assessment Act 1936 that deals with trust distributions and what the ATO’s recent draft guidance materials mean for you and your clients.

They explore:

What section 100A is and why it’s in the spotlight at the moment
The conditions under which section 100A applies and its requirements
Guidance from cases including East Finchley, Prestige Motors, Idlecroft and Raftland
Where to from here for section 100A, including the pending court appeal in Guardian

Host: Robyn Jacobson, CTA
Guest: Jonathan Ortner, FTI

Robyn Jacobson:
Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax professions great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by Jonathan Ortner. Jonathan is a partner in Arnold Bloch Leibler, Sydney taxation group. He practices in all areas of direct and indirect tax with a particular focus on the taxation of trusts and corporate income tax and mergers and acquisitions. Jonathan has particular experience in dealing with the ATO on complex tax issues in a dispute resolution context. He is a keen and active member of the tax community, as well as presenting on tax topics at various sessions and authoring a number of published articles, papers and bulletins. Jonathan is the deputy chair of The Tax Institute's national SME technical committee, and is recognized as a key tax lawyer in the legal 500 Asia Pacific. Jonathan, a very warm welcome to TaxVibe.

Jonathan Ortner:
Thanks Robyn, thanks for having me today.

Robyn Jacobson:
It's wonderful to have you on board. We recently had you join us for a member only webinar run by The Tax Institute as part of a panel with the ATO. We were focusing on section 100A, which will be our focus today. So very pleased to get you back again. I just want to set the scene for our listeners. I'm describing this as the biggest development in the taxation of trust income in more than 10 years. The 23rd of February this year, the ATO released long awaited draft guidance materials on section 100A. And what I'd like to do with you is unpack this provision, understand what it is, what it does and broadly, why is there such concern across the tax community about the guidance materials that have been released? So the materials without diving into specific details now are broadly three products. We have a taxation ruling, TR 2022/D1, a draft practical compliance guideline PCG 2022/D1 and a taxpayer alert TA 2022/1. So with that overview, could you run us through what exactly is 100A and why is it in the spotlight at the moment?

Jonathan Ortner:
Sure, 100A is a specific anti-avoidance provision, which was originally designed to counter tax avoidance through trust stripping schemes. But it also remains a clear threat in any circumstance that involves the distribution of trust income, where cashflow is not aligned with the legal entitlement and the enjoyment of the benefit of the funds by the beneficiary is deferred or does not eventuate. The provision works by effectively deeming there to have been an accumulation of trust income by the trustee with the result that the trustee is assessed at the highest marginal rate of tax.

Jonathan Ortner:
As to why it's in spotlight, the section has been part of the Australian tax landscape, as we know since 1979, but it's only recently become an area of significant focus within the ATO. It's certainly a fair question as to why it's in the spotlight. What currently concerns the ATO is factual situations where a beneficiary is made presently entitled, but at the end of the day, someone else benefits. So perhaps in their view, this has become more prevalent and a crackdown is warranted. However, in saying that discretionary trust have been the subject of intense scrutiny by the ATO over the last 15 years. This to me really appears to be just another attack on trust, more broadly. Their initial public views on 100A, expressed as far back as 2009, which was at the same time as the issues relating to UPEs and division 7A led to tax payer concern and cause for guidance material. So it really was inevitable that we would end up where we are. And as I always say, be careful what you wish for.

Robyn Jacobson:
Can you provide some insights as to why this has now got the momentum that it does? What was the Genesis for the ATO starting to focus on this provision given it's been around for more than 40 years?

Jonathan Ortner:
I think just going back to what I said previously, in terms of why the ATO is focusing on it, perhaps it's in relation to just their broader attack on trusts or their genuine dislike for entitlements or the cash not flowing with the entitlements. So this has prompted them to release guidance on their views in relation to the application of 100A. We first saw their comments in 2014, where they provided examples of the types of arrangements that they thought 100A applied to. And when the ordinary family or commercial dealing exception might apply. On the back of that significant concerns were raised by advisors and taxpayers in relation to the way that the commissioner was proposing to apply 100A, which was far broader than previously applied by the ATO and arguably far beyond its intended scope. And so that really resulted in a demand for a proper guidance product, so that advisors and tax payers understood what risks existed in relation to the types of arrangements that were otherwise previously thought to be common to private family groups.

Robyn Jacobson:
There's been no shortage of seminars and discussions and conference sessions discussing 100A in the last five to 10 years. And anyone who sat through the ATO speaking about 100A would understand that it has been on their radar and many practitioners have also been putting out cautionary tales about the scope of 100A. So this still seems to have caught the profession by surprise, given the scope of the guidance that's now been published. Why do you think that is?

Jonathan Ortner:
The ATO's taking a strict view on certain aspects of the law, which appears to be contrary to past practice. The way that the Commissioner is now proposing to apply at 100A, again, arguably goes far beyond its intended scope. Examples include typical family dealings, which advisors otherwise believe fell within the ordinary dealing exception. That includes arrangements like the retention of trust funds, the gifting or assignment of UGEs and the utilization of losses. And as a result of that, most private groups could in some form be distributing trust income in a way that puts them in the ATO's red zone. That's possibly prompting a review or audit action. So taxpayers are really bound to be upset given this new approach by the ATO and the fact by the way, that there's no limit of amendment period.

Robyn Jacobson:
So let's unpack the provision a bit more so we can understand how it operates. It has been around in the law since 1979. It took effect in 1978, which was the original date of announcement. How does the provision work? What are the conditions that trigger 100A?

Jonathan Ortner:
The first thing to note with 100A is, it's self executing and it applies if the criteria of its operation exists. So unlike, for instance, the provisions of part 4A, 100A is not made depending on a determination being made by the Commissioner. That's the first thing to know, so taxpayers must self-assess. For 100A to apply there are a number of key requirements. The first is that there must be a beneficiary who is presently entitled to a share of the income of the trust estate, whether actually, or on a deemed basis. There must be a reimbursement agreement, which will be the case where firstly, there is an agreement and the broad definition of which does not include conduct or a transaction entered into, in the course of an ordinary family or commercial dealing. The identified agreement must provide for benefits to someone other than the presently entitled beneficiary that may or may not be equivalent value to the incoming question. And the identified agreement must have been entered into with a tax reduction purpose. So we need a present entitlement, we need a reimbursement agreement and we then need that present entitlement to arise out of the reimbursement agreement. So a lot to chew through, but at its simplest level those are the key requirements.

Robyn Jacobson:
All right, let's unpack some of that. So with the beneficiary who must be presently entitled, are there any conditions around what sort of beneficiaries we're talking about?

Jonathan Ortner:
Yes, a beneficiary under legal disability will not be caught by these provisions, but otherwise, a beneficiary presently entitled will be caught.

Robyn Jacobson:
All right, so that would exclude our minors and people who are bankrupts and so on.

Jonathan Ortner:
Correct, and you'll see an example in the Commissioner's tax ruling, I think it's the tax ruling, not PCG, that talks about a minor being entitled to income in a testamentary trust where 100A won't apply until such time that minor turns 18. And then, obviously the provision may be switched on, it needs to be looked at.

Robyn Jacobson:
All right, reimbursement agreement. It sounds like I've incurred something and I'm going to be reimbursed for that amount. Does that have any relevance whatsoever to what we're talking about here?

Jonathan Ortner:
I think the thing to note and what the courts have said is that you can't break up the term reimbursement agreement and just focus on the ordinary meaning of reimbursement and try and work out what that actually is. You've got to look at the provision which define a reimbursement agreement. And really that involves a situation where benefits go to someone other than the presently entitled beneficiary. That can be at it's very simplest form, you, Robin being made presently entitled to $100, but that $100 going to me instead, that's a reimbursement agreement potentially because I'm receiving the benefit and you're the one entitled not getting the benefit of cash.

Robyn Jacobson:
And that could be money paid to you by the trust? It might be an asset being transferred across to your property? It could be services being provided? So it's quite broad.

Jonathan Ortner:
It could be by the trustee, that's one thing to note. Or the cash could flow to you and you could give it to me. So that's still a reimbursement and that's important to remember. It doesn't only involve situations where the cash doesn't flow to you. It's where the cash doesn't stay with you necessarily.

Robyn Jacobson:
Isn't my choice? If I'm made presently entitled, I get my $100 from the trust, and then a week or three years later, I choose to then gift it to you. What's wrong with that?

Jonathan Ortner:
Well, it depends as always on the facts and the arrangement. So, three years down the track with nothing more will not invoke this revision. But if there's repeat behavior of the gifting of entitlements and there's clear evidence of an arrangement that has been entered into with a view to reduce tax on that entitlement, then you need to be aware of this provision as it may apply.

Robyn Jacobson:
Perhaps the way I could describe it, Jonathan is, it's a separation of the cash from the benefit as you were articulating in your opening comments. If there's a situation where someone is being made presently entitled, but they ultimately don't get to keep that amount because there's an arrangement to pass it on. And the typical arrangements we've seen is where the adult child who's at university or on a low income, they get topped up to one of the income thresholds so that they're still below the top marginal tax rate, but able to benefit with those marginal rates. Then they're passing the benefit of that distribution on to their parents who if the parents had received the distribution from the outset, would've been taxed, presumably at the top marginal tax rate, given the dollars involved. So I think that the ultimate problem here is you've got someone who, if it was always intended the parents get the distribution. Why then did you distribute to the adult child? Why didn't you just give it to the parents originally? And it comes into this third element about the tax purpose and why you did it. There might be 50 reasons why commercially you did it, or for family reasons but you were talking about how there's a purpose of reducing or deferring income tax. Now, the purpose of using the marginal tax rates might be just one of those purposes. Is that enough to potentially get us into this provision?

Jonathan Ortner:
I think just one point before we go there to note is that the example you just described is something that many advisors would've otherwise felt previously fell within the family dealing exception. And so that's a reason why many are upset. The other thing to note is that a reason for doing or a reason for giving effect to an arrangement in a way that you described. So as to increase the wealth of the family group on a post tax basis is not accepted by the ATO as being something that has at its pursuit or in a familial end. I just wanted to make those two points.

Jonathan Ortner:
In terms of your question, there's two parts to this. The first is to work out whether the ordinary family or dealing exception can apply and embedded within that is some consideration of purpose of the arrangement and whether it's motivated by tax or not. Now, if tax, taxating is sort of incidental to the overall pursuit of the familial end, then the Commissioner says that it won't be one that is set with a tax avoidance purpose, and perhaps may come within the exception. If for whatever reason it doesn't come within the exception, then you still need to go through the other requirements of 100A. One of those requirements is the tax reduction purpose requirement. And really all you need to find there is a purpose of achieving a lower amount of tax than what otherwise might have been paid in a counterfactual, a reasonable counterfactual scenario. And if the answer to that is yes, then you may fail the tax reduction purpose.

Robyn Jacobson:
This is why it's so much broader than part 4A, you've already mentioned that it's got an unlimited amendment period, whereas part 4A has only four years. Secondly, part 4A of course, has a sole or dominant purpose of entering into the scheme or the arrangement. Whereas this is a purpose. So it seems to be so much easier to full foul of 100A than it does part 4A.

Jonathan Ortner:
Well, definitely because it doesn't require, at least in the context of the tax reduction purpose requirement, it doesn't require a dominant purpose. There's no dominant purpose test. So it's just a purpose, no matter how minor that purpose may be, that's enough to fail the, or satisfy rather the tax reduction purpose. So yes, and the other thing to note though, as well is part 4A is an objective test. There's elements of the tax reduction test that require subjectivity to come into it, to get into the mind of the relevant person that had the tax reduction purpose. That's also a key distinction.

Robyn Jacobson:
Back to real world, we've unpacked all this theory and we've explained what the provision does, but in practice, how does any practitioner or taxpayer work out whether or not they have fallen foul of 100A? You say it's a self-assessing provision. So it's not relying on a determination by the Commissioner. How do we know where the goalposts are, or the red flags down at the surf beach to know whether or not we are within that safe zone or whether we've fallen outside? It seems incredibly gray.

Jonathan Ortner:
Yeah, what we know from cases such as Prestige Motors and IDLECROFT is that the examples given in the extrinsic materials were intended to be illustrative and not an exhaustive statement. Som what we might have previously thought of being the types of arrangement, subject to 100A, like blatant and complex trust stripping schemes. Schemes devised by promoters involving artificially created paper losses. Those aren't the only types of situations where 100A can apply. Really it's a provision that remains a clear threat in any circumstance involving trust distributions, where cashflow is not aligned with the legal entitlement. If that's something that arises, you really need to take a step back and look at the arrangement in its totality, work through the provisions of 100A and ask yourself whether you're caught out.

Jonathan Ortner:
In my opinion, the [inaudible 00:17:03] of scheme 100A was introduced to counter, I think are important to establish some sort of practical boundary between what is okay and what is not. So it's not as simple as taking the Commissioner's examples in the tax ruling and the PCG and putting your hand up and conceding that a 100A applies, that won't always be the case. I think you really need to drill down into the cases into the extrinsic materials, into the provision, understand the context and the purpose, and take a proper approach to statutory interpretation, to work out whether your particular arrangement is caught.

Robyn Jacobson:
Let's take a look at some of the cases that have come before the courts and particularly some of the high profile cases and what do they have in common? And is there something unique to those cases that we took some comfort from and therefore dismissed 100A is being relevant to the sorts of arrangements that are typical in family groups?

Jonathan Ortner:
The four cases that we're all familiar with are Prestige Motors, IDLECROFT, Raftland, East Finchley, and now obviously Guardian, but I'll leave that to one side for now. Judicial consideration of 100A appears to have started with Dr. Thomas and East Finchley and he migrated to Australia in 1978, established a discretionary trust and established a discretionary trust with a corporate trustee. In 1983, the corporate trustee distributed the income of that trust to various persons who were relatives of Dr. Thomas and valid objects of the trust. This included 126 relatives who were overseas residents and who received $585 each, which was neatly the tax free threshold for non-residents at the time. So no tax was paid in that situation.

Jonathan Ortner:
In Prestige Motors, there were three separate transactions that were largely centered on the transfer of a business to a unit trust and units being issued to a company with losses and to a tax exempt organization. Again, the arrangement had the purpose of allowing the business profits to be distributed effectively tax free.

Jonathan Ortner:
In IDLECROFT a joint venture between various trusts was put in place where the trustee of those trusts inserted a beneficiary that had substantial tax losses and so paid no tax upon the appointment of income to it.

Jonathan Ortner:
Finally, Raftland, although a very complex case and one that the high court ultimately found to be the subject of a sham involved, the introduction of unit trust with substantial tax losses and entitlements not being paid in cash other than a single sum of a small amount. And there was some evidence that there had never been any intention of making any further cash payments. So we can certainly see a trend here. It was only the egregious paper schemes that previously came before the courts, and that appear to reflect the types of arrangements, the extrinsic materials that a 100A was inserted to stamp out. So rightly or wrongly many believe these cases provided a sort of limiter on how broadly 100A could be applied.

Robyn Jacobson:
So if we combine the decisions in these cases, all of which I think we can comfortably describe them as being egregious or blatant schemes.

Jonathan Ortner:
Yes.

Robyn Jacobson:
Then we also look at the wording in the legislation, ordinary family or commercial dealing of which there has been little to no guidance on the meaning of that term, and certainly no judicial guidance until very recently. And that itself in Guardian as the subject of a full federal court appeal. It's no wonder that practitioners looked at these situations and thought, well, what I'm doing, therefore doesn't fall within 100A because we can take some comfort from this safe harbor being the exemption for the ordinary dealing. So there's been quite a significant shift. The question is whether there's been a shift in the original policy intent from the late seventies to what the law is doing today, or whether there's been a shift in the way that practitioners understand the provision to work?

Jonathan Ortner:
I don't think that there's necessarily been a shift in the way that practitioners believe the provision to operate. I think the reality is no one knows how it operates, particularly in relation to the ordinary dealing exception, we are all including the Commissioner, we're all making it up as we go. And we're really waiting on the courts to provide some firmer authority on what some of these terms mean. So I think that if you look at it from a policy perspective and the time at which this provision was inserted back in the 70s, which was a time that was the bottom of the harbor schemes, the policy intent behind the provision is certainly in my opinion, different to the way the Commissioner is now administering the provision.

Robyn Jacobson:
It's hard to think of any other provision in the tax law that has been there for as many decades as this one that is so poorly understood. And we're all struggling to understand how it applies in practice. It shouldn't be this difficult.

Jonathan Ortner:
It shouldn't be, but that's, I guess, Australian tax law for you and it's probably not the only provision... Well, it's definitely not the only provision that's been around for a long time. That has a lack of clarity and uncertainty about it. A very simple one that comes to mind is 99B, that was also inserted at the same time as 100A and that is also a provision that has been drafted in a way that is incredibly broad, that applies to trust. But what kind of trust non residents or Australian trust is something that remains debated until today.

Robyn Jacobson:
So the case that remains before the courts at the moment, Guardian, can you briefly explain what was going on in that case and how helpful is this? Does it share any similarities with those previous cases you mentioned?

Jonathan Ortner:
I would say that it doesn't really share the similarities of the previous cases. It's a case that certainly introduced more commonly encountered family group dealings or concepts. I'll give you just the facts that follow us down a pattern to give the listeners some context. Guardian was the trustee of a discretionary trust, and it also owned all of the shares in the company, which was one of the beneficiaries of that trust. In three financial years, Guardian made the company presently entitled to a share of the trust income. Then in the following year, sufficient cash was paid by the trustee to the company to allow the company to pay tax on the net income. Then the balance of that entitlement remained unpaid, and having paid tax on the net income, the company could then declare a fully franked dividend to its shareholder being the trust. The trust would set off the dividend against the balance of the unpaid entitlement that was owing to the company. Then the trust would stream the franked dividend to Mr. Springer, who was a non-resident at the time, and so no further tax was paid.

Jonathan Ortner:
In essence, the income was sheltered at the corporate tax rate of 30%. It was this that the Commissioner took issue with. It is a fact pattern that is far removed from the types of egregious schemes that we might have previously become accustomed to where you've got low or no tax introduced beneficiaries, where you've got promoters of tax schemes, where you've got entities with significant tax losses. Here, we have pretty much a family group dealing with tax being paid still at a fair rate of 30%, but it coming within the ATOs view of 100A.

Robyn Jacobson:
It does display some features that were described in the ATOs July 2014 guidance, which has been described in the vernacular as the washing machine.

Jonathan Ortner:
Yes and no. I mean, it wasn't a strict washing machine in that it was going round and round and round. It was going to the company and then back to the trust and then out to a non-resident. So I guess, it was incorporating elements of it. It was also incorporating elements of other types of examples the commission doesn't like where distributions are going out to non-residents and no further taxes being paid, and it's capped at either withholding tax rate or because we've got a franked dividend, there is no withholding tax.

Robyn Jacobson:
Can you comment on lessons we can learn from Guardian, which as I say again, remains on appeal before the full federal court and could ultimately go to the high court that remains to be seen. But in terms of the credibility of the taxpayer and their advisor and the quality or otherwise of contemporaneous documentation?

Jonathan Ortner:
The case largely turned on the facts. But at the end of the day, the taxpayer won because of the strong contemporaneous evidence. And because Justice Logan was persuaded by the credibility of the witnesses and oral evidence provided, The contemporaneous documentation included emails and file notes, which corroborated the oral evidence provided. Justice Logan said, 'I thought each of these witnesses offered honest, candid, consistent evidence, which also sat well with this correspondence.' So it was not as though there was a significant amount of evidence. It was just that the evidence came together in a way that properly supported what was being said by each witness and made sense in the context of the overall affairs of the taxpayers group. So the key takeaway for me, is remembering the importance of the whole picture, an oral statement without nothing else will not be sufficient. That an oral statement that is affirmed by the surrounding events that unfolded and even basic documentation, such as emails, file notes and aid memoirs will be given significant weight.

Robyn Jacobson:
Really important to understand and learn from. So in terms of moving forward from here, there's been a lot of discussion around the retrospective application, whether this is fair, how broadly the ATO should apply the guidance to taxpayers and what should taxpayers do? Just before you answer that, it's worth noting that this guidance is currently available for consultation and those consultations close in a couple of days, time and The Tax Institute, like many others will be putting forward submissions with our views and our concerns, but in terms of the retrospectivity, this is probably the biggest issue that is concerning the profession.

Jonathan Ortner:
Yeah, it is absolutely. It's certainly what has received the most attention outside of arrangements that many thought were otherwise family or commercial dealings. Really several examples set out in the guidance material reflect what many believe to be taxpayer practice for the last 20 to 30 years. The examples provided are not necessarily egregious and the Commissioner has not previously as a matter of practice audited or queried those factual scenarios, including at the time, since the commissioner issued his website guidance and the 2014 financial year. Certainly I've seen in practice in various reviews or disputes an opportunity for the Commissioner to apply 100A when he didn't and this was post 14. So the change in attitude by the commissioner arguably represents a U-turn according to many advisors, and it's understandable. Then why many believe the approach being taken by the commissioner is unfair.

Jonathan Ortner:
The commissioner believes the white zone compliance approach in the PCG is sufficient. I disagree, the white zones blurred by its various exceptions and the 2014 website guidance was, and really remains confusing. And in my mind, it's not an appropriate date for a line to be drawn, particularly in relation to the non egregious examples in the draft guidance material. This view seems to be shared by the government and opposition who've also articulated their concern regarding the potential application of the draft guidance material on a retrospective basis. It's my view, which I previously expressed on the panel presentation that the guidance materials should operate on a prospective basis only, from the date that the draft materials were released, not from obviously when it's finalized, because we're now aware of the commissioner's views.

Robyn Jacobson:
It's also interesting to note the recent media release issued by the Assistant Treasurer, Michael Sukkar, who made the comment that the ATO would not be applying this retrospectively and that anyone who was relying on the July 2014 guidance, where that would give them a more favorable outcome than the ATOs draft guidance could continue to rely on that, but went further to say that they would be looking at this closely and after the election and I understand that both the government and the opposition have made this undertaking. It remains to be seen who forms government after the 21st of May, but both have committed to looking at the provision and if necessary making legislative change. Now with that said, and that's comforting to hear that. I think it's also important to acknowledge that generally there would be a preference or a leaning towards administrative approaches by the ATO, rather than trying to amend the law.

Jonathan Ortner:
I think an administrative approach might be an interim solution, but I don't think it's a permanent fix. I think legislative change is important here. The reason for that is when you... There's really not many, or if any reason, given for why 100A was thought to be a provision that should be subject to an unlimited amendment period. Perhaps at the time when amendments were made to section 170, which dealt with amendment periods, it was thought that the egregious paper schemes of that time were such that the commissioner needed an unlimited period to be able to actually uncover those sorts of arrangements much like that is the justification for fraud or evasion cases and why there's an unlimited amendment period. But when we break it down now, and we think about the way the Commissioner's trying to apply the provision in practice, and it's really to a set of fact patterns that arguably part 4A could also apply to, which is subject to a limited amendment of four years. I see no reason why from a legislative perspective, 100A should not be subject to the same four year period as other types of specific integrity provisions.

Jonathan Ortner:
Now, if an administrative approach is going to be applied, the Commissioner could take a similar approach to that, which he does involving trustees of discretionary trust that aren't issued with assessments, so that where there's evidence that there has been no fraud or evasion, the commissioner will limit his review of cases involving 100A to a four year period. And that seems to be a sensible approach to take until we have a legislative fix, if we ever get one.

Robyn Jacobson:
What should taxpayers do now? How can they prove their situation or substantiate their circumstances or decisions they've made? Particularly where if you're trying to show there is not a reimbursement agreement in place, how do you prove that something didn't exist?

Jonathan Ortner:
This might be a vapid comment, but I think taxpayers should think seriously about whether 100A might apply to the set of facts in motion first. Substantiation is not about creating evidence that leads to misdirection. It's about lending support, to refute arguments that the Commissioner might advance and prove the facts in issue. At the end of the day, it is the taxpayer that bears the owns of proof. So maintaining strong evidence is always essential, whatever the tax matter might be. Once it's established that 100A ought not to apply or it's reasonably arguable that it ought not to apply. Then the answer is to your question that is, it depends. It depends on what the relevant arrangement or lack of arrangement entails.

Jonathan Ortner:
In Guardian, the documentary evidence was simple, emails, file notes, aid memoirs, and actions taken by Mr. Springer, which supported his statements regarding the need for asset protection and simplifying his life, going into retirement, everything was consistent, and what was said was able to be corroborated.

Jonathan Ortner:
My suggestion would be to think about what it is that you're doing, ensure that what is said, or what is being done rather is defensible. And so in some instances, a reasonably arguable position paper might be obtained from a qualified tax professional. In other instances, it will be about proving how the arrangement in its totality sought to achieve primarily commercial or familiar [inaudible 00:33:15]. And in more simple cases, it might just be about retaining basic documentation, such as in Guardian's case. There's no one size fits all.

Robyn Jacobson:
There are two further issues that have come up that seem to have antagonized the profession. That is in the taxpayer alert where the Commissioner talks about referring agents to the Tax Practitioners Board, where they've been involved in promoting these arrangements to their clients. And secondly, potentially applying promoted penalties to such arrangements. What are your views on both of these?

Jonathan Ortner:
Personally would not worry about it. It's been blown out of proportion. The assistant Commissioner Justin Dearness came out and said that taxpayer alerts have, and I'll just read what he's actually said, 'Have a standard way of being presented. And they are meant to identify the full range of remedies that might be available for anyone operating the market.' So he said, don't take this general messaging as an indication that the ATO is out there looking for referrals. And the promoter penalty laws are not intended to obstruct tax advisors and intermediaries from giving particular advice to their clients. For what it's worth, and I said this again on the panel as well, I think the tax alert should be withdrawn. It could have probably been dealt within the PCG, and I really don't think advisors should be concerned about some of the statements in that alert, although I accept that those statements should not have been made in the first place.

Robyn Jacobson:
So Jonathan, as we pull this to a close we're waiting on the appeal in Guardian, there are potentially more court cases in the pipeline. We're waiting for the ATO to finalize their draft guidance materials, which may or may not happen before the Guardian matter is resolved. We're still waiting to see exactly what compliance activity the ATO will undertake. There's a bit of uncertainty here for practitioners. It makes it very challenging.

Jonathan Ortner:
It does. I suspect the full court... I think they sit again in may and then August. I think Guardian won't be heard again until later this year, so we may not really find out anything more until 2023 on this case. I do know that there are other arrangements that are currently before the court. Some of which reflect the examples in the draft guidance materials. So it will be a case of watch this space, because I think that there's a little more action to come and I don't really think that guidance materials will be finalized before the end of this financial year, given the election, the cases before the courts and the current market reaction. They'll need to seriously take into account. All submissions provided by relevant stakeholders. So we've got a bit of a way to go still, Robin.

Robyn Jacobson:
I would suggest the submissions are going to be very extensive.

Jonathan Ortner:
I'd say so.

Robyn Jacobson:
Jonathan, thank you so much for your time and your insights today.

Jonathan Ortner:
Thanks very much Robin, for having me.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Jonathan Ortner of Arnold Bloch Leibler in Sydney. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum @community.tax institute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing TaxVibe@tax institute.com.au. We look forward to you joining us next time.

Episode 17 — Tax and technology: transformed

Release date: 22 Apr 2022

In this episode of TaxVibe, Robyn chats with Alan FitzGerald, Founder of Practice Connections Advisory, about tax and the current technology landscape, including:

Digital disruption and how practices have become agile during the pandemic
The current state of tax and accounting software
The future of technology in tax and the impacts of solutions like Artificial Intelligence

Alan has spent over 30 years in technology, with 23 of those just in tax and accounting software. He now offers independent and technology agnostic advice to firms big and small.

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: Alan FitzGerald, Practice Connections Advisory

Robyn Jacobson:
(Silence). Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax professions great thought leaders, who will share valuable and practical insights you may not hear every day.

Robyn Jacobson:
We hope you enjoy this episode of TaxVibe. I'm joined by Alan FitzGerald. Alan has spent over 30 years in technology with 23 of those just in Tax and accounting software. In 2015, based on demand from several accounting firms, he established Practice Connections Advisory and offers independent and technology agnostic advice to firms large and small in areas such as practice management, workflow, tax, document management and reporting solutions options.

Robyn Jacobson:
Alan is regularly engaged to write and speak on the accounting tech market by The Tax Institute, CPA Australia and Ireland and Chartered Accountants Australia, New Zealand. He is also regularly engaged by corporate organizations to assist with developing accounting and finance technology strategies, as well as by vendors to assist with their future product development.

Robyn Jacobson:
Alan's experience working with Tax and accounting software, along with his industry insights makes him the perfect buyers advocate. He's independent, tech agnostic, always willing to share his knowledge. And it's great to have him here. So just as a side note, I first met Alan about four years ago.

Robyn Jacobson:
Alan was part of a panel discussion that I was facilitating on work related expenses, so very much in the individual's tech space. At later stage in the panel, there was a question from someone in the audience asking about Country-by-Country Reporting, which is polls apart from work related expenses.

Robyn Jacobson:
And to my great surprise and with great agility, Alan easily answered the question. And I remember going up to him and saying, "Who are you?" So Alan, it is great to have you on TaxVibe. And just before we get underway, a mention that we are not endorsing any of the products. This is a general discussion about what solutions are out there now. So Alan, welcome to you.

Alan FitzGerald:
Hello Robyn. Thank you. It's wonderful to be here today.

Robyn Jacobson:
So we are into 2022, it's been interesting ride over the past couple years. What have you been seeing in the technology space and particularly the ability or otherwise for practices to pivot towards this remote working environment?

Alan FitzGerald:
Look, I think everybody would appreciate that the last couple of years was not on the bingo card, if we could say that. It certainly wasn't one of those items that could be ticked. And I think the firms and the organizations for that matter that were able to manage that appropriately, and what I mean by that is the ones that had a setup that enabled them to be able to, hey, it's a horrible word, but pivot, from being in the office to be able to then work from home was the success for a lot of organizations.

Alan FitzGerald:
Now, when I say success, I don't mean the organizations that weren't in that space, collapsed or went out of business, but they certainly found it a lot harder. And I think part of that was driven by, there's a great curve. I use it a lot. It's called the Everett Rogers diffusion of innovation curve. Now, that's a bit of a mouthful, but it's fundamentally, you have on the very left-hand side, you have the innovators.

Alan FitzGerald:
And on the very far right-hand side, you have the laggards. And it's a bell curve basically. And across that you have the early adopters, the early innovator, et cetera, et cetera. Anyone who was on the left-hand side of that curve had a far easier way of working from home, in essence, in the professional field.

Alan FitzGerald:
Anyone that was on the right, and they were generally the ones that reliant on in-house systems or in-house client servers or everything was done within the four wall. They had a bigger issue to working from home because generally their remote access systems only allowed one or two people to concurrently access the systems. Whereas those on the left-hand side of that Everett Rogers diffusion curve, could allow anybody to access the systems.

Alan FitzGerald:
So if you are on the right-hand side of the curve and suddenly you had to send 20, 30 people at home, then you had a lot of problems. And that was really, I guess, the genesis for me and for a lot of the other similar advisors out in the marketplace is how do we pivot from this older way of doing things to a newer way of doing things so we don't have these issues?

Alan FitzGerald:
And I think that was probably the biggest lesson that has come out of the whole event. And there's been a lot of talk, Robyn, you may have seen some of those polls, what has been your IT strategy? What has been driving it? And at the top of it is COVID 19. It is just an issue that a lot of firms have faced and a lot of organizations too.

Robyn Jacobson:
Alan, you remember back in 2000 when the GST was introduced.

Alan FitzGerald:
Oh, I remember.

Robyn Jacobson:
It was a new system, and it took thousands upon thousands of businesses out of what used to be the shoebox full of receipts into automated accounting software for the very first time. And of course, that practice or behavior has been sustained.

Robyn Jacobson:
What are your thoughts on the change that we've seen with accounting practices and also law firms? Any professional practice really, that is using the word you've used already, pivoted, to this online space and remote learning. Surely, this is now sustainable. We're not going to go back to how it was, are we?

Alan FitzGerald:
Oh, no, absolutely. I think it is sustainable. I saw an advert in the, it might have been in the US, where they weren't hiring by a geographic locality, i.e., if you are in New York City or if you are in, I don't know, Kansas or something like that. They were hiring by time zone. So if you fitted into a particular time zone, they wanted to talk to you.

Alan FitzGerald:
And so this whole work from anywhere scenario, and we see this with property prices in regional areas around Australia, because people have gone, why do I need to live in the city when I can actually do all of my work quite satisfactorily from a remote location? Now, obviously, you miss out the whole social interaction component of.

Alan FitzGerald:
That there is absolutely an element to that, but there's nothing stopping people from working remotely. I've worked remotely now for, in essence, six and a half years with Practice Connections. And I have to say, my business has doubled, tripled every year since inception. It hasn't been a barrier to what I do.

Alan FitzGerald:
Now, I can understand when you've got a multidisciplinary firm or you've got a larger organization that you do need to have those interactions on it on several days. So what we'll definitely see is that whole three days in the office, two days at home, potentially, or vice versa.

Alan FitzGerald:
The knock-on benefits for that for organizations is the fact they don't necessarily have to hire bigger offices because they can actually save on real estate. So there's a couple of knock-on benefits can come out of this, but it's only, I guess, from the legal, and if we focus in on the legal and accounting fraternity, it's very particular to those markets.

Alan FitzGerald:
So it's very difficult for a welder, for example, to work from home. Or you'd know this example, an airline pilot, you don't necessarily want your airline pilot working from home. Right? So there's certain professions where it's simply doesn't work, but there's other professions where it does actually work quite well.

Robyn Jacobson:
So in terms of moving into the current landscape, we've looked at the past couple of years and how firms have shifted. And there are still some firms to go through that process. There are many that have maintained, we want this paper environment. We like the way our work papers are operating and our processes and that suits us.

Robyn Jacobson:
Now, that is of course their decision. And there's a lot of pressure from government and from the ATO to move into more digitalized space. And even, some of the budget measures we've seen this year further that objective. The government is very much trying to get everyone into a digital space. Having a look around the current landscape, what are you seeing?

Alan FitzGerald:
There is a definite move to more, it's called the holistic systems. And what I mean by that is that, the challenge for accounting firms, in which we focus in on accounting firms just for the moment, is that they build up processes based on the constraints of the software that they use. So you get used to a particular software, you know it's pros and it's cons and it's pitfalls.

Alan FitzGerald:
And so you build up a series of workarounds. It's very difficult some times to change to another system because you have to unwind all of those processes and all of those, the workarounds that you have. There's a great quote by a guy called James Clear in a book, that he said, "You don't rise to the level of your goals. You fall to the level of your systems."

Alan FitzGerald:
And so it's basically, you're hemed in by what because you're used to what that system actually delivers. So when firms ask me to come in and talk to them, I say, "Just start with a clean slate. What would you like to do? And if you had no constraints on what you were able to do, what would you like to do?" And it's quite incredible when they say, "Oh, we can't do that because the system."

Alan FitzGerald:
I say, "No, no, no, no. Forget about the system. What do you want it to do, so we'll get the core basics out of it?" Because technology these days can fundamentally do anything you want it to do, but that comes with two caveats. And the two caveats are your appetite for risk and how deep your pockets are. Right?

Alan FitzGerald:
And so it's one of those things, you can go with a series of solutions that are out in the marketplace that play, I call the term play beautifully together. So it's like kids in play group. Do they play nice together? Yes, they do. Great. So when they play nice together, they start sharing and it's a good way of doing information.

Alan FitzGerald:
So those pitfalls that we're previously holding back firms, they're suddenly realizing, oh my God, we can either automate or all of this stuff or there is actually a better way. Because the way that software has developed particularly over the last five years is that you have a series of individual vendors that are basically saying, "We're just going to do this bit."

Alan FitzGerald:
"And you know what, we're going to try and make it as good as we can. And we'll connect it to all of these other pieces." And those other pieces are going, "Yeah, going to try and be the best we can over here as well." So what you end up is this best of breed scenario rather than a suite. Because a suite, they always have to compete for price.

Alan FitzGerald:
And that each element of that cannot be a best of breed, because it just simply goes against the grain. So what's happening now is this evolution. And I actually wrote a post about it on LinkedIn the other. Because the main vendors in the marketplace in Australia today, so reckon APS, MYOB, Sage, Handysoft.

Alan FitzGerald:
They were the guys that were creating the suites and they told the market for many, many years, "You have to have a suite to compete. A suite is the only way to go." They are now literally disintegrating all of their products. So they're basically saying, "We're going to do a few elements of this. We're going to try and do this as good as we can, but we're going to start pulling in the ability to interact with other third-party applications."

Alan FitzGerald:
So that has impacts on those organizations, but it also has major impacts on the client base, because the clients are now going to go, "Oh, hold on a second. If you're not going to support a suite, then who does the research to find out who does the various elements of it as they come through?" So we're seeing this transition from the legacy players going, now, look, we're the only guys in town to, maybe we're not. Maybe we need to start to playing nice with other people.

Robyn Jacobson:
Alan, you talk of research. This can be incredibly daunting to even know where to start. If you've recognized that you need to update or improve your processes and software environment, where do you begin? How do you know what's suitable for you? How do you know what to trust and how do you know what's going to be the most suitable for your practice?

Alan FitzGerald:
Oh, look, good call. I mean, obviously, we don't endorse or advocate any one particular product and, or solution apart from Alan FitzGerald who's talking right now. Sorry, I've put that plug in. Look, it comes down to, there's a couple of elements. Talk to The Tax Institute.

Alan FitzGerald:
Talk to other associations. There's a series of events coming up. There's ABE. I think you and I are going to be in separate things at ABE in a couple of weeks time. Accountex are launching in 2023. That's from the UK. There's ChangeGPS. There's Zero Forms. There's a lot of fora that are happening at the moment. It's having an inquisitive mind.

Alan FitzGerald:
It's having and taking time, that you sit back and go, "Okay, I'm just going to take a day out or a couple of days out on alternate days or alternate weeks and say, I wonder what is actually out in the marketplace." And it's part about having the what if scenario? And so I used this a lot. I got a recent engagement from a firm that approached me in Sydney a couple of weeks back.

Alan FitzGerald:
And they said, "Oh, we're about to go down the path of seeing what our current vendor offers." And I say, "Okay." I'm going to quote Warren Buffett to you here. Right? One of the world's greatest investors. "Why would you ask your hairdresser if you need a haircut?" Right? Because the answer is, "Yes, we can give you that haircut. There's no need to go anywhere else. We'll just lop off a little bit at the end."

Alan FitzGerald:
And so it's about having and look looking at about what is out from an independence perspective, but also understanding what you want from the firm. Because every firm is in a different stage of their transition. They're either starting out. And I talk to a lot of people who are exiting firms to set up their own organizations or they're looking to hand over a firm or they're somewhere in between.

Alan FitzGerald:
And it depends on where you are in that scheme of things, determines what products are going to be best for you either to position your firm for a sale or position yourself as a startup firm for success into the future. And so I have to say, there is a lot of information out there, that horrible word that we're seeing a lot with relation to COVID, do your own research. Maybe not.

Alan FitzGerald:
But there is certain certainly avenues that you can go down to explore what is actually going to be good for me, and picking up the phone and just ringing people. You'd be surprised what your peers would be able to say. "Hey, what do you think about product X, Y and Z?" They'll tell you a story of why.

Robyn Jacobson:
Alan, the nirvana of having integrated systems and everything works seamlessly. And I'm talking not just across your own practice, but across different government agencies. We've got so many different government agencies to deal with and different regulators.

Robyn Jacobson:
We'll get into more discussion on online services for agents and for businesses shortly, but are the current systems, whether they're provided by the government agencies or their third-party providers, are they meeting the requirements of the sector?

Alan FitzGerald:
Compliance is a funny, funny beast. So if you look through tax, and hey, we're talking with Tax Institute today, let's talk tax. Every tax application, the outputs are not determined by the vendor. They're determined generally by the regulatory authority, in Australia's case it's the ATO. How the various vendors get that output, which in theory should be the exact same, varies from vendor to vendor. Right?

Alan FitzGerald:
So as part of that process, its ability in turn to then play nice, I'll use that expression again, with other applications become a determining factor. And so you can have a very low cost compliant application, which doesn't necessarily talk to other components because they're selling it at a low price in order to get a market share.

Alan FitzGerald:
Or you can have an expensive solution which talks to a lot of things and nice with a whole variety of vendors. And that comes back to my point earlier about your appetite for risk and how deep your pockets are. And so this is where the interactions between, arguments say, what's provided from the regulatory authorities.

Alan FitzGerald:
So you can go onto ASIC Connect, for example, and then set up a company. Or you can go through things like BGL or NowInfinity or a host of other applications to do it. And so there's a couple of methodologies that you can employ. And so what I see when I talk to the bookkeepers, the smaller accounting firms, they're quite happy because they've only got a handful of clients. They're happy to go through ASIC Connect.

Alan FitzGerald:
Once you start getting into the director's identity numbers, you got multiple clients and blah, blah, blah, then you have to have a solution. And then it comes down to, well, how do these solutions talk to my main database? How do they then work with other solutions that I've got in my kit bag that will then, as I build up a piece and I look at that landscape of the solutions that I use in my firm, do they all talk to one another?

Alan FitzGerald:
And if I use that one, what are the opportunities for me to use another solution that sits off to the side? Do those guys talk well to each other? And so there's a lot of things that you'd have to sit back and go, what does my landscape look like and how much does it actually interact with each other? And I think it's one thing to listen to a vendor, to say that.

Alan FitzGerald:
When you're talking, arguments say, a tax vendor talking about practice management, talking about accounting, talking through to corporate compliance and self-managed superannuation, so forth, they have to be... I'm fortunate I have that 30,000 foot view. So I get to see and I go, "Oh look, those bids work really well with each other."

Alan FitzGerald:
But sometimes the vendors will just, and it's understandable, they want to sell you their product. And so it's like, now you're a prospect, Robyn. So we're going to tell you it does everything. And then when you switch it on, it's like, "Oh yeah, that bit, that's coming in the next release." And so suddenly you've become a customer.

Alan FitzGerald:
And so it's that balancing act between being a prospect and being a customer. And I think that's where finding out where these things actually sit, and I'm not an advocate of integrators selling their preferred tech stacks. So people might see these on forums where they talk about this is our preferred tech stack. That's great, because it suits that particular vendor to support that particular tech stack.

Alan FitzGerald:
It's easy for them to support. Or if it's an accounting firm, this is my tech stack. That's great. That works for them. It may not necessarily work for you. And so that's where you have to sit back and actually take this 30,000 foot view and simply ask questions. People are more than happy to answer questions.

Robyn Jacobson:
Let's drill down now into some more tech specific type tools that are available to the market. What are you seeing out there that people may not be aware of?

Alan FitzGerald:
I think people underestimate, especially the newer solutions. And when I say newer, I'm referring to ones that are more in the cloud than the traditional. So if I talk from an accounting firm perspective, because if you think of probably the most comprehensive tax solution out in the marketplace is MYOB's AE tax, right? That stems from the late 1980s. Now, that's had a complete rewrite and it's progressively going up into the cloud.

Alan FitzGerald:
So what people are using on AE today is not what they're going to get when they move on to the cloud solution. Now, that's the same when you move from a client server and you move it into the cloud, there's elements that you get a positive element in some aspects. But also, you don't get the same functionalities it used to have in the past. And that functionality has only evolved over time.

Alan FitzGerald:
Now, what I tell my clients is that whenever this has scenario in any kind of work situation or a life situation, the first statement that comes at is, "Okay, let's just get back to basics here. Let's get back to what we actually need." Instead of being something like, "Let's get back to complexity." Nobody ever says, let's get back to complexity.

Alan FitzGerald:
And so what's happened with some of these solutions is that over time they've just created more, more fluff within them to justify the monthly maintenance fee that the various vendors charge for this, right? Whereas the new software vendors like your Logic, your Zero, your TaxLab, to a great extent, they have basically said, well, what do people actually need?

Alan FitzGerald:
So the ATO says, we need these forms. We need individuals, companies trust, blah, blah. What we need within there. And so the guys then have gone into those and said, "Well, what are the forms that are most popular within the tax returns?" So they've gone, "Well, let's put those forms in." So that's going to cater 80, 90% of what the market needs.

Alan FitzGerald:
And it's those 10% outliers that might need to do stuff in either externally in Excel or might need to look at another application. And when I talk on that scenario, that might be the larger organizations might need to do consolidations or they might need to do a caning calculations. You're not going to get that in an APS, an MYOB or a Zero, right.

Alan FitzGerald:
You're just simply not going to get it. You have to then go into the next echelon of tax return software, which is your TaxLabs, your Wolters Kluwer Integrator, Thomson Reuters ONESOURCE, that's where you start getting into that realm. And so then it comes up, okay, well, I've just jointed tech stack here.

Alan FitzGerald:
So I've got a tax returns for 80%. And then I've got a different version of tax app here for the other guys. There's one vendor. And I do wear a small hat, which is the Xero which will do everything from the individual through to those consolidations.

Alan FitzGerald:
We're seeing a consolidation, no pun intended, a consolidation of what the tax return capabilities are and then the functionalities that exist within there. But it shouldn't be a shock and don't let it be a shock if you move from a 30 year old, 20 year old piece of software to a cloud environment software which is at best, six, maybe seven years old.

Alan FitzGerald:
Don't be surprised if it doesn't get the same functionality, but be surprised as to what you'll actually get out of that particular piece of software. Because for most firms that I deal with, and I've moved from very large firms onto what ostensibly is quite basic tax return softwares. We've gone, we didn't notice anything different.

Alan FitzGerald:
We were told to be scared and to be wary and not to do it by the incumbent vendor, naturally, because they don't want to lose no client. But when we actually dipped our toe in the water, we didn't actually notice a difference. And they can get access to the information that they previously hadn't had access to.

Robyn Jacobson:
Alan, there's such a range of needs of firms. It's not just tax return preparation software, we've of course got practice manage, the time sheets, self-managed superannuation funds and all the requirements that are associated with that including all the investment strategies and member statements, et cetera. We've got all the corporations act requirements.

Robyn Jacobson:
And then you think we've got FBT returns, we've got payroll software that some firms are still very much involved with on behalf of their clients. There is so much to manage. And then I'm thinking further ahead, we've got client verification requirements that are being implemented, and there'll be more information on that coming shortly. So again, try to juggle all the needs of a practice where tax return software is really just a very, although important, but a very small part of all the requirements of the firm.

Alan FitzGerald:
Oh, look, if you think of, and I talk about this, about arguments say, I do talk about this, but the practice management in particular is that the very popular practice management suites that are in the marketplace at the moment that have been around for the last, in essence, 20 years, were designed for 20 years ago.

Alan FitzGerald:
I've done a number of keynote speeches where I talk about practice management is for billing a client, whereas CRM is more for knowing a client. Now, what I mean by that is that the rise of the multidisciplinary firms, and you gave a great example of that with self-managed superannuation and wealth management and all the associated things.

Alan FitzGerald:
They're not suited to be run a practice management system because it's only giving components of how much they built last year, what their current whip is, et cetera, et cetera. They're not actually telling you, when I look at that client, how much is that client worth to me at a single view across my database. And so a client relationship management system will give you that.

Alan FitzGerald:
And this is the fundamental change. So every organization that deals with a client, so I'm talking about, or every vendor that deals too with an accounting firm is using a client relationship management system. So everyone is using a client management system. Yet, what are they selling the accounting firm, we're selling them a practice management system.

Alan FitzGerald:
Well, I want to say, that doesn't make any sense. You're using tools to sell to me a tool that I should be using when I'm talking to my clients, but I'm not. You're selling me something different. And I think it's that, because the nature of the interaction with the clients, so the end clients, so the actual client of the accounting firm, it's a different relationship to what has happened over the last 20 years.

Alan FitzGerald:
To your point, GST came in, the rise of clients using their own GL systems, receipt captures, automated systems, so forth. Well, hey, the practice management systems were designed before GST came into play and they haven't really evolved since then. So you're using a system, it's kind of a square peg in a round hole.

Alan FitzGerald:
You're using a system that was designed for a particular function back then, but nowadays we're actually offering more services and more capabilities to our clients, but the systems aren't adapting. And I think that's one of the key things that is happening in the marketplace at the moment.

Robyn Jacobson:
You speak of evolution, let's look to the future.

Alan FitzGerald:
Yup.

Robyn Jacobson:
Artificial intelligence, robotics, big data. What's ahead for the profession or what does even some of this mean? There'll be some of our listeners who are yet to fully understand what is AI and how does it work in the real world> can you unpack some of this for us?

Alan FitzGerald:
Yeah. Sure. Absolutely. Love it. Oh, love this stuff. Love this stuff. Okay. So robotics, robotics is basically automating processes. Yeah. And linking pieces of software and automating a process that happens within there, rather than having human do that particular process. There's two ways you can look at this. One is you're taking the robot out of the human, which is, at least I'll be freeing up their time.

Alan FitzGerald:
And the other element is, don't automate a bad process. Because if you automate a bad process, you're just speeding up a bad process. Now, that goes back to my original point where a lot of firms are in this scenario at the moment because they're constrained by the capabilities of the systems that they're using. Right?

Alan FitzGerald:
So if you just all automate a bad process because of the limitations of that software, great, you're making it faster. But what are you doing? You're fundamentally automating a bad process. So what robotics do is basically they learn by Roch. So you basically say... So a great example is you're out of office reminder on email. In essence, that's a really robot.

Alan FitzGerald:
You're basically saying, I'm not in the office between these days. As soon as the expiry date finishes, I don't have to go back in and change the out of office reminder. Right. So that's a very simple one, message comes in, bang, a reply message goes out. Machine learning then basically says, "Oh, Robyn seems to take every Tuesday, Wednesdays and Thursdays off." Right. I know you don't.

Robyn Jacobson:
I wish.

Alan FitzGerald:
But it's like, "Oh, okay, well, that seems to be a bit of a trend." And the software will learn. So if you think of looking at Netflix or listening to Spotify, so it is listening or watching or recording what you're watching. So if you're into, I don't know, sci-fi adventure. It's saying, "Hey, you might like some of these ideas."

Alan FitzGerald:
So that's a mixture of machine learning and artificial intelligence because it's picking up on, Robyn's always looking at Star Wars movies. So she might be interested in Star Trek. Now, I know that two of them are an affirmate to each other in some instances, but it's basically, here's some suggestions and some stuff that you might want to do.

Alan FitzGerald:
So it's actually picking up on a trend that you're learning on. So when we utilize that in a tax and finance scenario, it's basically saying I can look at it, rather than looking at a handful of transactions, I can look at all of the transactions. And I can identify within, or the system can identify, actually based on what Robyn has said previously, that seems to be, to me, the computer, that seems to be bit of an error in transaction.

Alan FitzGerald:
Let me just grab that. And I'll just flag it to Robyn and saying, "Hey, I found one. You might want to take a look at this. I'm not saying it's right or it's wrong. I'm just bringing it to your attention." And that's where this rise of AI will come in there. So you could view AI rather, than being artificial, you could view it as more of an assisted intelligence. So it's not going to replace anything.

Alan FitzGerald:
And this is one of the lines that I use in my, and every tax person will appreciate this, is that, up until a point that robotics, artificial intelligence, machine learning, all of these things can actually clarify what a client wants, you're all safe. Right? Because you know, Robyn, I talk about tax advisors and financial advisors being the anxiety transfer specialist. Right? Because you guys speak a very special language.

Alan FitzGerald:
That's the language between the general ledger and the ATO or any kind of regulatory authority. And that's why people come to accounting careers, because they don't want to learn that language. They simply don't want to learn it. They want someone to be that translator that can also keep them compliant and think. And that's where I think is the unharnessed awareness from a tax and financing perspective that needs to be brought forward.

Alan FitzGerald:
So these are just simply, AI, robotics, it's just an evolutionary tool. They're in tools that used day in day out. Google Maps. That's why Google Maps puts all these different alternative routes to take you from destination A to B. It's also why Google Maps often sends you down those errands lane wise, why am I being pointed down this way?

Alan FitzGerald:
Because it's trying to learn, is this a faster way at this time of day to send people rather than the way that they would normally associate with that direction? So the machine is trying to learn, and that's where the machine learning element comes into play as well. So it's gathering all of this information.

Alan FitzGerald:
And that's where, using Google Maps as an example, if you put on between say Melbourne and Tullamarine Airport, it'll show up in certain areas as red. So its certain stretches. It's pulling information where they can see that the traffic isn't going 100 kilometers an hour, it's going 20. So it's flagging that as red.

Alan FitzGerald:
Because everybody's sitting there going, using Google Maps like, "Why am I slowed down?" And so it's actually learning or picking up all of that information. So my message is, don't be afraid of it. It's not going to replace the jobs. It's actually going to be a tool that will benefit and accentuate some of the stuff that you're already doing.

Robyn Jacobson:
Without suggesting in any way that you're a spokesperson for the ATO, how do you see AI affecting online services for agents, online services for business, practitioner lodgement service, et cetera. So these are basically tools or platforms that the ATO's built. How is this going to be affected by the evolution of robotic and AI, in your view, but [crosstalk 00:30:43] this is all crystal ball gazing?

Alan FitzGerald:
And I don't get paid by the ATO. Look, I did a posting many years ago about the changing of the portals. We had to send some of the portals to the new generation of it. And I used, I'm trying to think, my analogy was space travel and the ATO portal and why they were actually interlinked. And it was the story of Michael Collins. Michael Collins is the guy, when Buzz Aldrin and, oh God, I've even forgotten his name. First man in the moon.

Robyn Jacobson:
Neil Armstrong.

Alan FitzGerald:
Neil Armstrong, thank you very much. Stood on the moon, he was floating around in the capsule going around. And he had time to think, right. He had time to think. He's waiting for the guys down on The Eagle has Landed. And he looked around the capsule and he realized that everything in that capsule was made by the lowest cost vendor. Right.

Alan FitzGerald:
And my point in that article was that the design of the portal that was coming, by the time it was released, would be out of date because the process to get it right was based on the technology that existed at that particular point in time, rather than, and I know it's a chicken and egg scenario, rather than the technology that would exist when it was ultimately released.

Alan FitzGerald:
So the frustrations that people are encountering, this is why people are saying don't switch off the portal because we've just got used to it. It had its foibles. It had its weaknesses. It had all these issues, but it worked. And then they swapped onto something else. And hey, presto, things started going wrong.

Alan FitzGerald:
And it's because you have this lag from the ATOs perspective, whereas the rest of the software that everybody else is using has leapfrogged ahead. And so it's kind of always a generation behind, in order to keep up with it. They are in fact in a no-win situation.

Alan FitzGerald:
So because they can't be so far on the bleeding edge, because the technology hasn't got there in order for them to have something that's going to be stable for the next couple of years after that. So they're anything up to 3, 4, 5 plus years behind.

Robyn Jacobson:
Something that your world and our world has in common, and I'm talking technology and tax, neither of them stands still. We get daily updates. We know the law is constantly changing. We've got decision coming out. The courts, we've got guidance being issued by the ATO on a daily basis.

Robyn Jacobson:
I'm not going to sit here and work out which one changes faster. But certainly, from the perspective of an accounting or law firm, it's incredibly challenging that not only is their technical world changing in terms of tax law, but their technological world is also changing rapidly.

Alan FitzGerald:
Absolutely. Look, the compliance is one of those, particularly tax compliance. And it's probably the main reason that I've hung around in this market for so long is because it changes every year. And that to me is one of the... I did a presentation to about 140 CFOs a couple weeks back.

Alan FitzGerald:
And I said, "Look, if you have kids, nieces, nephews, whomever. You have kids friends, neighbors friends or whatever, and they're interested in doing tax and they're interested in learning something else." I said, "Get them to learn software, because even though it sounds the most bizarre thing, the tax software world is probably one of the most dynamic software platforms around because it changes every year."

Alan FitzGerald:
Yeah. You might say, "Oh yeah, it's percentage here and it's percentage..." No, no, no, no. It is all about, how can we make this stuff more and more efficient? So if you think back to what I mentioned earlier about the 30 year old piece of software and moving it to cloud, and it's like, okay, what do we need?

Alan FitzGerald:
The massive benefits you get in productivity and efficiencies by moving to newer generations, which as I said, the outputs are determined by a third-party. And they all tick the boxes with relation to that. How you get their changes, that is amazing at the moment. It is absolutely amazing. And so when you actually open up your mind to go, "Oh, oh, actually, let's sit back and take a look at this."

Alan FitzGerald:
You suddenly go, "Actually, this is potentially for us a better way of doing things. And that's where it gets really exciting. And so because of the regulatory landscape change is so much. The vendors, in turn, not only are they trying to keep an eye on what the changing goal posts are with relation to the tax technology, but they've got the opportunity on a regular basis to update how you get to that end point.

Alan FitzGerald:
And that invariably means it's the Altius, Citius, Fortius, the Higher, Faster, Stronger, the Olympic ideals. And so it's basically how can we tweak this software in a way that is more efficient to process returns for the accounting firms, which in turn frees up the accounting firm's time to be able to offer additional services and, or go home early.

Alan FitzGerald:
I'm a big effort of the go home early bit. So it's one of those scenarios where these software solutions are becoming so much cleverer. They're not taking anything away from the practitioner, far from it. They're actually basically saying, here's a third arm or [inaudible 00:35:46] operate. That's a really obscure reference for anybody, but [inaudible 00:35:49], here's the second hand to be able to do some of those things that might have taken up more of your time.

Robyn Jacobson:
Final question for you. What is, in your view, the single biggest opportunity for practices with technology?

Alan FitzGerald:
I think it goes back to that CRM component, the client relationship management from an accounting firm particularly, because I think it's, as I say to some of my clients, it's a eureka moment when you discover what you can actually do. I'm not suggesting that people stand up naked in their bathtub or anything.

Alan FitzGerald:
But it's basically, when you realize that you can see all of the information across all of your clients ranked and you can say, well, if I have 2000 clients and I look at that and I see that there's a proportion of them that are, arguments say, doing wealth management or there's a portion that don't have self-managed superannuation.

Alan FitzGerald:
It actually allows you to go, "Oh, okay. Now, which guys do I like working with?" This is really important. This is what CRM does as well. So it gives you the opportunity to go, which organizations that I like dealing with or the individuals that I like dealing with, and how can I best hone my skills?

Alan FitzGerald:
So if I'm a specialist in transfer pricing or if it's a specialist in indirect taxes or self-managed superannuation, let's look at my database and I can basically hone in and manage the opportunities that sit within my database in order for me to either increase my business potential or get rid of the clients that I don't need to deal with anymore.

Alan FitzGerald:
Now, that's something that I see, it's the shedding of clients being a massive thing in the next six to 12 months. Because we've got low unemployment, we've got high rates of people exiting the profession and not coming into the profession. So that whoever's left over is going to be managing a big database and going, "I don't want to have to deal with that person anymore."

Alan FitzGerald:
And so they start working out who their ideal client is going to be. So I'm guessing that there's going to be a lot of change over the next six to 12 months in that space alone, as CRM is going to be able to enable you to analyze that.

Robyn Jacobson:
Thank you so much for your comments. I feel like we could keep talking for many more hours. We haven't even touched the surface of things like Bitcoin and cryptocurrency and they're very much associated conversations, but I thank you for your insights today. It was great chatting with you.

Alan FitzGerald:
Wonderful. Thank you for having me.

Robyn Jacobson:
Thank you for listening to this episode of TaxVibe. I've been chatting with FitzGerald of Practice Connections Advisory. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter.

Robyn Jacobson:
You can join the conversation on our member-only community forum at community.taxinstitute.com.au. Don't miss our inaugural member appreciation week, April 26 to 29. An opportunity to recognize, acknowledge and thank our members for everything they do for the profession and for The Institute.

Robyn Jacobson:
Visit taxinstitute.com.au for more information. Not a member of The Tax Institute, join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 16 — 2022 in Our Sights

Release date: 10 Feb 2022

In this episode of TaxVibe, Robyn chats with Julie Abdalla, FTI, Tax Counsel at The Tax Institute about what’s in store on the tax front for the year ahead, including:

PCG 2021/4
Section 100A
Division 7A
Individual residency
Corporate/multinationals (Sharing economy, LPP protocol & more)

Host: Robyn Jacobson, CTA
Guest: Julie Abdalla, FTI

Robyn Jacobson:
Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, a senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute we do tax differently. I'll be chatting with some of the tax profession's great thought leaders that will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Julie Abdalla, who is the tax counsel at The Tax Institute. Julie's an experienced tax lawyer and emerging leader. She has practiced in the corporate tax teams of big four and top tier law firms in Sydney and Melbourne. Julie also gained experience across the spectrum of UK taxes while working at an international law firm in London.

Robyn Jacobson:
Julie has a strong passion for tax policy and reform, and the depth of knowledge to advocate for members. She has been recognized among her peers and throughout the profession for her leadership and excellence in tax. Julie holds a Bachelor of Arts and a Juris Doctor from the University of Sydney and a Master of Laws from the university of Melbourne, part of which was completed at the University of Oxford. Julie, welcome to TaxVibe for the very first time and, of course, our first episode for 2022.

Julie Abdalla:
Hi, Robyn. Thank you for having me. It's a pleasure to be here.

Robyn Jacobson:
I wish we could still do this in person at some stage, but for the time being we will still do this remotely, you in Sydney and me in Melbourne.

Julie Abdalla:
I know. It'd be nice to be in the same room, but I suppose that's one of the beauties of technology, that we can actually do this from totally different states.

Robyn Jacobson:
Absolutely. Look, we've already got ourselves one month into the new year. Can't believe it's February already. In terms of the holiday break, how did you chill out? Because, gosh, it was a big year last year. In fact, two big years, but how did you spend time to just recharge and break away from this tax law?

Julie Abdalla:
It was a big year, and you're right, it has been a big couple of years. My break was actually pretty short, but I became a proud auntie for the second time to another little niece so I had a lot of family time with them. I was actually in London when my first niece was born, so it was nice to actually be here this time and not miss out on the early stages where they're changing so much. That's been really fun. Otherwise, I had a pretty quiet break. I spent a lot of time in my garden. I've got this wild, lush garden and the complete introvert in me is speaking now but I really love spending time out there. Got this fish pond and I've managed to keep my fish alive, so very happy with that. What about you? Your break was probably a bit more adventurous than mine.

Robyn Jacobson:
Well, having been locked out of Melbourne for what feels like all of two years, and a few of our members may recall that beginning of 2020 I broke my foot and so I was laid up with a moon boot and keeping my leg elevated. I really feel like lockdowns for me began back in January of 2020, but I was able to do some trips around regional Victoria. One of the things I love doing is getting out in the car and doing road trips and country trips and catching up with friends and family so, look, I feel like I've covered the north of the state up to Yarrawonga and down to Geelong and down the peninsula and through the alpine area of Victoria. It was lovely to get some fresh air, not read tax. It may surprise some people, but yes I can go a couple of weeks without tax. It was lovely to recharge and have some time out.

Julie Abdalla:
When I lived in Melbourne, I used to love doing those regional trips out to different parts of Victoria. It's so beautiful out there. I mean, it's quite different from regional New South Wales but that's also really beautiful. I just love being in the country so I'm happy either way.

Robyn Jacobson:
And it's quite a compact state so with a few hours' drive you can cover a fair bit of it.

Julie Abdalla:
Easy to do, yeah.

Robyn Jacobson:
As we get back into the working year, how do we best pace ourselves? Now, that's you and I and our broader team and, of course, the profession more broadly again. We talk about New Year's resolutions and how quickly they are broken [inaudible 00:04:15] this way of approaching this when we're talking about getting back into the working year and how do you manage it?

Julie Abdalla:
Well, that is the million dollar question isn't it. I think, look, different things work for different people. I think, though, the past couple of years have been relentless and draining, especially in and out of lockdown and having to adapt to different working situations. But for me, I don't actually make any New Year's resolutions. I find that's a very good way to break them very quickly. I do like to set goals and there are things that I want to achieve throughout the year, but try not to put too much pressure on the beginning of the year by calling them resolutions. But it's a bit of balance, and balance isn't even a 50/50 thing. Balance is just what works for you on that day, during that week. It's exercise, it's managing work, it's spending time with my family and my friends in my garden. What about you?

Robyn Jacobson:
Look, I think it is time out. When you're looking at these beautiful long evenings we've got at the moment... I know WA doesn't have daylight savings nor Queensland, but for those states that do we have got these long evenings, and particularly in Melbourne and then more so down in Tasmania. Our highlights are so much longer than the northern states.

Julie Abdalla:
So beautiful.

Robyn Jacobson:
I have been making a point of getting out every evening and having a walk after work, and that's something I would love to maintain right through winter but that's one of those things that you strive to do and may not actually [crosstalk 00:05:41].

Julie Abdalla:
I always do it in the morning. I go out for a morning walk so I get it over and done with for the day, but you're right. It's so important to just take a moment to reset and refresh.

Robyn Jacobson:
So with a better year ahead, let's just flag some key dates coming up. Federal budget. Now, I've always described this as the most exciting date on the accountant's calendar. We're talking typically that second Tuesday in May, and I've already said cancel your social plans and if you're going to spend the evening with anyone else, it's got to be other accountants or lawyers where you order your pizza and have a beer or two and just enjoy the evening. But this year with the federal election having to be held at least in the Senate now, it's unlikely we're going to see two elections, one for the lower house last September. We are talking about, of course, a federal election by the 21st of May. That's brought forward the budget to the 29th of March, which is only a couple of months away. We will keep a very close eye on what is going on with that, but can you make a brief comment about what we've been doing lately? Because pre-budget submissions are an important part of gearing up for the federal budget each year.

Julie Abdalla:
Yeah, that's right. We've just lodged our pre-budget submission and it's something we do pretty much every year, and it's one way that we advocate for what our members and what the community wants and needs from our government in relation to tax and to the system. They're things that we put in there that we want to see in the upcoming budget and, I guess, it's a wait and see on budget night. I've been very privileged to actually attend the budget lock-up, which is where we have a first glimpse of the budget papers and the budget measures before the Treasury gives his speech on budget night. Hopefully we'll have that opportunity again this year. Of course, we'll be providing resources for our members to explain the impact of the budget measures.

Robyn Jacobson:
We're also going to have another disrupted parliamentary year [crosstalk 00:07:33]. In an ordinary parliamentary year, and I'm talking ordinary outside COVID and outside elections and anything else that might be a big disrupter.

Julie Abdalla:
I don't really remember those times.

Robyn Jacobson:
Feels like a few years now. We typically have around 19 or 20 sitting weeks a year, which doesn't sound very many but they need to spend time back in their electorates throughout the year. But with the election having to be held by May, and then of course we've got the caretaker period before that and the election campaigning, I've counted up we're unlikely to see much more than six sitting days before August this year, which might sound quite extraordinary but we've got a few sitting days in February, we've got the three days for the budget then we both are going to go into caretaker mode, the election will be called.

Robyn Jacobson:
I'll be very surprised if there are any sitting days at the end of June. It depends how long they're going to take to count the votes, but I think with COVID we're going to have a much higher proportion of postal votes than we might have seen in years gone by. That always takes longer to count those up and get them in, and then we've got the winter resets so it really could be August, September before we get any meaningful debate before the parliament. What does this mean when we've got such disruption to the legislative program? The business world has to keep on operating.

Julie Abdalla:
Well, that's right. The world keeps spinning, doesn't it? I mean, businesses going on, people are living their lives and we do need a degree of certainty from our taxes, and that's the problem. If we don't have enough time where parliament's sitting, we don't get legislation through, but we need to have some of these new measures coming through, we need debate and people need certainty. We need some degree of certainty from our tax system, and what we've seen in the changing landscape where things are moving pretty quickly all the time is that our system's just not coping.

Robyn Jacobson:
Our members recently will have received a copy of our State of Tax Policy Report which sets out the status of all the tax and superannuation measures that we think are key to our members. It'll be interesting to rerun that report roughly midyear because, of course, we will either have a returning coalition government or a new Labor government. Now, if it's returning coalition you'd expect any lapsed bills before the parliament to simply be reproduced, but they may take it as an opportunity to tweak some of their policies. If it's an incoming Labor government, then we would expect some changes in tax policy but that's all to be revealed. It's going to be in one sense a very disruptive year, but it's also a year of opportunity.

Julie Abdalla:
Absolutely. Absolutely. We have to keep hopeful.

Robyn Jacobson:
What are the key things on our radar at the moment? Now, we've got some things noted down here and we're going to across the SME sector as well as the large corporates, but what would you like to kick off with in terms of what we're keeping an eye on over the months ahead?

Julie Abdalla:
Okay. What about the professional firm's PCG 2021/4? The final version was issued in December last year, and so I think the dust is really still settling on this one. But PCG sets out the ATO's compliance approach to the allocation of profits or income from professional firms to in the assessable income of the practitioners that work in those firms. It does so through two gateways and a risk assessment framework of objective factors which are used to rate arrangements from low, medium or high risk. As we know, PCGs are essentially risk assessment tools. I think people are still really coming to terms with this PCG and what it means for their practices and how it affects business structures and operations. We've had a working group, a committee of our experienced practitioners involved in consultation with the ATO for quite some time now. I'm very conscious that PCG applies from mid this year, from 1st of July 2022, so we're working with our committee during this time to provide resources to educate our members on what they need to consider and what they need to do in light of the PCG.

Robyn Jacobson:
I think what's really important to note, and you made that comment about it being a risk assessment tool. Practical compliance guidelines, or PCGs, are not rulings. They might look like one and sort of have the flavor of one, but they don't explain the Commissioner's interpretation of the law or how the law applies to tax payers. What they do is set out the extent or the risk profile that they're likely to undertake a review or an audit of a taxpayer.

Julie Abdalla:
But it is how they allocate their compliance resources and what the Commissioner will consider as high risk or not, but it isn't a statement of the Commissioner's view of the law and we do need to be mindful of what they mean, how they operate, what reliance can we place on them.

Robyn Jacobson:
Another interesting thing we're keeping a close eye on, and this has been, I've got to say, dragging on for some years now, Section 100A. Anybody who has a trust and has distributions made to a beneficiary where, I'm going to describe it really simply, your cash goes one way and the distribution on paper goes somewhere else. It's a separation of profit and the economic benefit of that distribution. If [inaudible 00:12:33] agreement, you can end up with adverse tax on occasions for the trustee. Now, the ATO has been saying for some time that they would provide some guidance on this and they did delay it from late last year. They said it was ready at the time, but because of the pressure on the profession they said they would delay it until this year. Now, at the moment the ATO website is still indicating that this guidance is expected to be completed in February, but I think what is interesting, and we need to wait and see how this plays out, but there's been a recent Federal Court decision called Guardian.

Robyn Jacobson:
Now, I won't go through the detail of the case, but it is worth a read and we've also included a summary of this in our recent TaxVibe or [inaudible 00:13:11] The Tax Institute. But I think what's really relevant about this case, it is a single judge not three judges, but I would expect it to go on appeal to the full Federal Court. It deals with what is a reimbursement agreement and concludes that there wasn't one. It deals with whether there was an ordinary family or commercial dealing and the judge concluded, Justice Logan, that there in fact was this situation. In other words, they got the benefit of the exemption. And he went on to conclude that part 4A did not apply. To me, this case has everything and you just need to see whether this delays the ATO's guidance because it's hard to see how they could release a draft ruling and a PCG when potentially there's still an appeal still to play out. We'll keep a very close eye on this one.

Julie Abdalla:
Yeah. Look, I think it was a very sensible decision to hold off on releasing the guidance in light of what's going on and the pressure on practitioners. I think it would be difficult to see how finalized guidance would be issued at this stage. We do need to see what happens next.

Robyn Jacobson:
Now, dovetailing very closely with that, Division 7A. Can we ever have a conversation about SMEs and tax and not talk about Division 7A?

Julie Abdalla:
I don't think so.

Robyn Jacobson:
I'm going to say we're heading into 11, 12 years now since the original review by the Board of Taxation was commissioned by the then Labor assistant treasurer way back in 2012. Now, we are still waiting for the proposed Treasury reforms. We have seen nothing formally from Treasury since 2018 when they released that discussion paper. We know the measures are deferred and they will commence on the first, 1 July following enactment of the enabling legislation. That's open ended. That could be anytime. Could be five, ten years from now, but in the mean time we do know that the ATO is going to be releasing a new package of Div 7A guidance, a new ruling, presumably a new PCG and possibly a new practice statement but that might all be bound up together in the PCG. We'll be very, very keenly following this. It's going to be highly relevant for many of our members and the broader profession, those that have, of course, trusts, private companies, et cetera so we'll keep a close eye on this one.

Julie Abdalla:
Absolutely. The guidance that the ATO's looking to release, that's quite distinct from the Treasury reforms, though, those reforms.

Robyn Jacobson:
Yes, it is. I think that's a really important point because people may get the two confused or even conflate them. Treasury putting forward a bill to parliament that amends the legislation is quite different from the ATO providing guidance on how to interpret the law, or indeed how they might approach risk reviews. So yes, this is distinct and, again, will be interesting to see what does it do, how does it rewrite the existing rulings. I'm referring to 2010/3 and PSOA 2010 form documents like that, which are then around for more than 10 years now. Maybe it's time to update them, but how does that sit in the context of the proposed reforms? It's really interesting to watch. So next issue, individual residency. We are still waiting and waiting and waiting.

Julie Abdalla:
We are waiting and waiting. As you know, last year there were those changes that were announced to the individual tax residency rules in the federal budget. The new framework is based on the recommendations made by the Board of Tax in its 2019 report. Essentially, it's proposed to consist of a primary bright-line test based on visible presence and then you've got a secondary test based on certain objective factors. I don't think we have time to get into the detail of all the challenges right now, but certainly with the Addy case and the ATO's recent decision impact statement there's a lot going on in the individual tax residency space and likely to be a significant overhaul of the rules. We haven't seen the draft legislation yet, but I think we'd anticipate there will be some consultation at that time.

Robyn Jacobson:
Is it too simplistic to boil it down to one core concern, and that is are we at risk of replacing one set of complex rules that require interpretation and possibly judicial guidance with another set of complex rules that require interpretation? Isn't that a significant risk here?

Julie Abdalla:
No, I think you're absolutely right. If you think about the litigation of these kind of matters over the past few years and when they changed the rules earlier, exactly as you say, replacing complex rules with more complex rules. But I don't know that that's the answer.

Robyn Jacobson:
The date was 1 July 2009, that's when they changed or narrowed particularly the exemption 23AG. Since that time, we've had a whole bundle of taxpayers trying to argue that they in fact are non-residents because that way, the incumbent would otherwise be assessable in Australia, could be exempt, and most of them have been unsuccessful. Onto the corporates and the multinationals. What do you see as, I guess, the top priorities or the key areas that we are keeping a very close eye on?

Julie Abdalla:
Well, sticking to the theme of residency, corporate tax residency is another to keep an eye on. In the 2021/22 federal budget, the government announced technology amendments to clarify the corporate residency test and those amendments would basically provide that a company that's incorporated offshore is treated as an Australian tax resident if it has a significant economic connection to Australia. Those changes have been really welcomed. Last year, a further announcement was made by the government that they would consult on extending the rules to trusts and CLPs, so corporate limited partnerships. Consultation hasn't taken place yet and it's been delayed a number of times, presumably due to other priorities, but we anticipate it'll commence in the coming months. That's one area to keep an eye on.

Julie Abdalla:
Pillar One and Pillar Two... Now, of course, we don't have time to get into the detail here, but at a very, very high level we've got Pillar One, which is about ensuring profits are allocated more appropriately, Pillar Two which is essentially implementing a global minimum corporate tax rate. There have been ongoing negotiations for quite some time, which are expected to progress throughout the year. I think it goes without saying that it's an ambitious timeframe for go live, if you will. It's really interesting to see the interaction between tax and accounting and the administrative aspects as well. I know Treasury and the ATO are working really closely together. It's also interesting to think about the policy designs going on, so that's a watch and see over the next 12 months, I think.

Robyn Jacobson:
What's happening with the sharing economy? Because we've seen a lot of noise and activity in relation to Airbnb and Uber and the like, but we're getting a new legislative framework that's going to allow more data sharing with the ATO.

Julie Abdalla:
Yes. Well, we think so, depending on how the parliamentary sittings go. This measure... You're right, it does have its roots in the efforts of the shadow economy taskforce recommendation. Last year, we actually appeared before the Senate Economics Legislation Committee inquiry into the bill and we've been keenly tracking its progress. The proposed start date for taxi travel and short term accommodation is 1 July of this year, and for pretty much every thing else that's captured is 1 July next year. The bill hasn't been passed though, so potentially in the upcoming parliamentary sitting this month but we don't know. We do understand the ATO will be consulting on administrative issues with the implementation of the regime, including the need for public advice and guidance and, of course, reporting requirements so watch this space.

Robyn Jacobson:
Few things to keep an eye on there. Legal professional privilege pressure cult. Try and say that quickly three times.

Julie Abdalla:
It's a tongue twister, but it's a very important fundamental concept, the LPP... Well, it's a fundamental right of all clients, and including taxpayers who seek legal advice. What the protocol attempts to do is document the ATO's view of what is best practice when making claims of LPP in response to formal information gathering notices from the ATO. There has been ongoing consultation with the ATO and certain groups, including The Tax Institute, and I know that the protocol has evolved over time due to that consultation, which is great to see. The ATO website at the moment is telling us that further consultation may take place, but expected completion is in March, so next month. So it remains to be seen whether it will change again since feedback was provided late last year or if that's it.

Robyn Jacobson:
One final measure in the corporate space, what is known as CCIV, corporate collective investment vehicles.

Julie Abdalla:
We do like a little bit of a tongue twister in the corporate space. Yeah, so the bill was introduced into the House of Reps in late November. It won't be debated until parliament resumes this year so, again, potentially in this February sitting, but it has been referred to the Senate Economics Legislation Committee and they will be reporting on it early this month. The main purpose of the bill is to create a new class of companies, so CCIVs, that any investors in which will be taxed on a flow through basis. At a very high level, it piggybacks off the AMIT rules, the existing attribution managed investment trust rules, but if the CCIV doesn't fall within those rules then its shareholders may be taxed under Div 6 or Div 6C.

Robyn Jacobson:
So, effectively, we're trying to attract foreign investment here.

Julie Abdalla:
That's right, we are trying to encourage foreign investment and it does have the benefit of relating back to the AMIT rules as well, which is something we're a bit more familiar with over the past few years since they've been around. It's actually been a long time coming. The new regime start date is 1 July this year, but the intention to create it was actually first announced in the 2016, 2017 federal budget. It'll be interesting to see how this progresses following standard inquiry as well.

Robyn Jacobson:
It will. When I hear you talk about AMIT and CCIV, it just makes me wonder if the government and the ATO have run out of three letter acronyms so they're having to move into four letter acronyms.

Julie Abdalla:
Well, let's hope we don't move to five any time soon.

Robyn Jacobson:
Creating new words by then. Here's another four letter one, IGTO. IGOT depending how you express it, but the Inspector-General of Taxation and Taxation Ombudsman is currently undertaking three reviews. Now, the office of the Inspector-General always has a web program available on their website setting out the work that they're doing, but what are these three particular investigations about?

Julie Abdalla:
This first one's about the ATO's administration and management of objections, second one's the exercise of the general powers of administration and the last one's about the exercise of the commissioner's remedial power. They're really interesting topics. We've been doing some work in the background on these issues and we've been engaging with the Inspector-General. It's always interesting for me to see how things are done in other jurisdictions as well to compare... Sometimes we can learn things from what other countries do, something that we should be doing or actually what not to do. And we'll be making three submissions in response to those reviews.

Robyn Jacobson:
Another issue we're looking at is the... Here we've got another four letter acronym, the ANAO, which is the Australian National Audit Office. Now, many of our listeners may not be aware that the role of the Australian National Audit Office is in fact to audit the government and government departments. They're currently conducting an audit of the ATO's engagement with tax agents. I have already mentioned on behalf of The Tax Institute with the ANAO we've had some initial meetings to talk about the scope of their audit and feedback that they're seeking. We have put a call out to our members saying, "If you've got any feedback on this, please let us know." They are calling for feedback right through til April, but we will continue to be meeting with them between now and then.

Robyn Jacobson:
This is a formal audit that gets sent in draft to the ATO, and then it will be actually formally tabled before the parliament, expected in August. It will interesting to see not just what the recommendations of the ANAO are, but what might come out of any reforms so changes could be made down the track to these processes. Another issue we're looking at, there is a current working group set up by the ATO called the Lodgment Program Review Working Group. Again, I am the Institute's representative in this working group and we are meeting with other professional bodies and some practitioners and the ATO and looking at the whole scope of everything that has to be lodged, the timing, all the different lodgment requirements.

Robyn Jacobson:
I think back 20 or 30 years ago where it had these lovely quiet periods in between lodgment season. Yes, [inaudible 00:26:10] April, May. Yes, you have a flurry of activity in June, your lodgments began July, business lodgments you typically have another rush before Christmas and maybe another one in May. With activity statements and TBARs and TPARs and, of course, tax returns and SG statements, there are so much now. It just seems to be a rolling cycle of lodgment obligations.

Julie Abdalla:
Practitioners certainly have their work cut out for them, and actually so does this working group.

Robyn Jacobson:
Absolutely. Once again, we're seeking feedback from members and we're keen to hear your thoughts and your experiences and what can be done to improve the current lodgment program. The last comment I wanted to make was in relation to the COVID business support. We had almost thought that we might be coming out the tail end of all these different programs and the vaccine level's so high, and yes Omicron is widespread and case numbers are up but its severity does not seem to be quite as bad as Delta and the previous variants. But that said, there is a hesitancy by consumers to go out in retail settings. We're certainly seeing an enormous staffing shortage where almost every business you have some sort of dealing with now, they're short staffed.

Robyn Jacobson:
The service is limited, it's taking longer to do everything and not just truck drivers, but shop assistants and hairdressers and all sorts of things. On the 30th of January, the New South Wales government announced another round of business support. Now, it would be a mistake to call this JobSaver 2 or JobSaver 2022. It is called the Small Business Support Program and what we know to date is that there will be a one off payment in February based on a decline in turnover of at least 40%. Now, the specific parameters and the features of the program we will be sharing in social media as well as in vlogs with our members but, of course, if you want the initial detail you can find that at the New South Wales Premier's media release webpage.

Robyn Jacobson:
Hopefully we don't have to continue to rely on government support to get through the remainder of the pandemic, but I think it would be unrealistic to think that we're not going to see further outbreaks. What we may well see is targeted or localized support rather than a universal program being rolled out like JobKeeper, or JobSaver in the case of New South Wales. More detail to come on this program. Obviously applications still need to open up and all the fine print needs to be worked through, but I'd like to think that we won't see too many more of these in the next year, but I hope I'm not proven wrong.

Julie Abdalla:
Fingers crossed. I mean, it is great to see the government still providing some level of support while I know there's a lot of effort to go back to normal, whatever normal is, and living with COVID, but we do have to acknowledge businesses are still struggling and people are still struggling through so it's great to see that support coming through.

Robyn Jacobson:
And not wanting to overlook members or practitioners or businesses outside New South Wales, do keep a close eye on your particular state or territory because, for example, I saw last week South Australian government has announced further support. I'd expect there might be something further from Victorian government, and with case numbers as broad as they are and businesses continue to be affected it is important that you do check your local state government websites to see what support is available to you or your client's businesses. Julie, as we wrap, big year ahead, lots of things in store, but there's that certain optimism and hope every January, February as we embark on a brand new year and we don't know what's in store.

Julie Abdalla:
Always. I mean, we do have to keep that hope alive throughout the year, but yeah, absolutely, it's going to be a big year. Very much looking forward to it.

Robyn Jacobson:
And I look forward to working with you and the rest of our tax policy advocacy team.

Julie Abdalla:
Yeah, likewise. Hopefully, we'll get you up to Sydney more often this year.

Robyn Jacobson:
Well, I hope so. I want to stand in front of a live audience, so I do look forward to that. No, thank you so much for your time, Julie.

Julie Abdalla:
Thank you for having me on the podcast.

Robyn Jacobson:
We'll get you back again this year, so don't think this is your last appearance.

Julie Abdalla:
Thank you.

Robyn Jacobson:
Thank you for listening to this episode of TaxVibe. I've been chatting with Julie Abdalla, FTI, tax counsel at The Tax Institute. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join before 28th February 2022 and save 50% on membership. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time. Robyn Jacobson:

Episode 15 — Taking a wellness break and 2022 vision

Release date: 14 Dec 2021

In this episode, host and Senior Advocate, Robyn Jacobson, CTA chats with Jerome Tse, CTA, Partner at King & Wood Mallesons and Marg Marshall, CTA, Partner at WLF Accounting & Advisory about the importance of looking after yourself and what’s in store for 2022, including:

Health and Wellness
What’s in our sights
Vision for 2022

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: Jerome Tse, CTA, Partner at King & Wood Mallesons and Marg Marshall, CTA, Partner at WLF Accounting & Advisory

Robyn Jacobson:

Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate at The Tax Institute, and your host of today's podcast. We love the vibe of tax and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax professions, great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Jerome TaxVibe, CTA who is a partner at King & Wood Mallesons in Sydney, specializing in taxation disputes and litigation. Jerome is also the firm's global transfer pricing coordinator. Jerome is an experienced tax practitioner and has been involved in a number of Australia's recent high profile tax cases. Jerome is a National Counselor of The Tax Institute, has been the 2021 Vice President and will be our President for 2022.

Robyn Jacobson:

I'm also joined by Marg Marshall, CTA who is a partner at WLF Accounting and Advisory in Hobart. Marg has built a reputation as one of Australia's foremost experts in specialist taxation. She is regularly engaged to present local and national conferences and seminars. Her professional commentary is also in demand for media. And as a panelist speaker, Marg has over 25 years experience in chartered accounting firms, Marg has been the Tasmanian National Counselor since 2016 and a State Counselor for Tasmania since 2013, she'll be the Vice President of The Tax Institute for 2022. Jerome and Marg, welcome to Tax Vibe for this final episode for 2021. And congratulations on your appointments for next year.

Jerome Tse:

Thanks Robyn. Very excited for 2022, very excited for 2021 to end too.

Marg Marshall:

Oh yes, absolutely. Yes.

Robyn Jacobson:

We talk about the light at the end of the tunnel finally, and we hope that this indeed is the light at the end of the tunnel and not another oncoming train like the Delta Variant was this year. So Marg, just to quickly kick off, the professions pretty exhausted, isn't it?

Marg Marshall:

You're right. Robyn, everyone really needs a break. People have worked very very hard over the last 18 months to two years and not many did take a break last year, I know that. So we are seeing a lot of fatigue amongst our members and we are really strongly encouraging people to try and take that break. In fact, not just try, actually book it in and do it-

Robyn Jacobson:

And leave the laptops at the office.

Marg Marshall:

Yeah. Leave your laptop at the office, if you are working in the office of course. That's one of the problems I suppose, with this year is so many people still working from home, that separation of work and fun, those lines are very blurred. So shut it, close it, put it in its bag, put it in a cupboard. So you can't even see it.

Robyn Jacobson:

Don't be tempted.

Marg Marshall:

Yeah.

Robyn Jacobson:

Jerome, the Tax institute's going to be launching a new campaign called Out of Office, and we're going to be running this over the next few weeks. And it's really an opportunity to our members and the wider tax community to take that willing break so people can focus on life outside of work over the holiday period. We can talk in cliches about swapping suits for sandals and Zoom for [zeeds 00:03:33] and emails for easy breezy days. But Jerome in all seriousness, how, do we ensure that people do take the break that is so deserved and needed this Summer?

Jerome Tse:

That's hard though to, especially because we can't travel and we might get to that down the track in this podcast. I'm seeing a lot of our staff accumulate annual leave and that's not great for us. And the cynics might say, as an owner of a business, you're just trying to reduce your a liability, but in all seriousness, that is there for you to rest and recuperate. It's not there for you to, I mean, ideally, if you've got an eight week European holiday book, that's great, but we've had a two year stint in Australia where we can't really go anywhere. We really need to take this January, take the leave and rest. January, I guess, for a litigator like me is probably the ideal time because the courts are closed. The barristers are all on holidays and I've encouraged my teams to take January off.

Jerome Tse:

It's one of the few months of the year or few weeks of the year that you can. And indeed the holiday period, between the end of December and January, no client's going to be calling you. So as Marg said, take, put your laptop away. When I go overseas for a longer break, I usually turn my work emails off in iPhone. So I'll keep my home emails on. I'll keep my messages on, but I'm one of those people who have [Ad 00:04:57] so there's one on there, I need to read it. So if I turn it off, I don't see that there's an email outstanding and I'll turn it on at the end of the day. But please do take a break. I've been telling my team to take a break. And I tell all our members and our listeners, you deserve a break.

Marg Marshall:

And it's Important to have that self-awareness or however you want to express that emotional awareness that sometimes we get so caught up in the busyness and the deadlines and the adrenaline that sometimes it can be difficult to stand back and recognize that you indeed do need a mental break.

Jerome Tse:

That's right. Unfortunately, alcohol... I'm Probably one of these people, alcohol probably doesn't help you sleep. Right? So maybe sometimes just go lighter on the alcohol. You get a better sleep for it. I mean, I usually try and do [Feet Fast 00:05:45] or [Dry July 00:05:46]. I'm not plugging either of those charities, but they're good for You.

Robyn Jacobson:

I've got friends who are drinking 0% alcohol. Now I'm not here to plug that either. But it is something that's becoming more socially acceptable and you get none of the downsides of having an afternoon on the beers that does contain alcohol.

Jerome Tse:

Yep. And that's certainly something I'm starting to do more and more. And you know, they look like real beers. I've had bad, not alcohol free Gin. I haven't found a good one at those yet.

Marg Marshall:

I've got a recommendation for you.

Jerome Tse:

Probably a Tassie one. Hey Marg.

Marg Marshall:

Yeah, definitely a Tassie one. There's some good ones out there you do, but you'd have to find them, but you're absolutely right. The whole alcohol thing can be... it's a time when we do have lots of opportunities to drink. There's always been in the past a bit of an expectation, but I'm seeing the same thing amongst my friends and peers, people making choices about how much or what they're going to drink and making those healthy choices and absolutely right. I sleep much better if I haven't had a skin form before I go to bed. So yeah,

Robyn Jacobson:

We recently went to both a brewery and a winery and managed to get through most of it without any alcohol. It's, it's quite amazing. Jerome, we look at the year, in fact, the two years that we've had, but particularly the last 12 months, which we didn't see coming, and we can say the same thing about 2020, but we got to the end of 20 and really thought we'd done the hard yards and 21 was going to be very different. And, and so for many people, this was actually a harder year than 2020. And of course, New South Wales had the extended lockdown really for the first time in the pandemic, to the extent it did. So, how do you avoid burnout? And, and when you find yourself depleted, how do you perhaps in a normal environment, if I could still refer to normality and perhaps how has it been affected by the past couple of years?

Jerome Tse:

Usually what I like doing, I'm not as active as my doctors tell me, I need to be, what I usually do is, go... I like holidays, I like going to new places, whether it's domestic or overseas, unfortunate enough or unfortunate enough to go overseas for work for a bit. So, usually take on a weekend here or there just to find a new place. And that's been hard obviously, because we haven't been allowed to travel. So I don't think I've switched off as well as some other people who might be able to, do laps of Bondi Beach, and go up and down swimming. So it's been hard for me and I think people have to not be afraid of saying it's been hard, because people will help, but I'm hoping, next year, subject to Omicron that will stop and we can go and do things again. I have to preach what I tell my teams. I need to recharge in January too.

Robyn Jacobson:

Marg, How do you work out the best way to break away from all the hecticness of the day?

Marg Marshall:

Well, Robyn of course, being in Tassie much more fortunate than the rest of the country in terms of haven't had a lockdown since that very first one that the whole country went into, apart from a very short three day one, and generally, able to do most things. My personal thing is Green time, I'm a big believer in Green time, getting out, having a bush walk, even locally here in Hobart. And it's the same in most cities, there are parks and trees are really important for that. If you can get in amongst some trees, whether it's half an hour or an all day walk, I find that's very... it's calming, and it just resets your mind. And I've been on this one, my personal trainer runs Friday afternoon walks or Friday night walks and that's Winter and Summer. So down here in Summer, of course we get the very long evenings and that's fabulous.

Marg Marshall:

But in Winter, the walking in the dark, is a lovely thing to do as well. And we take really easy parts and those sorts of things and it's really local and it's only an hour and a half. It's a Friday night thing and it really puts a great full stop on the week. They're becoming more popular, more people doing them. And so, I would encourage everyone to and get some Green time if you can. I know it's not everybody's cup of tea. And a lot of people aren't that active, but you know, a half hour stroll through a park even can be enough really.

Robyn Jacobson:

Thinking of the contrast. So, let's work on the basis. You've spent the whole week in your office. You've been sitting at your desk, you've been sedentary and the mind's been incredibly active and working hard, and then you've switched them around. So when you're going for your walk on the Friday afternoon, closes off the week, you're now physically active and the mind is switched gear completely.

Marg Marshall:

Yep. It is amazing. And it is really, really good for wellbeing. I find it's great for my wellbeing and I've noticed because I haven't been able to go for the last few weeks and now the season's finished and everyone's busy doing Christmas things. I can see a difference in me just from not having done it. So I know what it does for me. Green time, really important.

Robyn Jacobson:

Maybe it's because I'm a Piscean, but I've always found that water is calming. So whether it's a beach, an ocean, a lake, a river, I find if I can be near water and watch the floods, it's a bit like watching the embers in a fireplace, watching the flow of water, I find incredibly calming. So let's change gear in our conversation. We're closing off 2021 move. We're moving into 2022. We know it's got to be a federal election year. We have this wonder full system in Australia where we're still going to have speculation for many months as to when the election will be held. But we know it's got to be held on the basis. There is one election next year, not two because they technically could run the half Senate plus the full Lower House, but they're going to run one general election. It would need to be by the 21st of May. We now know that the parliamentary sittings they've scheduled 29 March for the federal budget. So that would suggest an election sometime in early to mid-May. So, there's an imperative to keep tax reform on the radar here, but what are some of the key issues that we'd like to keep on our tax radar? And Jerome, I'll kickoff with you, in corporate land? What are the key tax issues on your radar?

Jerome Tse:

I think industrial matters are going to come to the forefront. There's been a lot of pressure on staffing, not enough employees, in restaurants and so on in accounting and IT and so on. So I think industrial issues pertaining to tax and super will come to the forefront, particularly contractor, employee issues. You've seen the on call payroll tax matter and that's spreading to New South Wales and other states and territories as well. So, I think those things are important to keep an eye out on. Internationally transfer pricing, I think continues to rear its ugly head, financing issues, commodities, IP, and then IP generally, you've got two products coming out from the ATO next year, got the current draft software ruling and also the intangibles BCG. So, they will impact corporate tax payers if not mid-market as well. And finally, I think Crypto finally, Crypto is coming to the forefront for good or bad-

Robyn Jacobson:

And in the corporate world,

Jerome Tse:

Well, in the corporate world, you're looking at exchanges and financing and blockchain issues. So maybe not Crypto particularly, but blockchain and technology. There are some really interesting developments coming out. CBA's released its Crypto App in the last couple weeks. So, consumers can start or select consumers can start trading in Crypto now. So you've got Senator Bragg's report coming out and then a referral on Crypto CGT and Crypto to the border tax. So that's all next year. So I think Crypto is going to be quite an interesting new development. It's interesting to me and I hopefully interesting to a few other people I wouldn't ever in invest in it yet. I've got a house to pay off, but there are others who probably are less risk averse.

Robyn Jacobson:

Look, it's certainly one of those areas that a few people dabbled in it some years ago, but it is becoming much more mainstream. And for that reason, we're seeing increasingly more guidance from the ATO about the CGT implications. And of course the impact we in you're trading or exchanging for different Cryptocurrencies.

Jerome Tse:

Yeah. And whether it's a foreign currency now, we've got Ecuador, I think-

Robyn Jacobson:

El Salvador.

Jerome Tse:

El Salvador, sorry, using Bitcoin. So, there's some guidance to come out from the ATO hopefully next year, too.

Robyn Jacobson:

Really interesting space. And I want to watch next year. Marg, in the SME space, what's on the radar here?

Marg Marshall:

Uh, Robyn, we've got a few things that we've been waiting for a while. People are probably sick of us hearing from the Tax Institute that we're still waiting on, D7 reform that we've been promised now for years. There has been some indication that we are likely to see something early in the new year around D7 [inaudible 00:14:15] 100. So I guess it's a watch this space with that one, but does seem as though there is some traction going on there that's, as I understand it, the ATO talking, we're still not really sure what treasury are doing.

Robyn Jacobson:

That's correct. What we're hearing. And this was a shared at a recent conference. We ran in [Mosa 00:14:33] we are of still of course waiting for treasury to release draft legislation on the proposed reforms, which- we are now up to nine and a half years from when the measures were first reviewed by the Board of Taxation. And certainly we're talking about five years or so since the government committed to reforming them. This is [separate 00:14:51]. So the ATO is looking at the current D7 guidance that the ATO's published. And they're looking at putting out some fresh guidance early next year. So I think it's important to note, this is quite separate from any legislative reform that treasury might initiate or progress.

Marg Marshall:

Yeah. So I think it's important for us to note, to be across that. And of course when that guidance comes out, we will be putting material out to our members and no doubt offering training, but it's a really good distinction that Robyn points out that this is not legislative reform, which is what we've been waiting for. So, we continue with a bit of uncertainty there. The other big thing that I suppose we can all expect is the analyzed version of the PCG 2021 D2, which of course is the allocation of professional firm profits. So that's obviously very dear to a lot of our members' hearts, and it'll be interesting to see what the ATO have done with our voluminous submissions that have come through from various parts of the profession. We certainly put our own in, and there was a joint submission as well. So I'm very keen to see what it looks like in terms of my own practice. And I know others are as well.

Robyn Jacobson:

PCG is scheduled to be released on Thursday the 16th of December. It will be interesting to see if it doesn't indeed get issued that date. And then of course the reaction of the profession to what is finally published. But we do know that there will be an additional 12 months in terms of its application date. So it's now going to take effect from on July 2022, which is a positive and a sensible outcome.

Marg Marshall:

Yes. As it should be, Merry Christmas, like thanks ATO, maybe they'll listen, but maybe they won't, but we'll see. Yeah.

Robyn Jacobson:

All right. So vision for next year, both of you move into formal leadership positions on National Council and as Directors of The Tax Institute. So Jerome is President and Marg is Vice President. What are your respective visions? And I'll start with Jerome first. For next year, what would you like to see as a legacy of your presidency and, and the Institute more broadly achieves throughout next year? And by the way, I'm not going to hold you any commitments in this podcast.

Jerome Tse:

Marg will though.

Marg Marshall:

I've got, I'm taking notes Jerome.

Jerome Tse:

I think the first thing is I think looking at our, the diversity of our membership and making sure it's reflected in all our committees, councils, event organizing committees events and so on, and also to try and attract new members who might not normally be members. So that's really important for us. I think that's been important for society, I think in the last couple years, if not more. So I'm really keen to get a formal diversity policy up and running with Joanna Price. Who's the GM of people and culture at The Tax Institute, making sure our members don't burn out is really important supporting members through education, advocacy, and so on. Just what, what do members need? We're looking at a new website. I know we've said this a few times, but I mean, going back to the industrial issues, trying to find IT staff, in all our businesses has been difficult. So it is a little bit slower than what we'd ideally like, but we want to get a website that works for our members. So, that is coming next year. There are a few other things Marg, you might want talk about Micro Credentials and things, but that's quite exciting.

Marg Marshall:

Yeah. Jerome, I'm happy to... Like Micro Credentials, is a new way of learning that probably a bit of a buzzword out there in learning and education, but we've taken on the challenge of turning some of our programs into really tiny bite sized bits. So you can get hold of a small, maybe a 10 minute or a 20 minute online learning program, do that and build up your knowledge that way. So these little bites like chunks that, you just might want to understand one section of Div 152. So, you've got something a bit quirky on the CGTS, more business concessions. You get, you've got the basics down, but you've got something that's a bit out of the ordinary. So you can go through the catalog of Micro Creds and find that bite size bit. It doesn't, it's not going to be hideously expensive to do the course.

Marg Marshall:

You're not committing to 10 hours. It's not a whole day thing, you can do it when you want to. And it's meant to be something that you can get in, do it, and then get on with your work and, hoping to launch that in this coming year. And that will grow as we go. The first offerings will be limited because to Jerome's point about IT staff, and all of that sort of stuff, we've got lots to do in terms of making sure that the learning content is right as well. So there's a fair, there's going to be a lot of rigor behind this and, it will be something that you can hang your hat on. We're really excited by the prospect that people can get what they need in the timeframe that they wanted it and in something that's easy, and not too time consuming.

Marg Marshall:

So looking forward to seeing that come to fruition and look, we are really interested in seeing how people's careers are going. What makes your career in tax actually meaningful? Look, I'm really, really quite proud to say well, to have been involved with The Tax Institute over the last couple of years through the pandemic, the amount of work that we did that supported our members, all of the webinars that we did around job keep and cashflow boost and, and the stuff that was done for the state based stimulus packages, all of that was provided as part of your membership. And so we want to make sure that our community is engaged, that we continue to see that happen. People are seeing this as a valuable thing to have in terms of their membership and that they can be either involved just via the learning and the training opportunities that are provided or get involved in other ways. So we are really looking forward to seeing how that pans out for next year.

Robyn Jacobson:

You talk about diversity. I think about how diverse tax is. It touches everything we do. And I don't just mean we as tax professionals, everyone in the community, whether you're a business owner, an investor, a retiree, an employee, you work in the gig economy, tax affects everything. And so everyone can be part of this conversation about how to improve the system? How to improve engagement? How to improve... How the regulators do what they do? And The Tax Institute's got a really important role, not just for our members, but also more broadly for the community.

Jerome Tse:

Now that's that's right here. And I think diversity, I mean, may not just mean gender or ethnicity. It can mean getting more younger people involved, or getting the older, and, who have the wisdom, who might be retired and getting them back involved in the community as well, even though they might not be practicing anymore. They've got an important part to play in the system as well. So, I am interested in making sure that we, our membership and our offerings are diverse to meet those diverse audiences because the TTIs vision, isn't just for our members it's to improve the system for the community generally.

Robyn Jacobson:

So, as we draw the year to a close and thankfully we can draw a line under this very challenging year, how are both of you going to stop and recharge over the Christmas break and come into 2022 with your new roles and, lots of fighting energy to take on all the challenges of next year?

Marg Marshall:

Is probably common enough, in a number of offices. Well, I hope it's common. We will close on Christmas Eve. The lead up to Christmas in our office is amazing. Really, we do Christmas very well in our office with lots of things on lots of celebration, secret Santa and Christmas decoration competitions and all sorts of stuff. So the office looks a bit like Maya with the windows and things.

Robyn Jacobson:

Santa's Workshop?

Marg Marshall:

Yeah. Yes, somebody just walked past my office carrying a Large Life-Sized Elf. So, it's on. So we will close until the 4th. Then, I am going to take a break in January. I'm having the second two weeks of January off and having beach time going to a lovely spot. One of my favorite parts of Tassie, The Bay of Fires. So really looking forward to 10 days at the beach. And yeah, so that's my way of having a bit of a break.

Robyn Jacobson:

[inaudible 00:23:06] feeling the sand between your toes instead of the keyboard under your fingers.

Marg Marshall:

Absolutely. Right. Robyn, absolutely. Right. Yes.

Robyn Jacobson:

And Jerome?

Jerome Tse:

Probably just trying to find short breaks in New South Wales, maybe Queensland now that I'm allowed to go and Tassie as well. I mean, Marg knows I can [sort a 00:23:23] Tassie holiday earlier in the year because of coronavirus. So might head back down there and visit Mona in Hobart and just recharge for the new year.

Robyn Jacobson:

Well, thank you both for coming on the show, it's been wonderful to chat to you both, and hear about your visions for next year. I also want to thank you on behalf of The Tax Institute for the work that you do for us and the work you have done and will do into next year. So, I hope you have a wonderful break and come back with all that wonderful energy we're going to need from you both.

Jerome Tse:

Thanks Robyn. And just thank you to all our members as well. You've done a great effort over the last year, two years, to help support the community through this job keep, job saver, all the New South Wales and state support packages. I know you're tired. We're here to help you next year. Our goal is to help you educate not just in technical, but in practical ways in wellbeing. Hopefully, we'll see you in person in some events as well. That hopefully that starts again. And I know Robyn, you are reaching to get going and seeing people around the country. So hopefully we'll get to see you all in 2022.

Robyn Jacobson:

Okay. Those sentiments. Exactly. Jerome, it's been an amazing year. The profession has absolutely stepped up. Everyone should be incredibly proud of themselves, but absolutely recharge and, take that will deserve break. And we look forward to seeing it some face to face events next year. So, thank you for listening to this episode of Tax Vibe. I've been chatting with Jerome TaxVibe, partner King and Wood Mallesons, and the 2022 President of The Tax Institute and Marg Marshall, partner at WLF Accounting and Advisory and the 2022 Vice President of The Tax Institute to keep up to date with Tax Vibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter, you can join the conversation on our member only community forum, @community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,OOO practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today, and save 50% on membership. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. On behalf of The Tax Institute, I wish you all a safe, relaxing and happy festive season, and we look forward to you joining us next year.

Episode 14 — What’s on the radar with SMSFs?

Release date: 11 Nov 2021

In this episode of TaxVibe, Robyn chats with Liz Westover, Partner and the National SMSF Leader at Deloitte, about the current state of play with self-managed superannuation funds - including the latest legislative changes, the array of contribution caps, and tips for those considering setting up a SMSF.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Liz Westover, FTI, Deloitte

Robyn Jacobson:

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate of The Tax Institute and your host of today's podcast. We love the vibe of tax and here at The Tax Institute, we do tax differently.

Robyn Jacobson:

I'll be chatting with some of the tax professions great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Liz Westover, the Partner and National SMSF Leader at Deloitte.

Robyn Jacobson:

Liz is responsible for the firms' SMSF service offering, providing compliance and advisory services to the firm's clients. Liz has extensive experience in superannuation and has strong capabilities on the technical application of superannuation and associated tax laws. She is a regular commentator on superannuation issues with mainstream and social media and has also blogs and articles on superannuation and related issues for many years.

Robyn Jacobson:

Liz has been heavily involved in superannuation policy development and advocacy, regularly liaising and consulting with government, regulators and stakeholders on technical, legislative and policy matters. Liz is a Fellow at The Tax Institute, a Fellow Chartered Accountant, CA SMSF Specialist and holds a Master of Legal Studies from the University of New South Wales and a Bachelor of Business from the University of South Australia. So in this big week of The Tax Summit, Liz, welcome to TaxVibe.

Liz Westover:

Thank you, Robyn. Lovely to be here.

Robyn Jacobson:

Great to talk to you and look, we did have a chat earlier in the week. You've already run your session for The Tax Summit. And in terms of this week, you're one of more than 100 speakers at our event, The Tax Summit: Challenge Accepted.

Robyn Jacobson:

So as we are emerging from a very long COVID period and particularly, you and I in Melbourne where we have been locked down more than any other city in the world, how important is it for you, as a practitioner, to be able to reconnect with your peers, even if it's in a virtual environment at the moment?

Liz Westover:

Critical, Robyn, I think. And these online sessions and virtual sessions and things like that, they do become difficult and that craving to be face-to-face with people is almost palpable at the moment, especially as the end is in sight for us.

Liz Westover:

But it does make these online events even more critical than before, simply that we're not face-to-face with our peers and our clients and our staff members. So we've got to stay up to date and we've got to get that information through some forum, and I think The Tax Summit has been one of those vital forums for us to be able to do that.

Robyn Jacobson:

Well, it's been great to have you as part of it. So I thought we'd have a chat today about of course your pet area, self-managed superannuation funds. Can we start with what's the latest on the legislative front?

Robyn Jacobson:

We sometimes think that tax law moves very quickly and it's constantly changing and there's less going on in the super space, but when we start to work through the legislative changes in super, it's not a short list. So can you touch on some of the key changes that we've seen recently?

Liz Westover:

Absolutely. And you're spot-on. As I started to put this session together and I said, "Oh, my goodness. What am I going to talk about? There's not that much that's been happening." But as I started to collate it all, it became very apparent that there were lots of changes and some of them quite meaningful. I think probably one of the key ones that we've seen is the ability to increase the number of members in a self-managed super fund from four to six came through in the 2018, '19 Federal Government Budget.

Liz Westover:

I don't think anybody particularly asked for it, but I think now that it's here, people are really starting to see value in it, and I've certainly had a lot of inquiries from my clients asking, "Okay, can I now add the kids?" and so on and so forth. So I think it will be quite useful and people will make the most of it.

Robyn Jacobson:

That change has been a long time coming, hasn't it?

Liz Westover:

It has but it is now effective from the 1st July 2021. So we're off and running. But probably a couple of things to think about and number one is, think about why you're adding extra members in the first place. And we've always said this, whether it was four members or six members was your maximum, think about who is in your fund.

Liz Westover:

Because those people that are in your fund have a lot of control over your benefits and particularly in payment of death benefits and so forth. And those people have a say in how that fund is run. So if you want to bring the kids in, that can be well and good and there might be some really good reasons why you do that, but those kids have just as much say in how that fund is run.

Liz Westover:

They have a lot of visibility about your own benefits as a parent. They'll know what you have. So if those sort of things, you'd rather keep separate from your kids then perhaps you don't want to bring them actually into the fund and if you want to help them, you might set up a separate fund.

Robyn Jacobson:

Because of course the main rule that the member in a self-managed fund, of course, has to be the trustee as well.

Liz Westover:

That's right. All members are trustees and all trustees, members. And of course payment of death benefits generally in an SMSF death benefit, in the absence of any binding death benefit nominations, remaining trustees decide who receives those death benefits. So do you want your kids to decide who gets your benefits? Do you have blended families in the sense of who's making decisions, who's going to have control where you want those benefits to go to?

Liz Westover:

Think about who's coming into your fund and who actually has the control. But in a practical sense, there's probably a couple of other things to think about is check your trustee. Always check your trustee. And a lot of practitioners in this area is, "Check your deed, check your deed, check your deed. Read the deed."

Robyn Jacobson:

Liz, it's interesting that you say that because we ran a podcast recently with Paul Hockridge and we were talking about trust and unpaid present entitlements, and repeatedly throughout that discussion, he said exactly the same thing. So because a super fund is a trust, there's no escaping the deed.

Liz Westover:

No, that's exactly right. So I've had some clients already talk to me about increasing the number of members, adding members, and what we found is with some deeds, they're actually hard-coded, restricting the number of members in the fund. In fact, the first inquiry I received from a member, I had a look at the deed. Sure as eggs, there it was, no more than four members in the fund.

Liz Westover:

So it's hard-coded into his deed. So no matter what the law says, his deed says he actually can't have more than four members. So if we want to increase the members, if we're going to put in member five and six, then we actually have to get a deed update and to a deed that allows those additional members to come through.

Liz Westover:

But the other practical side of it too is trust law, so state-based trust law. Most states actually restrict the number of individual trustees of a trust to four. So in actual fact, if you're going to have more than four members, again, coming back to all members are trustees, and all trustees are members, if you want more than four trustees, you have to have a corporate trustee.

Liz Westover:

So you can certainly have six directors of a corporate trustee but you can't have more than four individual trustees. So corporate trustee, check your deed, think about you who you want as members of your fund.

Robyn Jacobson:

Very good. There's been another change and this is to do with making non-concessional contributions, and it's called the bring-forward rule so you can access two future years' worth of your non-concessional contributions cap. Can you run through the changes that are affecting people here?

Liz Westover:

Yeah. Not a huge change other than the age for which you can bring forward those contributions. So previously, it was maxed out at age 65. So if you're above age 65, you might still have the ability to make contributions if you're passing the work test, but you couldn't use the bring-forward provisions. Once you're over that age group, it just wasn't available to you.

Liz Westover:

So previously, we've seen changes to the work test. So that no longer applies up to the age of 67. And so now these new changes allow bring-forward provisions up to the age of 67 as well. So bit of alignment there between the work test and the bring-forward provisions and giving people a renewed opportunity. So my tip in that is probably go back and see which of our clients might actually have a renewed opportunity to make some last contributions into your super.

Robyn Jacobson:

There's been a very technical change and this relates to where you've got someone in pension phase and then calculating how much of their income is able to benefit effectively from a tax exemption and actuarial certificate. So would you like to run everyone through that?

Liz Westover:

Yeah, absolutely. So we have this circumstance where you might have a fund that is wholly in pension phase for the whole year, but a member of that fund has a total super balance. So that's their balance within that fund and any other superannuation holdings they have, if they have a total super balance of more than $1.6 million.

Liz Westover:

What that meant was that that fund had what we call disregarded small fund assets. And the law says that if you are one of these types of funds with these disregarded small fund assets, is that you can't segregate your assets, which means you can't use the segregated method for calculating your exempt current pension income.

Liz Westover:

You are required to use the proportionate method to calculate it. And part of the proportionate method meant you had to get an actuarial certificate. Now, if you've got a super fund that is wholly in pension phase for the whole year, then what's that actuarial certificate going to say? 100%. Of course, it's going to say 100%.

Liz Westover:

So we have this red tape where people who are clearly always going to be fully exempt or be able to claim 100% exempt current pension income, were required to get an actuarial certificate and the cost that was associated with doing that for no added benefit whatsoever.

Liz Westover:

So the requirement to get that actuarial certificate has now been removed. If you're in that bucket, no longer have to get an actuarial certificate. So a really good practical, sensible movement in this piece of legislation.

Robyn Jacobson:

So not every amendment we get is an unwanted one.

Liz Westover:

No, that's right. That's right.

Robyn Jacobson:

Another change is coming through and in fact, there's a lot of talk about this outside the super space. I'm referring to the DIN, the Director Identification Number. Its genesis was in concerns about phoenix activity and people illegally moving around companies and using false names.

Robyn Jacobson:

And astonishingly, when you apply to be a director of a company, or you notify ASIC that you're going to be a director, you could basically tell them anything. They never verified the information you gave them. So now we're going to have this verification process and every company director's going to have a DIN. Why is that relevant to self-managed funds?

Liz Westover:

Well, the issue is that it equally applies to any body corporate that is registered under the Corporations Act and that applies to trustee companies as well because they are registered with ASIC under the Corporations Act. So any director of a corporate trustee of a self-managed super fund is going to have to have a Director Identification Number or a DIN as you said.

Liz Westover:

So we equally have to pay attention to this matter. Individuals only have to have one DIN across all of their directorships. So if you are a director in another entity, perhaps your own business and so forth, you can use the same DIN for your SMSF, but I imagine for a lot of practitioners out there, there's going to be a little bit of coordination that goes on around this one.

Liz Westover:

Interestingly, directors have to apply for the DIN themselves. It's not something that we can actually do for them. But clearly, they may not be aware that this is coming or in fact that it's here and that they will need it. So a little bit of coordination around making sure that they do get one or that they actually have one. And there are some dates that were released I think only last week around these transitional arrangements.

Liz Westover:

So big thing, big date for me really is that if you become a director for the first time between the 1st of November this year and the 4th of April next year, then you've got 28 days after your appointment to get a DIN. So in other words, if you're setting up a self-managed super fund with a corporate trustee, and I think there is a real trend towards using corporate trustees now for SMSFs, if you're doing that now, you are squarely in this regime.

Liz Westover:

Just really pay attention if you've got anyone that's setting up new funds. If you are in fact increasing your numbers from four to six and you've got an extra director coming in for the first time, they're going to need a DIN.

Robyn Jacobson:

And a couple of other tips to pass on, existing directors have until November next year to get a DIN.

Liz Westover:

That's right. Yes.

Robyn Jacobson:

And if you become a director from April next year, you have to get your DIN before you are appointed as a company director.

Liz Westover:

That's exactly right. And I think April is going to be upon us very, very quickly.

Robyn Jacobson:

Yes, it will.

Liz Westover:

So I think firms really need to get their systems and their processes in place to identify who actually needs one of these DINs and making sure that their clients actually get them.

Robyn Jacobson:

One more tip and I can almost hear some of the groans already coming through from our listeners. The best way to do this is using a myGovID. And as you correctly say, you can't do it as an agent on behalf of your client.

Robyn Jacobson:

So they'll have to do it themselves. But myGovID is the best way to do this. Not myGov. That is different. You need a myGovID which is the identification process through, typically, a smartphone. There will be alternatives through telephone and paper but there will be delays, not as efficient and your experience is going to be much better if you do it through the myGovID.

Liz Westover:

And do you know what? My tip in that space will be I plan to do my own very quickly, as soon as I can. Simply because if I've been through the process myself, I can talk my clients through it. So I would strongly suggest that perhaps we take care of our own affairs first and then we're in a better position to help our client.

Robyn Jacobson:

Make sure the plumbers don't have leaky taps.

Liz Westover:

That's it.

Robyn Jacobson:

All right. And one more change that's worth noting of significance and that's to do with minimum drawdown rates.

Liz Westover:

Yeah. Look, this was another COVID-19 relief measure. So we saw an extension of the 50% reduction, the mandatory minimum that needs to be withdrawn and that's been extended up until 30th of June FY '22. So we've got this extra year of just reducing what we're required to withdraw from, from pensions. My tip there really is around when you apply the percentage, make sure you have the percentage first and then apply that reduced percentage to your opening balance or closing balance.

Liz Westover:

So you're doing closing balance to work out what your mandatory minimum actually is. The risk is if you apply the larger percentage of the old percentage and then halve the resulting figure, you may end up with this anomaly where you've actually paid less... rounding can force you to pay less than your mandatory minimum.

Liz Westover:

And it might sound like rats and mice but it can make a difference and it can detrimentally impact on your fund. So just be careful, apply the percentage first or reduce the percentage first and apply that against the balance.

Robyn Jacobson:

Okay. Good advice. Let's move onto the caps and gosh, there's an array of them. I've certainly written content about this previously and listed out all the superannuation caps we have in the system and it's quite extensive. Is it really necessary that we have this many limits and this many sets of rules to keep on top of?

Liz Westover:

Look, I don't think there'll be anyone that would argue that simplicity would be a much better way to go. And I think indexation, particularly around the transfer balance cap, is going to cause a lot of problems. And it is going to cause a lot of errors to be made and whilst we might have a handle on it around this first round of indexation, I think the next round of indexation is going to put people in a whole world of pain just trying to work out what their personal transfer balance cap is.

Liz Westover:

So previously, we haven't really been concerned about the difference between a general transfer balance cap and a personal transfer balance cap because it was all one and the same. It just didn't really matter. So we used this generic transfer balance cap. Now we need to start talking about what the general transfer balance cap is versus a personal transfer balance cap.

Liz Westover:

And that'll be different for different people depending on what they have or haven't done already around income streams. Basically, if a new transfer balance cap and your general transfer balance cap is the $1.7 million, if you are now commencing an income stream for the first time, your personal transfer balance cap will be the same as the general cap and that's $1.7 million.

Liz Westover:

But if you have previously commenced an income stream, so prior to the 1st of July 2021, you previously commenced an income stream, your personal transfer balance cap will not be the general transfer balance cap. And in fact, if you had previously used 100% of that $1.6 million cap, your personal TBC is $1.6 million and you have absolutely no ability to use the indexed amount to commence any future income streams.

Liz Westover:

And then if you are somewhere in-between that, then your ability to use any of the indexed amount, will depend on the proportion of the previous cap that you've actually used. So if, for example, you used 75% of the previous cap, so you commenced an income stream of, say, $1.2 million then you've got 25% unused cap. So you apply that 25% against the indexed amount, 25% of $100,000 gives you $25,000. So your new personal transfer balance cap will be the $1.6 million that you previously had, plus $25,000 of the indexed amount. So 1.625 is your personal transfer balance cap.

Liz Westover:

So a little bit confusing already, so imagine how it's going to look when we have indexation again and we're trying to work out what proportions people have actually used of previously indexed amounts and so forth. So gee, I wish we had some simplicity around that.

Robyn Jacobson:

Liz, it's hard to point to any other cap, threshold or limit anywhere in the tax or superannuation law that is indexed but the indexation isn't provided to everyone. So if you think about everything else that has increased out there from year to year, all taxpayers, all classes of taxpayers who come under that particular set of rules, benefit from it.

Robyn Jacobson:

But in this particular case, it's only those who had started a pension and not fully exhausted the 1.6 to begin with and that's a proportionate amount, or you get the ones, of course, who never started an income stream till later and they get the full benefit. But everyone's going to have their own special personal transfer balance cap. The complexity in the system's going to be extraordinary.

Liz Westover:

Absolutely, absolutely. And I think it's only going to get worse. And that is compounded too because we often use, previously, that $1.6 million as a reference point for other measures. So for example, your ability to make non-concessional contributions. And in fact, in some areas of law, and in the one we talked about previously about actuarial certificates, that is hard-coded at $1.6 million.

Liz Westover:

That amount, when you talk about a person's total super balance in terms of determining whether they have disregarded small fund assets, that's hard-coded, that $1.6 million. It's not indexed. So now not only do we have some thresholds, they all started from this one reference point, but now some are going forward, some are not, some are played differently to different people in different ways. Of course, it's going to get confusing and people will make mistakes.

Robyn Jacobson:

We've also got, for good reason, delays in reporting by self-managed funds of the transfer balance account data known as the TBA. And they, of course, report on a quarterly or an annual basis depending on the size. But the delay in getting that information to the ATO then results in of course that then delayed passage of information back to the members.

Robyn Jacobson:

And where I'm hearing this is particularly becoming a problem, is you've got people giving advice to individuals on how much they should contribute or what their fund should do with the options available to them, who don't necessarily have access to that data that is on myGov, which is the individual's own account, or through online services for agents which is only available to tax agents.

Robyn Jacobson:

Now those agents, of course, shouldn't be giving advice on super. So we've got this category of people like lawyers, people like self-managed fund administrators and financial advisors who are almost at the front-end of giving the advice but it's the agents, the tax agents who have access to the data through [OSPA 00:19:27] who are dealing with the tax implications if they happen to get it wrong.

Liz Westover:

Yeah. And you're spot-on, Robyn. And we often talk about tax agents but there is often a difference between the tax agent for the fund and the tax agent for the individual. You actually have to be the tax agent for the individual to be able to get access to that information. So you're absolutely right. This is a cohort of people who need the information and can't actually access it.

Liz Westover:

It is a real challenging area. I think APRA-regulated funds have a much tighter timeframe within which to report but nevertheless, it still takes time to do calculations and work out what's going on to be able to report that information.

Liz Westover:

Self-managed super funds, in particular, we often don't do the accounts until May or June, the year after the end of financial year. So there is a huge delay in all of this. But I'd also say that if you're in an SMSF, you've got access to that information more readily or to find that out before you make decisions around commencing income streams and so forth.

Liz Westover:

So if I'm looking after an SMSF client, my first point of call is what other funds have you got? Let's check that out. Let's check what the valuation is and then determine what capacity or what balance we actually have to commence an income stream out of the self-managed super fund.

Liz Westover:

So yes, it's challenging to get the information but it's not impossible. And I think we just have to make sure that we get the right relevant timely information before we advise the clients about commencing income streams.

Robyn Jacobson:

I think it also illustrates the importance of getting proper advice. Now self-managed, you do have to take responsibility for trustee decisions that you make but equally, you've got to make sure you're getting the right advice because we all know that you can't cry foul later and say I didn't know or I wasn't aware of the laws and how they operated because it's not going to get you anywhere.

Liz Westover:

Yeah, absolutely. Absolutely.

Robyn Jacobson:

All right. So moving onto some other issues, can you give us an update on what's going on with SuperStream?

Liz Westover:

Oh, heavens. Yes. So look, SMSFs have been familiar with SuperStream for a little while and their notion of having an electronic service address. We've had to be in that regime for quite some time where a super fund was receiving employer contributions.

Liz Westover:

So employers have been legally obliged to use SuperStream to make those contributions and that meant if an SMSF was receiving them, they had to have an ESA to be able to receive those contributions. So we're kind of familiar with these concepts. And I would suggest most funds would have an electronic service address.

Liz Westover:

What's new around all of this is that from the 1st of October this year is that rollovers in and out of self-managed super funds must now be undertaken by SuperStream as well. So APRA funds will not roll over into an SMSF and [inaudible 00:22:08] via SuperStream and equally, SMSFs in-between themselves, can't actually do it.

Liz Westover:

It's all got to be done via SuperStream. And that means technology is going to play a big role because that's exactly what SuperStream is. It is a data and payment standards around employer contributions and rollovers in the super industry that's done electronically for consistency around payments and the associated data that comes with it.

Liz Westover:

So we absolutely have to be involved. Now, it's not always as easy as you think and timing is everything, and getting it wrong can be quite problematic as well. So there are 20 penalty units which is $4,400 per trustee if you actually get this wrong. So main thing to remember is that once full information is received requesting a rollover, you actually have three days to roll it over. And that applies to self-managed super funds as well.

Liz Westover:

So if you are looking at rolling over from a fund, be very careful about when you pull the trigger on getting that rollover done. You don't want to go to your new APRA fund and request it because once that comes through, you've got three days to do it. And I would suggest that most funds are going to take a lot longer than three days to actually bring member records up to date to determine a balance and be able to process that rollover back out of the fund.

Robyn Jacobson:

So if you're a trustee of a self-managed fund, where's the best place to go to look for information on these ESAs?

Liz Westover:

Yeah. Look, there are a couple of points around that one. So as I said, most SMSFs are going to have an electronic service address. Anyone that uses the three major software providers, they all provide an ESA service. There's probably a dozen or more providers already around ESAs, but not all are compliant with rollover.

Liz Westover:

So there are a number of ESA providers out there that are capable of doing employer contributions, they are not yet capable of doing SuperStream rollovers. So speak to your provider and your ESA and there is also a list on the ATO website that'll tell you who the providers actually are and what they're capable of doing, either employer or rollovers. And if you're looking at rollovers, you may need to change your ESA provider to be able to actually facilitate a rollover.

Robyn Jacobson:

For those who are not yet compliant for rollovers, would you expect that they will be at some point? It's just a case of them catching up?

Liz Westover:

I believe so. I believe there are a lot of providers out there who are taking steps to become capable around rollovers, but that's a business decision for them as to whether or not they actually do that. The other thing to remember about SuperStream, Robyn, is it's not mandatory to have an ESA.

Liz Westover:

If you are not receiving employer contributions and you're not making rollovers or receiving rollovers, you don't have to have an ESA. It's not mandatory to do that. The ATO will be processing a number of their release authorities through SuperStream as well, so you will be receiving DIV 293 excess contribution release authorities and so forth via SuperStream.

Liz Westover:

But again, if you don't have one, they will still issue those by paper. So it's not mandatory to have one unless these events are actually happening in relation to your fund.

Robyn Jacobson:

But like most things, I'm thinking of Single Touch Payroll and myGovID and all these other digital initiatives. It is designed to make life easier and more efficient to deal with the government.

Liz Westover:

Look, and I think it will eventually. It feels a bit clunky at the moment, and I think that's because it's a new process, we're not getting information in the way that we used to. And even at the moment, there is a flow of information into the fund, but we don't have that document that we normally get. So like a rollover benefit statement. We don't have it yet and it's making sure that we get it so that we've got complete files so that we can prove it to the auditor. Those sorts of things.

Liz Westover:

So it's still finding our way around it. We've started doing our first ones already and we're just really taking our time in terms of dotting the Is and crossing the Ts to make sure that we get all the right information and certainly, if we're requesting rollovers. So now I can go and request a rollover from an APRA-regulated fund, is making sure you've got the authority from your client to do that.

Liz Westover:

Because the last thing you want to do is process a rollover for their full balance when they didn't actually intend for their full balance to come over and you've just blown up all their insurance in their APRA-regulated fund. Make sure that you're getting those authorities signed to actually process the rollovers.

Liz Westover:

But equally, you've got to make sure that the ATO actually has up to date information for the fund. So it must have obviously the member details, so particularly around if you're adding members and you're trying to do rollovers, make sure that you give the ATO time to update their data so that when the APRA-regulated fund checks, it's all good.

Liz Westover:

They can say, "Yes, that person is a member of this fund and it's all correct." The fund has to have an ABN, they have to have a unique bank account and of course, they must have an electronic service address. So you've got to just line up all your ducks before you press the go button.

Robyn Jacobson:

So it sounds a bit like the toddler's walking but still needs to be a bit steady on their feet.

Liz Westover:

I'd say that's quite a good analogy, yes.

Robyn Jacobson:

Okay. Now, we could talk for a long time about this but with the limited time we've got, can you identify the main concerns the profession has with NALI and NALE? And I've not yet found a way to distinguish audibly between the two. So non-arm's length income, NALI with an I, and non-arm's length expenses, NALE with an E.

Liz Westover:

I hear you on that one and it's NALI or NALE, I'm not sure. But I absolutely agree with you on that one. In a real nutshell, what they're saying, is non-arm's length expenses. So if you're not paying enough or you're not paying anything for services to the fund, or that the fund receives, then it's going to invoke non-arm's length income provisions.

Liz Westover:

And that means income associated with that or has a sufficient nexus to those expenses will be taxed at the highest marginal tax rate of 45%. The real concern in the industry at the moment, because this isn't new law, this has been around since 2018. So the real concern in the industry at the moment is the Law Companion Ruling that came out recently from the Tax Office.

Liz Westover:

And in particular, the real sticking point around this is the ATO has a view that general expenses has a sufficient nexus to all of the income of the fund. So when we talk about general expenses, we're talking about accounting fees, audit fees, financial advisor, investment management fees. Those things that don't have a particular nexus, in the way a property manager would to a property. You've got that direct link.

Liz Westover:

We're talking about things that apply really to the whole fund. So if they are deemed to be non-arm's length expenses, then we have a problem for all of the income of the fund. So the ruling has been widely criticized by the profession and rightly so. I don't think that they have really made their case around sufficient nexus between the general expenses and the income of all of the fund and I certainly don't think that that was what was intended when this legislation was brought in.

Liz Westover:

So needless to say, there's a strong push and quite an aggressive push by industry against these reforms and I think Minister Hume said at The Tax Institute Super Conference that they are well aware of this issue and that in fact, they would be looking at it. No promises or anything like that by any means but at least we know she's aware of the issue.

Liz Westover:

And hopefully, we'll see some change, but I think for us as practitioners, how many of us are used to getting our firms to do our own funds? How many financial advisors are used to providing their services to their own funds? And we've seen a very gray area arise. It's not been clear where the line is actually drawn on trustee providing services in your capacity to a trustee, versus providing services in your capacity as an individual.

Liz Westover:

And this is where I kind of struggle with it is because I'm skilled at what I do, why can't I do that for my fund? And why do I have to pay for those services when anybody else who's not a tax agent, can legally still do all their own accounts and lodge their own tax return and in fact, they can't charge for that service. But because I am a tax agent, I must. So I really struggle with that a little bit and I just don't think that is consistent with our overriding drive to increase retirement savings.

Robyn Jacobson:

And there's a real tension also between the SIS Act which regulates what funds can do which says you can't charge for your services as a trustee and this rule which is saying you must charge otherwise, you'll have a NALI problem.

Liz Westover:

That's right.

Robyn Jacobson:

And I know it's a great concern to the profession about does that mean I have to charge or does that mean I can't charge for my accounting services? I would draw everyone's attention to the examples that I think it's around example six to 10 in the ruling which is 2021/2. It's a Law Companion Ruling, an LCR, where it does talk about if I'm a trustee who's an accountant versus I'm a trustee who's an electrician.

Robyn Jacobson:

And it seems to go with this argument if I'm providing accounting services then that's a trustee capacity, so it's okay if I don't charge for that. But if I'm providing electrical services to my rental property that's in my fund, then if I don't charge for that, I would have a NALI problem. And it is gray, it's awkward.

Liz Westover:

Absolutely. And it's all well and good to give examples where there is extreme differences between the two scenarios but as we all know, in real life, that is rarely the case. And you can imagine a whole heap of scenarios that are somewhere in the middle and people not knowing how to actually apply it.

Liz Westover:

The other thing in that ruling too which I think people should pay attention to too, is they talk about acquisition of an asset is really important in this context. So if acquisition of an asset is deemed to be not on an arm's length basis, then the asset is actually tainted for life, and that includes capital gains.

Liz Westover:

So that's actually huge. So get your financing wrong, don't do the purchase at a market value, you've tainted the asset for life. All of the rental income or the dividend income, whatever it might be, including ultimately your capital gain.

Liz Westover:

And we also know that typically what people do is there might be a... when an asset is acquired by the fund, let's say it's a business real property, there might be a portion of a purchase and a portion that's done as an in-specie contribution. And this ruling makes very clear that if you do not document correctly then that document actually says that you might have non-arm's length expenses, regardless of the fact that you might journal an in-specie contribution within the fund.

Liz Westover:

So even though you think you've done everything right, maybe you think you're doing it the way we've always done it in the industry, you could be causing your clients to actually have non-arm's length expenses and around an acquisition of an asset, tainting that asset for life. So it is critical that the documentation around acquisition of assets where it includes an in-specie contribution component is documented correctly and meticulously or we're going to have a problem.

Robyn Jacobson:

A lot of work has been done by The Tax Institute in conjunction with the other professional bodies, and I'm not just referring to the traditional accounting bodies either. We've been involved with superannuation industry groups, it's a really broad group of organizations that have been working together. So it'll be interesting to see in the months ahead and we do hope that the government does listen to the concerns of the profession.

Robyn Jacobson:

But there's one piece around the ATO's interpretation of the law through this final ruling and there's another piece around the policy that of course the treasury and the government are responsible for. Now maybe there's a tweak that could be made to the legislation itself which is merely to clarify how the law was intended to work, and maybe if that could be done and remove something like a problem where there's $100 discount on electrical work done on my rental property, shouldn't taint all of the income earned from the $10 million worth of my assets in my fund and all my future capital gains forever either. It's just nonsense.

Liz Westover:

When you think about it, the genesis of this legislation was really around limited recourse borrowing arrangements that had related party loans. And at the time, people were doing it with 0% interest rates. The safe harbor provisions actually took care of that. So we've now got this piece of legislation that's come in with a fairly disproportionate approach to something that's already been resolved.

Liz Westover:

But moreover, it not only affects self-managed sup, it actually affects APRA-regulated funds as well. And I'm sure that from these little old LRBAs way back when to now having what could be a catastrophic impact on APRA-regulated funds, it's not right. And that's what I mean by what I said earlier is I don't believe this was ever the policy intent.

Robyn Jacobson:

Well, let's hope that this is rectified because as you say, the impact on not just the self-managed sector but the APRA-managed funds as well. The profession's aware of this, the sector's aware of this, there's such unanimous agreement that this needs to be fixed and we can only hope that the government... Well, we know they're listening. We hope they do something about it.

Liz Westover:

Well, all I can say, Robyn, is in all your efforts, you are very much backed by the profession as well as to get some resolutions around this one. So thank you very much.

Robyn Jacobson:

Thank you. That's good to know. All right, just as we wrap up, what would be your top tips for someone who has or is considering setting up a self-managed fund? Now you could write a book on this but what would be your top three tips?

Liz Westover:

I think some of my points from earlier is if you're setting up a fund, think about who you're in the fund with. Who has control? Who you want in it? Who has visibility? All those sorts of things. I think for anyone, and this is probably not just around people setting up a fund, anyone who's in a fund as well, is think about your exit strategy as well.

Liz Westover:

I think that has become critically important and I am still amazed by the number of people who think that superannuation is dealt with as part of their will and not understanding that actually, super is dealt with quite separately from your will, unless you specifically direct it to go into your estate and then it will be distributed as part of your will.

Liz Westover:

So I think that's the missing piece. And also too is that super also effectively has death tax. So a bit of planning around that exit strategy as well and understanding is that if you have a taxable component in your self-managed super or within any super, a taxable component that's paid to an adult beneficiary, adult child, will be taxed at 15% plus Medicare on the taxable component, which for some big funds, that can add up to millions of dollars that you're going to hand over to the Tax Office if you don't.

Liz Westover:

And there's planning that we can do around this. There's absolutely planning. And that's part of having an exit strategy for your fund. And probably my only other tips is just dot your Is and cross your Ts. Just make sure you've got your deeds, you get your deed from a reputable provider that gives you a lot of flexibility about what you do within your fund.

Liz Westover:

Fill in your forms and moreover, make sure as a new trustee of a fund, you actually understand the roles and responsibilities that you have in running your own fund. The ATO requires you to sign an ATO trustee declaration form. Read it, understand it and if you've got any questions, speak to your advisor.

Robyn Jacobson:

Liz, my observation about what happens when you die, you'll know the figures better than I will, the total amount that's held in superannuation at the moment.

Liz Westover:

We're at $3.3 trillion is currently sitting in superannuation at the moment. SMSFs have about 822 billion.

Robyn Jacobson:

822 billion. Okay. And we know that we've got an aging population. Now follow me through here with joining all those dots. Aging population with a significant amount held in super, we've got the introduction of the transfer balance cap, which one of the effects is you can't retain amounts in super beyond death unless it's in a pension.

Robyn Jacobson:

And the pension through the transfer balance cap is limited in terms of the assets that we can hold in it. So it's not like you can die and just leave the rest of it sitting in an accumulation account. So my point is it's ultimately going to have to exit the fund through death benefit payments.

Liz Westover:

Yes.

Robyn Jacobson:

Now if you've got, say... And I'm being conservative. I know some people have far less but you might have a $5 million fund, $10 million fund, a $15 million fund. Once that money comes out, we've got very strict rules on how much can go back in. $25,000 or now $27,500 a year or you've got your $110,000 as a non-concessional depending on age et cetera.

Robyn Jacobson:

It's going to take you a lot of years to get that amount back into the fund if that amount is coming out. So my point is we're going to see a massive shift of wealth in the decades ahead out of the superannuation environment into... ?

Liz Westover:

Absolutely.

Robyn Jacobson:

Is it held privately? Is it held in trust? Is it held in companies? What does that do to revenue collections because what might have been taxed at 15% or 0% depending on how the amount was held in super, versus how that income is taxed outside the super environment. I think this will be fascinating to watch.

Liz Westover:

Look, it absolutely will. And I think the big funds, those SMSFs that have got big balances, they're legacy products. As those people die and we cannot get those volumes of balances into super anymore, we're not going to see many of those big funds. But that means there's a lot of planning that goes around those particular ones.

Liz Westover:

And what I would say is, and I'm doing a lot of work with my clients at the moment around this, is where they've got business real property in the fund, so the business succession can actually depend on their ability to manage what's going on in their fund. So I've got situations where there's a very chunky asset that's held in the fund, it's being used by the family business.

Liz Westover:

If one of those members dies, we actually have to get it out the fund. It cannot stay in the fund anymore. How do we do that, to your point earlier? Ultimately, we might want it held in a family trust but you can't pay it out from the fund to a family trust. So does the family trust have assets to actually purchase that asset? So a whole heap of planning that goes on around just getting benefits out of super.

Robyn Jacobson:

Well, there'll be no shortage of work in the years ahead for the profession, that's for sure.

Liz Westover:

No, it's almost a semi-profession itself for SMSFs, isn't it?

Robyn Jacobson:

Absolutely.

Liz Westover:

It's very busy.

Robyn Jacobson:

Liz, thank you for your time. I think again, you've highlighted not just the complexity ongoing in the super space but the volume of changes. It never stands still and always a challenge to keep on top of what's going on, but thank you for your insights.

Liz Westover:

My pleasure.

Robyn Jacobson:

Thank you for listening to this episode of TaxVibe. I've been chatting with Liz Westover, Partner and the National SMSF Leader at Deloitte. To keep up to date with TaxVibe, be sure to subscribe, rate and review whenever you listen to your podcasts.

Robyn Jacobson:

If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member-only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession, and find out what the best tax professionals have in common.

Robyn Jacobson:

Join today and enjoy 14 months membership for the price of 12. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 13 — Delving into trusts and unpaid present entitlements

Release date: 28 Oct 2021

In this episode of TaxVibe, Robyn chats with Paul Hockridge, Principal, Hockridge Advisory Pty Ltd, about the current state of play with trusts and unpaid present entitlements, including a discussion on section 100A.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Paul Hockridge, CTA, Hockridge Advisory Pty Ltd

Robyn Jacobson:

Hello, and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and you're host of today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax professions, great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:

I'm joined by Paul Hockridge, the principal of Hockridge Advisory Proprietary Limited. Paul has worked for the ATO, a large law firm and has been a partner in medium and big four chartered accounting firms and a multi-family office. He has over 30 years experience in tax, asset protection, estate and succession planning. Paul's niches include litigation support, property development, and FBT and salary packaging. Paul specializes in advising high wealth families and closely held businesses, as well as providing support for a number of accounting and law firms.

Robyn Jacobson:

Paul maintains a practicing certificate as a legal practitioner in Victoria. He is a fellow of Chartered Accountants, Australia, New Zealand. He's a senior fellow and teaches in the masters program in the law school at the University of Melbourne. And he is a chartered tax advisor with the Tax Institute. Paul sits on the Tax Institute's National FBT and Employment Taxes Technical committee, and contributes to the Tax Institute's book, estate and business succession planning. Paul is best known as a regular presenter at local, state and national Tax Institute conferences. And I have indeed sat through many of his sessions over the years. Paul, welcome to TaxVibe and particularly during this week of The Tax Summit.

Paul Hockridge:

Thanks very much, Robyn.

Robyn Jacobson:

Great to have you with us. And look, firstly, this is a big week for the Tax Institute. We of course had our very large face to face event in Sydney in March, 2020. And we've had to pivot to a virtual conference this time round, but you are one of more than 100 speakers at this week's event, The Tax Summit - Challenge Accepted. And indeed it's been a challenge for the entire profession over the past 18 months or so. So just a question before we get into our discussion today on trusts and unpaid present entitlements. As we're emerging from this COVID experience and it has been a challenging year for everyone, how important is it do you think for practitioners to reconnect with peers?

Paul Hockridge:

From my perspective, Robyn, really, really important. It's always been important having things like state and national conventions where we get together and we challenge ideas. We don't fall into that group think approach that we can sometimes have in our own firms. So that sort of exchange, that interplay, that testing and pRobyng and stimulation's been really important. But I must say since lockdown and particularly those who are in Melbourne have been locked down for such a long time, not having people across the desk, across the partition, who we can bounce things off, where we hear what's going on in the background, those other exchanges, because we've been missing those, this opportunity to reconnect right now couldn't have come at a better time.

Robyn Jacobson:

Look, it's wonderful and I do hope that next year we get into properly face to face events again, but having this virtual experience, it's really been marvelous this week, to be able to see what's possible and let technology work for us. So today we're having a chat about unpaid present entitlements or UPEs. Now some of us have lived and breathed this journey for many years now, but for the uninitiated, what is a UPE and why are we even talking about this?

Paul Hockridge:

Okay, well, let me start with, first of all, why we're talking about it, first of all, UPEs, which I'll explain in a second, come up predominantly, but not exclusively under Division 7A, the deemed dividend rules, and there are real live hot topic issue. And as you might be aware from other exchanges we've had along the way, litigation support is one of my niches and I'm doing yet another matter at the moment where a practitioner is being sued in relation to his firm's handling of a Division 7A matter. And this is not the first litigation support job I've had in this area. So are UPEs important? Absolutely. So then to go to your question as to how they arise, perhaps the simplest way to describe a UPE is an obligation that a trustee has to pay an amount to a beneficiary of a trust or flip that on its head and it's the entitlement that a beneficiary has against the trustee of the trust to pay them an amount.

Robyn Jacobson:

So when a trustee has all the income derived for the year, they of course distribute it out to the beneficiaries every year, otherwise, they caught top rate of tax on the retained amounts.

Paul Hockridge:

Yes.

Robyn Jacobson:

But ordinarily wouldn't the cash follow those amounts?

Paul Hockridge:

If only life was so simple. And frankly, even if it did, it would almost never flow on the 30th of June. So if we've got the Jacobson family trust, and let's say it's a trading trust, so you won't really know what the profit of the trust is until well after year end, because it takes a while to close off the books. But on or before 30th of June, Robyn is the sole trustee of the Jacobson family trust is going to resolve to distribute income. Let's say you resolve to distribute 50% to your partner and the rest equally between your adult children. That might be an effective resolution because you've done it on a percentage basis, but you don't know what the cash entitlement is because that won't be resolved until later. And even if you did, the cash might not be there because the cash might be tied up in the business.

Paul Hockridge:

So we might resolve to distribute income on or before 30th of June that the actual distribution, the passing of the cash, or in the terms of some deeds, the paying, the applying, the setting aside, that might happen a little later. So let's check the deed, but let's anticipate that we won't necessarily know what the cash entitlement is. And even if we do the cash might not be readily available. So if there's an unpaid entitlement at the year end, that's a UPE, an unpaid present entitlement. So that's what I'd call normal, that's what normally arises for an awful lot of trusts.

Robyn Jacobson:

And what you've done there is highlight the fundamental difference between a company and a trust in terms of how it's taxed, because a company of course makes its profit. And you may not necessarily know that by June 30 either, but you can work it out post year end and whatever it is, it's subject to tax at the corporate rate. Whereas if a trust took that approach, it wouldn't get the corporate rate, it'd be taxed at 47%.

Paul Hockridge:

Yes, correct.

Robyn Jacobson:

And that is why we need to distribute every year.

Paul Hockridge:

Yeah. And so I think two important takeaways there are, first of all, let's make sure that we resolve on or before 30th of June to distribute the "income of the trust". And I'll just put inverted commas around what the "income of the trust" might be. And then secondly, after we resolve, or sorry in the process of resolving, we should read the deed to see what's required. Because I mentioned before about this concept of paying, applying, set aside, that might be what the trust deed requires in relation to a distribution resolution. If so, that's likely to be a defined term. So to really two important takeaways, please resolve on it before 30th of June, second, please read the deed to see what it requires for an effective resolution.

Robyn Jacobson:

Paul, I'm sure if we continue talking for the rest of the day, at least every half an hour, you would keep saying, read the deed. And every trust session I've ever been to, the advice is read the deed. It's one of those golden nuggets that you, there's no escaping it, is there?

Paul Hockridge:

No, it isn't. And what I would say, because this is predominantly an issue for the accountants, and I can say this being an accountant and a lawyer, an awful lot of accountants are intimidated by the idea of reading a deed. And the message I'd pass on there is please don't be intimidated. Most often, they're just not that hard to read. Very, very often they lean themself to a plain reading. Now life isn't always that simple, but a lot of the time it is. So please, message for the accountants, particularly the younger accountants who often come to me feeling a bit intimidated, please don't. If you got through university, there's an extremely high probability you are quite capable of reading and understanding what the deed says.

Robyn Jacobson:

I'm really interested in your insights as to what the landscape currently looks like with Div 7A, UPEs, this concept of [sub-trust 00:09:18]. But before I throw to you again, I just want to set the scene and provide a bit of context for our listeners. Div 7A was introduced of course, in 1997. And I remember all those years ago, I was in practice at the time and we all thought, gosh, this can't happen. And it actually did. And overnight loans that had been made by companies to shareholders really had to be dealt with. They couldn't just be ignored and people continuing to strip these funds out of their company's tax free. But we're 24 years on, and I had a look recently at the extent of amendments that we've had to make provisions in that 24-year period.

Robyn Jacobson:

Now I'm ignoring bills sort of basically withdrawn particular things. But if we focus on the bills that have inserted or amended the law, I counted 23 different bills that have been enacted, that have made changes to Div 7A in 24 years. That's about one a year every year. And just by a nice piece of symmetry, we currently have 23 ATO rulings or practice statements or practical compliance guidelines. So 23 bills, 23 bits of ATO guidance, does that tell us that this is an incredibly complex area?

Paul Hockridge:

It should. And in fact with those 23 ATO pronouncements, the fact that we need 23 ATO pronouncements on top of legislation is horrifying. So when I'm working on a matter later today, this litigation support job, some poor accountant, I'll describe the group as, going through the main, what I call the main recent ruling, dealing with sub-trusts and UPEs, that is [inaudible 00:10:57] 2010/3, and the practice statement PS LA 2010/4. And then there's the PCG, the practical compliance guideline on sub-trusts. The three of those alone are 98 pages long. So there's all the others you mentioned, but just three of the 23, you mentioned, are 98 pages. Now you don't get 98 pages of stuff from the tax office, unless it's important and unless it's complicated. So from my point of view, I'm horrified that this far down the track, we are still living in a world where Division 7A is so important, so complex and people are regularly getting it wrong. So-

Robyn Jacobson:

[crosstalk 00:11:45] understandings this many years on of what I would call the basics or the fundamentals and it's no criticism that the profession, that's a reflection of the complexity of the law.

Paul Hockridge:

I think we're at the stage really where we do need root and branch reform of Division 7A.

Robyn Jacobson:

There's been talk for now nine and a half years of reforming Division 7A and bringing in some new rules. We haven't actually ever seen draft legislation. The closest we've got was the discussion paper released by treasury back in 2018. But in terms of, should we be wishing for these reforms to come in? Because we could be wishing for something that we actually don't like when we see it.

Paul Hockridge:

Without me crossing the boundaries of confidentiality, because I have been involved in confidential discussions on reform with the government, my sense in that time is the government, because there's various stakeholders from the government, were taking an open-minded intelligent collaborative approach to resolving a number of these issues. So am I fearful of change or [inaudible 00:12:49]? No, my sense is we would be likely to see an improvement.

Robyn Jacobson:

And we can only hope for that. I don't want to keep seeing the series of [inaudible 00:12:58] where it just seems to be getting heavier and heavier under the weight of these amendments that keep being made to the provisions.

Paul Hockridge:

Exactly.

Robyn Jacobson:

So at a practical level, when you've got, in some case, in very large numbers of structures, I came across a group years ago that had about nine different trusts involved, sub-trusts, unit trusts, discretionary trusts, and sitting underneath it all was one company, one corporate beneficiary and all these Div 7A issues existed because of this one company sitting underneath. I used to describe it a bit like an upturned umbrella. So you've got the company sitting at the point that's on the ground and the rest of the volume of the umbrella is this bunch of trusts, which were way down with compliance and management because of the exposure to Div 7A. So how's the best way for people to manage these sorts of things? So that's probably on the larger side of a typical SME group. You might only have one or two entities, how would you get people to manage that?

Paul Hockridge:

Okay, first I would start with, do we have a company that has made a loan or if we don't have a company that's made a loan, do we have a company that is owed a UPE by a trust? If the answer is yes to either those questions really, we then have to look where the funds have flowed within group or out of the group, because funds flows within the group that are other than company to company could well be caught by Division 7A as could transfer the funds outside the group. So like I said, I would start with, if I've got a corporate beneficiary, has it made a loan or is it owed money by a trust and has that trust made a loan? If the answer to either question is yes, that's when I start pulling out what little hair I have left, because I think I'm going to have quite the time ahead of me.

Robyn Jacobson:

And the interaction of different layers of trust. If we start looking at say, a UPE, from one trust to another trust, and then from that trust down to a company, and then we start making loans out the top trust, yes, there are rules to deal with that as well. And there are so many different quarantining dates, grandfathering dates when different rules came in.

Paul Hockridge:

Yeah. And I'll deal with some of these and the flowing through different entities in my paper for The Tax Summit.

Robyn Jacobson:

Very good. So if people wanted to listen to more detail, they can tune in there.

Paul Hockridge:

That's it.

Robyn Jacobson:

We talked a moment ago about the flow of money. So in other words, a distribution out of a trust is one thing, but the actual physical flow of the cash is another and they don't always float at the same place. So I want to now bring into this discussion, the provision called 100A. Now some will be very familiar with this, others may not have even have come across it in practice, can you explain again, for the uninitiated, what is it, should we be worried about it and why is it really just being talked about now and it's been around since 1978?

Paul Hockridge:

Sure. Section 100A is often referred to by the heading of those rules, which are the reimbursement agreement rules. And that's really unhelpful because in most situations it's got nothing to do with reimbursements. So I would turn the title around and ask whether someone other than the purported beneficiary has benefited under the trust. So again, if the Jacobson family trust decides to distribute to Robyn, but the cash doesn't go to Robyn, someone else is benefiting from that cash or from the trust assets, that's when I say, gee, maybe 100A will apply because someone other than Robyn who is the purported beneficiary, you are the beneficiary who's named in the distribution resolution, if someone else got the cash, not you or someone else got a benefit rather than you, that's when the alarm bells go off and we need to look a bit further. So you mentioned before these came in since about 1978, I think it was, and now we're dealing then with trust splitting amongst others. So trust splitting, dealing with trust stripping, but they obviously apply much more broadly than that.

Robyn Jacobson:

If we look at the case law that we've seen over the years where the [inaudible 00:17:11] used it effectively. And I think of cases like [Idol Kroft 00:17:16] and [Ralph Lindon 00:17:18] and similar, these were quite blatant cases egregious even, and arguably the commissioner could have used potentially the trust loss provisions or the general anti-avoidance rule part iVA, but ultimately went with 100A and successfully prosecuted those cases through the tax system. We've had very few 100A cases in a more generic or [inaudible 00:17:41] type situation. Is there a reason for that?

Paul Hockridge:

I suspect that one of the reasons for that is the existence of this broad anti-avoidance rule has caused people not to enter into transactions, which might well be caught, which is really an indicator of a very effective anti-avoidance rule when you don't have to apply it because it scares people away. So to give you a simple example of when this might have applied, if I had my daughters still at MLC, where they went to school, if instead of me paying school fees for both of my daughters, the Hockridge family trust may have an income distribution to MLC and MLC is an income tax exempt entity, so wouldn't matter so much why or from whom there was a deposit into the MLC account, as long as there's enough there to cover of my daughter's school fees. In that situation say, well, MLC is the beneficiary of the trust.

Paul Hockridge:

Let's say it's an eligible beneficiary of the Hockridge family trust, did someone other than MLC, the purported beneficiary benefit under this arrangement? And the answer is too right. Paul did, because Paul didn't get a bill for the school fees. So as effectively paying for the school fees out of pre-tax money by distributing to MLC. Now, because someone other than the purported beneficiary, MLC benefited, that is, Paul being the person who didn't get the bill for the school fees, in my view, 100A would've applied. The same sort of principal would apply if I tried paying an old folk's home, a retirement village for looking after my mother or my father. So the fact that people became aware that those sort of arrangements would be caught by 100A perhaps encouraged people not to try such things, which is a mark of the effectiveness of the provision. That's not to say all the issues are resolved, but I suspect that that's one of the reasons we haven't seen its widespread application.

Robyn Jacobson:

Let's put a couple of other scenarios to you and you comment on whether you think 100A could apply. You talked about where the cash is potentially retained by the trust. So let's say my trust is running a business and it distributes to me that the UPE rises because the trustee retains the use of the cash so it can run the business working capital, UPE exists. Now I'm still technically accessible on the distribution, but could 100A happen because I'm not getting the use of the cash the trustee is?

Paul Hockridge:

Yeah, that's one of the really big, important questions that we are hopeful that the tax office will address in its ruling, which the ATO has promised us early next year. And because this sort of issue that you are referring to is so incredibly common because as we said at the outset, very often, the cash behind the distributions, the cash design to fund the distributions is tied up in working capital in the business activities. So we're expecting a ruling from the ATO early next year. The ATO tells us that active compliance resources are not to be devoted to the application of 100A in the ordinary course of events prior to the 2021 financial year. So from 1st of July '21, then we can expect the commission of application of 100A to be put on the front burner, so to speak. We might have a little bit of safe harbor in relation to pre one July '21, but that's assuming that the act haven't been particularly egregious.

Paul Hockridge:

So to go to your point, which is probably the most live of all of the 100A issues, let's see what the commissioner comes up with. My crystal ball says I would be absolutely amazed if the commissioner sought to apply 100A in that situation without a change in legislation, simply because of the practical difficulties of determining in what circumstances it would be reasonable to expect a trustee to be able to access cash, but only time will tell. So let's keep our fingers crossed and our eyes peeled for early in the new year for this ruling.

Robyn Jacobson:

Indeed. But guidances on that is going to be so crucial for these common type transactions.

Paul Hockridge:

Absolutely, absolutely.

Robyn Jacobson:

[crosstalk 00:22:05] one I want to explain. What if we have a trust carrying on a business, distributes to a company, a corporate beneficiary, the amount is left unpaid. Now, if the trustee uses the funds, we know already that that is a potential Div 7A issue, and they'll either be a loan or the UPE would be treated as a loan, anyway. We know that if the funds are linked out to say an individual, who's an associate of that company, we definitely already have a problem under the legislative provisions of Div 7A. So in other words, Div 7A seems to neatly deal with all of that. But let's put a 100A lens over the top of it, have we got potential exposure there and bearing in mind that Div 7A is a consequence for ultimately the person who uses the funds, whereas 100A is a consequence for the trustee.

Paul Hockridge:

Yeah, good point. You might recall, Robyn, that when you get to the back of Division 7A, there are the anti-overlap rules. So we run through with loans, with payments and debt forgiveness, and we say, here's what fringe benefits tax applies to, here's what Division 7A applies to. And then in the commissioner's rulings, he then tells what happens if you've got a UPE that's deemed to be a loan, which set of rules do you apply, [subdivision AA 00:23:23], or what are called the main Division 7? The issue we're rising now is, well, gee, what if it's a different part of the act applies, a different part of [inaudible 00:23:32] act applies, we need a primacy rule.

Paul Hockridge:

We need a rule that says, in the following circumstances, here's the rule we apply because the commissioner won't seek to tax the same amount twice, even to different tax payers, but we really do need legislative guidance, we need a clear statement, just like we find at the end of Division 7A in relation to, is it FBT or is it Division 7A, we do need that clear rule saying who's going to have to pay in these circumstances.

Robyn Jacobson:

I do hope that is clearly set out in the draft ruling and then ultimately the final ruling, I am thinking back to some issue, a guidance a number of years ago, where it was no more than a fact sheet. It wasn't binding on the commissioner, but it gave us a sense of what the commissioner was thinking on 100A, and I remember it did allude to the idea that there could be a Div 7A loan that is being with a seven or 25 years, but still 100A potentially could apply if you like over the top of it. So I agree that distinction between the two and understanding like a delineation is really important.

Robyn Jacobson:

One more issue with 100A as we wait for this ruling, there is an exception built into the provision dealing with what's called an ordinary family or commercial dealing. And it's one of these gems that everybody loves to draw upon, everybody thinks they have an ordinary family or commercial dealing, but it's ultimately not really ever been defined, we haven't got judicial clarification from the courts. And that's why this ruling again, is going to be so important to provide some guidance on that. But if we have a dealing that is common, does the fact that it's common make it an ordinary family and commercial dealing?

Paul Hockridge:

In my view, no. And I very rarely give binary type answers, but I think the answer there's got to be no. And the reason I say no is the golf club approach where everybody down at the golf club, at tennis club does it. So it must be okay, doesn't make it right, it doesn't make it the correct interpretation. And simply as a matter of public policy, I can't imagine a court saying that widespread inappropriate behavior is so common that it must be okay. And that's-

Robyn Jacobson:

Do you remember [crosstalk 00:25:47] for the speed limit, it was someone was saying driving past a 60 speed zone sign, well, the traffic was doing 80, it's the same sort of thing.

Paul Hockridge:

Yeah. So do I think as a matter of public policy, the law would be interpreted that way? No, I don't.

Robyn Jacobson:

Look, it Will be interesting to see when this ruling is finally [inaudible 00:26:04] in a draft form. My view, I suspect the profession's not going to be thrilled when they see it, but I have no insights, I haven't seen a draft, and it'll be very interesting when it does come out.

Paul Hockridge:

Yes. My fear is that trying to define an ordinary family or commercial dealing, which is where that carve out is, is likely to [inaudible 00:26:25] as easy and straightforward as explaining what income according into ordinary concepts are, or when [8/1 00:26:30] will apply to a loss or outgoing occurred in producing income where a negative limb doesn't apply. We really are being asked to split the baby in half.

Robyn Jacobson:

We shall see. Now in your paper, you talk about a concept in terms of a estate planning called the angel of death. So can you please explain what you mean by this?

Paul Hockridge:

Sure, sure. By way of background, a lot of us have very wealthy clients with corporate beneficiaries and there can be some big chunks of change sitting in those corporate beneficiaries. So companies pregnant with retained earnings, commonly with the ability to fully frank those dividends, commonly those corporate beneficiaries are owned by the trustee of a discretionary trust. And that's been the case while the wealth has been accumulating for asset protection reasons. And then as mom or dad start to get on in years, we think, gee, that's a really unfortunate structure because we can pass control of the family discretionary trust that owns the shares and we can distribute dividend out through the trust in years to come.

Paul Hockridge:

That's doable, but it's not terribly tax efficient. What we would much rather is have this wealth, that's sitting in the corporate beneficiary, as an asset of mom or dad when they pass. Because then it can form an asset of their estate and it can be dealt with under a testamentary trust. And by testamentary trust, I mean, a trust created under the will of the deceased. It comes into existence under the will, only on the passing of the [crosstalk 00:28:09].

Robyn Jacobson:

Because of course, if they don't hold the shares upon their death and the family trust does, it remains outside the estate.

Paul Hockridge:

Correct. So estate plan is sometimes draw a line down the page and on one side they put the estate assets, they're the things that mom and dad own. And then there's the non-estate assets and discretionary trusts and indeed she's in companies owned by discretionary trust, then non-estate assets. So then we're saying, gee, there's, let's say $10 million dollars in a corporate beneficiary owned by the trustee of a family discretionary trust, that's a non-estate asset. I would really love it to be an estate asset so it can form part of the corpus of a testamentary trust. Why? Well, the answer there is we can make distributions of income out of testamentary trusts to minors without having the penalty rates of tax apply. And if that distribution is a fully franked dividend say, paid to mom or dad to apply for the benefit of their children to pay school fees and the like, with current tax rates, we could distribute in the region of $100,000 without having any catch up tax payable.

Paul Hockridge:

So when we think, let's say it's Robyn now, and Robyn's kids are just finishing school. So this doesn't sound particularly attractive, because there's no grandchildren. On the other hand, we're thinking, well, hang on this estate planning structure, this might be in place for a long time before anyone passes. So we might be talking about potentially income distribution of dividend income, not just of you and of your children, but of your grandchildren, of your great-grandchildren. So we could be looking a long way in the future from a, in estate planning perspective. So then we say, well, how do we get this wealth out of this corporate beneficiary up to mom and dad and how do we do it only very shortly before they pass away? Because if we do it now and [inaudible 00:30:08] pass away for 20 years, we don't have asset protection and we don't have income and capital distribution flexibility for the next 20 years. And here's where the angel of death comes in.

Paul Hockridge:

So let's just say the [inaudible 00:30:21] is your mom. She's been a successful professional woman all her life, she's accumulated enormous wealth in a corporate beneficiary owned by the trustee of a discretionary trust. After discussions with Robyn, with all Robyn has been learning over the years and all her years in tax, it's agreed that you will take over as replacement director of the corporate beneficiary as replacement director, let's say sole director of the trustee of the family trust that owns the shares. And let's assume that then shortly before you're, sorry, I should mention this one other thing to do. We'll create a company now, it's owned by your mom and it will just sit there until a required time. Maybe for years and years and years, it'll just sit there owned by your mom, $10 cashier bank, $10 paid up capital.

Paul Hockridge:

So then there's your mom in [Peter Mac 00:31:18], the lymphomas flared up. She's not going to last very much longer. The trigger for you to replace her as a director of both the corporate beneficiary and the trustee of the family trust, those triggers have happened so you step in as a director, because you've planned in advance. You haven't made a decision, because that would be inappropriate, but you have prepared documentation declaring a dividend of 10 million dollars fully franked out of the corporate beneficiary. And you had turned your mind to what would happen if that happened and the trustee of the discretionary trust [inaudible 00:31:54], it's probably a good idea if I distribute this 10 million fully franked dividend to mom's company, the one that she set up all those years ago.

Paul Hockridge:

Now, again, you're not going to resolve ahead of time to distribute that fully franked dividend, because that would be in breach of your trustees duties because you should only make such a decision at the time, having regard to all of the facts and circumstances at the time. But shortly before your mom passes, what might have been happened is, a dividend has flowed from the corporate beneficiary, through the family trust to the company owned by your mom and suddenly your mom's estate is worth 10 million dollars more and in years to come, particularly around school fees time at 35 up $1,000 of pop for the kids in senior years, assuming that that they're not boarding.

Paul Hockridge:

And let alone any other costs, the trustee of the testamentary trust might have a word to the director of the company and director of the company might declare a fully franked dividend to the trustee of the testamentary trust to trustee of the testamentary trust might say, Robyn, here's some money, please apply it for the care of your children who are the beneficiaries. And suddenly we start draining money out of what's effectively a corporate beneficiary with no catch up tax. So...

Robyn Jacobson:

[crosstalk 00:33:16] we shift to the wealth across just prior to death?

Paul Hockridge:

Correct. And so the angel of death, you are the angel of death. You are there to try and protect some of the family wealth for the benefit of future generations.

Robyn Jacobson:

So it's going to be applicable in so many cases where there's significant wealth and where this can all be planned out and it's interesting look at how state planning can be very effective. So but what I'm also thinking through that, I've often spoken about this in the context of deceased estates and similar matters, but there's always that difference between the hospital bed and the proverbial [inaudible 00:33:54].

Paul Hockridge:

Mm-hmm (affirmative), yes. That's right.

Robyn Jacobson:

And this of course is assuming that you know in advance and can make the necessary arrangements.

Paul Hockridge:

Yes. So one of the comments I make in my paper is, do I think 100A, the reimbursement agreement rules, should apply [inaudible 00:34:09] general anti-avoidance rules? No, and no. But it'll also raise your point that does this help us in the event of unexpected death? So if someone dies too soon, heck we did our best, but we've just missed out. But having said that doesn't mean we should do nothing just because there's no guarantee of success 100% of the time. I suggest no. I think we should do the best with what we've got. As a minimum, we should raise with our clients, these alternatives, the prospects of the potentially really big savings.

Paul Hockridge:

If it doesn't work out, hopefully we'll explain to our clients the fact that these things aren't absolutely foolproof, that mom could pass a little too soon or she could have a heart attack, and it was just too soon, but sometimes our clients appreciate us raising options, raising choices. And are we likely to have to tweak every one of these arrangements sort of facts and circumstances in each case? Absolutely, absolutely. And one of the big ones going to be, who's going to be the angel of death? Is it going to be Robyn or Robyn and her sister? Or-

Robyn Jacobson:

And what if something happens to that angel of death along the Way?

Paul Hockridge:

Yeah. And what should happen when people get married and those sort of issues. So are there lots of important details? Absolutely. But the reason for including this in the paper was to take us a little bit away from some of the pure compliance, raise a broader structural issue, which might help and have some longer standing effect because it really is dealing with intergenerational wealth transfer.

Robyn Jacobson:

Paul, thank you. And I think those comments at a broader level, just typify the challenge that any tax advisor has, you can only give advice based on what you know at the time and whether that's the stage of the tax law or the physical state of the family or the state of someone's mind, there are so much that can change. There is no guarantee. We do talk about death and taxes being where the only two things that are guaranteed, but I think that's a really interesting take on how planning can be done when it comes to estates. So I thank you.

Paul Hockridge:

My pleasure.

Robyn Jacobson:

Also, interesting to recap on where we're at with UPEs and [inaudible 00:36:17] 100A ruling, which, yes, we hope to see early next year. It has of course been deferred a number of times. So thank you again, Paul.

Paul Hockridge:

My pleasure. Thanks Robyn.

Robyn Jacobson:

Thank you for listening to this episode of TaxVibe. I've been chatting with Paul Hockridge, principal at Hockridge Advisory Proprietary Limited. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram and Twitter, you can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of the Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today and enjoy 14 months membership for the price of 12. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 12 — Walking the tax dispute pathway

Release date: 14 Oct 2021

In this episode of TaxVibe, Robyn chats with Jerome Tse, Partner, King & Wood Mallesons and current Vice President of The Tax Institute, and Scott Treatt, CTA, General Manager, Tax Policy and Advocacy, at The Tax Institute about the pathways available in resolving tax disputes.

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: Jerome Tse, CTA. King & Wood Mallesons and Scott Treatt, CTA, The Tax Institute

Robyn Jacobson:

Hello and welcome to TaxVibe, a podcast by the The Tax Institute. I'm Robyn jacobson, the senior advocate at The Tax Institute, and your host of today's podcast. We love the vibe of tax and here at The Tax Institute we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not here every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:

I'm joined by Scott Treatt, general manager tax policy and advocacy at The Tax Institute. Scott is a chartered tax advisor and has been practicing as a tax specialist since 1997, gaining his experience in large second tier and Big Four accounting firms, as well as government. Over the years, he's been engaged on direct and indirect tax issues pertaining to individuals, startups, small businesses, private groups, and multinationals, addressing issues including but certainly not limited to, asset, business, and entity transactions and disposals, insolvencies, structuring, succession, and disputes within family groups, as well as with the ATO. Scott has a passion for our tax system and tax education, continuously seeking to find opportunities to improve the efficiency and effectiveness of both. He's a regular presenter at industry events and had been a lecturer for some 12 years in The Tax Institute's structured education programs. Scott joined The Tax Institute in November, 2020.

Robyn Jacobson:

I'm also joined by Jerome Tse, CTA, who is a partner at King & Wood Mallesons, specializing in taxation disputes and litigation. Jerome is also the firm's global transfer pricing coordinator. Jerome is an experienced practitioner and has been involved in a number of Australia's recent high profile tax cases. He's currently the vice president of The Tax Institute. Jerome and Scott, welcome to you both and great to have you on TaxVibe.

Scott Treatt:

Thanks, Robyn. Great to be here.

Jerome Tse:

Thank you.

Robyn Jacobson:

We don't often have three of us on the air at the same time, but this will be a really interesting discussion and today we're going to have a chat about dispute resolution, and I think what will be useful for us it to set the scene. Why are we even having this conversation? And then I'm interested to get your thoughts and insights as to what does it look like when someone is on the pathway of resolving a dispute with the ATO? I think it's useful to point out that we'll be covering both the SME market, as well as the corporate market. So, disputes do remain a big part of the tax system. Jerome, why is this?

Jerome Tse:

Well, Robyn, I think everyone knows the age old saying, there's nothing certain but death and taxes. I think that's particularly accurate when you're talking about tax disputes and tax controversy. If you're looking in the Australian context, our tax laws run over thousands of pages. You then add the double tax treaties to it, you add the ATO guidance to it, the legislation, the EMs, and then all our case law, and you invariably with have a tax system that is complex and open to different interpretations.

Jerome Tse:

Tax disputes I think in that context are here to stay. Even during the pandemic, if you look at what's happened in the last 18 months in Australia, we've been quite fortunate to not weather the pandemic as badly as some other countries. Tax disputes didn't go away. Gratefully the ATO offered many taxpayers to pause compliance action over the course of 2020, to allow businesses to really deal with keeping themselves afloat, keeping staff employed, and really just looking after their own wellbeing, economically and mentally.

Jerome Tse:

I think that was a great initiative by the ATO. It was optional, so some taxpayers said, "Look, I'm happy to keep going." But others said, "Yes, please. I need to deal with JobKeeper," all the other job ones. Robyn, you know those better than me. Pause is coming off now, Sydney's coming out of lockdown Monday, and the rest of Australia won't be too far behind.

Robyn Jacobson:

Jerome, does that mean that all bets are off? If we're recovering and starting to emerge from COVID, where does this leave taxpayers moving into 2022 regarding disputes?

Jerome Tse:

All bets are off in a sense. I think audit activity will start again, if it hasn't already started. It will pick up. But the ATO has said publicly also that if you're still struggling, please go and talk to them. They would like their lodgments up-to-date, but if you've got other issues, come and talk to them and see how they can help manage the process. Again, I think they're being a bit more bespoke in how they deal with disputes and other audit activity. But it is coming off now. I can almost see bottleneck is just like a bottle of soft drink shaken a little bit. It's about to burst. We might see the next 18 months, Robyn, might be an uptick in audit activity.

Robyn Jacobson:

Scott, we talk about living with COVID. Do we also need to live with tax disputes?

Scott Treatt:

Of course. I mean, tax disputes have been here for a long time. That's why I love tax. Everyone's got a difference of opinion. I get 10 tax practitioners in a room and you've got 10 different opinions. So, disputes have always been here and they always will. What we've got to focus on is the process and efficiency in that process, and what have you. I just wanted to pick up on something Jerome just said there too, around what is living with COVID in tax mean? I think a piece of that too, is transparency, and that is ensuring you keep your lodgements up-to-date. Some people might be holding off on getting lodgments in and what have you, for fear of a dispute or for fear of not being able to pay or what have you.

Scott Treatt:

But I think it's crucial that piece, of ensuring lodgements stay up-to-date but then as Jerome says, stay in communication with the ATO. That's what they keep saying. Talk to us. Talk to us through this time at the moment, so that we know what you're going through, so we can work with you in relation to it. I think they're living by it. I just wanted to at least tie that off. But looking at disputes too, this has been a topic that's been recently covered in our TaxVine on the preambles. We had Chris Kinsella do a two-part series just recently, and I thought it was excellent.

Scott Treatt:

I thought it was good to cover off on those questions of when do you settle and when do you litigate? Looking at issues of what your technical position is, who's got the onus of proof, what's the cost? What is the cost? Like, that's a significant part of this and I think it can't be overlooked. There is a large cost that can be associated with disputes and I think that's the piece that we should explore as we go through, is there is a large cost on a portion of taxpayers to exercise rights that are coming their way.

Scott Treatt:

I know IGOT's been looking at this. Inspector General's been, or shortly, to release their review on the communication of taxpayer right, and in that report itself it looks at how well the ATO is communicating rights of taxpayers to not just their part 4C rights, but just their other rights to complain and seek out other forms of resolution for the issues they're having.

Robyn Jacobson:

I spoke with the Inspector General of Taxation and Taxation Ombudsman Karen Payne just yesterday and she did indicate to us that yes, we're going to be releasing this report, this investigation on the 14th of October. We do look forward to its public release. But what she did share is they've already got up on their website, and anyone is welcome to go and look at this, some survey results following some recent questions that were put to taxpayers. I just want to share some of those results with you because I think they're quite insightful and really set the scene for the discussion that we're going to continue to have.

Robyn Jacobson:

So, one of the questions was when a taxpayer was asked how important is the effective communication of taxpayers' rights, 96% of respondents said it was important or very important. This is clearly something that is of value and important to taxpayers. 72% thought the part C rights, which is the right to lodge an objection, are well communicated, but these are the formal objection rights. Most people are aware that if they don't agree with an ATO decision, they can object. But there is less communication or it is communicated less well when it comes to the administrative or informal rights. So, there's a lower awareness of rights that go beyond those relating to objections, and there's certainly room for improvement for the ATO to better communicate those rights to taxpayers.

Robyn Jacobson:

In other words, what are their options and what are their pathways? And just to pass on some of the quotes that these respondents provided the Inspector General, taxpayers should be made aware of their rights if they disagree with a decision made by the ATO, and should feel confident that there is information available to support them to have a decision made by the ATO reviewed. I think this one's really important. Taxpayers have a right to be fully informed about all review and appeal options. A variation of this, all taxpayers should be made aware that they have rights to take a decision further. If you're unaware of the processes, you cannot act.

Robyn Jacobson:

The ATO needs to be consistent with how they communicate outcomes. There are quite some recurring themes in that feedback, and I'm interested, Scott, if I can come back to you, when we finally do see the release of this report publicly, it's going to be interesting to see of course, how it's received by the taxpayer population and by the profession. But what do you think are going to be the implications of this report?

Scott Treatt:

I think there needs to be, and I'd be interested to read the report once it is released and that of the ATO's response to the report, but looking at correspondence in general would be I guess a logical piece around what is communicated around rights and the avenues that taxpayers can go through? But there's a more broad issue, and this is probably the next debate that's had, and that is an understanding of once you know what your rights are, how do you exercise them? How do you best communicate? And Jerome, a lot of your work is in the area of disputes and it is nuanced, the way in which you approach a dispute, the way in which you lodge your objection, how you formulate your arguments and get that to position yourself well through the disputes process. Do you have some insight in that regard which would be beneficial to our listeners?

Jerome Tse:

I might start, Scott, just with Robyn's comments on the IGOT survey results and what's on the website. And I found it quite interesting that only 72% thought that their part 4C rights were well communicated. I think that's surprising. In the corporate market I think that would be much higher and that might mean that there should be a focus, or there could be a better focus on the small business market or the individual market of who may be less informed on their rights.

Jerome Tse:

Certainly I think informal administrative rights are less well known than the formal part 4C rights. There are other rights that I think people shouldn't forget about. Freedom of information, that's always a good way to get a little bit more information from the ATO about your own affairs. Then there are formal judicial review rights that if you get down that route, they are very important, as well. But looking at how you run a dispute, Scott, I think you're right, there's a lot of strategy there to think about.

Jerome Tse:

What do you put in your objection? What do you not press? When do you do it? When do you engage for settlement? When do you litigate? I remember probably five or six years ago, I was in Adelaide with Debbie Hastings who used to be the Deputy Commissioner of Review and Dispute Resolution. We were sitting down having a coffee before getting on, doing a joint presentation, and she said to me there are only four instances really where the ATO won't be keen to settle. One is when the taxpayer itself doesn't want to settle, so you can't settle. You need two to play tango.

Jerome Tse:

The second is if there's a point of law that really requires clarity. Law clarification is one part of what the system needs. The third is if the ATO needs to send a signal to the market. Whether it be by way of punishment or otherwise. And the last one I think is where I usually get to, if I go to court, and we always try not to go to court, not to litigate. If the parties have tried and tried and tried to reach a settlement and we just can't, then we go off to court knowing that we've tried to do so. I think there's enough nuance and strategy in how you run a dispute, but it shouldn't be to get to the litigation end. It is to find ways to get off that highway to try and find ways to resolve the dispute. I think that's the trick to advising taxpayers.

Scott Treatt:

That's right. And part of that is understanding where is the highway? What is the highway you're driving along? Because what we operate in is a self-assessment system. The highway which you're referring to Jerome, is that whole end to end process. It's that piece from you're lodging, you're getting an assessment raised. From that point of time, there could be a compliance review or an audit which comes through. You might through that process, it could be self-amendments, there could be objections to outcomes from those reviews. If you even get there.

Scott Treatt:

You can certainly challenge the way in which the reviews or audits are taking place along the process, as you're engaging on the issues which are being raised. The ATO is generally very transparent in that audit process around the issues they're looking at and why. There's opportunity to enter discussions through that. As I said, then you've got the right to object to an amended assessment, if you get to there. You might have even gone for a private binding ruling before you've lodged your return.

Scott Treatt:

There's so many different avenues along this highway to which you're referring, where you can enter into dispute resolution in one way, shape, or form. And the ATO over the years has been really good at expanding their alternate dispute resolution activities. You've got in-house facilitation, independent reviews in the large market, in the small market. Small market also, or your more vulnerable taxpayers I would say, you've got the dispute assist tool and that's probably one of the less well known. Lesser known. Sorry, lesser known tools which are in the toolkit, that dispute resolution toolkit there.

Scott Treatt:

Then you might end up in court and you pick up on the points you're just raising around why you end up in court and why they want to push them. If there's a principle of law that they're testing, then there's test case funding. There's that whole pathway there of availing yourself to test case funding, where it is a precedential view that they're seeking to pursue. You've got the right to get in the AAT. You can be self-represented through there. But these days as well, there's a small business tribunal, right? Which exists within the AAT. That's another tool in the toolkit for small businesses in particular, where they can again, self-represent.

Scott Treatt:

And if that's the case, then as I understand, the ATO too effectively have to be self-represented. And if the ATO choose to get external representation, then the rules associated with the small business tribunal is that they've got to pay for your representation. There's a lot of different things to consider along that pathway of dispute resolution or that highway as you call it, Jerome.

Robyn Jacobson:

I want to draw on something both of you have mentioned. Jerome, you spoke about larger corporate taxpayers probably having access to people who are perhaps more familiar with the litigious side of these pathways. And Scott, you've spoken about all these different pathways that are available. Now, I think that most people would understand that if they disagreed with the ATO on an interpretation issue, they can then dispute that with the tax office. But we've got to bear in mind there is at least a quarter, if not more of the population, I'm talking individual population now, that doesn't use a tax agent.

Robyn Jacobson:

In other words, they're self-lodgers. So, how does that part of the taxpayer population even begin to understand the pathways that are available? And understanding that there are significant differences between someone who self-lodges using myGov, and a multinational who has access to a whole boardroom full of advisors to guide them through these pathways. Can I get a response from each of you? I'll start with Jerome.

Jerome Tse:

I think that goes to quality before the government. We do need to do some work about helping individuals who are using myGov or lodging their own tax returns to give them the education that they can object. And object, we use it in a very technical sense but an objection can be as much as a letter to the ATO saying, "I don't agree with your assessment. I should be able to deduct these motor vehicle expenses." That can be an objection. Whether it's maybe more plain language web guidance from the ATO, whether it's really educating through bodies like The Tax Institute where we need to be providing educational services, not just to our members but to community at large, to help them educate at this base level.

Jerome Tse:

I think it's really, really important because it'll be very disappointing for a taxpayer to say, "I disagree. I should have gotten that deduction. I don't know what to do. It's only a thousand dollars, $50, I'm just going to leave it." When if you or I looked at it, or Scott looked at it, it's a clear deduction. That'd just be a very disappointing outcome that shouldn't happen in the system. I don't know what you think, Scott.

Scott Treatt:

Yeah, it's interesting. Just reflecting on the question as Robyn asked, and we sit here as tax practitioners and we know the system. We come from a very educated point of view of knowing how the system works and what our underlying rights are, who we need to liaise and communicate with. I'm not sure that Joe Blow on the street knows that. And it's not just about communicating. If we look at Karen, the work that Karen Payne is doing, it's not just about this is your right. It is about how to avail yourself of that right.

Scott Treatt:

There is an element of this. I think you're right, starting there Jerome, the web guidance. How that articulates how one moves through that process. But also importantly, how a taxpayer finds that web guidance. We have all experienced searching the ATO website. I recall, distinctly recall the commissioner himself a number of years ago, "I wouldn't search on our website. I'd use Google." I think that was in a Tax Institute National Convention he made that comment one year.

Scott Treatt:

But that's certainly what I do. How does the general public find how to avail themselves of the right that's been communicated to them? Then the other piece, too though, is that around the vulnerable, [inaudible 00:21:30] which the tax clinics look after. I actually think the tax clinics have been doing a great job over the last few years, as well, in terms of supporting those more vulnerable clients go through this process. Not just bring their lodgements up-to-date, but also run through a dispute.

Scott Treatt:

There is a part of the population who may not have had the knowledge or access to process of objecting or going through a dispute, now do through these tax clinics. Yeah, there's a whole range of issues which come out of it. I think depending on what comes out of the report, and as I say, the ATO's response, I think we need to sit back and actually put ourselves in the shoes of those who aren't represented to see do they understand it?

Robyn Jacobson:

You've both spoken of this almost litigation highway and how there are going to be different exit ramps that you can take along the way, depending on the choices you make or perhaps choices that the ATO makes, as well. I think it might be useful just to put all this in perspective. I'm going to provide you with some broad numbers relating to the 1920 income year. The total number of returns lodged, so this is things like activity statements, tax returns, FBT returns, et cetera, is nearly 39 million returns.

Robyn Jacobson:

Now, of those, about 470,000, there were audits conducted that led to adjustments. Of those, we ended up with around 22,000 objections, minor amounts of settlements and independent reviews, but I want to focus on the litigation line. 375 matters went to litigation out of nearly 39 million returns. Now, of course, in that figure you're going to have some wins for the tax office and some wins for the taxpayer. But there is a minuscule proportion of taxpayers that end up in litigation. That is not to downplay the importance of litigation, and nor is it to suggest that it's not a massive impost on those who are going through it.

Robyn Jacobson:

But there have got to be better ways that, and it's obviously not everyone's getting to the litigation point, but we need to encourage more people. If they're going to dispute a position with the ATO, that they find an exit ramp before they get to court. Again, Jerome, can I start with you in response to that?

Jerome Tse:

I think those stats generally show system overall is working. To have litigation at those so low levels, out of 39 million tax returns lodged, the ATO I think is now picking, and in part it can't choose, but it is picking the right fights or better fights in litigation and what goes to court and what doesn't. I say that in part the ATO is in control, because the ATO can reach settlement prior to litigation with taxpayers. Even though taxpayers are the ones that have to push the matter into court.

Jerome Tse:

I'm not surprised that litigation's at the 3-400s. I don't think it's going to go up or down too much more over the next couple years. But I think it's a good sign for the Australian tax system that litigation is so low. I think it's also important to say that the pathway to litigation needs to be there to give confidence in the tax system. Sometimes you just can't settle. Sometimes, as Debbie and I were talking about years ago, you need law of clarification or you've simply tried.

Jerome Tse:

I think one example of that is the Chevron transfer pricing case. People tried to settle for years and years and years, but we had to get to court. What belies this number as well, I think this 375 number that we talk about, is that in the Chevron case, we got past trial, we got past the full federal court. We filed special leave and then we settled. So, sometimes you may need to litigate to reach a settlement outcome, as well, and that also I think shows you can settle at any stage of the highway, even if you started on the court process.

Robyn Jacobson:

Scott, I'll seek a comment from you in a moment, but just while I've still got Jerome, and I'm wondering Jerome if you can try and provide a response without the bias of being a lawyer, but see if you can do this objectively.

Jerome Tse:

Oh dear, oh dear.

Robyn Jacobson:

I'm thinking of this pathway and let's go right back to some of the earlier stages. In my discussions with lawyers over the years, there's been some fairly consistent feedback from them, that had the accountant or had the taxpayer approached them or engaged them earlier in the process, then they wouldn't have been called in at the 11th hour to fix the bigger mess that takes longer to resolve, has been escalated, and inevitably costs more. Without saying should lawyers be engaged early, because I'd of course expect you to say yes, from an objective perspective, and he has got his thumbs up as we're doing this, from an objective perspective, at what point should people engage legal advice?

Jerome Tse:

It is a good point. I think you can only speak in generalizations here. Because there will be good tax agents and accountants who have the requisite skillset to assist their clients. Tax disputes is a specialization in itself. So, there are nuances that we talk about with taxpayers having a burden of proof, for example, in how to approach a dispute and how to deal with the ATO.

Jerome Tse:

I would probably say, and it's hard for people to say you're a lawyer, you're just saying this, I'd err on the side of probably get a lawyer in the AAT. I think that while some tax agents can do well at the AAT, I think their clients may be better served by having a barrister or a solicitor helping them. In terms of earlier on in that highway, Robyn, I think when you're looking at RFIs and responses, and it's getting trickier and trickier, just having someone there to ring up, not to take over your client, but just to say, "Hey Jerome" or, "Hey someone. I'm about to give this information over to the ATO. What do you think? How should I present it? Should I give them more? They've only asked for basket A of information, but if they had basket B, it'd all be done."

Robyn Jacobson:

Jerome, I've had the opposite where a lawyer has been called in. I've had this numerous times and when the lawyer looked at it, too much information had been provided. And they said, "Why did you give that?" "Well, the ATO asked for it." Nah, they didn't ask for that much or that many years. So, sometimes there's a risk of providing too much in a dispute.

Jerome Tse:

There is, as well. I agree with that. That's where the skill and the experience comes into it, to know when to provide more and when to provide less.

Scott Treatt:

I agree. Absolutely agree. That's why I'd echo your comment Jerome, as well as saying of course you'd say that because you're a lawyer. Just had to, I'm sorry. And that is tax dispute resolution is a real specialty, and there is a balance. I think I think was an area I focused on in practice a number of years back, and often it was a question that wasn't being asked by the ATO that needed to be answered, to be able to resolve the dispute.

Scott Treatt:

It was being able to look at what are the real issues here, and look, there's the other end of this spectrum, too. There are still a number of taxpayers out there who don't trust the ATO. Therefore don't want to give them more information. Therefore actually exacerbate the problems associated with the dispute by not working with them. There's a fine balance. The earlier you can call in a specialist, need not be a lawyer but someone who is experienced in disputes, to assist with that process I think is beneficial.

Scott Treatt:

But certainly as you're getting towards the pointier end where some of the RFIs are getting more tricky or it is tending towards being unlikely to resolve the dispute before amended assessment or what have you, you might end up in court. Therefore, why not seek the advice of a legal practitioner at that point of time, to understand a lot of the issues that you're going to come across?

Robyn Jacobson:

Scott, just for our listeners, RFI?

Scott Treatt:

Request for information. I beg your pardon, yes.

Robyn Jacobson:

Yeah, good.

Jerome Tse:

Sorry, that was my fault, Robyn.

Robyn Jacobson:

No, that's all right. Just wanted to clarify so everyone understood. We're going to talk about independent reviews in a moment and also in-house facilitation, and Scott, I'm interested in your thoughts on that, but I also want to comment and get your thoughts on what the ATO calls the tax gap. They publish tax gaps in a lot of different spaces. There's a GST tax gap, and there's a superannuation guarantee tax gap, and there's one for income tax, of course. This is done by sector, and every year, and we're about to see the next lot of tap gaps with the annual report is not too far away, as it's released every year around this time.

Robyn Jacobson:

The '17-'18 data showed that large business, so this is essentially your large corporates or multinationals, have a 3.7% gap. In other words, the ATO is collecting around 96% of what they think they should be collecting from this sector. You'd think that they couldn't do much better than that, maybe another one or 2% with audit, but you're never going to squeeze 100% out of this particular lever.

Scott Treatt:

You never can, no. No market's ever going to get to 100%.

Robyn Jacobson:

No, you're right. That's on world stages, as well. The small business sector, the gap is significantly bigger at around 11-12% and we're yet to see what this year's figures look like. Perhaps Scott, can you comment initially on the gaps and what does this mean? Particularly in terms of disputes.

Scott Treatt:

General observation, you've got to look at that large market one and think wow, they're actually doing a great job. I think there's still a significant misnomer out there around large corporates paying their fair share and what's going on. I was in a senate committee hearing recently and absolutely was asked on the record, very pointed questions about the approach to the large market, but look at that gap. They're doing pretty good job at complying with their obligations.

Scott Treatt:

Small business gap, yeah, you could probably understand that a bit more. But that doesn't mean it's as a consequence of knowingly, not including income or knowingly overstating deductions. It's not [crosstalk 00:32:17]-

Robyn Jacobson:

It may not be deliberate.

Scott Treatt:

... at all, right? What it's saying is that there could actually be a massive education gap that's there. A lack of understanding around obligations and what have you. Don't know that it necessarily means that this is a dispute issue. There is an underlying educational piece around ensuring people will know how to pay their fair share of tax.

Robyn Jacobson:

Can you provide some brief comments, Scott, on what is in-house facilitation and what are these independent reviews that you and Jerome have been referring to?

Scott Treatt:

That was something, like if you look at that highway we're talking about, when to get into it and what have you, this is a lot ... A number of these, or a lot of those, all of those, pre-amended assessment. You might be in dispute with the ATO and you just feel at loggerheads on a particular issue. Now, got to say, there's a time you can get into these and a time you cannot. There actually needs to be a dispute. Just because you don't agree with what the tax office is doing at a particular time doesn't necessarily mean that that's a dispute.

Scott Treatt:

It takes obviously, it absolutely needs to go through their processes of collating information to be able to form an opinion that you might then dispute. That can be just before position paper, or it's at around position paper time, right? In-house facilitation is bringing the parties together. It's the ATO's form of mediation. A number of people will be used to mediation in the courtrooms, or in relation to court processes, but in-house facilitation is that pre-amended assessment, bring the parties together, let's try to resolve where we are and where the issues are.

Robyn Jacobson:

I just want to pause you there, Scott. Jerome, do you see much use of in-house facilitation in the corporate world?

Jerome Tse:

Not really, Robyn. It's probably just a factor of the issue involved and the numbers at stake. It's not to say in-house facilitation isn't open to the corporates. I just don't think we take advantage of it in preference to more formal ADR processes, like mediations, ENEs, arbitrations [crosstalk 00:34:30].

Robyn Jacobson:

Can you tell me what an ENE is?

Jerome Tse:

It's called an early neutral evaluation. That's where the ATO will present its case. We'll present our case and you've got an evaluator there, usually a retired judge, or a very senior QC, barrister, who will give an opinion, evaluate the matter and give an opinion on who's right or wrong. It's non-binding, but those type of mechanisms I think are probably preferred by the corporate market over in-house facilitation. And those are also available for the smaller market, too.

Robyn Jacobson:

So returning to Scott, if we're not seeing the corporates particularly having an uptake in in-house facilitation, this is certainly something available to SMEs, as well. But you also speak of these independent reviews, so what are these?

Scott Treatt:

I'll admit that I've got a bias towards these. I like these. Independent review is having your matter reviewed by someone else in the tax office who is independent of the audit team. In essence, re-deciding the case and looking at all the material that was there. On the public record, there's some data around independent reviews. Now, I know the experience across markets can differ, but certainly in the small market, I think if you run the numbers on what's in the public domain, I think there was something like 44% of the recommendations which were coming out of small business independent reviews were either in full or in part supported in the taxpayer's view.

Scott Treatt:

That actually demonstrates to me the small business independent reviews in particular work, and I think in the year that was in question, there were a thousand small business reviews offered and only 163 people took up the offer, which means again, it demonstrates the ATO's communicating quite well what reasons are for decisions and whether or not, should I actually dispute this further? Do I understand why I've received an amended assessment?

Robyn Jacobson:

With this 44% that ultimately went in the taxpayer's favor, it's telling me two things. One is that it is saving that taxpayer from having to take one of the further pathways along this highway. In other words, we don't need to go to the point of a formal objection or going into litigation even-

Scott Treatt:

Correct.

Robyn Jacobson:

... to resolve it. And secondly it means that we've avoided the taxpayer having an incorrect outcome. In other words, had the independent review not occurred and they chose not to further dispute it, then presumably they would have been left with the adverse outcome against them. To me, this is telling me that that process is working well, as well.

Scott Treatt:

Yeah, absolutely. And ultimately that's why it's there, is to prevent unnecessary occurrence of cost.

Robyn Jacobson:

There's also an option available through the Administrative Appeals Tribunal, being the small business taxation division, and this is still in its relatively early days, but can you just broadly explain what this option provides taxpayers with?

Scott Treatt:

Yeah. Again, as I said earlier in the peace around what is the highway, if you're a small business, you're eligible. If you're moving into a court dispute, so if you're moving into AAT, it is possible to be referred to the small business tax division of the AAT, instead of the AAT more broadly. Now, that effectively just provides that ability to protect oneself in relation to cost. Again, I don't have data in relation to all matters necessarily in the AAT, and what have you, but what I've found fascinating again, based on information in the public domain, was if you look at that first period of operation of small business tax division, 60% of those cases that were going through there actually related to undisclosed income, non-deductible expenses, penalties, or R&D.

Scott Treatt:

That's actually quite fascinating when you look at the broad spectrum of issues that could otherwise move through and you look at that and go, "Well, they're probably the right type of things to go into disputes if you're looking at that." Debating what is income, what are deductible or non-deductible expenses? Rather than fact based, other type issues which could otherwise reach dispute.

Robyn Jacobson:

It also sounds like it's not really high level technical interpretation of provisions in the Tax Act.

Scott Treatt:

You'd hope you're not necessarily getting that in the smaller market.

Robyn Jacobson:

Agreed. Interested in thoughts from both of you, and I'm going to go back to Jerome first, how do we make the system more efficient? How can we reduce disputes, even below the relatively low level they are now?

Jerome Tse:

I think the first point when we talk about cost of litigation, I think we need to go beyond my costs, the lawyers costs, the accountants cost, to the cost of focusing on tax rather than your business. That has a real impact. If you're dealing with a tax dispute, not dealing with your business, there's an opportunity cost there. Having dealt with some higher net worths, as well as corporates, especially when it's your own money, there's an emotional cost there as well. It drains you, having to deal with cost of a dispute.

Jerome Tse:

I think when we're looking at efficiencies and how to get better at tax disputes, I think we have to look at the cost side, as well. Not just numerically or economically, but more broadly. I think it starts with better education and better understanding of policy. Better guidance on policy from parliament perhaps, better guidance from the ATO on administration and perhaps even education.

Jerome Tse:

We've got a role as The Tax Institute in helping educate tax agents and the public, and all of that I think will eventually drive efficiencies and get us to the right amount, the right outcome for the system with the least amount of I guess friction, if I call it that.

Robyn Jacobson:

Scott, I've also been reflecting on the impact of COVID on this, and if you can bear with me as I join all these dots, technology is clearly a pathway to improving the way we do things. We've known for some years that the government more generally is on this roadway to a digital space for all of us to engage with government. Many will remember the proposal to bring in a $10,000 cash limit to try and address what is known as the shadow economy. So, undeclared income or cash moving around that is basically off the books or away from the authorities.

Robyn Jacobson:

That never went through ultimately and since we've been in these rather extended lockdowns, particularly in the Eastern seaboard, it's very rare to see anybody paying with cash. This came about because of the contactless payment forms that everybody wanted, so we weren't touching cash and sharing the viral infection. It's almost through some sort of alternative pathway that we've ended up not through a deliberate process of getting rid of cash, but through this alternative way, but through COVID we're now using PayPass and EFTPOS and electronic means of payment far more than we ever have.

Robyn Jacobson:

When we talk about credit card usage, I'm thinking of businesses that might have had increased cash sales and have now switched either wholly to digital sales, or certainly lessened their cash sales, which by definition puts those sales on the books, which by definition has to therefore reduce the amount of non-compliance. Thoughts?

Scott Treatt:

Interesting drawing all of that together, but I don't know that I necessarily agree. Your cash sales, yes, I agree. They've dropped. Why? Because we just simply can't go to the shops and cash across the counter. Some of those industries to which you refer there are higher risk industries, and their sales in this environment are likely to have suffered, as well. Their doors are shut. Their sales will have dropped. I don't know that you can draw an actual nexus between what their incomes were pre-COVID to what they are now, to be able to then say, "Well, actually, more is now being captured" because Sydney's about to open up again, those restaurants will start opening up again, people will all have cash in their wallets again. That environment opens up again.

Robyn Jacobson:

But do we see a return to the pre-COVID where cash was used extensively in retail hospitality, or have habits now been formed that are going to persist beyond the COVID situation? I'm just interested to see where this lands long term. I wonder if habits will ultimately change.

Scott Treatt:

It shall be interesting to watch the statistics over the next couple of years, absolutely, I would agree with you. I think though, what has highlighted during this period is a bit more of education and understanding around what one's obligations are. Because their habits might have been that I had some cash sales before, now I haven't, now everything's disclosed, maybe their habits change. I know my mind doesn't necessarily think the same way as theirs.

Scott Treatt:

It may have influenced those type of behaviors. But I think longer term anyway, how do we improve compliance and reduce disputes? I do think a lot of that comes down to education. I think one is understanding obligations, your own personal obligations and that for your business. And then understanding reasons decisions being made. People probably understand what the system's doing and the reasons why something's accessible, why something's not deductible or what have you, then it does lessen the impact of dispute. But we spoke before of the litigation numbers. That's one part of it.

Scott Treatt:

The numbers you shared with us in preparation for this session, Robyn, I look at the objections. It was 2017-18, there were 24,350 objections resolved. '18-'19, it was 26,000. '19-'20, it was 22,000. Average that out, you're sitting mid 20,000 of objections which are resolved. I stress resolved because I find that a little misleading. It doesn't give us transparency on how many were actually lodged, but if I'm looking at that element of those being resolved, that is actually still quite a high number of people who are lodging an objection for one reason or another, for an amount being included in assessable income or denied as a deduction for one reason or another. [crosstalk 00:45:23]-

Robyn Jacobson:

We also don't know which way the objections were resolved. We just know that they were resolved.

Scott Treatt:

Very true. Very true. But it does demonstrate that there must be an opportunity there to increase education, to lessen the number of objections that are going through in the first place.

Robyn Jacobson:

Jerome, the ATO often talks about in its compliance documents, about there might be a particular risk or a concern or something they've identified. But we will commonly see wording that we don't dedicate compliance resources to that particular issue. Is this a practical way of dealing with how the ATO should approach compliance?

Jerome Tse:

Firstly, it's a matter for them, how they want to spend their limited compliance resources. What I'd say is it doesn't give taxpayers certainty, because even though they won't dedicate compliance resources to the issue, if they are auditing the taxpayer for a different reason, they will still pick up on it. It's not a guaranteed, "We won't look at you on this issue" point. It doesn't give taxpayers the degree of certainty that you would with a ruling, a private binding ruling or otherwise.

Jerome Tse:

Having said that, look, I'd rather have that assurance than not, and I think taxpayers would rather have that than not. But I wouldn't want taxpayers or our listeners to be confused that that means that they're not going to have to consider the issue in the next three or four years because they might.

Robyn Jacobson:

So it's not what we'd call a safe harbor.

Jerome Tse:

It's not a safe harbor. And some people say, "Well, why bother putting that out then if you're not going to give us that guarantee?" It gives you a little bit of a comfort that you can move on, and maybe for most people, most taxpayers, that's enough. It's a hard one. It depends on taxpayer situation. Like, any good lawyer would tell you, Robyn.

Robyn Jacobson:

Of course.

Jerome Tse:

Depends on the facts.

Robyn Jacobson:

I'd also like to just wrap up our discussion with this final discussion on some global observations, and in particular, there is something called BEPS Action Item 14. Now, that's a mouthful. To break that down, BEPS is base erosion profit shifting. It comes from the OECD and it would be good to just explain for some of our global listeners, what does all this mean and what are the implications of BEPS Action Item 14?

Jerome Tse:

You're right, Robyn. What BEPS Action 14 is about, it came out of a project that the OECD started, I think about three or four, or five years ago now. 2016, I think. It came out with a number of findings or actions and one of them was Action 14 on how to really look at better ways to make dispute resolution more effective. That's in the context of treaty disputes. Double taxation disputes, under our double tax agreements, and the broader, multi-lateral instrument, which is where a number of countries signed up to single-handedly change their treaties in one go.

Robyn Jacobson:

So what we'd call cross-border? There are dealings or transactions across the borders of two countries.

Jerome Tse:

Yeah. Where let's say Australia might say that is deductible here or not deductible here, should it be assessable on the other side? It is on cross-border transactions, where you might get a different tax outcome between the two countries. And in that context, I think what BEPS Action 14 is looking at is trying to find minimum standards on dispute resolution that all the countries can agree on to improve dispute resolution generally.

Jerome Tse:

That could be through the increased use of bilateral advanced pricing arrangements, where both parties, both states, both countries sit down together and work out the tax outcome for the transaction. They've also looked at educating tax officers to get a more efficient outcome. When we're looking at these disputes, you enter into what's called a mutual agreement procedure. That's the procedure where you get the ATO, for example, to go and talk to the counterparty authority in let's say America, the IRS, and work out that solution between them.

Jerome Tse:

Get clarity on when you can use MAP, what we call MAP, and who gets to apply for MAP. What's most interesting I think development for us and what I'm hearing from the corporates is the adoption of binding arbitration. Previously in MAP, you could go on forever if the two tax authorities couldn't reach agreement. Australia and a number of countries now coming out of the BEPS project have agreed to binding arbitration where the countries are now required to enter into an arbitration to get an answer in a specific time, and that gives certainty to the taxpayer on how the transaction will be treated across the jurisdictions.

Jerome Tse:

I think that's a good thing for that particular taxpayer, and it gives certainty. It makes dispute resolution easier. The question I guess from a system perspective from me is it doesn't create a precedent. It doesn't help anyone else, unlike a court decision. You might be, and I think a lot of companies or corporates are now looking at binding arbitration as the alternative to going through the court process. But is that going to be better for the system in the longer term? I think only time can tell, Robyn.

Robyn Jacobson:

Thank you. Scott, any comments on that?

Scott Treatt:

Not on that. I think globally in each particular jurisdiction, not necessarily focused across jurisdictional disputes, I think there's the opportunity to improve dispute resolution processes holistically. We're not alone when it comes to improving dispute resolution processes. I think one thing Australia should be looking at is how we can accelerate the time taken for disputes? How can we bring forward outcomes or certainty on issues which are precedential? So that the system can operate with certainty as it's moving forward. That to me would be probably where I would close my remarks and just say yes, there's a lot that moves through our system effectively, right?

Scott Treatt:

You look at those numbers that we spoke about earlier. It is only a very minute proportion that end up in litigation. Even though I highlighted the number of those objections actually resolved each year, in the scheme of things, yes, it's 25 odd thousand objections. But on 39 million lodgements, was it that you said earlier? That's not a large number. We can increase education through that process but if we speed up the resolution of disputes and speed up certainty on precedential issues, many of those objections and disputes may not actually arise. Because people actually have certainty earlier on. We don't actually have to get there in the first place. So, [crosstalk 00:52:39]-

Robyn Jacobson:

I'll consider that your wishlist, Scott. Perhaps Jerome, if I could just ask you what's on your wishlist? One quick item, what would you like to see changed or improved in the system?

Jerome Tse:

I think encouragement to get off the highway quickly, or as quickly as you can. There are always opportunities. Keep your eye out for those, and you'll do better for your client. You do better for yourself if you're in that position. I think that's a high level, that's what I say to my clients. How do we avoid court if we can?

Robyn Jacobson:

Thank you, Jerome. And thank you, Scott. I think we've covered an enormous amount of ground in this discussion and I'm very grateful to you both for your time and your insights. Thank you for listening to this episode of TaxVibe. I've been chatting with Scott Treatt, General Manager Tax Policy and Advocacy at The Tax Institute, and Jerome Tse, Vice President of The Tax Institute. To keep up-to-date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter.

Robyn Jacobson:

You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today and you'll have an all access pass to the tools, resources, and opportunities that make our members some of the most successful tax practitioners around. For more information, visit membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 11 — Taking stock of COVID-19 support measures

Release date: 15 Sep 2021

In this episode of TaxVibe, Robyn chats with Scott Treatt, CTA, General Manager, Tax Policy and Advocacy, at The Tax Institute about the range of COVID-19 business support measures on offer around the country and the pathway forward to a better tax system.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Scott Treatt, CTA, The Tax Institute

Robyn Jacobson:

Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute, and your host of today's podcast. We love the vibe of tax, and here at the Tax Institute, we do tax differently.

Robyn Jacobson:

I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Scott Treatt, general manager, tax policy and advocacy at The Tax Institute. Scott is a chartered tax advisor, and has been practicing as a tax specialist since 1997, gaining his experience in large, second tier and Big Four accounting firms, as well as government.

Robyn Jacobson:

Over the years, he's been engaged on direct and indirect tax issues pertaining to individuals, startups, small businesses, private groups and multinationals, addressing issues including, but certainly not limited to: asset, business, and entity transactions and disposals, insolvencies, structuring, succession, and disputes within family groups, as well as with the ATO.

Robyn Jacobson:

Scott has a passion for our tax system and tax education, continuously seeking to find opportunities to improve the efficiency and effectiveness of both. Scott is a regular presenter at industry events, and has been a lecturer for some 12 years in The Tax Institute's structured education programs. Scott joined The Tax Institute in November 2020. Scott, welcome for the very first time to TaxVibe, and this will certainly not be the last.

Scott Treatt:

Yeah. Thank you very much, Robyn, for the kind introduction, and certainly not the last.

Robyn Jacobson:

There's always so much to discuss, but I thought the focus of today, we could have a look at what's going on by taking stock with all the support measures that are on offer around the country, for COVID-19 in terms of business support. Now, where does one start reflecting on the economic, the personal, and the mental health impact of the COVID-19 pandemic?

Scott Treatt:

Where indeed? What an environment we're in.

Robyn Jacobson:

No one saw it coming. No one saw it coming on this scale. We're deep into the second year of the pandemic. You're up in Sydney and remain very much in your extended lockdown. I'm based down in Melbourne, and in fact, on the 23rd of September, if all the internet searches are correct, then Melbourne will have spent more days in lockdown than any other city in the world, as we hit 235 days on that date.

Robyn Jacobson:

And that will break the cumulative 234-day record that Buenos Aires set in Argentina. Now, lockdowns continue. We are starting to see a little bit of glimmer of hope, and we're starting to see maybe a bit of movement before the end of the year.

Scott Treatt:

Indeed.

Robyn Jacobson:

But I'll just let you make some opening comments about where we've landed. We're 18, 20 months into all of this. And gosh, it's been a tough ride.

Scott Treatt:

It has been a tough ride. It has been such an impact on the community, businesses, the accounting and legal profession. They've been at the forefront here. There's been a massive learning on the tax community in particular, to help roll out the stimulus measures and support measures to keep the economy rolling, to keep us afloat for when we do eventually come out of this.

Scott Treatt:

And as you say, there's a light at the end of the tunnel. As I always say, let's hope it's not a train coming the other way, but it's been a rough ride for so many people. And yes, there's the physical, there's the tiredness and what have you.

Scott Treatt:

But that mental cost, that mental cost that is there on the tax community, on businesses, on individuals locked up at home and the families dealing with kids. The skills, the resilience that people have had to draw on, it's extraordinary. Unprecedented, really, in my view. Unprecedented.

Robyn Jacobson:

There's a saying that you need to be at your strongest when you're at your weakest, and I think we've all had to draw on enormous strength to get through this, wherever you are in the country. You may be in states that are not directly in lockdown at the moment, but certainly businesses have been impacted by, for example, the lack of travel from the east coast to the west coast, or down to Tasmania.

Scott Treatt:

And it's not just travel, right? Tourism is huge now in our country. It's a massive underlying support for our economy. It's the supply chain. There's the indirect flow-on for each of those jurisdictions, should one jurisdiction be suffering.

Scott Treatt:

And I haven't tested the data, but if you believe the actual figures that Gladys has been talking about, 70% of the population resides within New South Wales and Victoria. Don't know that it's quite 70%, but let's use that figure.

Scott Treatt:

Those two jurisdictions are the one that's been in the lockdown. That has a massive flow-on effect through the supply chains throughout the whole country, in addition to the restriction of movement and the impact on tourism.

Robyn Jacobson:

And then on top of that, you've had other states and territories that, for shorter periods, have been moving in and out of some form of lockdown.

Scott Treatt:

Correct, correct.

Robyn Jacobson:

The uncertainty and not knowing what's going to happen and how long this is going to go on for. The Tax Institute, of course, has been very much supporting our members since all of this hit in March last year, and we've been assisting members to understand and decipher and deconstruct and communicate just the volume, the absolute array of information that's been available to guide us, the constant changes.

Robyn Jacobson:

Do you think, when all this was put together at very short notice, and we've got to commend the government for actually getting it through parliament as quickly as they did at the beginning of last year, do you think it was deliberate design to put the accounting and tax profession at the core of this, as the key intermediary in delivering support? Or do you think that's almost a byproduct?

Scott Treatt:

No, I think it's a natural consequence of the way our system operates. You look at the number of taxpayers who use a tax agent, and what is it? It's above 75%, or a figure like that. It's significant. Tax agents and accountants, lawyers play a core role in our economy, right? Be it the administration part, or be it here in a support aspect. I think it's a natural fit for us, I will say "us," to play that role. And I don't know that it was considered specifically, but I think it was just a natural way that the systems rolled out.

Robyn Jacobson:

And if you think about the business community, about 95% of businesses use a tax agent. So that becomes even more accentuated, if you like, when you move into the business community, instead of the households.

Scott Treatt:

Indeed.

Robyn Jacobson:

So it is logical that businesses would have turned to their accountants and the tax lawyers where appropriate for assistance. So today, while of course, a lot of the financial support provided by government has been directed to households, I think with everything we'd like to get through, we'll confine our remarks to the business support.

Scott Treatt:

Sure.

Robyn Jacobson:

I'm going to kick off with JobKeeper. I can't not talk about support. Yes, the program has ended, but this was an unprecedented level of support by the Commonwealth. Now, we're talking total figures, I think, have landed around $70 billion all up, in terms of what was provided by financial support, and that was just across one moving support and all of the support provided by the Commonwealth, designed and legislated in a remarkably short period. I mean, it is-

Scott Treatt:

Oh, absolutely. Absolutely. Again, let's use the word "unprecedented." It was so quick, and that speed naturally then leads to issues. Right? Naturally.

Robyn Jacobson:

Does that set a precedent, that now they've proven they can do it in a short period of time?

Scott Treatt:

Well, we're still going to encourage consultation. We're still going to have consultation. In that environment, though, you've got to look at it and say, "Well, actually, we had to bring the law through. We had to bring the implementation in, without that level of consultation that we'd ordinarily expect, so that we could at least commence." The economy needed it. The public needed certainty. Business needed certainty.

Robyn Jacobson:

There have been criticisms of JobKeeper. There have been criticisms about the way it was designed. There have been criticisms about the way it operated. There have been criticisms about the way it was administered by the ATO. In short, did it work?

Scott Treatt:

Criticism's always easy to throw in hindsight. Did it work? In my view, yes. I think it worked. It did the job that it was intended to do. Could there have been different ways of doing it? Yes, but with the timeframes that we had, with the unexpected environment that we had, we had to do something.

Scott Treatt:

And I think both sides of government came together and brought in the program which worked, ultimately. Yes, then there were some teething issues. Yes, we worked through that. We consulted well with government or the professional bodies worked well with government then, and the ITI, to push this out.

Scott Treatt:

And as you said, you have to commend the way the government approached it. You have to commend the ATO with the way that they brought it through, they implemented it, they administered it. It worked as well because we had consistency. We had consistency across the country. The ATO had much of the underlying data needed to test the ability. They had a lot of the data there to test and maintain the level of integrity. Again, was it perfect? No. But commendable.

Robyn Jacobson:

There's been a lot of talk about, "Should it have continued?" And I don't particularly want to get too far into that particular conversation, but I think as a statement of fact, when the government undertook its mid-term review of JobKeeper around June of last year, decisions were made by July to extend it for a further six months.

Robyn Jacobson:

And I think it should be pointed out that those decisions were made, of course, ahead of Victoria's second extended lockdown late last year, and of course, before the lockdowns had continued well into 2021. So when you look at its cessation at the beginning of the year, we didn't really think we'd be still so entrenched in lockdowns this year.

Robyn Jacobson:

But we're, of course, now moving into a range of state measures which we'll get into in a moment. I just want to link back to JobKeeper from this comparison. I'm interested in your thoughts on this. Did the national rollout of JobKeeper, i.e., administered at a Commonwealth level by the ATO, ensure that it was a more efficient approach than perhaps the state-based approaches that we're now seeing in respect of support for businesses?

Scott Treatt:

Well, I'll answer that in a different way. What last year has taught us, and what this year is teaching us, is to expect the unexpected. We need to be in a position that, we've got systems designed that can deal with the unexpected.

Scott Treatt:

This is not the first large-scale natural pandemic we've seen. Certainly, in most recent times, absolutely. I get that. Certainly not the last natural disaster that we will see, and there will be more large-scale natural disasters in the years to come. We have an opportunity now to look at last year, to look at the present environment and say, "What's going to work?"

Scott Treatt:

What worked with JobKeeper was the consistency. A national approach, a centralization. Information that ensured eligibility was easy to determine. Systems in place that ensured integrity of the system as much as possible. We've got an opportunity now to look at, how can we do this in the future, which ensures we've got a program which is scalable, so it can be dealt with on a local basis or a national basis?

Scott Treatt:

One which addresses any concerns of secrecy, any concerns of data-sharing and information-sharing, so that we've got a body, preferably, in my view, a national body, that can roll these out quickly, and scale it as necessary for the next time some significant natural event arises. I think it's an opportune time to learn.

Robyn Jacobson:

"Scalable" is a word that was used by the prime minister in March of last year, when the first trench of support measures was announced, and I think anyone who expected that we would not see further change or tweaks to the system, would not be mindful of the emerging health crisis.

Robyn Jacobson:

It has to be fluid. It has to adapt to how things are changing, and where the health crisis is, and where those pressure points are. So, I know on one hand, the profession has just been constantly rolling its eyes at the volume of changes and all the updates and having to keep on top of it. But at the same time, those changes are necessary. And if further changes clarify something that was unclear before, then I'm in favor of that.

Scott Treatt:

Changes are necessary, absolutely. I think what we're seeing though, right now, in the present environment, is we've now got state-based measures. We did this once before. You say that Scott Morrison made those comments in March 2020. Okay, we're at September 2021.

Scott Treatt:

So, what have we learned over that period of time? Why is it that we're now redoing what we did last year, at eight months ago? We're going through a process of re-learning, re-implementing systems and designs across a state-by-state basis, instead of leveraging a lot of what was actually learned and implemented with JobKeeper at eight months ago.

Robyn Jacobson:

And it does, at times, feel like we're back to first base, doesn't it? That we're re-inventing the wheel.

Scott Treatt:

It certainly does. It does, and there's a number of issues and concerns, and we've seen it through the many webinars that we've done, where the questions are being raised which were the same questions which were asked at eight months ago.

Robyn Jacobson:

I think one of the fundamental differences is, the ATO is very accustomed to consulting with the profession. All the stewardship groups, the various forums. There is constant engagement and it's very collegial. State governments maybe aren't as accustomed dealing with the profession in this context as the ATO is, and maybe that's something that we can look to those opportunities in the future, particularly when we talk about tax reform.

Scott Treatt:

Yeah, and look. You look at the issues that have arisen. Sure, they've arisen, but the state governments have moved on. They've learned, and I think the positive there is that ... Was it pleasant to go through that? Maybe not, but the positive is that there is a higher level of engagement now, and we expect that that will last into the future. So, they've learned. We're working together. I only see that as a positive aspect of what has happened.

Robyn Jacobson:

Agreed. So, let's focus specifically on New South Wales as we take a tour around the country. Now, this has attracted the most attention. It's the largest volume of support at the moment in terms of the dollars rolling out. Yes, Victoria is continuing in lockdown as well, and we'll turn to Victoria shortly.

Robyn Jacobson:

But New South Wales, with the introduction of initially, the business ground and now the JobSaver program, there are some differences from JobKeeper. The most important of which, there is no wage condition. You don't need to pay your employees to be able to receive JobSaver.

Robyn Jacobson:

So there have been some teething issues as it's rolled out, but can you comment on how those are being smoothed out, and in particular, the role that the profession has played in working with the New South Wales government?

Scott Treatt:

Yeah, absolutely. Yes, as you acknowledged earlier, there's some teething issues. There were some issues around how consultation was taking place, but once the connection was established with the New South Wales government in this particular case, they have been so receptive to the issues and concerns that have been raised.

Scott Treatt:

I'm really pleased with how the New South Wales government now is listening to the issues we're putting forward, that we've heard from our members, that the other professional bodies have heard from their members, that other industry representatives are sharing with us as the joint bodies, to be able to take to government.

Scott Treatt:

Just the fact now that we've got regular meetings with them is awesome. I've got no other word to use than that. Just they are engaging, yes, again, hindsight, people can throw stones and they can criticize and say, "Why didn't it happen earlier?" And what have you.

Scott Treatt:

I hear that, but we're getting the data. We're getting the information. We're getting the knowledge that we need to pass on to our members now, and the New South Wales government is open and willing to share, quite transparently, what we need to know. And that's an exceptional step forward from where we had been a couple of months ago.

Robyn Jacobson:

And most importantly, the money is now flowing to the businesses who are most in need.

Scott Treatt:

Correct. It is flowing out, and again, there's still issues there in terms ... Some people feel the timing is still a bit slow, but the government is working through that. And we do acknowledge too, that there are some businesses who still have not yet applied because they don't know that they're eligible.

Scott Treatt:

And again, we're working through that. We're trying to get that information out of the government as quickly as possible to pass it on to our members, so they too can understand which businesses haven't applied, so that they now can.

Robyn Jacobson:

Absolutely. Now, as part of the overall package, of course, there is the micro business grant for those under 75,000. There's the small business fees and charges rebate. But the main focus has been on JobSaver. And look, to some extent, it has been a complicated set of rules, but I'm going to look at it from another perspective.

Robyn Jacobson:

It's been an approach to looking at a support program with less bells and whistles than JobKeeper had. So it doesn't have all the moving parts that some people might be expecting or familiar with under JobKeeper. In other words, it's done its job or it's continuing to do its job.

Robyn Jacobson:

It may not have the level of sophistication and all the moving parts that we'd like to see, but I think at the end of the day, it is getting that financial support out to the businesses who are being affected by the lockdowns in Sydney and across New South Wales.

Scott Treatt:

And I think it's more tailored ... That's probably the wrong word, but there's more uniqueness about the support that's coming through. Different levels of businesses are getting different levels of support. There's a greater level of variability, which is probably right when you look at the variability within our economy, within businesses. I think that's right.

Scott Treatt:

And you used the word there, "complex." I guess anything that's new is complex, and as we get used to it, it becomes less complex. And again, with the clarity that's starting to flow out of New South Wales government, I don't know that it's as complex as what it appeared to be if we, again, move two months into the past.

Scott Treatt:

But again, it highlights, if we have a standard approach as we move into the future, and we have something which people are aware of, sits in the background, ready to have operation and then scale up as economic situations change, that uncertainty, that complexity is not so much there, because people know what to expect.

Scott Treatt:

So now is an opportunity, as I say. Let's set up a precedent. Let's set up the systems and programs so that next time it comes, the rates and amounts, et cetera, might all change and move around, but at least we know what general eligibility would be, how the money's going to flow, how we're going to deal with over-payments, how we're going to deal with under-payments. All of that is stuff we've learned over the last 18 months. It's information we can apply to the decision of future-proof systems.

Robyn Jacobson:

Setting up a framework.

Scott Treatt:

Setting up a framework.

Robyn Jacobson:

Let's move south across the border, into Victoria. Very different approach, and there has been speculation as to whether we would see a JobSaver-type program in Victoria. But for the moment, the state government of Victoria is rolling out a hardship grant.

Robyn Jacobson:

Now, this is now, $20,000 with the significant difference from the other states around the country, that you've got to have at least a 70% declining turnover, as opposed to 30%. Now, that is higher and many will debate the merit of that particular threshold, but it is what it is. In terms of contrasting the approach with New South Wales, interested in your comments.

Scott Treatt:

Yeah. It's really a challenging one. It's a political one. I am personally challenged by the use of the 70% threshold. I look at it and think, "In what state, in terms of economic performance of the business, in what state is a business when it's hit the 70% declining turnover?"

Scott Treatt:

Imagine the underlying stress, the personal toll, let alone the financial toll that that business is already suffering. And to hit 70% rather than 30%, I do, I struggle with it. And then you look at the level of support. Again, it's variable in New South Wales.

Scott Treatt:

So in New South Wales, you have got a minimum of $1500 per fortnight up to, for much larger businesses, a significant amount. But it started as between $1500 ... Sorry, it was $1500 a week, through to $100,000 a week. Now, that amount contrasted to a one-off grant of $20,000.

Scott Treatt:

If you're at a declining turnover of 70%, to what extent will $20,000 get you through, as what you have said is a record, world record lockdown period, that the Victorian economy is going through? It's challenging to see, and as you say, contrast the two different approaches.

Robyn Jacobson:

And I don't find that it's appropriate to look at a lockdown period in isolation. And look, I can't recall the exact date off the top of my head now, we've had so many down here in Victoria. But a lockdown of, again, let's call it July.

Robyn Jacobson:

But the analogy I've been using is, you know when you're down at the surf page, and you get dunked by a wave, and you're gasping for breath. You come up to the surface, needing that oxygen. And then just as you take that breath, another wave dunks you under. We've all been in that situation.

Robyn Jacobson:

In Victoria in particular, we're in our sixth lockdown. So if this was our first one, maybe $20,000 would be apt. But I just question how many businesses are now absolutely struggling, kilometer after kilometer of this marathon. It's not a sprint. We're doing this long-term now. And have they got the sustainability to be able to keep going on a $20,000 grant at the moment, after what they've already been through?

Scott Treatt:

I think that's right. As you said, the analogy is quite apt. Have you been able to come up for air and recover, to be able to get through the next hit? And I don't know that many businesses have. And I'll even turn back to our profession, right?

Scott Treatt:

I don't know that many advisors have had the time to come up for air and then deal with a new set of rules, a new of administration, a new set of applications that need to go in, and understanding and advising clients who are struggling.

Scott Treatt:

And it must be challenging on the front line at the moment, because that mental pain and suffering comes out in the way that they're interacting with advisors. And the advisors are playing a role, not just of tax and financial advisors, but to some extent, a mental health advisor and sounding board during this period of time as well. And so, all of this takes a toll. And to have these approaches which, again, are they actually covering what needs to be covered for a long-term recovery?

Robyn Jacobson:

Scott Morrison talks about the country being open for Christmas, and I think of The Grinch Who Stole Christmas. I'll just make this side observation, and I think others have through the course of this year as well. I'm not sure we've had a public holiday or festive event that hasn't been affected somewhere in the country by some sort of lockdown or restriction.

Robyn Jacobson:

If we go back to effectively Christmas and New Year's and Australia Day, Valentine's Day ... I may not be doing this in order strictly across the country, but all the long weekends, Easter, we've had Mother's Day, Father's Day. There's been a whole string of public holidays and special events there, where we've not been able to interact with the people that we want to be with.

Robyn Jacobson:

And we're absolutely hoping that, of course, by Christmas, and I mean Christmas this year, not Christmas 2030, that we're going to be in a position to do that. It's certainly better than last year. So if we now take a walk around the states and territories, I just leave Victoria with this observation as well.

Robyn Jacobson:

It's one of the few states and territories that doesn't specify a turnover in terms of size of the business. The way they measure size, and they call it the small business COVID hardship fund, is your payroll has to be more than $10 million.

Robyn Jacobson:

So that's a payroll threshold, as opposed to a turnover threshold. Most of the other states and territories are using a $75,000 threshold, and they're requiring registration for GST. So New South Wales stands alone in that it's basically offering support for those under $75,000, who may not be registered for GST.

Scott Treatt:

Correct. And again, we've got to look at the economy as a whole, and most of the businesses out there are small businesses, and they're startups. And my view is, who's actually going to struggle the most during this period of time? It's those that are in the startup phase, and the small businesses, because they struggle the most, even in the best of times. So again, I commend where New South Wales is taking that one.

Robyn Jacobson:

I do, and Tasmania does have a one-off payment of $1000 for those who are between 25 and 50,000, I think is the upper threshold. But again, $1000 isn't going to take you very far at the moment.

Scott Treatt:

It's not, but again, look at that and go back to where we started in our conversation as well. Tasmania's one which hasn't suffered the same level of lockdowns as other jurisdictions, but there's the flow-on consequence, right? And it's not just tourism.

Scott Treatt:

There are other supply chain issues that flow on into Tasmania and the businesses down in Tasmania. Again, it just highlights the fact that governments around the country need to acknowledge that there's direct and indirect consequences of what Australia as a whole, and I stress, Australia as a whole is actually going through.

Robyn Jacobson:

If you think about supply chains, the fishing business down in Tasmania that supplies high-end seafood to restaurants in Sydney?

Scott Treatt:

Correct. That's right. And that's the concern. That's the indirect impact that we can't lose sight of.

Robyn Jacobson:

All right. If we now make some key observations about the roll-out of support packages around the country, we've talked about the profession being the key intermediary, and we've talked about how dependent businesses are on their accountants and their tax professionals. Has there been sufficient recognition of this by the governments?

Scott Treatt:

It's a very closed question, so can I just say no? I don't believe there has. I think there's been acknowledgement that played a key role. I think there's acknowledgements of the impacts that these measures have had on the profession and what they've had to endure.

Scott Treatt:

I don't know that there's been an understanding of it, though. One thing is recognition, but to actually understand it and to really know what the front line's been going through is a separate thing, and I'm not sure that there's a full understanding of that, broadly, across government.

Scott Treatt:

In patches, there are. Right? In patches. But I don't know that there has been a full recognition. And to some extent, from what I hear from members is that upsets the provision, the fact that there hasn't been as widespread public acknowledgement of that.

Scott Treatt:

And that was also a challenge with regards to the implementation of the New South Wales measures. There was a level of work that was needed to actually inform government of the role, the important role that advisors play in the system, and helping businesses improve and get through this, because they're not alone. They're hand-in-hand with their advisors.

Robyn Jacobson:

It would have been nice if the prime minister or the federal treasurer at the end of last year had just done a shout-out to the profession to say, "Thank you. You helped keep our business afloat, our country afloat."

Scott Treatt:

Absolutely.

Robyn Jacobson:

And it would have been a small gesture that would have cost them nothing, and would have made, I think, a big impact on the profession that has just been absolutely slaughtered by the amount of work, the hours that the profession has put in. They have put in so much effort, and often without pay. And I don't think that's talked about enough.

Scott Treatt:

Agree, agree. And that's what I mean, hand-in-hand. Advisors know what their clients are going through, so advisors usually stand by their clients. And that's why their clients stand by them. And there have been many, many advisors who don't charge their clients for a lot of the work that's directly related to some of the stimulus.

Scott Treatt:

Some of them are not charging the full fees, or they're on deferred terms, and that has a cost on the advisor's business as well. So there is a direct impact on the advisors, and I don't know that it's seen. I think you're right.

Robyn Jacobson:

I don't think it is seen, because I've been in consultations with government where they've expressed suppress at accountants who would actually be claiming financial support. Well, aren't they working hard? And I think we very much need to distinguish between working hard ... Accountants have been working 60, 70, 80-hour weeks, perhaps more, and many have not had a day off in 10 months or 18 months. They're working incredibly hard, but it doesn't mean they're being paid for those hours, because so much of it's being done on a pro bono basis for moral reasons.

Scott Treatt:

Exactly. That's exactly right.

Robyn Jacobson:

Now, in terms of coordinating national leave, I think never in our federation has the power of the states been better illustrated, in terms of what the premiers have been able to do in their health orders and so on. And that could take us in a whole separate, tangential direction. But from a tax perspective, it's hard to ignore the lack of consistency, particularly now when we're rolling measures out across different states and territories.

Scott Treatt:

I think that's right, but again, taking a step back, when we say "from a tax perspective," this isn't tax. And we can't lose sight of that. We've grabbed a hold of this because JobKeeper and cash flow boost were pushed out through the ATO and created a nexus to the tax system.

Scott Treatt:

So I think we often conflate this with tax, right? But it's a grant. This is the transfer system in operation. This is pushing funds out to those in need, to maintain economic support. So, is it unusual to have inconsistency between the states? I would say no.

Scott Treatt:

You've got different state grants with different things, and states are within their constitutional rights to be doing that. And I think that is right, that states have that power. But when we're looking at a national crisis, to me, that's different.

Scott Treatt:

We're looking at something that we are actually all in this together, no matter which state we're in, no matter where we're living, where we're operating, with whom we're doing business. We're all in this together and there's some direct or indirect impact as a consequence of that.

Scott Treatt:

So to me, it's natural that there should be consistency in those environments. There should be elements where it shouldn't matter, as I say, where you are. You're getting a level of support that is recognizing the size of the business, your general profitability, the impact on you, because that shouldn't really be differing state-by-state.

Robyn Jacobson:

How do you think this [inaudible 00:34:06] with the various government agencies around the country? And I'm thinking of putting on an item of clothing that you're really not used to wearing, and it doesn't quite feel right, and you're jiggling around, trying to get used to the fit.

Robyn Jacobson:

These agencies are core revenue collection agencies, and I'm thinking of ATO and the various state revenue offices, et cetera. The systems were never really designed for those collection agencies to in fact be the key administrator in delivering business welfare. How do you think that sits with them?

Scott Treatt:

Oh, I think you've highlighted the key point. I think it's a challenge. It's a different way of thinking, to protect integrity of a tax system, and ensure collections are maintained, versus pushing funds out and then, what do you do if you've overpaid? What do you if someone's manipulated the system to get more benefit than what they've otherwise been entitled to?

Scott Treatt:

There's some level of behavior that overlaps, absolutely. The knowledge and behavior that overlaps. But it's not their natural inclination. That's why I go back to my earlier comment. There's an opportunity to set something up now, or use an existing agency to develop the systems that can do this consistently, nationally as we move forward.

Scott Treatt:

And as I say, set it up now. Deal with the secrecy provisions, deal with the information sharing and what-have-you that would be needed to maintain the level of integrity between that system, the population in receipt of funds, and the tax system, right? So that the data can be obtained, and we can have trust and confidence in the transfer system as it pertains to grants in this way.

Robyn Jacobson:

I just want to retain to the ATO for a moment. We have regular meetings, of course, with the ATO, through our various consultancy forums. And something that they are particularly focusing on is to make sure that they're still collecting revenue. The system has to continue. It can't grind to a halt.

Robyn Jacobson:

But at the same time, they are very mindful of the enormous pressures that businesses and agents are under. And something they're mindful of not happening is that people start to drop out of the system by not lodging, because they think, "Well, if I lodge, then a tax debt gets crystallized, and I just can't deal with it now, or I haven't got the funds to deal with it."

Robyn Jacobson:

So it's really important that businesses continue to lodge, and if they've got problems paying, then the ATO of course is open to talking about payment arrangements or other alternatives. So again, I'm interested in your thoughts on how businesses can navigate this, because it's an incredibly stressful time for them, but at the same time, they can't just walk away from their obligations.

Scott Treatt:

Oh, absolutely. And I think it comes down to the core of trust and confidence. And you're right, people need to be in a pattern of behavior, in good times and in bad, of lodging and communicating about their personal circumstances.

Scott Treatt:

And if you look at last year, I think the ATO responded really well where the crisis was more national, the lockdowns were more national, the impact was national, and so it was easy to have a standard approach in relation to how that was taking place.

Scott Treatt:

Now that we've got differences between the states, it's more challenging for the ATO to come out with standard lodgement extensions and what have you. So there is a level of shift in transparency that comes back to agents and the population, to ensure that they're saying to the tax office, "Made our lodgement but we're really struggling. We're really struggling with payments and we're even getting to this lodgement or that lodgement."

Scott Treatt:

And the ATO is actually really receptive to it, I've got to say. And they are walking the walk, not just talking the talk in the experiences that we've had around people having concerns in lodgements, people having concerns around payment arrangements and what have you. All I can say, approach the ATO. Talk to them, because they will talk to you.

Robyn Jacobson:

Can you make some brief comments about the challenges of firms that probably for, in many cases, the first time, are working remotely? Staff morale, how to maintain that? And of course, the mental health challenges.

Scott Treatt:

It's really difficult, isn't it? These lockdowns impact people differently. I think extroverts will feel it more than the introverts, but there's that level. But even those that are quite happy to be isolated, if I can say that, do feel the strain of lockdown as well.

Scott Treatt:

It is impacting absolutely everyone, and what it's needed to do, employees and business owners have needed to do, is really be agile and work through different ways of flexible working hours. That's been a challenge. How do you educate children at the same time as getting through your daily work?

Scott Treatt:

And that impacts productivity. That impacts how you flow through. How do you, then, as a business owner, manage that staff member who you feel might not be as productive as what you otherwise hoped? Well, maybe in this environment, we've got to put a greater impetus, or greater focus on mental health, that personal side of things, as opposed to the productivity side of things.

Scott Treatt:

And I think, generally speaking, I think the community has been more open and understanding of that in this environment, but there's just ... As we come out of it, it's going to be interesting. I look at our team, and I think when we come out of lockdown, that will be the first time that the team's actually together, because we've had new people start in a lockdown environment, that started remotely.

Scott Treatt:

We've had to onboard them remotely. It meant that we've had to change the way that we've onboarded and engaged with them to make them feel a part of the team. How does that impact culture? How does culture form in a remote environment? How do you manage that? There's so many different considerations that need to be had in this unique environment that we're in, and then managing the mental health side of it on top of that.

Robyn Jacobson:

You spoke earlier about light at the end of the tunnel, and I think at the end of 2020, we thought there was light at the end of the tunnel. It did turn out to be the light of an oncoming train, being the Delta variant. If we now look at the next light, which we do hope is 2022 being things opening up, where does all this leave us moving forward? What is our pathway forward?

Scott Treatt:

I think again, we've got to look at the past to look at the future. We've had to go through all these economic support measures that we've spoken about. As a consequence of that, we've incurred huge debts as an economy to be able to support businesses through this time.

Scott Treatt:

And we're not alone. Australia is not an island. Well, we are an island, but we're certainly not alone in the global economy around the debt levels that have been taken on to get the global economy through these different phases.

Scott Treatt:

And as we're moving forward now, we need to understand, what's our vision? What's our direction? Because we do need to repay the costs that we've incurred. And you look at the UK, just recently they've just done a hike to their insurance taxes to cover the NHS costs, and they've actually put a stake in the ground to say, "We need to do something to pay for these costs."

Scott Treatt:

And I think in Australia, we acknowledge we've got to for those costs, but we yet ... We don't see where we're going to do it. We haven't seen any agenda or vision of what this might mean for the future, other than in a loose sense, "We will get there. I don't want to get into the detail, but we'll work through it."

Scott Treatt:

That's fair to say that. However, we're coming through this. You're now selling a story that there's a light at the end of the tunnel. We've got to actually free the economy and allow the economy to work again. Okay, in what tax environment?

Scott Treatt:

What is the environment that we will operate in? What's your vision and agenda for reforming our tax system, to actually repay these costs? What's your policy? Give us a policy. Give us a plan, so that we understand, what's going to be our sustainable future?

Scott Treatt:

And I think it's time for the government to actually start talking that talk. We're going to be coming up to an election. We've got to know what we're voting for, because this is not just a short-term fix. This is a intergenerational repayment issue that's going to last for decades. And so, we need to reform our system. We need to look at our base, not just our rates. We've got to look at the base, and how the system will be sustainable in the long term.

Robyn Jacobson:

It is a fine balance between raising revenue, imposing new taxes. You can always look at cost-cutting, but the impact of the pandemic on both the way businesses operate, and the way that households operate, we are still to let this dust settle. We don't know how this is going to change the way we live and how businesses operate.

Scott Treatt:

Right.

Robyn Jacobson:

But we know that things are going to be different. This is a seismic shift. It's one of those paradigm shifts that, when we're older, 30, 40 years from now, for those of who'll still be around then, we can look back on this period and say, "Gosh, that was one of those pivoting moments in humanity."

Scott Treatt:

Absolutely, and you're right. It's a fine balance. The government can't come out, let's say January, let's say we come out of lockdown this side of Christmas, and in January, all of a sudden, they're saying, "We're going to hike rates on this one and that, just to repay some of those costs."

Scott Treatt:

I don't think that's the right approach, because businesses and households need confidence in their budgets. They need to know what they're dealing with, and it's going to take them time to recover economically on a before tax basis, let alone on an after tax basis.

Scott Treatt:

So that's why I say this needs to be a policy-setting discussion around, what's the right timing? What's the right way the system can be structured for the future, so that we can move with confidence and clarity from where we are now, to where we need to be to bring the economy into the right performance and position?

Robyn Jacobson:

Is it lazy to just increase tax rates? Is it far more clever to look at the base on which those taxes are levied?

Scott Treatt:

We've got to be smarter. Our system struggled for years without this event. We've got to look at our base. We've got to look at how the global economy's been changing, and the sustainability of tax collections, and the impact on our federal budget. To do that without looking at the base is shortsighted, and I think would have a greater level of economic devastation than necessary.

Robyn Jacobson:

Scott Morrison has made some remarks in the past, and they indicate that he's reluctant to commit to a formal tax reform agenda. Is this view sustainable?

Scott Treatt:

Certainly not, and I think he in particular needs to come out with a vision to be clear about where we're going. And as I say, we're coming up to an election. It is an opportune moment to put his take in the ground, to say, "This is where we're going." We're seeing it from both sides of politics in the decades past. It's time for both sides of politics to step up and do it again.

Robyn Jacobson:

As a closing comment, what is your vision for the next 12 months?

Scott Treatt:

The next 12 months will be interesting. I would like to see a plan ... I don't think any side of politics is going to have the answers yet. I don't think they can. We've just gone through such a tumultuous time economically, to be able to then say with certainty, "This is what's going to fix this longer term," I think it's difficult.

Scott Treatt:

But I think there's a level of being able to set in place a plan for a review and engagement that actually says, "Yeah, we're willing to reform. We acknowledge the issues, and these are the steps that we will take to design a system that is sustainable for the future." I don't know that we can ask for much other certainty than that in the present environment, certainly in that short 12-month time frame that you talked about.

Robyn Jacobson:

As you're talking then, some words come to mind. And I agree, I don't think we can expect a fixed agenda or, "These are the changes that we're going to make to the system at a micro level." But words such as "hope," "optimism," and "courage" come to mind, and I hope we see those in the next 12 months.

Scott Treatt:

Confidence, certainty.

Robyn Jacobson:

Absolutely. Scott, it's been a delight. It's been so great to mull over these issues with you, and I hope for all our listeners' sakes out there, we do see lockdowns being lifted in the weeks ahead. I know it's been an incredibly tough period for everyone, and we are thinking of you, and we will continue to support you as best we can. So I think-

Scott Treatt:

Indeed. Thank you, Robyn. Thanks, everyone.

Robyn Jacobson:

Thank you for listening to this episode of TaxVibe. I've been chatting with Scott Treatt, general manger, tax policy and advocacy at The Tax Institute. To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts.

Robyn Jacobson:

If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession, and find out what the best tax professionals have in common.

Robyn Jacobson:

Join today, and you'll have an all-access pass to the tools, resources, and opportunities that make our members some of the most successful tax practitioners around. For more information, visit "membership." You can also contact us by emailing taxvibe@taxinstitute.com.au.

Robyn Jacobson:

And I remind you that we are also running our webinar, part three of the COVID support measures series. We look forward to you joining us for that, and we look forward to you joining us next time on TaxVibe.

Episode 10 — Tax Time Tips

Release date: 28 Jul 2021

In this episode of TaxVibe, Robyn chats with Tim Loh, CTA, Assistant Commissioner, Experience and Government, Individuals and Intermediaries and Tax Time spokesperson for 2021, ATO, about the annual Tax Time program.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Tim Loh, CTA, Australian Tax Office

Robyn Jacobson:

Hello and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate of the Tax Institute, and your host of today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax professions great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:

I'm joined by Tim Loh, Assistant Commissioner, Experience and Government Individuals and Intermediaries, and the Tax Time Spokesperson for 2021, at the Australian Taxation Office. Tim's role is focused on improving the content experience for individuals to make it easier for individuals to comply with their tax obligations, whether they choose to lodge themselves or through a registered tax agent. Tim is the ATO's tax time spokesperson for 2021, and is also the ATO's steering committee member for the women in law enforcement strategy, formal mentoring program.

Robyn Jacobson:

This works to promote women in senior leadership positions across a number of Commonwealth law enforcement agencies. Prior to joining the ATO, Tim worked at one of the world's largest mining companies, two international law firms and a big four accounting firm. Tim, holds a master of laws, a bachelor of laws, and a bachelor of commerce. Tim has a charter tax advisor with the Tax Institute and admission to practice in Victoria. Tim, a very warm welcoming to TaxVibe.

Tim Loh:

Hi Robyn, thanks so much for having me today.

Robyn Jacobson:

Look, it's great to be here and yes we are into tax time, yet again. How the world moves so quickly and how the world has moved on from a year ago.

Tim Loh:

That's right. It's gone really quickly and here we are again.

Robyn Jacobson:

Absolutely. So, what we're going to chat about today is obviously tax time, it's that time of the year where everyone turns their mind back to lodging tax returns, and we've got to look at some of the impact that the COVID-19 pandemic has had on claiming work-related expenses and some record keeping issues and some tips and traps. But I thought I'd start with tax time itself, there's always this perception that it's just a few months of the year, really July to September, maybe up to the end of October being of course, the day that individuals need to lodge if they don't have a tax agent. But when we think about lodging tax returns, it actually runs right through to mid-May even June of next year. So, how does the ATO define tax time?

Tim Loh:

Yeah, really good question Robyn. Look, it really depends on perspective, right? From an agent perspective, I'm guessing runs right through from 1 July to the 15th May, because particularly given tax payers in the tax payable position, we'll wait until the peak, to lodge, right? From a cash flow perspective but from an ATO perspective as you quite rightly pointed out, it runs all year for us particularly for our small business clients, obviously we do put a lot of focus on that period from 1 July the 31st of October for individual clients who are lodging themselves. But we also do a lot of work together with the profession to help their clients lodge right through to the 15th of May as well. So, it's one of those things where yeah, we're here to help, run throughout the year at the ATO but obviously that 1 July to the 31st of October period is a really busy time for us as well.

Robyn Jacobson:

How does the ATO prepare for tax time?

Tim Loh:

Look, it's a really big machine tax time in the ATO so, every year the ATO wants to ensure that we've got a system that's ready and it can implement a number of our system changes and business changes to support tax time. So, these changes are varied and the implementation of these new measures and software updates does take a lot of time so, we're months in advance that we start planning from an IT perspective, even from, if you think about it from a resourcing perspective, getting the staff trained up, bringing people into the organization to help us during this really busy period, that all is done months in advance to make sure that we're ready to help people get their tax return in and in most cases, get their tax refund as well.

Robyn Jacobson:

There's been extra challenges obviously due to COVID, but I'm thinking of historically, it used to take up to a couple of years to get a new label put into a tax return form and that if you think about the legislative measures that we've had in the last 12 months, so we've now got the ability to carry back losses if you're a company and you've got temporary full expensing, we've had instant asset write offs and so on, and all of these require extra reporting and labels in tax returns. So, the long period that used to arise, it's had to be shortened significantly because obviously the 21 tax returns had to build in all these new legislative measures?

Tim Loh:

That's exactly right, Robyn. So, I can't stress enough how hard everyone in the tax communities work, not just in the profession but also at the ATO. We had a lot of people working around the clock to make sure we could put through these changes into the tax return forms and the tax return process and obviously road test a lot of this as well. So, this has got to be done months in advance. So, and you've got to do it as the changes come through the system. So, it's really something that we've all been working hard right across the tax profession to make sure we can get people getting their tax return right and making sure that all those stimulants’ benefits were coming through as well.

Robyn Jacobson:

And let's not overlook the digital service providers or the software developers have had to update all their software and cloud-based programs in order that these can be implemented and updated in the accountant's offices. So-

Tim Loh:

That's exactly right.

Robyn Jacobson:

Right across the profession. So, in terms of the proficiency for all at tax time, I want to share with all our listeners, in case they weren't aware, the ATO has what's called the tax practitioner stewardship groups, the TPSG and this is a forum that is represented by very senior ATO officers, a member of each of the major professional bodies and also a number of practitioners and at tax time, we meet weekly with the ATO. So, it's a great opportunity and forum for us the profession to be able to raise issues with the ATO and for the ATO to pass messages back to us. So, when I think about the profession's role at tax time clearly, it's a busy time for particularly the agents involved in lodging the I, the individual tax returns and the business returns tend to kick in typically from about August, September onwards. But there's this constant dialogue between the profession and the professional bodies and the ATO, which many tax payers may not be aware of.

Tim Loh:

That's right Robyn, but before I talk about that, I do want to say a big thank you to the tax profession. The tax profession does a lot of heavy lifting to support your clients and I know speaking for many of us at the ATO, your willingness to work with us and stay on top of new developments to support your clients, to get it right, is really vital as important partners to the system, so I just want to say a big thank you there. And it's obviously pretty clear during last year with the stimulus measures and right now with the situation in New South Wales, Victoria, and South Australia, that you're doing your best to help your clients get the support they need and I hope your clients appreciate that hard work that you're doing for them.

Tim Loh:

But to your point, you're exactly right Robyn, with the tax practitioner, stewardship group. It is an opportunity for us at the ATO to tell you what's happening with tax lodgements, refunds but also at the same time, it's important from our perspective to get feedback from the tax practitioners stewardship group members of which you are a member of as representative of the Tax Institute. So, as you said before, we've got really important messages that we want to tell the profession about but at the same time, we want to get that feedback from yourselves to make sure that we're doing the right thing and making the changes we need to do on the fly so to speak as tax time rolls on.

Robyn Jacobson:

I think the TPSG is such a collaborative group that it's collegial and it's frank and very constructive, and it's a very good feature of the system.

Tim Loh:

Yeah, it's great. And I think it's one really good thing about it is that it covers off various aspects of the market so, the micro-enterprises, you've got the bigger practitioner groups, and then obviously Tax Institute represents a multitude of stakeholders as well and then this as well. So, it's just a really important group and as you said before, it's about full and frank discussions about how we make it better for everybody.

Robyn Jacobson:

What support is available for both tax agents and best agents at this time of the year in particular, but throughout the year?

Tim Loh:

Yeah, look obviously it's a really difficult time at the moment, given the current lockdowns in New South Wales, Victoria and South Australia, we do have a range of support options available for tax practitioners and we can work with tax practitioners to tailor our assistance to meet a particular situation or know the tax line 27 article today had a lot of information about what support is available for agents. From our perspective, you do need help and support to lodge for specific clients, you can request a deferral if that's something that you need, lodgement deferrals effectively extend the due date for lodgement of a document by providing additional time to lodge without incurring a foul to lodge a penalty. The website on the ATO has a lot of information about all our deferral mechanisms. One thing to note is if your whole practice has been affected by a significant issue or setback or you're just generally overwhelmed we can work with you to co-design a supportive lodgement program that helps you get your lodgement program back on track.

Robyn Jacobson:

Do you have any current stats that you could share with us on how many lodgings there are or how many are lodgings through agents or how many lodging the first few weeks of July for example?

Tim Loh:

Yeah. I'm happy to share some stats in terms of how many people lodging in the first few weeks of this year's tax time, we've actually received over 2.8 million individual, 2021 tax return lodgements over the past few weeks. So, it's an incredible number of people lodging and that can be due to obviously variety of circumstances obviously the tax cuts that were introduced at the start of last year but only came into effect in October in terms of the withholding. In terms of year on year, this year it's a 7% increase on the same time last year in terms of people lodging. So, it is incredible number of returns and the systems are doing well in making sure that people are able to lodge their returns and get their refunds as well Robyn.

Robyn Jacobson:

Is it fair to say that those who are keen to lodge in early July are more likely to be in a refund position and therefore very keen to get their money back sooner?

Tim Loh:

Yeah, I think that's a fair assumption, right Robyn. So, I think what we obviously at the ATO want people, we just want people to get a right. I think what we do see is some people make mistakes so, in past years or every year, really, there's normally about 200 to 250,000 mistakes that we've seen that first a little period of time where people have forgotten to include income because they've lodged a little bit too early because their income statement hasn't been running. So, we'll talk a little bit more about when's a good time to lodge, but yeah, people do make mistakes but you're right, absolutely right, especially people with refunds who do lodge early.

Robyn Jacobson:

We know that there's often that rush, even the first or 2nd of July, by some people who are just chomping at the bit to be able to get their return lodged as quickly as they can and just a reminder of course, the two main ways of lodging your tax return are through a registered tax agent or you can lodge directly yourself through myGov account. Very rare instances where paper attain is still accepted but suddenly the ATO doesn't encourage that any longer, we're moving into a digital space. So, for those who like to lodge early, what are some of the risks of lodging to early?

Tim Loh:

Well, we know tax agents probably have already got a lot of requests and we'll continue to get a lot of requests to lodge their client's tax returns early and I know in the competitive environment, there is a bit of pressure to do that. But look lodging before for example, the income statement is provided and tax ready and would be full prefill information has been received, can really result in the wrong details being provided. I think one thing to remember that can actually delay the tax return being processed or the speed in which the tax return can be processed.

Tim Loh:

So, typically we say 10 business days 14 days for your tax return to be processed and for you to get your refund. But yeah, when things go wrong, it really can delay when you get a refund, if that's what you're entitled to because there has been a mistake. And another risk, which often doesn't get talked about but I try to remind people about is in relation to your deductions, sometimes if you're in a rush to lodge your tax return, you forget that received from the first, last year, which rightly could be related to directly earning your income. So, it's important to make sure that you've got all your deductions as well so you get the refund that you're entitled to.

Robyn Jacobson:

When it comes to employers and I know there are still some people out there that call them the group certificates and they are showing their ages, they're calling it that, for 20 odd years, it was a payment summary but it's changed again with the introduction of single touch payroll reporting so, it's now called an income statement, and this is available through your myGov account or all through your tax agent and you can get it from the ATO directly as well.

Robyn Jacobson:

But there are some people who are of course very keen to launch their return but it's really important, I look at the status of that income statement and employers actually have until the end of July to finalize that reporting. And so, therefore it's really important to wait until it says tax ready rather than not tax ready. Now, it doesn't stop someone actually lodging in the meantime but I think they will just need to be mindful that if the third week of July and you're still waiting for your employer to finalize, it's probably best to wait and hold off lodging your return until it is tax ready.

Tim Loh:

That's exactly right, Robyn. It is really important to make sure that your income statement is tax ready as you said before, typically employees have until the 14th of July to lodge their income tax, then this year will be extended to 31st of July because of the situation in New South Wales. And it's really important that you do that because for the reasons I said before, because if you do get it wrong, it can delay the speed in which you get your refund back. And the other thing I would say is, again, we know it's a prefill, as an agent if you are lodging return for your client and you do have access to that income prefill information and a lot of that prefill information only arrives at the end of July as well.

Tim Loh:

So, it's really important typically to wait for that time because it probably speeds up the process in terms of lodging a tax return and as I said before, we have seen in the past, people make mistakes and it has resulted in amendments being made to people's tax returns before the actual assessment is lodged. So, I think last year we amended over 500,000 tax return before we issued tax assessments. How we do that is we cross check against third party information to see if anyone has omitted income. So, for example, if you omitted income from a government agency on Services Australia, we'll check against that and if it hasn't been included in the tax return, we'll include that return based on that information.

Robyn Jacobson:

You give some examples of what data is prefilled and why it's better to wait until that data has been populated?

Tim Loh:

Yeah, Robyn, we get a lot of information from third parties. So, we get information from obviously government agencies like Services Australia, we also get information from banks and other financial institutions as well as shared registries and health funds as well. So, this year, I think we get all the information from health funds so that makes the job easier for both tax agents and if you're preparing a tax return yourself for people trying to prepare the tax return. So, that's the typical information that we get from third parties, I'm happy to talk a little bit later on about things around data matching as well but that's the information we get from third parties and again, it's all about trying to make the tax return process, the tax agents and individuals as easy and as simple as possible.

Robyn Jacobson:

It also adds to the integrity of the system.

Tim Loh:

That's exactly right Robyn.

Robyn Jacobson:

So, let's now turn our attention to a classic work related expenses. So, these are things like travel expenses, car expenses, certain clothing is able to be claimed and working from home is not a separate label in the tax return, it actually comes under other work-related expenses. But working from home, let's start with that one because millions of Australian employees have transitioned out of offices into home offices. So, this has totally changed the landscape.

Tim Loh:

It absolutely has changed the landscape and it might have changed the landscape forever, to be honest. Last year 4.4 million people in Australia claimed a working from home expense in their tax return. So, in the previous year it was 3.16 million so that's pre-pandemic, it was 3.16 million. So, that's nearly a 40% increase and last year $2.84 billion in working from home expenses were claimed and compared to the previous year, that was $1.7 billion. So-

Robyn Jacobson:

And Tim if you were saying, was it 4.4 million?

Tim Loh:

Yes. That's right-

Robyn Jacobson:

Last year. And that was 2020, I'd expect that to go up again for '21?

Tim Loh:

Absolutely. And we expect that so we do expect things like working from home expenses to increase, it's just natural, people were home so, I don't think we've got a problem with that. In fact, as we said before, and we can talk about a bit more, but there's obviously the methods that we have available for people to claim their working from home expenses. So, last year we choose for the last three months, the temporary shortcut method to work from home expenses and we extended it this year and it works. It's a very simple method and many of your tax agents would know that, it's just 80 cents per hour multiply by the number of hours you've worked from home, and that's effectively your deduction for all your working from home expenses. There's two existing methods that 52 cents per hour fixed rate method and the actual cost method, which are alternative methods that you can use to decline your working from home expenses.

Robyn Jacobson:

It's important to understand that whilst the rates can vary across those methods, particularly the fixed rate or the shortcut method, you need to look at what that includes and what it doesn't include. So, don't try claiming things that are already built into the particular method that you've selected. You spoke about the working from home expenses going up and I'd expect that to be the case again in '21, but I'd also expect to see a decline in things like travel expenses and even care expenses because people would not have been using their cars to travel for work nearly to the same extent as they've been historically the case?

Tim Loh:

That's exactly right, Robyn. And obviously in places like Victoria, a lot of people have been working from home for pretty much the whole year so we do expect the current travel expenses to go down. Last year, it went down 5.5% this year, I would have thought it would go down a lot more, in fact, the only people have been traveling in Victoria is probably from their bed to the desk or the dining table. But look, it would depend on obviously the jurisdiction that you're in but yeah, look, we do expect the car and travel expenses to go down because you can't travel for conferences. It was hard to do Tax Institute conferences, right? You have to do a lot of it virtually. So, yeah, we do expect those types of expenses to go down dramatically this year.

Robyn Jacobson:

Well get into record keeping and those issues shortly, but thinking about the three golden rules of claiming a work-related expense, you must've incurred it, and we'll talk about that shortly too. You must not have been reimbursed for it, and there must be documentation to substantiate it, I want to talk about the second one. So, a lot of people would not have been set up properly or adequately when COVID first hit. So, millions of Australians have rushed out and bought computer equipment or monitors or webcams or new keyboards, mouse, whatever they needed headsets now, where the employer has paid for this or reimbursed the employee of course they can't be a claim by the employee. So, interested in the ATO perspective and just reinforcing that message about what you can and can't claim.

Tim Loh:

Yeah, that's exactly right, Robyn. So, look, if you have been working from home and if you had incurred the expense to buy a desk or a laptop or an iPad or phone for work, I obviously cannot claim deduction for that. Obviously, it depends on the price, if it's $300 or less, you can claim an outright deduction, but if it's over $300, you do have to claim a deduction as a decline in value or depreciation over a period of time. Now, that's obviously really going to depend on the effect of what the particular assets, so if it's a desk, I think it's like 20 years so, it's not going to be a very big deduction, but for something like a laptop that's two years. So, assuming you've used it a lot for work, that's quite a big deduction that you can get over particular income year.

Tim Loh:

Obviously, there's one thing that comes up a lot, which is around internet and telephone costs. Look, if you're using the 80 cents per hour, temporary shortcut method, that's all inclusive so, it already covers that cost. But if you are using the 52 cents per hour, fixed rate method or the actual cost method you can claim a deduction for that one thing to know is to make sure that you're only timing the work-related portion. So, for example, let's say it's internet expenses, it's a $100 a month so $1,200 a year, you've been using it for work and you've been using it for Netflix, you can only claim the work related bit.

Tim Loh:

So, that's something that people need to remember and it's obviously a very difficult question for tax agents to ask, right? And get that information from their clients. But I guess what we want people to do is to make sure that you are asking the question and trying to get as much information as you can from the client to verify the claim.

Robyn Jacobson:

It becomes challenging for example, if you're running the four week diary to substantiate your private versus business use, and of course the teenage members of the family, who are not on Netflix or any of the social media after 11:00 o'clock at night, very difficult to work out. I want to talk about clothing. This has always been an area that has challenged agents and taxpayers as to what they can and can't claim in this. In my view it's always been a disconnect between what taxpayers think they ought to be able to claim and what they actually can claim. And of course, it's conventional clothing is not deductible.

Robyn Jacobson:

So, just because you're forced to wear black because you work in a restaurant or just because there's a certain look that your employer wants doesn't mean it's deductible and I'm not going to go through all the clothing rules now, but I wanted to talk about this in a COVID context in the same way that just because you need to wear or expected to wear safe to work, and that's not deductible, you're not able to claim your pajama, because you've been sitting in front of a Zoom sessions for the last 12 months. I could just see some people saying, Oh, but I went out and bought extra pajamas or extra socks or boots or whatever in order to work from home so therefore that's deductible because if I'd not been working from home, I wouldn't have bought those things.

Tim Loh:

Well Robyn, PJ's are considered to be conventional clothing so they're not a uniform. There's probably only two people actually who could claim pajamas, that's probably B1 and B2 from the Bananas in Pajamas, but, you just can't claim those types of costs, they're considered to be conventional clothing. It's very similar to the black pants, white shirt example that you used before. There's only three situations, it's got to be occupational specific, it needs to be a compulsory uniform or non-compulsory uniform and it needs to be protective clothing as well. So, those are the types of situations in which you can claim. And if you've been working from home, it's very unlikely that you've been wearing that protective clothing in front of the Zoom call.

Robyn Jacobson:

Okay. For other things like dry cleaning costs or repairs to clothing, which are deductible ordinarily, when it's say compulsory uniform or a non-compulsory uniform, that's registered. But I would have thought even those that typically would wear uniforms, many would have been wearing them a lot less working from home. Now, obviously there are still some businesses where a particular type of retailer, where they asked to bring that uniform to work and they're open face to face but for those that used to be perhaps in an office environment where they wore a uniform but now they're working from home, you'd expect dry cleaning costs to go down in that perspective?

Tim Loh:

That's exactly right. And if you've been in Victoria, you'd be lucky to find a dry cleaner that was actually open because of the situation that people were in. People weren't going into the offices anymore, they're working from home. So, look, we've obviously got data analytics at the ATO that runs checks across everybody's tax return but yeah, I'd be saying to people is really analyze your tax return and really, again, we're not asking tax agents to run interrogation of their clients but it's just a common sense check about, it does not make sense and given the situation and it really will depend on the location that you're in. If you're in New South Wales, for the most part of it was fine until more recently, but if you're in Victoria, the situation will be vastly different. So, it really depends on people's facts and circumstances.

Robyn Jacobson:

Look, I've had a which I'm going to describe as entertaining and amusing story. So, I've heard of someone asking the ATO, I bought a dog to keep me company while I was working from home is the cost of feeding my dog and veterinary bills deductible? Of course, it's not. I heard of someone who had their teeth brushing at great expense, and they thought that that was necessary to make them look better, to go through job interviews that would then lead to more assessable income. So, therefore they claimed that that was deductible too. So, we do see some creative arguments.

Tim Loh:

We certainly do. And I'm sure tax agents have even more crazy clients that their clients are bringing to them, which I'm sure you help knock them out before they come to the ATO, but you're right, we do see some crazy claims, but one thing we do have at the ATO we've got some occupation guides, probably 40 occupation guides that can help people work out what they can and can't claim this tax time. So, check out our website and that can be really helpful for tax agency use to support the views that they're providing to their clients as well.

Robyn Jacobson:

Tim, another aspect that the ATO uses or rather a tool they use is talking to employers. So, can you just explain how and why the ATO goes about doing this?

Tim Loh:

Look, at the ATO, obviously we see a lot of people putting tax returns both from an agent perspective and self perspective, but one thing I harp on about, which I think people get annoyed about is it's records, records, records, and I'm going to sound like a bit of a broken record so, pardon the pun there, but good records are like, I don't know, they're like the front door to the house, you can't even think about a reduction without the record. So, if you think your client has made a questionable claim and again, it goes back to what I said before, it's about asking the question and making sure that it makes sense to you as an agent, that what they're saying about the claim is legitimate.

Tim Loh:

But one thing we do at the ATO, as I said before is around data analytics, so, we'll look at a particular client's deductions against someone with a similar income in a similar industry. Deductions stick out like a sore thumb, we'll be asking them questions about whether that deduction is legitimate and one of the ways we do that is we'll check with the client's employer to confirm if A, that the client was actually required to spend that money in the course of their employment and B, to a point that you said before Robyn, whether they've been reimbursed for any of those expenses.

Tim Loh:

But just to be clear though, we don't make any decisions around deductions denied based solely on the information we get from the employer but it is definitely something that we do consider in our decision-making especially when the client hasn't actually provided any evidence to support the claim in the first place. And as I said before, we rely heavily on the professional expertise of tax agents and Tax Institute members who are tax agents. So, we're not asking you to interrogate your clients but it is important to exercise due diligence and ask your clients questions as part of your professional obligations.

Robyn Jacobson:

Metadata is a really important aspect of this and I want to speak for a moment about the why, the ATO uses this data. If we think about our digital footprint so, we've got credit card traces when we pay for things, we put our ID tags on our motor vehicles, our mobile phones, now, if anyone can remember back to the '90s, when mobile phones first came out, they would often show at the top of the very small screen at the time, the tower that the mobile phone was connected to at the time and we don't have that feature on our phones anymore.

Robyn Jacobson:

So, the ATO can use metadata so for example, if someone is saying, well, I did a business trip, 300K out of Melbourne or Sydney, Adelaide, Perth, Brisbane whatever, and yet their phone says, well, hold on, I spent the afternoon in Yarra Valley, the Hunter Valley, the Barossa Valley, Margaret River, then will the ATO look at that and say, gee, am I going to rely on the record that says the car was being used for that purpose or I've got to rely instead on the phone data, which tells me where that mobile phone was positioned? And most people are not separated from their mobile phone of a distance of more than two feet.

Tim Loh:

It's all right, Robyn. No, that's exactly right. And every year we're improving the data that we get from third parties and the like and different sources to expand and continue to expand our data matching capabilities. So, for instance, you would have seen in the media that we've got data matching protocols with most cryptocurrency exchanges, in reation to sharing economy particularly with the combination providers, property management reports, novated lease vehicle information, lifestyle assets or information from insurance companies about what people were insuring their assets. And we'll use all that information and cross-check that against taxpayers to see if there's any discrepancies and as you pointed out with your example before, there are discrepancies but we'll be asking questions of agents on behalf of their clients.

Robyn Jacobson:

The insurance one is really clever because if you've got anyone who runs an expensive car, artwork, a race horse, an airplane, all the good stuff in life, then they are typically going to insure it. And once you know that that policy is held over an asset, then all you've really got to do is look at who owns the asset, as in who's the policy holder. And then you can ask questions about, have you dealt with the private use of that asset? What do the FBT issues look like? Are there issues where a company has bought an asset that is being used by shareholder of the company? What about the elements of when it was disposed of? So, I think lots of questions arise just by asking the question, who owns that particular asset?

Tim Loh:

That's exactly right Robyn, that's part of the reason that we're getting that information is obviously to make sure that people are compliant with their tax obligations. And another part of that is an education piece, as I think in terms of the points that you've raised before, just then, and part of it is, we're trying to educate people to get it right the first time. Obviously, with technology now you can audit a lot more people compared to the old days when a lot of it was manual. But at the same time, we just want people to make sure that they are doing the right thing in accordance with the tax system and if they're not, we've got this information now that we can use to cross check against income and making sure that it will include the right amounts of income, because if you're not including much income and you've got these types of assets, well, obviously something is wrong.

Robyn Jacobson:

This is probably a very poor example in a COVID environment but possible records. Now, I'm going to ignore the last income view because almost no one's allowed in and out of the country at the moment, but typically the ATO will check in with customs and border control. And I have had of people who've been silly enough to fabricate a log book for their motor vehicle to say, they're using it for work purpose. And then when it's matched up to the days the car is supposedly doing the work trip, it aligns with the days they were physically out of the country, because the passport stamp proves this. So, if you got to make up lies, be clever about it and I said that right in front of chief.

Tim Loh:

That's right Robyn.

Robyn Jacobson:

So, leading into some other issues with capital gains tax and assets and other investment properties, look, there's a whole separate conversation which we could absolutely have another time but just what are some of the key issues people need to think about at tax time when they're making claims for things like rental properties and they're selling assets?

Tim Loh:

Yeah. Look we're happy to talk about rental properties and what, in capital gains tax in the context of that. We're just making sure that you obviously include all your proceeds from salvage proceeds, you cross check but I think it's also important to make sure that from a cost based, perspective you are including everything that's required to include in your cost base to make sure that you are hopefully getting a capital gain and you've made some money there from your property but also if you've got a capital loss that you're identifying the right cost base and proceeds from the sale of a rental property.

Tim Loh:

In relation to cryptocurrency, but we've seen a lot of people invest in cryptocurrency, over 600,000 people over the last few years and Bitcoin prices have skyrocketed. So, last June it was about $12,000 for Bitcoin, in April this year it was just over $80,000 for Bitcoin and right now it's about $45,000. So, there's a lot of volatility at the moment, but it is becoming more mainstream and we do see people looking to use it to include that in their investment portfolio. So, what would we be saying to people and agents is just a reminder that when you do sell, swap or exchange cryptocurrency, there are capital gains tax consequences.

Tim Loh:

If a taxpayer is holding the cryptocurrency as an investor, one thing to remember is, you have held the cryptocurrency for at least 12 months and you have made a capital gain, there is a capital gains tax discount that is available as well. So, one thing we're doing at the moment to make sure that people are compliant with their cryptocurrency obligations is we've written into a hundred thousand taxpayers this year to remind them of their cryptocurrency tax obligations.

Tim Loh:

So, just a word of warning to make sure that you're not ignoring those letters not burying your head in the sand. And this year when taxpayers lodge their tax return, whether it's through my tax or with a registered tax agent, 550,000 pop up messages will come up to remind people that they've got a cryptocurrency transaction that's taken place and that they maybe include that gain or loss in their tax return.

Robyn Jacobson:

And this is a new technology, the ATO is starting to feed these real time messages into tax return preparation?

Tim Loh:

That's exactly right, Robyn. So, we're using the information that we're getting from the data matching protocols that we've entered into. And again, it's just trying to make people get it right the first time and just remind people because if you've made a number of transactions, you might have forgotten that you had a cryptocurrency gain or loss. So, this is a reminder to taxpayers if they haven't got the record in place, to get the records in place but also to make sure to include that in your tax return.

Robyn Jacobson:

There are a lot of rules around deductions for rental properties and I think about travel expenses and repairs and depreciation claims, there are lots of things people need to be mindful of and it's almost getting to the point where it's so technical now, that you do it yourself you may run the risk of making an error. So, it is some way that I would encourage people to seek the advice of a tax professional in that respect. The definition of spouse, I just want to pause on this for a moment because there are some people out there that got to fill in the tax return and we see a lot of what I'm going to describe as defacto relationships. So, they're not necessarily legally married but certainly in long-term relationships. And it may surprise a number of listeners to know that spouse, for tax purposes actually include someone that you're not legally married to but you live with on a regular domestic basis.

Tim Loh:

Well, that's right, Robyn. Well, what is considered about isn't just the hubby or wife situation. So, it also does include, as you said someone whom you live with on a domestic basis in a relationship as a couple. So, yeah. perfect examples of de facto partner would also be considered as spouse. And it's really important that you declare that spouse income in your tax return because it does contribute to forming the whole picture of the individual's tax return each year. And something that sometimes people forget is that depending on your spouse's income, it cannot give you different tax results on both obviously positive and negative. So, no, from a positive perspective there's things around like private health insurance rebates, Medicare levy reduction, SAPTO, there's all these different things where you could be missing out if you haven't declared spouse income on your tax return.

Robyn Jacobson:

Tax time is a very unfortunately popular time for scams. They know that, as in the scammers know that people are looking at their tax, it's on their mind and there are some vulnerable people in our society who are contacted and threatened with arrest and prosecution and fines and even incarceration as in jail for not paying debts that actually don't exist. Now, when information is coming out in such droves at the moment, how could people be sure that what is being sent to them through an email or a text message or a data phone call is actually the ATO and not a scammer?

Tim Loh:

Yeah, it's a really good question, Robyn. And scammers are particularly around tax time targeting vulnerable Aussies to see if they can get money and take advantage of people at this time and there are to be a couple of typical scams that are floating around at the moment. And then I can talk about some of the things that people will do to spot such scams but from a phone call perspective, there's a couple of common ones is that the fake tax text scam and the suspended tax phone number scam so, this is the most common scam, you've probably received a couple of yourself Robyn, I know I have. And that scam is reported to us in a way where the scammer calls you and they threatened things like arrest, jail or deportation if you don't immediately pay that fake text tax.

Tim Loh:

So, again, that's not something we do at the ATO. So, again, we will be saying to people hang up and just don't give them any of their personal financial information. Another common tax scam we're seeing is through email. So, where a recipients get a message requesting him to click on a link to log onto a dummy mobile website. My advice there again is, never access online government agency services through hyperlinks, we would never do that and most government agencies don't do that either. So yeah, in terms of how can people spot, I guess such scams, the ATO does call, texts and email tax payers but there are some dead giveaways where you know it's not from the tax office. So, like I said before, we won't threaten you with an immediate arrest jail or deportation and you typically get a friendly voice on the other side of the phone call speaking to you.

Tim Loh:

Another thing that we don't do is we won't project our number onto your phone. So, it will normally come up with a no caller ID number, we are calling from the ATO. We don't use what I would say, I don't know if this is the right term, but we don't use prerecorded or robot code type messages to call people. So, it always be a real person on the other side of the phone. And finally we just never request cryptocurrency or apple gift cards as payment for text it so, it's a dead giveaway if someone is asking you to do that. My advice instead is to, call the ATO dedicated scam line if you think that the person is a scammer, we've got a number it's 1-800-008-540. And the reason why-

Robyn Jacobson:

Please repeat that number again Tim?

Tim Loh:

Yeah, it's 1-800-008-540 alternatively you can go onto our website, but it's really important that you do that because it helps not just yourself and your loved ones but also people in the Australian community who are vulnerable. And we do get people, yeah, every year you would think that people don't get ripped off but they do. It's despicable, it's an Australian behavior and we need to put a stop to it. And obviously the government is trying to do that, we're trying to do that at the ATO, the ACCC is trying to do that, but yeah, we need everyone's help to make sure that people don't scam others. So, if you do receive a call, you think it might be a scammer and don't feel obliged to keep talking to the person you can hang up. As I said before, if you're unsure, just give us a buzz at the ATO to say, Oh, was that person a scammer or was it a legitimate call? And again, with emails and SMSs, just don't click on the hyperlink and don't respond to those SMSs and emails.

Robyn Jacobson:

In your remarks, then it reminded me of many years ago when I was shopping up on at the department stores and I was browsing in the handbag section and got chatting to one of their sales assistants who shared with me the extent to which they have theft and it was just eye watering figures in terms of the amount of stocks that walks out the door. And I looked around the shop floor and I was just thinking to myself, all of these options that are on sale here are being purchased by the department store, but they can't on sell all of them because some of them are being stolen. So, that means that cost has to be priced in to the ultimate selling price that is being sold. So, in other words, all of us retail shoppers are paying more for the goods we're buying because embedded in that is covering the cost of the stolen goods. And to me, it's the same with the tax system, if everybody paid the right amount of tax, we would all be paying less tax-

Tim Loh:

That's right.

Robyn Jacobson:

That sounds simple but I think this operation that I call, what's in it for me, and I see someone else doing an amazing to get away but this whole perception of, well, the tax system seems to be helping everyone else but me.

Tim Loh:

Yeah, no Robyn like I'm with you. I think sometimes people forget and we do a lot of tax gap analysis and in the individual's market, the tax gap is over $8 billion, which is four times higher than the multinationals tax gap. And obviously there is a perception out there that multinationals aren't paying their fair share of tax but when you look at the statistics, it just shows that individuals are actually doing the right thing and it's really important to remember that the tax revenue is used for various things in public services like schools and hospitals and even grants that the people get and the small businesses get then and vulnerable people get as well. So, it's really important that if people do the right thing at the ATO we want people to claim the deductions they're entitled to nothing more, nothing less, and we want people to get it right, we just want people to do the right thing.

Tim Loh:

And if people do the right thing it just makes it a better tax system for all of us and it really is dependent on registered tax agents, the ATO and even individuals to work together to make sure we can get the tax system running as smoothly as possible. We live in a really lucky country, we have a wonderful tax system, obviously it can get better with people doing the right thing and if we look, we know a lot of people do the right thing. It's in our statistics that show that a lot of people do the right thing but there are some people who aren't and we'll obviously at the ATO, we'll follow those people up as well.

Robyn Jacobson:

Clear messages here, seek advice if you need it, claim only what you're entitled to claim, keep really good records, particularly keep a record of the hours you're working at home at the moment, even into '21, '22 we're still to find out what the rules are going to be for this year but start keeping a record now of your hours, because you may need them. If you get it a little bit wrong, now it's different to someone who's blatantly taking advantage of the system and manipulating it, and yes, we know where the rules stand there but if someone makes an honest mistake, if they're trying their best to and get it a little bit wrong, ATO's response and we might close on that note.

Tim Loh:

No. No, we're here to help. So, obviously people make genuine mistakes, the tax system is pretty difficult, right? We've both been working in the industry for a long time and every year there's changes, move out of the industry for a few years, you're starting all over again because of the number of changes that happen. So, at ATO, we know it's difficult, we are trying to make things easier for you to lodge your tax return. If you're lodging with a tax agent, we're trying to make things easier for tax agents.

Tim Loh:

We know, obviously the Tax Institute has some fantastic resources as well to help tax agents lodge tax returns on behalf of their clients. So, it is a difficult area, if you've made a genuine mistake, we're here to help people get it right. But as you said before Robyn, if you're taking the mickey out of the system, then we will come down and that's what most Australians would want us to do because a lot of people do the right thing and just want to make sure that they're doing the right thing and we're grateful for everyone who does do the right thing.

Robyn Jacobson:

Tim, thank you so much for your comments today, at the Tax Institute we're very proud and privileged to be part of the ongoing process to contribute to these very valuable conversations and I wish the ATO all the best during this next tax time season.

Tim Loh:

Thanks Robyn. Thanks so much for having me and yeah, I just want to finish off and just say, the Tax Institute is a wonderful partner in the tax system and we're really grateful for your support. Thanks Robyn.

Robyn Jacobson:

Thank you very much Tim, thanks. Thanks for listening to this episode of TaxVibe. I've been chatting with Tim Loh, Assistant Commissioner Experience and Government Individuals and Iintermediaries and the Tax Time spokesperson for 2021 at the ATO. To keep up to date with TaxVibe, be sure to subscribe, rate, and review whenever you listen to your podcasts. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram, and Twitter.

Robyn Jacobson:

You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of the Tax Institute, join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today and you'll have an all access pass to the tools, resources and opportunities that make our members some of the most successful tax practitioners around. For more information visit membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Bonus Episode — Post-Budget Reflections and Insights

Release date: 19 May 2021

In this special Post-Budget edition of TaxVibe, Robyn will discuss the key tax and superannuation measures announced as part of the Federal Budget 2021–22, providing her unique perspective and insights.

Head to taxinstitute.com.au/federal-budget for your Federal Budget Report.

Host: Robyn Jacobson, CTA, The Tax Institute

Episode 9 — Tapping into the tax community

Release date: 11 May 2021

In this episode of TaxVibe, Robyn chats with the President of The Tax Institute, Peter Godber, about being a member of the tax community during a changing time of reform and renewal. They discuss the role of professional connections in building knowledge, finding opportunities and excelling in your tax career.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Peter Godber, President, The Tax Institute

Episode 8 — Accidental property developers

Release date: 21 Apr 2021

In this episode of TaxVibe, Robyn chats with Leanne Connor, Director, WGC Advisors Pty Ltd, about the taxation treatment of property, held as a home, in the form of investment or for property development. We also discuss the role of women in tax, how COVID-19 has equipped us to face future challenges and pathways for younger practitioners.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Leanne Connor, CTA, WGC Advisors Pty Ltd

Robyn Jacobson:

Hello and welcome to TaxVibe, A fresh new podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax and here at the Tax Institute we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Leanne Connor, CTA. Leanne is a Director of WGC Business Advisors, a chartered accountancy firm in Melbourne, specializing in taxation and strategic advice to SMEs and high net worth individuals.

Robyn Jacobson:

Leanne has over 30 years experience providing accounting, business advisory, strategic superannuation and taxation services. Leanne's areas of expertise include tax and superannuation planning, business restructuring and understanding the fundamental issues relating to SMSFs, family trusts and private companies. Leanne is a member and past Chair of the Tax Institute's Victorian State Council and Professional Development Committee. She is a regular presenter for the Tax Institute and winner of the 2020 SME Tax Adviser of the Year Award. Leanne has also just been appointed a Director and National Councilor of the Tax Institute. Leanne, welcome to TaxVibe, and congratulations on your recent appointment.

Leanne Connor:

Thank you, Robyn.

Robyn Jacobson:

Great to have you. So, today we're talking about the accidental property developer. Now, this is an enormous topic and when we talk about property, there are lots of different contexts. There is the homeowner, the investor and the property developer. But I thought I'd start of with just looking at the current property market, it's all very hot to trot at the moment, do Australians have a love affair with property?

Leanne Connor:

Apparently so, Robyn, apparently so. Look, there's always the great Australian dream, and there's no doubt about that, but I think in relation to especially residential real estate in Australia, we've got a really strong emotional connection to that asset. And therefore when we're talking about tax, tax is very uniform, we think just because we make a capital gain on an asset we're going to pay the same sort of tax. But we seem to have a different conversation around residential property, whether it be our main residence or an investment property. I think that's because it's our family home, often, it's our major inheritance, it's where we grew up. So each conversation around tax and residential property has this emotional overlay and people believe that tax is a driver of all sorts of property issues and affordability, when in fact, perhaps it's not necessarily the major driver, but I think that's where we first land, that's the default position and I think politically, that causes politicians an awful lot of grief [inaudible 00:03:01] that change.

Robyn Jacobson:

When we look at the median house prices, look, over the years property has continued to, of course, increase in value, you and I are both based in Melbourne and expectations are by the middle of this year the median house price is expected to exceed $1 million. Now, Sydney's already been over that for some time and Canberra is hovering close to 900,000 and Brisbane and Adelaide not too far behind. Now, there are figures being quoted by Your Investment Property that says five out of eight Australian capital cities are likely to produce double-digit house price growth this calendar year. And then you look at around 40 or more non-capital city locations cracking more than 20% growth. Now, for some years we've talked about the sea change and the tree change, but has the impact of COVID-19 even more accentuated that move out of capital cities? Has there been a trend towards getting out into regional Australia or further afield because now we've got all these Zoom technologies et cetera and we can conduct our businesses and we can run our work-related activities from these remote locations? Do you think this has actually changed the landscape forever?

Leanne Connor:

I'm not sure about the longevity of the change, but certainly there has been a change. I know the provincial cities, certainly in Victoria, have had an extraordinary reaction, I think, to COVID and people looking to either rush to the regional cities or to the sea change. And I know Melbourne certainly had a lot of lockdown activity during last year and the first thing everybody did was to get out of town, "Let's get to our holiday homes, let's get out of the CBD or the close greater Melbourne." So, I think certainly, absolutely, and we're seeing that in price changes for real estate in either the peninsula, close areas to Melbourne or the regional or larger provincial cities in Victoria, absolutely. Whether it will stay that way, who's going to know? And I think there certainly, in things like Bendigo and Ballarat they're probably running out of property, which is also driving demand.

Robyn Jacobson:

So from a tax perspective, if we've seen this enormous growth in regional Australia and regions outside the capital cities, does that mean we're going to be seeing quite extraordinary capital gains potentially arising either for those that have held property for some time or even more recently where the growth is so significant? Which might make the main residence exemption even more relevant to some people where the gains are bigger than they were expected?

Leanne Connor:

Absolutely, Robyn. And I mean, it was just part of the conversation I had before around taxation of residential property and main residence is one of the big stalwarts of taxation in Australia. People have an expectation that their main residence is tax free and will remain tax free, and when you inherit it from your parents it will also be tax free, under most circumstances. And I think that's going to make any conversation around potentially changing the main residence or targeting certain tax payers or thresholds or things, perhaps a more difficult conversation to have if a bigger percentage of tax payers or title holders will now be impacted by it.

Leanne Connor:

Because, I question, I guess, who actually has been in the past making a real capital gain out of their home, by the time you take into account acquisition, acquisition costs, the cost of holding that property on interest and rates and those sort of holding cost, I think that there would be, not a high percentage of tax payers actually exposed to a real capital gain that would be taxable on your home. Having said, I mean maybe in the 20 or 30% and maybe in only the large, leafy suburbs perhaps of certain... Melbourne, Sydney sort of regions. But as you've just pointed out, if there's extraordinary growth in a larger sector of the community in prices, then perhaps we're going to try and hang on to that main residence exemption a little bit longer.

Robyn Jacobson:

Look, it's a really interesting point you make because without knowing the detailed figures of exactly who was benefiting and also who is making gain that is then disregarded because of the exemption. What we do know is that the main residence exemption is the government's biggest expenditure item and every year they release figures on what benefits they provide to tax payers known as the Tax Expenditures Statement. And it's around $75 billion a year relating to this exemption. So it is a huge cost to the government, but as you say, there's something quite sacred about taxing a family home and it would be political suicide, I think some would regard it as, if there were significant changes made to it.

Leanne Connor:

I certainly think during people's lifetime, we certainly had some conversations early last year about tax reform and the main residence and perhaps some options that could be discussed. And one of those was around perhaps the timing of taxation of a main residence and certainly that interacts with perhaps inheritances. Because we talk about taxation of main residence as zero for all taxpayers, which is very regressive and there's not many other areas of taxation where the community supports some form of progressive taxation system. That you pay your fair share, you pay more if you earn more, yet the main residence has no such thresholds, doesn't matter who the taxpayer is or the size of the gain or any other thing, we're all treated the same. And also it stays out of the net even after you've passed away, in some circumstances.

Leanne Connor:

So, I think any attempt to tax the main residence in any form would need some really careful conversations around who the target is, the timing of such tax, like is it after, potentially you've passed away and you've been able to roll over gains during your lifetime to ensure you're not taxing the family home and can't afford to move. And also perhaps in transitional provisions as to potentially only tax future events rather than everybody who has existing homes and existing circumstances, I guess, but it's certainly going to be a very difficult and emotive topic to be addressed.

Robyn Jacobson:

And your point is very valid, but I also think there won't be a lot of sympathy for someone who buys a $50 million home and sells it for $60 million and pockets $10 million tax free?

Leanne Connor:

Yeah. It's really interesting, once again I think people think, "Well, we're not just going to target the 50 million." And I think everyone's concerned it's going to affect them. And most people's decisions are, "How it affects me?"

Robyn Jacobson:

Now, there have been some figures also released say we have the best set of national real estate conditions since the turn of this century. There were expectations that with the recession after 29 years of consistent growth that we were going to be taking perhaps longer to move out of those dire economic conditions that we had last year. But the property market just seems to be getting hotter and hotter and I think it's also been compounded by the introduction of the HomeBuilder program. Now HomeBuilder, of course, is the government grants which already has been extended once and there's now talk of potentially extending it again and I'm interested on your thoughts on why the government might think this is necessary? But also, would the extension of HomeBuilder only further add more fuel to the flames of an overheated market?

Leanne Connor:

To answer your question, it probably does, although it would be interesting to see if they do need to extend what those conditions will be. I certainly know in Melbourne there's been a lot of talk around just the practicalities of the system at the moment if they had so many applications, so many granted, that I think there is just a physical strain on the building sector of being able to commence these buildings within the six months time frame that the legislation require. So I think we've got Tradie supply issues, we have material supply issues. So I think the call at the moment is a practical call to say, maybe they may not even extend the time of grant application but they may just extend the time of when those approved grants need to commence. Perhaps because the system, in my understanding, is groaning and certainly the client base that I look after, anyone in the trading or the residential building industry has work for a good 12 months, two years looking out. Which is a fabulous place to be for them in a very dire situation last year.

Robyn Jacobson:

But there is a supply issue too, isn't there? And the cost of building materials just continue to go up.

Leanne Connor:

Oh, absolutely. Yeah, absolutely. And the same, cost of labor or cost of materials, but I think not even a cost issue, I think it's just a physical material issue as well. I just don't think that people can manufacture, I know that there's timber mills and things working 24/7, I think, to try to get framing materials available et cetera. So, I think pricing is one thing and just physically being able to get the material is another.

Robyn Jacobson:

We were speaking earlier and you spoke of the cost of bricks, can you just repeat for our audience what your comment was?

Leanne Connor:

Oh look, I hope I was listening accurately yesterday, I was listening to one of the National Australia Bank economists who was having a chat to the National Bank customers and he made a comment about the cost of bricks and I'm sure he was talking somewhere around the 30 cent mark, like it was really cheap and it might have been referenced to last year when nobody was doing anything to now sort of post $3 and whether that was laid bricks or... I mean I'm not a builder by any means and I'm sure I'll be shot down for my statistics, but I think from an economic perspective I'm sure that's correct and the price of materials would have gone through the roof.

Robyn Jacobson:

They must be gold laden or something because it must be an extraordinary house by the time that one's built with those $3 bricks.

Leanne Connor:

Indeed.

Robyn Jacobson:

All right, moving on to the legislative framework and some of the developments we've seen. Certainly there are very big challenges in characterizing property for different purposes, and we'll get into that shortly. But if you just run through some of the key changes we've seen in the last four or five years, I'm going to run the thread through them all because there is a trend here. I'm going to kick this off in 2016, on the 1st of July the foreign resident capital gains withholding regime was introduced. Now, I'm going to keep all my comments a brief as I can for each one, but basically there was certain overseas property owners in Australia who were not paying tax on the capital gains from some of these properties. So now we have a withholding regime and 12 and a half percent of the purchase price has to be deducted by the purchaser when you've got someone from overseas who owns the property here, and there is a de minimis threshold.

Robyn Jacobson:

Then on July 2017, the government changed the law to deny deductions for travel expenses and certain depreciation on rental property assets, which is for residential property rental. On July 2018, we then had the introduction of a new GST regime, due to property developers and particularly those who are Phoenix operators, building properties, collecting the GSTs from their customers but not sending it on to the tax office. Then liquidating the company and the ATO wasn't able to get their hands on it. The data was quite extraordinary, so November 2017 in the five years leading up to that point, 3,731 individuals controlled more than 12,000 insolvent entities, $1.8 billion of GST debt had been written of by the ATO and these property developers have claimed $1.2 billion of input tax credits. Meaning this was a $3 billion problem in just five years and it was exponentially getting worse. So now we have rules that say, a bit like the foreign resident rules, we have to take out the GST on settlement, pay it directly to the ATO and then it's credited back to the builder.

Robyn Jacobson:

On July 2019 vacant land measures were introduced that denied deductions for the cost of holding vacant land. And there's far more to it than we can possibly discuss in this discussion, however, they are far-reaching and there are lots of complex aspects to it. And then finally, on July 2020, although we've got some 2017 bits built into this as well, the main residence exemption is being denied to foreign residents. Now that's a lot of legislative change for a single market, it impacts on millions of taxpayers and the thread I wanted to draw on, and I'm interested in your comments on this, is this is all about people not paying tax or not lodging tax returns and declaring the capital gains or the income that they should have and so rather than just targeting the people who are doing the wrong thing, instead we've got these legislative changes that impact on, as I said, millions of people, very complex rules and it's a very strong approach to take.

Robyn Jacobson:

Now maybe it was necessary but it certainly shifts the onus back onto tax payers rather than the ATO. So were all these changes necessary? Have they been effective and what does it mean for those in the market?

Leanne Connor:

Probably to start with I can identify two of those changes, perhaps the foreign resident capital gain withholding regime and the GST on settlement regime. I certainly agree that, that is targeting potentially quite egregious behavior by a group of taxpayers and certainly, from a lot of taxpayers I don't think that there would necessarily be a disagreement that it wasn't required in shifting that onus to target those who pay the money for the acquisition of those assets. And in that's quite a bit of history, that sort of behavior, if we look at quoting an ABN if you're a contractor, if you can't quote your ABN, you don't volunteer to be in the system, so to speak, then they will withhold some of the payment. So I understand the system and it's been around for a long time, so it sounds like, with the statistics that's been quite successful in being able to raise money that may not otherwise have been paid.

Leanne Connor:

I'm not sure I can support so much are main residence exemption legislation, I have issues with that legislation, it just seems counterintuitive to how we normally treat changes of residency and capital gains tax where we try to grandfather or respect the taxation of that asset whilst they are either a resident or a non-resident and have things like market value uplift some things to make sure that we're not losing what would otherwise have been taxed had it been disposed of, whether we were a resident or a non-resident respectively. So, that's where I have an issue, I think, with that legislation. It's capturing those that probably it shouldn't capture in most cases I would have thought. And I know that a lot of people were very vocal about that, that we weren't able to push through any change in relation to that legislation.

Leanne Connor:

And then there's the travel expenses and depreciation, I think that was probably a bit of a legislation, a hammer to crack a nut so to speak, here was a few people who were taking their trips to Queensland to visit their rental property et cetera, I'm not quite sure why suddenly we would have this legislation that pinpoints one small area, perhaps the travel expense area, but it's in and yes, it's very blunt and it certainly captures a lot of taxpayers in that investment property regime, which is where most of that is. And vacant land tax measures, as you said, very harsh legislation for some subsets of taxpayers. A normal, general expense deduction philosophy throughout the legislation now has this qualifier over it for every single deduction that you make over this concept of vacant land for certain taxpayers.

Leanne Connor:

And there's certainly people who talk about profit making developments, the small-scale ones later on in our conversation, but they're going to be left high and dry if they make a loss out of some of these things and they won't be able to claim things like their loss on which they otherwise would have. And I can't see that that was ever part of some policy intent. And I think that's where us as advisors talking to our taxpayers, it's very hard to explain why certain taxpayers are being caught in legislation that doesn't appear to have policy intent to capture them. And I think that's where some unfairness comes into the system and that's where we all get a bit nervous.

Robyn Jacobson:

It's a really good point Leanne, because I think when you talk, particularly about vacant land, you have understandably the impression that these rules apply to an undeveloped lot that has nothing on it. But in fact, the definition of vacant land for this purpose can actually include where there is a dwelling on it, but it's not available for use or being used in the course of a business and so on. So, there can be easily misconceptions about when these rules apply. But ultimately people haven't been paying and haven't been lodging, a small subset, but instead the legislation says, "Well, rather than dealing with you lot, who are the noncompliers, we will instead focus our attention on the people who pay you. And we'll get them to report, or get them to pay to us because at least we know we can secure the revenue that way."

Robyn Jacobson:

And it's a bit of a worrying trend and I'm just wondering what in the future is going to go down as similar law design pathway? So I wanted to mention also, Neil Brydges and myself are going to be discussing a number of these measures at the upcoming Yarra Valley Tax Retreat. So we are looking forward to poring through this in a bit of detail with our audience, which will be in early June. So, I want to move now, Leanne, on to holding property for investment. We know during the course of the 2019 election campaign, there were some policies put forward by the Australian Labor Party, they wanted to restrict or even abolish negative gearing and halve the CGT discount. They were just some policies which were put forward, but ultimately rejected by the electorate, as we know, with the return of the Morrison Government. But what is some of the issues that come up for people that hold property for investment purposes?

Leanne Connor:

In relation to negative gearing and the CGT discount, certainly for investment property, I think I'd go back to my umbrella overlay statement at the start about the emotional connection to property and investment property. And that's why we talk about negative gearing and that, as you said, sacred cow and if we started to talk about negative gearing. And I had cause to read the other day... And I was actually in senior high school when the Hawke Government withdrew negative gearing through 1985 to 1987 and I remember now that it was such a big issue back at that time where they would dare to withdraw negative gearing or only quarantine those losses against rental property income or rental property capital gain down the track, and ultimately it was obviously removed within two years.

Leanne Connor:

Interestingly enough, I think Joe Hockey also used the concept that, "Oh, during 1985 to 1987 rents went up." So rent's went up during the period of negative gearing being withdrawn, it turns out if you actually did the forensics, there was probably only two states where rents went up during that period and probably for other reasons, as I said, tax is not always driving concepts around property. So, that was a bit of a... And I think that's the issue, is that I think we lose factual things for the message that we want to deliver from a political perspective. I think with negative gearing, especially in high-interest rate environments, you will need a CTG discount coming hand in glove, otherwise it doesn't make any sense. If you go and lose a lot of money on negative gearing, people bank on a cheaper capital gain tax liability to balance the books at the end of the day. Otherwise, your investment property will ultimately lose money.

Robyn Jacobson:

This perception that negative gearing is always good for tax purposes and, "Why am I doing it?" "Oh, because it saves me tax." And there seems to be this oversight that in order to get back your 30 cent deduction, you've actually got to make the dollar in the first place.

Leanne Connor:

Absolutely. It never made any sense and I think, I remember 25 years ago, an awful long time ago when I was only starting out in tax and people would come along and sell these great concepts of negative geared properties to hardworking Australian taxpayers who were really only keeping their family afloat and they'd be offered these great taxation benefits of negative gearing. And I can remember at the time, going, "This is not making any sense. If this thing's not rented or you're on the edge anyway, interest rates go up, you're going to be out of business."

Leanne Connor:

So, I guess I always took a practical view of this and some of these conversations around negative gearing is, "Which taxpayer, which structure do you own property in? Do you own it in your own name? Do you put it in joint names? Do you put it into a structure like a self-managed super fund? All of those conversations, a lot of it's contingent upon, are you going to make a capital gain? What is the interest rates? All sort of factors come into whether, in fact, the whole thing makes sense in the first place, and often it doesn't. We just want the idea of owning property.

Robyn Jacobson:

And issue that has come onto the radar in the last few years is the idea of renting out your property through platforms such as Airbnb, Stayz et cetera. Now, I can think of some examples where, and I won't name the particular townships, but there are certain locations in which there are music festivals or road races or things like that, and there is certainly, more than a trend, it's an absolute certainty, when you go to those locations that the owners will make their homes available for a period of time at wonderful rates where they might move out for a few weeks or maybe just a few days and rent out their property through these platforms to make a quick buck. Now, I think there are sometimes an oversight that, in fact, you do have to pay tax on that rent. It might only be a handful of dollars, or a few thousand dollars, but whatever the case, you certainly still have to pay tax on it.

Robyn Jacobson:

What many fail to understand is that there are CTG implications for doing this, and many taxpayers have some understanding or awareness of what's called the six year absence rule. So you can rent your property out for up to six years and you don't lose your main residence exemption. But they don't understand that if you merely vacate your property for a few days or a few weeks, and leave all your belongings behind, you have not actually ceased to use that dwelling as your main residence. So, it means when you come to sell the property decades later, you'll have to go back and apportion your capital gain and you can't disregard the whole amount. And so I feel there's a lack of understanding that if you're going to use Airbnb or Stayz et cetera, to rent out your property, you really need to understand the tax implications of what you're doing. So what are you seeing out in the market and with your clients and those colleagues you speak to? Do you think people do understand this issue?

Leanne Connor:

Yes and no. There's been quite a consistent approach from the ATO and looking at rental properties in general, holiday homes, certainly in certain jurisdictions and I think Airbnb probably overlays on top of that. There's been an awful lot of activity over the past few years from the Tax Office arguing that your sea change holiday home that's rented out for a few weeks a year, can we make a loss on it? All that kind of thing. And then you've got to portion in deductible expenses and is it genuinely available for rent? I think what I take out of it, and certainly with Airbnb, I don't think taxpayers overall, understand the data that the Tax Office have access to.

Leanne Connor:

If you are Airbnb, if you are Stayz, all sorts of things, you have an electronic footprint that's going to remain forever. The ATO have an awful lot of data about your property, they use an extraordinary amount of tools to understand where you are, where you use your property, when you use your property such as tracking your mobile phone, all sorts of data that the ATO has on taxpayers, taxpayers use of properties. So I think to seek to change that in the future or ignore certain issues, I think taxpayers will be very surprised about the amount of data the ATO have at their disposal.

Robyn Jacobson:

You speak of the ATO and it prompted me to think of a story that was told to me some years ago when I had an ATO officer, a Senior Deputy Commissioner who was on a podcast that I had conducted/ And he was explaining to me that he had gone to Rent a Property, now you know when you go to rent out a property, you can only claim deductions if it is being rented or available for rent. And when you make a property available for rent it must be genuinely available for rent, you can't put ridiculous or onerous conditions, "I'm only going to rent to redheads." Or, "I'm only going to rent to someone that has Dalmatian dogs." Or whatever.

Robyn Jacobson:

And there were quite unreasonable conditions that were being imposed in relation to this property when this tax officer sought to rent it. And it was a holiday rental down on the South Coast of New South Wales. Little did they understand or even have the expectation that people that they're purporting or about to rent to worked for the ATO. So he, of course, referred it onto his colleagues and they did an investigation, found that this was not generally available for rent. So, you do need to be careful when you're purporting to rent out your property.

Leanne Connor:

Agreed.

Robyn Jacobson:

Now, investment can very easily transition into development, so I've got my property, I might live in it, and I decide that the kids have now grown up, I don't need that huge backyard anymore, I'm sick of maintaining it and mowing the lawn. There's all this development that's ripe around the place, we can do a battleax block and we can maybe put a unit on the back half of it and sell it off. Or we might decide that this old rental property is run down, we're not getting a good enough return, let's knock it down and build a couple of townhouses. This is a common occurrence these days, the backyard development. Can you discuss more in detail how this looks in some of the tax issues that come up? Because characterizing these transactions is incredibly challenging.

Leanne Connor:

It is incredibly challenging, you're absolutely right, Robyn. And to be honest, I think it's becoming more prevalent, you're quite right, where there's so many more people doing it. And I think there's so many more people inheriting property that they don't necessarily want to live in themselves in quite expensive suburbs and therefore they can afford to subdivide, they can afford to change the character of the properties. And therefore I think it's becoming a matter of attention for the regulators and the government, everybody is interested in obviously the taxation of these activities. And also, I think the complexities, many times people don't have the tax advisors that are necessarily au fait with the level of complexity of this and then we overlay GST on top of it, goods and services tax on top of the income tax and I think it just gets a whole heap harder.

Leanne Connor:

I guess there's two subsets, firstly, Robyn, you spoke about putting an actual dwelling on the back of a block of land and that's generally in a city environment, I guess. And then the other subset will be the broader acre and the development into sub dividable lots, which we'll talk about in a moment. So, the accidental developer, I think once again, people see it as a main residence exemption or see it as a very isolated thing, "Why would it be subject to tax? My family home's not subject to tax, so why on earth would the townhouse I put behind it be subject to tax? And what do you mean GST? I'm not in business, why would I need to register for GST? And how can I possibly lose a percentage of my proceeds?" And also, I think, there's a group of people why may do it once because of an opportunistic situation, there's also a completely different group of taxpayers who see the opportunity to do this several times. And we all know different taxpayers who love to, I'll use the term flip homes, because I think that's probably something that we're all familiar with. Whether or not you are in a building trade or otherwise, and I think that's where we get into that conversation around opportunistic use of the main residence exemption to ensure we stay out of the taxation net.

Leanne Connor:

So, I think, you asked me what the issues were in relation to your accidental developer, well, certainly if it's a family home, you're carving of the back of the backyard, you've got issues in relation to what is the value of the land at the back, is it still subject to a main residence exemption or does it become a separate asset because I've subdivided it off? If so, what's the allocation of some of the original cost allocated to the underlying land that we've now developed? We've got construction costs that go on it, are we then going to sell it immediately? Was that always our intention to build and sell or was it our intention to build and perhaps rent it out? Or is it to build and let one of our children live in it? There's all sorts of permutations and combinations of fact, that main fact then change the taxation implication.

Leanne Connor:

And I think that's probably going to be a vibe for a little while longer in our conversation around there is no rule, there is nowhere in the act I can go to, to give me the exact answer as to what tax is payable by a taxpayer in a certain factual matrix. And I think this where we get ourselves into all sorts of issues.

Robyn Jacobson:

If I described property across a very broad spectrum, now at one end I'm going to put, these will be the black and white examples, so at one end I've got the capital asset, the family home where it is clearly for either investment purposes or for private use and when I sell it, I make a capital gain and then I get my CGT discount et cetera. At the other end of the spectrum, it is very clear that it is carrying on a business. They are trading stock properties, so this is land that was acquired for the purpose of resale, I am clearly a property developer, big scale, I tune out hundreds or thousands of these a year, and it's very, very clear. In the middle is this gray area called the profit making undertaking. And it's a property that might be a one-off development or [inaudible 00:32:30] like a case as you described.

Robyn Jacobson:

But it is a revenue gain that we make when we sell the asset, not a capital gain. And I actually think, ironically, the law is quite clear for someone who holds the family home or investment, from a CGT perspective. Yes, I'm simplifying that because there are lots of complex rules within CGT. At the other end of the spectrum it's very clear when you sell land and you're a property developer that you're in business. But in the middle, the small-scale, the one-off, the backyard development that is the most complex part of all of this. It is the bit that lacks guidance and as you said, there's nowhere in the law to tell you exactly where to go to understand the tax implications. And yet these are the one who probably need the most help, because those that are in business and big scale developments, they know how to do this stuff, and they get it right just about all of the time.

Leanne Connor:

The biggest issue that you have is that when you spoke about profit making undertaking or scheme, which is effectively where this law is coming from, you either have that from the start, as in, "I had an intention to acquire that land or that house to put it into a profit making undertaking or scheme and we're going to flog it off for a certain amount of money. And I'm not quite in business because I've not got all of those business type indicia, I guess, or certain circumstances, I'm not in it for that purpose, but I'm certainly in it to make money and make a profit." So I think they're probably easier than a taxpayer who has a change of intention. So they held it on capital account as you said, whether it be a family farm, an investment property, something inherited from somebody else, certainly it wasn't acquired with that intention. But you've done something to then change it into a profit-making intention. What I struggle with though, is that nine times out of 10, when you buy a capital asset you want to make a profit.

Leanne Connor:

And so, I think even under capital gains tax, and presumably that's why we have a capital gains tax is that we make profit out of holding capital assets, irrespective of our intension of why we bought them in the first place. And probably the investment property is a better example of that a main residence which we want to live in. So therefore, what is the difference between holding a capital asset because I really do want to make money from it anyway, to what is this intention of profit making? Now I think the law talks about a significant commercial activity and we've got court cases around what that is. Is that size and scale? Yes, to a point. There's cases that says... Stratham, 105 property lots is still capital, it's not a profit making, 81 is not [inaudible 00:35:05] but does that make 106 significant? And I think this is where it's so difficult as an advisor to give such a definitive answer, because it depends on all sorts of things.

Leanne Connor:

Is there a significant intention to make a profit? What is the size and scale of what we're doing? What is our personal involvement in it? And also then, are we doing what we do to make a profit and with the purpose of sale? What if we were only doing it to rent it? Does that suddenly make it not an intention for profit making? And also, I think, we answer a lot of these questions when the regulator asks us rather than thinking about it at the start. And sometimes a lot of this is also got to do with the timing of when a change of intention might occur or especially if we do change to be in business, your large scale developers, someone had a family farm and if that family farm was in Northern Melbourne, for example, it could now be worth somewhere in the tens of millions of dollars. At some point they will venture this family farm in to be a business, a trading stock and that timing of that, that's where we get in disputes with the ATO. This is where a lot of this angst is going to come from.

Robyn Jacobson:

You talk about change in intention, and to date most of our discussion has been around the income tax and the CGT implications. GST is a whole separate conversation and there are experts, of course, in this space who deal only with this. But if I think about the GST, you've got, "Do I have to register? Is there GST when I sell the property? Is there GST when I rent it out because it could be commercial premises rather than residential?" Retirement homes bring a whole new level of complexity because you could have a combination of input tax and GST free and taxable supplies.

Robyn Jacobson:

We've got the cloning of the credits, we've got rules that govern adjustments to the credits that you might have claimed either to increase them or decrease them if the nature of the use changes. There's margin scheme, which is a whole separate set of rules about paying GST at a slightly lesser amount than the full sale price. And then you've got growing concern provisions if you end up selling the property or the development or the activity of leasing to someone else. There's a lot going on in this space and historically a lot of the litigation in GST and a lot of the amendments to the GST legislation had been around these property rules.

Leanne Connor:

And I think that's probably to do with the dollars, Robyn. I mean, with GST it's often very small transactions but a high volume of them. With property, it's usually one or more transactions but there are usually high dollars involved and therefore from both parties there's a desire to pursue it, to get the money or a desire to defend. I think the sad thing in all of this, and certainly from a tax advisor's perspective, is I can't even have that same degree of certainty whether I should register, let alone the complexities if I have registered. We've got all of those issues, Robyn, that you spoke about and you certainly need support often from an advisor's perspective to get that right. But we spoke about a certain degree of certainty, I guess, in the income tax side of whether somebody is going to be taxed under CGT or income tax, but we even have different definitions for GST.

Leanne Connor:

We have this concept of enterprise and enterprise goes beyond business it talks about this, an adventure or concern in the nature of trade. And from most public's perspective, "So what? What does that mean?" Well it means that perhaps it's a wider definition of activities that might be considered an enterprise than a business. And then you've got all sorts of issues saying, "Well, should I be registered for GST?" But that doesn't affect my taxation, I'm still on capital gain, unfortunately people don't necessary understand the nuances of two concepts. And we all end up with this blend of, "If I register for GST, I've automatically lost my CGT status." And vice versa. So there's certainly not only difficulty in understanding the nuances of the legislation, but I think the higher difficulty is understanding whether I should be in there in the first place.

Robyn Jacobson:

Leanne, if advisors are challenged to be across everything, or more to the point, to be confident that the advice they're giving their clients is correct, what hope do taxpayers have of getting this right? Particularly those that don't have advisors?

Leanne Connor:

Very little. Because I mean, we just don't go down the conservative route and say, "No problem. I'll pay the GST, I'm not sure but I'll pay and I'll go on the income tax route, I'm not sure but I'll pay." It's just not necessarily what happens and we're also getting a lot more information and guidance from the regulator, the ATO is giving a lot more guidance in relation to a whole range of taxation issues and we've certainly seen this in the property space with the draft website guidance that was brought out on a lot of these issues, which has subsequently been withdrawn subject to further guidance. Which is very interesting, because we can't even settle on a preliminary view from the ATO as to how these matter should be taxed.

Leanne Connor:

And the regulator takes a certain bend on this and think they are getting more aggressive in their interpretation of these rules and who should be perhaps taxed on income account or within the GST net. So I think that adds to the advisor's complexity, is that they may not necessarily agree or be on all fours with ATO guidance but that's often a tricky place to be especially with their advisors, if you want to potentially go against what the ATO's settled view or even draft view on some of the matters that we've been discussing.

Robyn Jacobson:

And these are not new issues, it's not like this is a recent development, we've been having these debates for decades.

Leanne Connor:

Absolutely. But then not everybody has been subdividing the family home either, so there's an awful lot of taxpayers that are going to be caught up in this net. And there's going to be some very nasty surprises popping up. And I'm not sure that a lot of these taxpayers will have the support to get the right answer or, in fact, understand the answer that they've been given.

Robyn Jacobson:

So clearly the message is for taxpayers, please seek advice and advice for advisors, be across all the issues, it's an awful lot to get your head around.

Leanne Connor:

Yeah, and it's costly, it is costly. It takes time and there's a lot of dollars involved and that's sometimes a difficult conversation to have with clients. You sometimes do have to seek the advice and the advice is sometimes... It seems that it is expensive and it seems that it's not worth it, if that review comes up, then it's really good to have actually sought advice and, of course, this is about mitigating penalties, Robyn. And this is part of this conversation, it's not necessarily about the primary tax, it's about what have you done at the time you lodged your return to ensure that you've taken a reasonable stance, an informed stance on the tax that you should have paid.

Robyn Jacobson:

Very, very good point. In our last few minutes together, I just wanted to change tack and get your thoughts on what lessons could be learned by practitioners based on last year? It was a remarkable year and we all migrated our businesses and our activities and we learned to work from home and we all learned to press Zoom buttons and, "You're on mute," has to be the most quoted statement of 2020. What experience can we take from this and how's this equipped practitioners to face future challenges, either in their careers or in their practices?

Leanne Connor:

Absolutely. It was extraordinary last year, Robyn, and I know we met face-to-face in early March of 2020 at a Tax Institute function in Sydney and I think the last one of 1500 people for an awful long time in would think in Australia, but we would never have understood or even contemplated at that time that we would have just shut our doors the following week, all go home and... I think advisors and professional firms have done extraordinarily well to have survived and some thrived. Some individuals thrived in that environment, so I think the take away is that we were on a journey of work-life balance and all sorts of flexible working hours conversations in the workplace. And especially from a female's perspective, if we're talking about women in tax and often a family situation will be carried more by the female in certain circumstances, but certainly males are taking a bigger role in sharing that balance between family commitments and work.

Leanne Connor:

I think what's happened is that certainly we all survived and I feel like we still treated water last year all being at home. Everything survived, we all kept going but I think we're seeing the transition where people want to come back to an office environment, at least in part and I think going forward I'd like to see that no longer do we necessarily have to justify why we wanted to work from home, as such. I think that there is now, in many circumstances a default position that you can have some time at home and still have productivity and efficiency and the business can still thrive in that environment. I'm not saying it's five days a week, it will be horses for courses within the particular business, but I think we have turbo charged the conversation of utilizing technology even amongst the client base. They will Zoom, they will Teams meeting, they will email you documents where in the past there would have been no hope of utilizing technology just to be able to communicate.

Robyn Jacobson:

I mean, I'm thinking in my mind at the moment, in movie, Back to the Future, do you remember the second movie where they went back to the 1950s, but they're on a different timeline than the one they thought they were on. So in other words, it diverged and there became a new reality. So I feel like we all turned a corner last year and found ourselves on a very different pathway. And we can't go back to that point and continue on the journey that we would have been on, we are now on a different trajectory. Where this takes us and what business life looks like remains to be seen, but I think we've all been incredibly challenged but at the same time it's been an opportunity for growth and new opportunities and new ways of doing things.

Leanne Connor:

I think, Robyn, we all have a greater, now, respect for face-to-face. We have a greater appreciation for that get-together and be able to, whether it be with our colleagues, with our peers, with our other professional colleagues or clients, I think we've got a heightened sense of respect for the benefits of that. I know that as we try to transition certain events back to face-to-face within, say, a Tax Institute environment or something, people are now keen to have that interaction again.

Robyn Jacobson:

[inaudible 00:45:41] pathways for younger practitioners and particularly women. What are your suggestions as to how they can get involved and how they can further opportunities for themselves?

Leanne Connor:

I think, from my perspective, I came to Melbourne after 10 years of practice and I was extraordinarily fortunate to have, I'll use the term mentor, but he was Managing Partner of the firm that I've been at for over 20 years. And Graham was, he's since passed away now, but he gave me an extraordinary opportunity to spend time with other practitioners. He tucked me under his wing and we went to things like Tax Institute functions and he allowed me to stand and listen to conversations, participate in conversations, learn from others. And eventually you find your voice, you find your confidence of being able to have an opinion, be able to participate and converse with practitioners you would never have otherwise done.

Leanne Connor:

So I think for me, it's two-way street, as a young professional, get involved, ask questions, if you're invited to attend a client meeting to take notes, if you're invited to go to a seminar, a function, take that opportunity. Take that opportunity to grow and to develop and to find a voice. Equally, a senior practitioner, go and find your mini-me, go and find a person that you want to invest your time in and bring them along. You don't have to push them out of the boat and into their non-comfort zone, but just allow them to be. Allow them to be with you and they will come along for the journey. So I think it is a two-way street and interestingly enough, I think if I speak to a lot of the stalwarts of the tax profession they will identify an individual which they felt assisted them in that journey and likewise, I hope they can name another person or persons that they're assisting along the way.

Robyn Jacobson:

Could you characterize this as perhaps a mini-me?

Leanne Connor:

Yeah. It is a mini-me. You find a mini-me and it might not be, obviously where they are today is not necessarily where they're going to end their journey. Sometimes you've got to see that little diamond in the rough, the quiet person who's sitting in the corner, the country girl, so to speak, and bring them along. You never know where they're going to end up.

Robyn Jacobson:

Is there a certain onus that the more seasoned and senior and experience practitioners have to be able to share their knowledge and push that back down to allow others to climb up the ladder?

Leanne Connor:

Absolutely. It's incumbent upon you, and that's why, you read in my bio that I've spent a lot of time being involved in organizations and mentoring, I actually don't like the term mentor too much, I feel it's actually... I just like to share knowledge. I mean, it's a privilege. It's a privilege to be able to share what you've learned with others.

Robyn Jacobson:

I met Graham on many occasions at various events over the years and I know he'd be terribly proud of you and your recent appointment as Director and National Councilor. So I want to say, well done, again.

Leanne Connor:

Thank you.

Robyn Jacobson:

What do you hope to bring to your role as a National Councilor? You've been a practitioner for more than 30 years, you work in the SME space and, of course, you bring another female representative to our National Council. So what are your hopes and dreams for the next few years?

Leanne Connor:

It will be quite simple, Robyn, to be quite honest. It certainly got an SME focus. I know that the majority of members in the Tax Institute are probably from an SME background, whether it be a sole practitioner or a small practice, and not necessarily even in the city. So, I guess, my role, my ambition as a National Councilor within the Tax Institute is to increase the volume of the voice of the SME practitioner. I know it has a voice, we have existing SME councilors, we have existing state committees that have SME representation.

Leanne Connor:

But they've got unique challenges, they have learning challenges, they have all sorts of things that aren't necessarily understood by other practitioners just as the challenges of the large practitioners and the large firms are not within my scope of experience either. So, I think increasing the volume of the representation within that SME community is certainly my goal on National Council. And also, as I said, there are some huge challenges coming out of COVID. There're huge challenges in how we deliver content to our members and what our members need. So, it's an extraordinary challenge in how we stay relevant to the Tax Institute and to our membership.

Robyn Jacobson:

[inaudible 00:50:12] it's about resourcing, providing support and assistance and guidance. And I regularly receive requests from members for assistance or suggestions as to how we can better support them with what we produce through guidance products and infographics and blogs and all sorts of things. So, look, we very much look forward to your contribution and I wanted to thank you very much for joining us today.

Leanne Connor:

Thank you, Robyn.

Robyn Jacobson:

Thanks for listening to this episode of TaxVibe. I've been chatting with Leanne Connor, Director of WGC Advisors. To keep up to date with TaxVibe, be sure to subscribe, rate and review where ever you listen to your podcasts. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member-only community forum, at community.taxinstitute.com.au. Not a member of the Tax Institute? Join the collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today and you'll have an all-access pass to the tools, resources and opportunities that make our members some of the most successful tax practitioners around. For more information, visit membership, you can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 7 — Insiders’ look at the IGTO

Release date: 29 Mar 2021

In this episode of TaxVibe, Robyn chats with the Inspector-General of Taxation and Taxation Ombudsman, Karen Payne, about the importance of her role and, more broadly, of women in tax.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Karen Payne, Inspector-General of Taxation and Taxation Ombudsman

Robyn Jacobson:

Hello, and welcome to TaxVibe, a fresh new podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate of the Tax Institution and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

I'm joined by the inspector-general of taxation and taxation ombudsman, Karen Payne, CTA. Karen was appointed inspector-general of taxation and taxation ombudsman on the 6th of May 2019. Karen was previously a member of the Board of Taxation, as well as the inaugural chief executive officer of the Board of Taxation. She was formally a partner with MinterEllison specializing in corporate and international tax for mergers and acquisitions, and capital raising for the financial services, mining, energy, and utility sectors.

Her career includes a broad range of experience, legal, accounting, audit, education and tax return preparation across a diverse range of taxpayers, including individuals, trusts, companies, and partnerships. Karen brings a wealth of experience and extensive networks to the role of inspector-general, having worked with a range of government and private stakeholders, as well as the legal and tax profession, as well as many industry bodies. Karen, a warm welcome to TaxVibe.

Karen Payne:

Thanks Robyn.

Robyn Jacobson:

It is great to have a chat with you. I do want to start off by acknowledging that we go back a fair way. We worked together in, I want to say the mid-2000, so around 2004, 2005, and both our careers have gone in slightly different directions within the tax profession. It's all good to be able to catch up with you after all these years.

Karen Payne:

Yeah. It's a small world, the world tax, so always stay connected with those that you meet up in the tax world.

Robyn Jacobson:

Absolutely. Look, the focus of today's discussion, the inspector-general of taxation and taxation ombudsman, it's always a mouthful title to get your mouth around. In terms of the role, you've been in it now for about two years. There may be some of our listeners who are not familiar with what you do or how you do it, or even why you do it. I wondered if you could just tell us a little bit about your role and perhaps go back to when the initial office was created.

Karen Payne:

Sure. I think probably most of the listeners will be familiar with the inspector-general of taxation, which was set up in 2003 by Prime Minister Howard, and with the support and endorsement of Senator Coonan, I believe, and also the board of tax gave an endorsement for the setup of the inspector-general of taxation. Initially, it was an agency set up to advise ministers and provide some input to ministers on tax system improvement opportunities. It's an independent agency.

It's clearly independent of the tax office. The inspector-general of taxation appointment is in fact by the governor general, so it's a separate statutory appointment. What happened quite significantly in 2015, and I have to say this escaped my attention, certainly when I was in practice, was the role of taxation ombudsman was actually inherited by the inspector-general of taxation agency as well. It was transferred from the Commonwealth Ombudsman's office.

That was pretty significant because it introduced basically a taxation complaint service, combined the taxation complaint service with the ministerial advisory role. It also introduced different mechanisms of independence and public reporting for the agency. As I said, we're an independent agency. We're actually about 28 people in size, excluding myself, so 29 with me. We're located exclusively in Sydney, and that's just for historical reasons and for budgetary reasons.

Absolutely we would like to be in other places if we could be, and we try to get out and about to meet with people. Fundamentally, what we do is investigate. We either investigate because somebody brings their concerns or their complaint about tax administration to us and then we go and conduct an independent investigation and provide them with a report, or because we see a trend in complaints or through our engagement with stakeholders, they bring issues to us.

We can also go and do an own motion review or an investigation of systemic issues and tax official actions and tax administration laws. We also have jurisdiction over the Tax Practitioners Board as well. We have two agencies that we have oversight of, but the tax office is predominantly the agency that we spend most of our time looking at.

Robyn Jacobson:

There would be some, if not many in the profession, who would argue that there are many systemic and administrative problems within the tax system. How does your office prioritize? Of all the things that you could look at, how do you determine your work program and which of those areas receive your attention and focus?

Karen Payne:

Well, fundamentally I think we listen to stakeholders. We listen to feedback that we get. One of the things we have instituted since I came into the role was to put up a register of potential review investigation. If you go onto our website, you'll see there is about 36 items currently on our register of potential investigations. Now, we're not big enough to do all of those things so I don't want to create an expectation that that's a work program by any stretch.

But I think it's important at the very least for us to signal through the publication of that register, including to the tax office itself, these are the kinds of issues that people are raising with us that are tax administration concerns. Even if we don't have the resources to look at everything that's on the register the tax office is involved when we go and do an own motion review investigation. They're involved very intimately in our gathering of evidence and providing us with inputs, et cetera.

There's no reason why the tax office can't review that register of their own motion and say, "Okay. Karen's list says that these are the kinds of things that are concerns for stakeholders. Maybe we should go and have a look at one or two of these." Fundamentally, when we want to go and commence an investigation, we would rely upon stakeholder feedback to say, "This is a concern, if you like, for the profession, or this is a concern for these tax practitioners or these taxpayers.

We think this is really a problem area that deserves an independent deep dive to see what's going on."

Robyn Jacobson:

How has the role changed since its creation back in 2003? Is it doing the same type of work? Does it operate in a similar way, or has it evolved over time?

Karen Payne:

No, no. I think it has evolved. Initially, it was purely an advisor to a minister and so all the reports would go to a minister and it would be up to the minister to release those reports to the public. Obviously, that's appropriate given government quite often needs an opportunity to consider and prepare a response. In particular, since 2015, when we inherited the tax ombudsman function, we also now have a much more, if I can put it this way, independent way in which we report.

So we're no longer reporting to a minister. We now, like any other ombudsman, report publicly. We just release our report publicly. The only time our statute says we must report to the minister and not go public is if we have recommendations for legislative change. So you can understand, if you're giving advice to a minister that the law needs to change, the minister would need appropriate time to consider those recommendations and prepare their own response.

That's the only time when effectively our public reporting goes through the filter of a ministerial process. Otherwise, if we're wanting to issue reports on the outcomes of our investigations and whether it's a review investigation, or indeed just a report, like we did in December of last year, a report on a complex area of investigations that we've done in the complaint space, then we can just report publicly.

Robyn Jacobson:

You speak of stakeholders, and some obvious ones come to mind. The ATO, you've indicated the Tax Practitioners Board, and obviously the profession itself, but there are other stakeholders. I wondered if you could elaborate on some of the other people that you either report to or present your findings to, or deal with. Professional bodies would be one, but other parts of the government and indeed the parliament, do you engage with them and at what level?

Karen Payne:

Yeah. This is part of the role that's very new to me because there's obviously a lot of appearances and attendances and just private consultations through the parliamentary committee process. There's two key parliamentary committees. One's in the Senate and one's in the House of Reps that we would engage with. The tax and revenue committee, which is chaired by Jason Falinski, we would regularly engage with them and have consultations on the work that we're doing and give them updates.

Also, we make regular contributions by way of submissions to inquiries that they have underway, obviously in relation to tax. Then the other one is the Senate Economics Legislation Committee, and a subset of that is Senate Estimates, which I have tonight, in fact. The Senate Economics Legislation Committee is also some committee that we appear before and provide, if you like, insights or information on what we're seeing in the tax administration world.

Robyn Jacobson:

It allows you to interact at both a government level, ministerial level with the other government agencies, with the professional bodies and indeed with the professional itself through the ombudsman role?

Karen Payne:

Yeah. I didn't talk extensively about this, but there's a lot of other Commonwealth agencies. The Commonwealth Ombudsman, the integrity commissioner, the Australian public service commissioner. There's a lot of engagement, and the secretary of the treasury and the treasury itself. There's engagement throughout the end-to-end process of the tax law, tax administration system, which gives you great oversight or great insight into how it all comes together. Yeah. It's really fascinating.

Robyn Jacobson:

Back to the taxpayer side of it all, tax advisors, just some basic logistics here. How would someone get in contact with you and what sort of issues should they escalate to your office?

Karen Payne:

Good question. Much to my surprise, we don't have a lot of complainants coming to us who are represented by tax advisors. Now, there could be a reason why that is, and it could be that they've got their own contacts and networks to solve their client's problems, but I would put a plugin just in case there is a misconception. If you're trying to resolve a problem for a client or a client's got a particular tax administration area that's not progressing how you would like it to, there is opportunity for everybody in the tax system to register a taxation complaint.

It doesn't matter if you're an individual or a small business or a medium-sized business, or a large business, or a listed company or listed trust. We operate across the spectrum and everyone has a right to lodge a taxation complaint with us. You can do that in a couple of ways, but we would recommend you lodge your complaint online through our website. You can also use our call center. Some people who've used us many times before, obviously have set up an email network. You can also do that.

One thing I would say, and I don't think this is really understood well. Well, it certainly wasn't understood by me when I was in practice. Before you bring a complaint to a taxation ombudsman, the idea is that you should have in the first instance, tried to resolve your complaint with the tax office. Now, I don't think a lot of people are aware that there is actually a complaints unit that sits within the tax office.

You can lodge a formal complaint with the tax office and get a reference number that registers that you've lodged that complaint. That's definitely something when you come to us that we would be asking, or we'd ask as initial information so that we can know you've already tried and failed, and you're still unhappy because you haven't been successful in understanding your experience or getting an outcome that you're satisfied with through the tax office.

Robyn Jacobson:

When you talk about an outcome, Karen, so our listeners are clear, we're not so much talking here about the way the law is being applied in terms of a tax outcome. What I mean is, if there is an amount being disputed that you think is deductible and the ATO says it's not, is it your role to get involved in deciding that sort of thing, which ordinarily would go through an objection process, decision on objection, and then seek reviews by the tribunal or appeal to the federal court?

Is your role more about the way in which that decision was made and whether a proper administration has been followed, whether there are systemic issues about process, as opposed to the technical interpretation of a law?

Karen Payne:

Yeah. Yeah. Sorry, if I haven't made that clear. We don't get involved in the substance of the tax law ever, unless it's about tax administration. Just to take your example, let's say you've lodged an objection with the tax office and you haven't heard back and it's six months. You've tried to make contact with them and tried to get them to give you an update and you haven't heard back. You can lodge a complaint about that with us, and then we can go and we get access to the tax system.

Once we've notified them that we've commenced an investigation, we have access to the taxpayer records and to the tax system, tax files. We can go and listen to recorded messages. We can look at file notes. We can look at the tax records and we can identify whether there is some defect in the way in which the laws have been administered, or equally whether there has been some procedural unfairness in the way in which somebody has decided an outcome for you.

Let's say somebody on an audit says, "You're being reassessed for this." You as a taxpayer say, "Well, hang on a second. I gave them this evidence and I told them this and this and this, and I don't think they've actually listened to me. I don't think they've taken the facts that I gave them into consideration." We won't get involved in the outcome of should you or shouldn't you have included amount of assessable income or got a deduction.

We will get involved in if you've given evidence as part of an audit or as part of a private ruling process or part of an objection process, and you don't believe that the administration of the system has been procedurally fair. We definitely get involved in that sort of thing.

Robyn Jacobson:

Okay. Thank you for the clarification. Now, a recent report, which has attracted a bit of attention, is your investigation into the ATO's administration of JobKeeper part and boosting cash flow or the cash flow boost that was made available to employers throughout last year. How did that report come about? The release of your report on 21 December has certainly led to a number of taxpayers having their cases reviewed.

Certainly The Tax Institute has been assisting members with particular circumstances that seem to fit within what you are describing in your report. These have been escalated to the ATO, and there've been some very good outcomes for people that had previously been denied the JobKeeper or the cash flow boost. Can you take us back to the origins of that investigation?

Karen Payne:

Sure. This is actually quite a unique report. Our agency has never released a report of this nature before, even though I'd have to say this kind of reporting is very common amongst ombudsman generally. What this report represents is the results of our collective investigations of complaints. Essentially, a number of people approached us who were unsatisfied with outcomes or information or process that they'd been party to in relation to applications for JobKeeper or boosting cash flow.

In fact, I think a number of provisional bodies were directing some of their members to come to us because they'd exhausted whatever avenues they were attempting to achieve an understanding of what was going on in the system. We commenced investigations and we escalated some of these complaint investigations to a category five.

Because they've been escalated to a category five, that means we automatically will get engagement from the ATO at SES level, which is pretty important, particularly if the essence or the substance of what's at issue is how the law should be interpreted or how the law is being administered based on the ATO interpretation or guidance. We commenced the investigations and we learned, through the investigations, that in fact, there might've been a disconnect between how the ATO was explaining to people the reasons why they were or were not eligible for these economic recovery measures.

We actually got agreement on a number of those individual cases with the ATO to actually reconsider it. We said, "Well, based on what we've now discussed, shouldn't you be going out and giving revised guidance or updating your website or doing something, telling people about it?" The tax office basically said, no, they weren't going to do that, because in their view that would create confusion. My view was, in those circumstances in particular, it was incumbent on us to tell the community, "This is what we have found.

You might be misunderstanding, or you might not have got results that you should have got because of some misunderstanding about eligibility criteria." This was particularly for new small business. "If that's the case, then you should reengage with the tax office." We're not saying everybody should get everything they want. We're not Santa Claus.

But if somebody was eligible or should be eligible, and for whatever reason, the process, the administration outcome in their circumstances has not been fair, then there is always, or should always be an opportunity for it to be reconsidered. The report was basically a summary of our observations as part of those investigations that we were undertaking.

Robyn Jacobson:

The taxpayer we're talking about here is essentially an entity that started a business. It might've been a brand new incorporated business. It might've been buying a business from another entity. It could have been our own internal restructure. The business started on or after the 1st of January 2020 and therefore didn't make what I will describe as a traditional sale, I sell you something, you pay me for it, until the March quarter.

If there were quarterly budgets, this was problematic because one of the conditions for the cash flow boost or for JobKeeper for eligible business participants is that you must have made a supply in a tax period that ends before the 12th of March. That simply wasn't possible where we had quarterly reporting for GST purposes. The particular circumstance that your report identified is that that may be the case.

That, if for example, the company had been incorporated in say November or December of 2019 and it had opened a bank account then we're getting into a very technical part of the GST law called this acquisition supply. This acquiring an interest in a bank account constitutes the making of a financial supply. It may be when all this is pieced together that there could be grounds to evidence business activity in circumstances where the ATO had previously said, "No, you're not eligible."

It was quite a significant report and I think whilst it's not going to apply to wide or large numbers of taxpayers, there are certainly some who have been turned away in the past and have now been able to secure the entitlements that they were entitled to under the law.

Karen Payne:

I think in fairness, the JobKeeper economic recovery measures were obviously needed to be introduced at short notice and everybody worked tirelessly, I'm sure, to bring it in. Obviously they wanted to rely on existing concepts and so they've picked up concepts in the GST Act and they've picked up concepts in the Income Tax Act, but they've put it into a statute that has standalone status. I think sometimes people may have been influenced by how a particular term works in the GST context, and specifically in context of JobKeeper and boosting cash flow it had a different meaning.

It had a different way in which it applied, but I think people were just bringing, well, this is how it works in GST so therefore it must work this same way when I think about JobKeeper.

Robyn Jacobson:

I think the ATO did a marvelous job last year in administering those measures and they were very quickly enacted and became law, as did the profession in responding to all of it. The haste with which it was all put together and the rush to get guidance out, and the urgency to get payments out to taxpayers who desperately needed them, it is understandable looking back on it, how it could have been interpreted in a manner that was then questioned by your office.

I think many taxpayers who are now benefiting would be very grateful to your office for your investigation. Interrupting this episode briefly to let you know about our events series Leading from Trials to Triumphs. When the going gets tough great leaders get going. Learn how today's trailblazers use and master the fundamental skills of leadership and how you can too at our national Women in Tax events. The events will be delivered locally in each state and territory.

Come join us as we hear from the experts, including Karen, who you've been listening to today. We welcome all supporters of diversity and empowering women in the workplace, no matter what your gender. Now, let's get back to the episode. Can you talk about some of the other investigations you currently have in progress and perhaps even an inkling as to what we might expect to see in your next report?

Karen Payne:

Sure. We have two investigations. These are, if you like, the more formal review investigations, the terms of reference are on our website. One's actually just an exploration of collectible undisputed debt. Partly that's because there's been a number of parliamentary committees who have said to the tax office, "You should report more information on your debt that's sitting in your books." Equally, what's occurred to me is we have a tax system which is designed to collect, on the most part in particular in the income tax space, we've got a tax system that's designed to collect tax progressively.

But when you look at the collectable undisputed debt levels that the tax office has been reporting in its annual report, they've been steadily going up. My question was, why is that? Why is outstanding debt going up? This report is really, I think, a first report to bring a level playing field and a level of just awareness on the dimension of collectible debts in the system to the community. We're hoping to get that out by the 30th of June.

I've got a draft report that I'm currently about three quarters of the way through. We hope to get it to the tax office for their comment before Easter and then sometime this side of 30 June, I hope to release that. It won't be a report that's got lots and lots of recommendations because essentially what we're trying to do is just tell people if you slice and dice collectable undisputed debts in lots of different ways, where is the tension?

Where is the point in the system where this seems to be accumulating inconsistently with expectations or economic activity? For example, we're going to look at debts by client experience group, debts by debt type. We're looking at the age of the debt, whether or not we're looking at ... So collectible debt includes primary tax, the general interest charge as well as penalties, we're dissecting that up as well. We're also looking at it by industry types, which industries predominantly contributing to higher levels of collectible undisputed debt.

The reason why I think this is important is because we have a self-assessment system which says, "I assess my tax to be this." This is debt where people have said, "I owe you this much tax and it's going up." Anyway, I'm intrigued. I think there's some value in just sharing this kind of information with the rest of the profession and with practitioners and with the community in general, to see if we all put our heads together, there might be better ways to tackle this so that we can start to bring the numbers down. That's one review.

Robyn Jacobson:

I assume as part of that you'll also be looking at SME sector debt because there are concerns that throughout the pandemic, that was always a reasonable and even just proportionate amount of debt given the size of the sector and their tax bills. That has actually been increasing throughout last year. It'll be interesting to see your report and whether it looks at the large corporates versus the SMEs.

Karen Payne:

It is true. I mean, I don't think that's giving away anything. I think it is true that the SME sector has disproportionately large amounts of outstanding tax debt. I think you'll be interested in some of the information presented in the report when you take a much deeper dive to try and analyze where within that SME sector, where are those debts arising? I think the comment I could make at the moment is it's not like the problem is with the whole sector.

Robyn Jacobson:

Okay. Thank you.

Karen Payne:

Most people in fact pay their tax debts on time and in fact, most people, even within the small business tax sector, don't have a problem managing cash flow or paying their tax debts. Interesting, when you see some of the data and you see some of the deep dive information, it'll be an interesting read I hope.

Robyn Jacobson:

We'll see more when the report comes out, but that suggests to me that maybe there's some benefit here for practitioners who work in that particular part of the sector. I have no insights. I don't know whether we're talking industry type or [inaudible 00:26:40] size of business. However, that's going to be broken down, it might allow practitioners looking after that part of the SME sector to be more aware of that, and maybe work with their clients to try and reduce those debt levels.

It'll be interesting to see. Thank you. Karen, you spoke of two current reviews. Can you briefly mention that the second one that you're involved in?

Karen Payne:

Sure, Robyn. The second one, again, it's on the terms of reference or on our website. We're looking at how effective the ATO is at communicating to taxpayers their rights to appeal, review, or complain about a decision or action and the reason why I think this review is very important is because obviously it feeds into the level of disputes within the tax system. The more effective your communications are upfront at telling people, "I've made this decision in relation to you and the reasons why this is the outcome in your circumstances are these."

Then you'd expect the greater the understanding of the taxpayer about why the tax system or why their experience in the tax system is the way it is, so that they can then make an informed choice. Either they accept that decision or not. Then if not, they can go in and contest it. We're going to release a thought leadership piece as part of this review ahead of the final report, because I think there's some interesting technical observations we would like to make basically ahead of the report.

Again, I expect we'll get that into the market pre-30 June as well. Watch this space.

Robyn Jacobson:

Right. Thank you. I wanted to turn now to your journey because it's been an interesting one. You began with what was then the Big Eight. I hope I'm not revealing too much in terms of age there, Karen. You did start off as a practitioner and you moved through various roles within the profession until your appointment as the CEO of the Board of Taxation and then of course, moving on more recently to the inspector-general's role. I just wondered if you could just share some of your insights as you've traversed the profession.

When I think about what motivates you and the roles you've held and what you're now doing, I think, like myself, you have an incredible drive, and dare I even call it a passion, to want to improve the tax system. We want to make a difference and we want to make sure that it's not about vested interests. It's about, how can we improve the system as a whole for all the participants and stakeholders? Throughout your journey, what has driven you?

Karen Payne:

Thanks Robyn. I began my career as a ... I went and worked for Ernst & Whinney straight out of high school and so back in the day, there was a two plus two scheme. Some of your older listeners might recall the two plus two scheme. I basically started my career without any idea that I had any interest in working in tax. I was working in small business accounting. I was doing small business accounts. I was also doing their tax returns and I was doing audits.

Then I found progressively that I enjoyed the challenge of tax and the problem-solving aspect of tax, and also the fact that if you want a career in tax, it's always going to be changing. Gradually, I found myself more and more specializing until I reached a point and I thought, "I'm going to do a master's in tax." I didn't have a law degree initially. I did my commerce degree part-time and then I did a master's degree, and then I did a law degree.

I have to say, when I reflect back on my career, it's always been expanding my area of focus, is how I reflect on it. Initially it was really about compliance and compliance with the law and actually preparing tax returns. I spent many years preparing tax returns. In fact, that's how I paid for my way through law school. Then I gradually moved into having an interest around the tax policy. Partly, that's also driven because I think what I'm most interested in is the commerce.

I'm most interested in making the tax system work so people can just get on and do the commerce. Because particularly when I was working through my M&A days, when I worked on deals and financial services launching funds, really, tax was always seen as a bit of a thorn in the side of the deal team. We were there to create problems, whereas I was always trying to come at the tax by saying, "Okay. Well, there is this big tax system that you have to navigate your way through, so let's make sure nothing throws any hurdles or obstacles so that you can get your acquisition done, or you can get your sale done, or you can get your deal done."

Now I find myself ... I mean, obviously at the board of tax it was a focus on tax policy, but now I supine myself much more interested in governance within the tax system, so in particular in my role as taxation ombudsman. Clearly, I'm caught up sometimes in specifics of tax complaints, but equally it's about standing back and looking at the whole system and saying, "Well, are there appropriate governance arrangements in place? Are there checks and balances to make sure that the system's working well and that it's not creating obstacles so people can get on and do commerce?"

One of the key things that I think our agency does, and particularly because we're independent, is that we can bring that fresh, independent perspective to, how are those governance arrangements operating and are they working appropriately?

Robyn Jacobson:

Tax shouldn't drive commercial decisions. Tax should be something that is a sensor, an outcome of decisions you make and transactions and arrangements that you enter into. The tax assumptions support productivity and support commerce, and allow people to get on with businesses. That leads to a broader discussion about the need for tax reform. There's plenty The Tax Institute will be saying about that in the weeks and months ahead, particularly with the case for change, a paper that we're producing for the government.

Coming back to your journey, if we look at young practitioners and all different pathways that are now available to a young tax professional, there are so many places that it could take them. I'm interested in your insights and your observations about that.

Karen Payne:

Well, yeah. I think that's exactly true. The first comment I would make is that it's been observed that the law is something that you improve at with age. I would certainly say tax law is something that everyone improves at with age, whether you're a female or a male in tax. For all of the females out there who might be listening, I think the fact that you get better at this as you age is obviously a bonus.

I think of tax as a statutory fiction, but as a statutory fiction, it gets to intersect and interact with a whole bunch of things that are real, like commerce and property and retirement and superannuation. It's those interactions and intersections that are very interesting, but also create a whole lot of diversity for anybody who's thinking about a career in tax to say, "Well, actually, it's this part of the system that I'm most interested in."

When I think back on my career, I started without any clue that I wanted to do anything to do with tax. I knew I wanted to be an accountant and that was only because my dad suggested it to me because he said, "Hey, Karen, you're good at maths, maybe you should do accounting." Now here I am as a tax ombudsman. I guess the other point I'd make is always keep your options open. There's lots of experiences out to be gained and so don't lock yourself in.

Certainly don't use labels like ... I know I just used it a moment ago, but don't confine yourself to I'm a tax lawyer. You're a lawyer or you're an advisor or you're an accountant or you're an advisor to somebody who's doing something. I think it's good to keep those perspectives because then you'll always be encouraged to contribute what it is that you know.

Robyn Jacobson:

Tex is one of those wonderful professions that it's incredibly diverse. We've got all sorts of backgrounds and experiences and skills. It's one of those professionals that can particularly empower women. But no matter what your gender, this is an amazing workplace and there're so many opportunities, whether you want to end up in government or administration or of course remain in the advisory role or in industry itself working for businesses.

I think there are so many different opportunities out there. You're going to be speaking at a couple of our events coming up. The Leading from Trials to Triumph in both Canberra on the 14th of April and in Sydney on the 29th of April. Can you just give us an insight as to what you're going to be discussing at these two events?

Karen Payne:

Sure. I'm actually going to talk about my observations around leadership specifically because I'm now sitting in a public service model and some of the observations that I have around leadership in the public service model and drawing some comparisons to what I might've observed in private practice. Anyway, hopefully it will be entertaining if nothing else.

Robyn Jacobson:

I'm sure it will be. There's a great lineup of [inaudible 00:36:00] panelists so we look forward to those events. Karen, final comments, as we look at the very important work that your office does and continues to do, it's an integral part of the tax system. On behalf of the profession, I and we at The Tax Institute, thank you for your work. Any final observations from you?

Karen Payne:

Just a plug if I could say, if you do want to contact us, we have a website www.igt.gov.au. There're some contact numbers on there if you need to give us a call and email contacts as well. I do genuinely extend an invitation to anyone who has any concerns around the tax administration system, we're here to serve the community. Please use us. Please contact us if you feel like you're in need of help.

Robyn Jacobson:

Karen, thank you very much for joining us on TaxVibe.

Karen Payne:

Thanks Robyn.

Robyn Jacobson:

Thanks for listening to this episode of TaxVibe. I've been chatting with the inspector-general of taxation and taxation ombudsman, Karen Payne. To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn Facebook, Instagram, and Twitter. You can join the conversation on our member-only community forum at community.taxinstitute.com.au.

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You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 6 — Superannuation: Not So Super

Release date: 10 Mar 2021

In this episode of TaxVibe, Robyn chats with two superannuation experts, Jemma Sanderson, CTA, Coopers Partners, and Julie Dolan, KPMG, about a range of issues regarding superannuation contributions.

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: Jemma Sanderson, CTA, Cooper Partners and Julie Dolan, KPMG

Robyn Jacobson:

Hello and welcome to TaxVibe, a fresh new podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate of The Tax Institute, and your host of today's podcast. We love the vibe of tax and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Jemma Sanderson, CTA, who is a director of Cooper Partners Financial Services in Perth, and heads up their SMSF specialist services.

Robyn Jacobson:

Jemma provides strategic advice on SMSFs, estate planning, and wealth management to clients, as well as technical support and consultancy to accounting, legal, and financial planning groups. Jemma has over 19 years experience in developing complex strategies for high net wealth clients. Jemma has a bachelor of commerce, and is a certified financial planner, a specialist member of the SMSF Association, a chartered tax advisor with The Tax Institute, and a trust and estates practitioner. Jemma is a regular presenter and author on superannuation matters.

Robyn Jacobson:

Jemma was also named the SMSF Advisor Of The Year, at the 2019 National Women In Finance Awards, for the third year in a row, and received the SMSF Association Chairman's Award in 2018 for her contribution to the industry. Jemma, welcome.

Jemma Sanderson:

Thanks, Robyn.

Robyn Jacobson:

Also joining us is Julie Dolan, head of KPMG's SMSF and estate planning division in Brisbane. Julie has more than 25 years experience in the accounting wealth management industry, with experience in accounting, consulting, compliance, risk management, leadership, education, training, strategic development, and change management. Julie provides detailed and high level strategic and technical support, and consulting services to hundreds of accountants, advisors, and lawyers around Australia. Julie has a bachelor of business, accounting and computer science, and an advanced diploma in financial planning.

Robyn Jacobson:

She's also a certified practicing accountant, a member of The Tax Institute, and a specialist member of the SMSF Association. And a very warm welcome to you, Julie.

Julie Dolan:

Thank you, Robyn.

Robyn Jacobson:

Look, it is great to have you with us today and we've really got the country covered here. I'm speaking to you from Melbourne, we've got Jemma over in Perth, and Julie up in Brisbane.

Jemma Sanderson:

Definitely do. Like the full triangle.

Robyn Jacobson:

Yeah, great triangle. So today, I'd like to focus on superannuation issues. Both of you were involved in The Tax Institute's virtual summit that we can last November, and in this forum we discussed the need for superannuation reform and we attained your insights, and it was really great to hear from both of you. You're also both going to be involved in the upcoming superannuation intensive series on the 24th and 25th of March. Jemma, you're presenting, and then Julie, you're leading a follow-on workshop on the 31st of March.

Robyn Jacobson:

And these are going to be further forums to discuss the very complex and highly regulated environment we've got in superannuation. Now, we could take this conversation anywhere today, but we are going to focus solely on contributions, and I think there's well and truly enough to speak about in that space. So, can I just throw to perhaps Jemma to begin with, in terms of how you see the current environment and all the constant changes we've got, and how people are possibly expected to keep up-to-date?

Jemma Sanderson:

Well, it's incredibly difficult to keep up-to-date and I guess it keeps the whole industry going from that perspective. The government is very good at keeping us in jobs, but it is becoming increasingly complex for people to understand what they are entitled to contribute to super, for employers what their obligations are, and for people to manage that. The concern that I have with the super system, even though I think superannuation is fantastic, biased because I work in that area, but it is incredibly complex. And I do hear people say, "I don't really like super because of the uncertainty and the constant changes and we put money into super or we build up this asset under the current rules, and then that just gets wiped out from underneath us."

Jemma Sanderson:

There might be grandfathering that's involved, but there's always these constant changes that they need to be on top of, and they're losing confidence in the system and really that is difficult, and like you already alluded to, just the number of threshold caps that we need to be aware of, that are indexed differently, and some are and some aren't. You need a degree in itself just to understand the background of all of those. It's one of those things, again, I love super but we do need to maybe take a step back and consider how we can make it easier for the general population to understand and also get that higher level of engagement with superannuation.

Robyn Jacobson:

Julie, you've [inaudible 00:05:21] changes made by successive governments over many decades. With all the increased regulation and red tape that we've now got that governs superannuation, and many would argue for good reason, it's a concessional environment and it needs to have rules around it to maintain the integrity of it, has the system actually served us well? Is it doing what it should, or are we just on a pathway or a trajectory that this is just going to get more and more complicated and start to move away from original intentions and being workable for people?

Julie Dolan:

Yeah, that's a really great question, Robyn, and there's many debates around that area. I absolutely agree with Jemma in the sense that where we've got, even if we just focus on contributions, is due to changes in government and policy, there's so many different Band-Aid approaches. It's got to the point that there's so many different Band-Aids that some of those Band-Aids haven't even kept up with our current standard of living and where we are now. And there's some rules that contradict each other because of when they were put in place, the standard of living and the complexities were completely different to where they are now.

Julie Dolan:

So, it's got to the point that as Jemma was mentioning, we've got the Tax Act, we've got all these other acts that we have to deal with as a profession that we find it a struggle to get across. The poor trustees, the ones trying to save for their retirement, it's absolutely getting impossible to understand. We're also moving through to a world where we are aging, the population is aging, the government is focusing on the retirement covenants and what that means, and the different pillars of superannuation.

Julie Dolan:

So, there is a bigger picture of whether this Band-Aid approach can actually keep going because of the complexities and layers up all of this sort of thing, or whether there is actually a point in time, sooner than later, that there needs to be a reset or a reassessment of certain aspects of superannuation to avoid furthering of these complexities and potential widening of the gaps between what one wheel is trying to attend, and what the other is, but we're just getting confused with all the complexities in between.

Robyn Jacobson:

Jemma, if I think of the caps we've got in place, and I think when anyone thinks of caps, they automatically go to the most obvious one, the concessional contributions cap. You and I, and Julie as well, are old enough to remember the old rules of the age based limits, where we got up to about $106,000 for someone aged over 50 until of course that was changed in 2007, to move to what was then a $30,000 cap. I think it was even a 50,000 for those who were a bit older, and then it all became standardized at 30,000.

Robyn Jacobson:

We're now back to 25,000. It's just been indexed by two and a half thousand to move to 27 and a half thousand from 1 July this year, and then we start building in the interactions with other rules, like the non-concessional which is six times that amount, so we end up on 110,000, up from 100,000. Bring in your bring forward rule, bring in things like the total super balance limits how much you can put in for non-concessional, and that's before we even get to the things like the 250,000 Div 293 threshold, and then we've got all the ETP thresholds, and then we've got things like the retirement exemption amount, $500,000 limit as to how much can go in, which says it's against the CGT cap.

Robyn Jacobson:

It all starts to get just a little bit silly. And whilst it was all designed for particular policy objectives or to close loopholes or whatever, where have we landed with what I count as more than dozen different thresholds, caps, and limits that apply, and if you want this full list that I've compiled, it's in the Accountants Daily column that I have written, and you'll see an extensive list there. What's your take, Julie, on all these caps and thresholds, how they're indexed, and the inconsistency that you referred to in your earlier remarks?

Jemma Sanderson:

Well, I remember when it was $105,113 for those people who were over 50, and then that was fantastic. And you could double up, as well. It was great. And then yes, they've overlaid so many different things with that, and all of those caps that you just reamed off then that apply now are confusing in themselves, let alone when you think about in the past. Julie made a point earlier about how some of the caps, that Band-Aid approach, and some of the caps that are in place now are no longer relevant because they were a throwback to when the rules were like reasonable benefit limits, and we had caps in place.

Jemma Sanderson:

The 10% rule is another example where at least we don't have that anymore. That was removed which was very sensible, and because that was a throwback to the previous rules, as well. So, the transfer balance cap is in place, which means it limits how much you can have tax effectively in super. The necessity to have some of these other caps isn't really that strong anymore, given that what you can building up in super tax effectively is no longer the sky is the limit, as it was pre-2017. I feel like we need to step back and revisit, "Okay, well why were these original caps in place?"

Jemma Sanderson:

Like you said, it was 105,113, then it moved to we had 50,000 for everyone, but if you're over 50 it was 100. Then that only lasted for five years, then it was 50 for everyone, then it was 25 for everyone, then it got indexed to 30 for everyone, and then those over 50 got an extra ... It was completely ridiculous. What again, is that intention? It is addressed, your article does cover off on that, actually, quite well, saying what is the best time for someone to be contributing to super? I think this is the issue that we encounter, is the demographics of it all.

Jemma Sanderson:

A 20 year old is not going to have the capacity to make a 25 or 27 and a half thousand dollar contribution to super, and I would never advise someone necessarily to do that at that age either, because they can't access it for 40 years. It's finding that balance there. The capacity to make those larger contributions is later in life, when you've kicked the kids out and paid off your mortgage and things like that, but the complexity of it all is challenging. Like you said, you can carry or catch up your concessional contributions, but that's limited to you've got to have a total super balance of 500,000.

Jemma Sanderson:

You've got your other total super balance which will be indexed next year, because that's tied to the transfer balance cap, and it's just becoming very confusing. I am now not sure if I even answered your question. But it's incredibly confusing and I mean, if we as the practitioners in the industry that are involved in this every day are having to move those puzzle pieces around and there's a lot of them to move around, then it's very difficult to expect the general population and the Australian public to understand it and no wonder the engagement with superannuation is not as high.

Robyn Jacobson:

Julie, on that point, if we look for example, at the carry forward concessional contributions measure, one of the conditions is you've got to have less than half a million dollars in your super fund at the end of the previous year. If we're talking about the general public and this measure was designed for low income earners or those with lower super balances, if you like, are they best placed to go and seek advice and pay advisors to work all this out, to determine if they're eligible to use a measure that is supposed to be more easily accessible?

Julie Dolan:

Absolutely. It's absolutely, and that's another area, and I know there's quite a lot of submissions out there at the moment around advice, affordability of advice, who is best place to be able to provide this advice, but it's the old analogy of the people who can afford it get the advice, and the ones who need it aren't getting the advice. And the ones who need it is the majority of the population. It's a real issue. The government really needs to spend some time on it, and I know it's starting to come at the forefront. I know even, Jemma and I have spoken about it, we've spoken many times with our colleagues, as well, about the people. There's big sectors of the industry are very well placed to be able to provide this advice.

Julie Dolan:

But there's so many layers of red tape and hurdles that once again, like the legislation that we're currently standing, is so Band-Aided that we've lost perspective around what the true intention is. The true intention is to have that centricity around the general population, about bettering ourselves for a standard of living that we deserve in retirement. We need to keep focusing on that. We need to see what the end game is for the population and step back and have some sensibility about it. It's just once again, spinning its wheels around where we are, very much so around the legislation. It needs to stop and actually have some pragmatic thought around it, and hopefully that pragmatic thought is starting to happen in the industry, with some of the submissions that are coming in.

Robyn Jacobson:

Julie, I'll stick with you for a moment. Something like the work test that applies for those aged 67 to 74, it was really designed to place some additional restrictions, or make sure that people who are of a post-retirement age, considered to be basically 65, were still working in order to contribute to super. Is there still a basis for such a rule? In fact, should we have even that 75 age limit that applies, other than SG contributions? In the old days, you would retire and you'd go and enjoy white picket fence and do your gardening, and life took on a much more relaxed tone about it.

Robyn Jacobson:

But these days we see so many examples of people who retire, but actually later decide to reenter the workforce. It's much more flexible, and we have got a transition to retirement measure, but I'm still questioning the policy settings and whether it's actually keeping up with the way that we are contemporarily living today, and how we're designing our retirement.

Julie Dolan:

Yeah. And that's another example of really sitting back and where these rules are crossing over and are not relevant, or keeping up with the demographics of Australia. I absolutely agree with you there, Robyn. There's no restriction of the young ones on being able to put money in, which they aren't usually in a position to do so, but the older we get, we're living longer. Our kids are living with us longer. My kids are still with me, I can't see them leaving anytime soon, and so the ability to be able to contribute to super and liquidate assets or small business or whatever the situation, even downsize in a sense, that's strategies there. But also the ability to release equity, it's all happening later.

Julie Dolan:

Those rules, I don't believe, and I know we've talked about it in other circles, that there should be a restriction on the ability to put money into super. The ability of having to satisfy a work test at certain ages, it would be nice to see that not be there, and there's the ability for people to be able to put money in later in life. Especially with these rules about you can only have so much money in pensions, so all those rules have changed of being able to have mass amounts in there. You can't get mass amounts in there anymore anyway.

Julie Dolan:

That's restricted. It's restricted to how much you can have in a pension, so the tax effect has changed. And then even on the transfer of wealth, on estate planning, that's all changed, so you can't keep it in there. There's all these restrictions, I think we just need to once again simplify and allow some equality across the ability to contribute in, because we've got a whole lot of complexities about keeping the money in and then having to come out at a triggering event.

Robyn Jacobson:

And further to that point, Julie, if you think about the transfer balance cap and these restriction imposes, there is going to be such a massive shift of wealth in the decades ahead, because it can't stay in there.

Julie Dolan:

Absolutely.

Robyn Jacobson:

Many will have maximized their 1.6 or indexed to 1.7 mill anyway, so I think it'll be really interesting from a broad social perspective, what happens to all this money that's sitting in super and where does it end up when it comes out, following the death of these members?

Julie Dolan:

Absolutely. Well, the stats are saying three trillion in 10 years. That's obviously the transfer of wealth. But I'm already starting to see across my client base, the funds that have had quite a substantial amount, that's having to start to move out. There's going to be a whole demographic shift anyway, in the population, the net asset values, the member account balances and sizes. That's already going to start to shift. And that's once again, another thought that needs to be incorporated into the bigger picture.

Robyn Jacobson:

Jemma, the transfer balance cap caused much discussion across the profession and the broader country when it was introduced in 2017. It's been sitting at 1.6 million, it's been indexed for the first time from 1 July this year to 1.7 million. Could you provide an explanation of some of the concerns that the profession has about the effective indexation? And what this practically means, is everyone going to be affected by this? Can everyone benefit from it?

Jemma Sanderson:

The very unhelpful answer to those questions is it depends. The issue that we're encountering with this indexation is that from 1 July, 2017, everyone really had the playing field was the same. It was 1.6 million. That's what people would peg their pension accounts to. If they had more than 1.6 in super, they could only put 1.6 million towards pension phase, so that was all fine. With the indexation, if you fully used your 1.6 million, then the indexation doesn't impact you, because you've used 100% of your transfer balance cap, so you've got 0% available of any indexation.

Jemma Sanderson:

But where the complexity comes is for those people who didn't fully use their 1.6. Whatever their unused proportion of the 1.6 is, they actually get that of the increase of the 100,000. Where the complexity's going to lie is that if someone used 85% of their 1.6, then they'll have 15% left of the additional 100,000 to use. Plus whatever they may have had unused of their 1.6, and again, I'm already confusing myself. So, everyone's going to have a different transfer balance cap that they might have available, particularly for those people who didn't fully use their transfer balance cap.

Jemma Sanderson:

Now, I know that the industry is very concerned about the record keeping of this. So, self-managed super funds as an example may not report some of the transfer balance account events, and they might be annual reporters. So, some of that information might not be current, sitting with the tax office and on the individual's myGov account, to see what their transfer balance account is. Now, when we go into the portal, we can actually see Jemma's transfer balance cap is this, and this is what has been assessed the highest value that you've had towards that, which is very helpful. But it's sort of garbage in, garbage out. If the reporting hasn't occurred, then you're not looking at the accurate information.

Jemma Sanderson:

And so that's going to be a challenge for a lot of people. The other consideration is if you haven't fully used your 1.6 million, so you've got some cap space there, the consideration there is well, you didn't fully use your cap space, that amount previously, so will the indexation even make a difference at all? It would be if you'd made another contribution, such as a downsizer, perhaps, where you wanted to put an extra amount into pension phase. Or I feel like where it will certainly have an impact is from an estate planning perspective. Having that extra amount available to receive a reversionary pension or start a new pension from the deceased's account, and trying to keep as much money in super as possible, between a couple.

Jemma Sanderson:

Like Julie mentioned, the estate planning landscape's changed substantially, because even though in the next 10 years, like you said Julie, three trillion dollars is going to be that transfer of wealth, we're seeing that early now under the current transfer balance cap rules. Prior to 2017, if mom died, her benefit would stay in super for dad invariably, or vice versa. But now you've got to benchmark to dad's transfer balance cap, and anything above that that was mom's must come out of super, like as you mentioned. That can be a real issue with where do you put that, and it's no longer in such a tax effective environment. So, how that transitions out, and then you've got the wider family issues that can come with it. It is a challenge with that transfer balance cap, and just understanding it. If you're not in it every day, like Julie and I, and yourself are, it is confusing.

Robyn Jacobson:

Interrupting this episode briefly to let you know about our 2021 superannuation intensive series. In keeping with the times, the 2021 super intensive is a hybrid series, made up of eight online technical sessions, followed by practical face-to-face workshops in your capital city. Hear from nine superannuation experts including Jemma and Julie, who you've been listening to today, Scott Hay-Bartlem, CTA, and Clinton Jackson, both partners at Cooper Grace Ward, Justin Micale, Assistant Commissioner at the ATO, and many more. Running over two weeks, with flexible registration options to suit you, and 14 hours of structured CPD to earn, this event is not to be missed. Now let's get back to the episode.

Robyn Jacobson:

So Jemma, a couple of reflections on the transfer balance cap. You spoke of the challenges in accessing current information, particularly with self-managed funds reporting quarterly or annually at the moment, versus APRA funds which of course, report on a monthly basis. But also isn't there a challenge with who can access that information? Tax agents can, but what if you happen to be a tax financial advisor, or a lawyer who's doing some work with the client? And of course, they need to be licensed to give financial advice, so I'll just put that disclaimer over it, but in terms of who can access this information, it's still very limited.

Jemma Sanderson:

That's exactly right. A lot of financial advisors have been lobbying to the tax office and to be able to access that information. So, aside from the tax agent, then it's only the client themselves that can log into their own myGov account and then provide that information to their financial advisor. The other consideration there is that there's a lot of, in the self-managed super fund industry, there's a lot of people that have the administration of their super funds done by a specific administer, rather than their personal tax agent. So, the administrator can't access that information of the client personally, because they're not the personal tax agent, either.

Jemma Sanderson:

You've definitely got issues from that perspective, but substantially looking at the financial advisors, and often the financial advisors who are obviously licensed, they are providing the advice to their clients on commencing pensions and things like that. So, it can become very difficult to provide that advice from an accurate perspective if you can't get that information, or the information that you can obtain is inaccurate. Particularly if someone's rolling over to an APRA fund from an SMSF, and the debits aren't reported immediately, so you can end up with an excess.

Jemma Sanderson:

And the other thing is who is responsible for that reporting to the tax office, as well? The TBAR gets done and in discussions that I've had with accountants and financial advisors out there, "Oh, well the accountant's doing it. Oh no, well the financial advisor, they advised on the pension so they're doing it." Is it getting done at all? Those are the other considerations, as well, and it's really brought to the fore how important that collaborative approach is across the advisor spectrum for a client, but even then back to Julie's point, the people that need that advice can't necessarily afford to have all those advisors in their court making sure that everything happens.

Jemma Sanderson:

That compliance red tape has just become bigger and bigger, and we live in a litigious society and you just see that with those audit cases of the auditor being left carrying or holding the baby in a couple of these cases. And quite rightly, they're making sure that they're covered off on the PI insurers. Everyone is making sure that they're covered, and that's resulting in more and more compliance, longer pieces of advice, and making it inaccessible for a lot of people to get that advice.

Robyn Jacobson:

And then we've got that separate regulation, perhaps it could even be described as a tension, between the provision of financial advice and the provision of tax advice. Of course, the transfer balance cap is very much a tax issue, however it stems off the provision of financial advice where these income streams were established in the first place. Jemma, just to stick with one moment for the transfer balance cap, my mind was also going into future indexation. So, okay, it's moving to 1.7 this 1 July. Let's forecast out five years, 10 years, 15 years, 20 years. And we've got constant indexation. Then depending when people have started their income streams, we're not just going to have a proportion of what will be one lot of $100,000. We could have all these different calculations based on all these different thresholds, which as it continues to be indexed in the years ahead, it's just going to get messier.

Jemma Sanderson:

Well, it is, and I recall RBL days, I'm sure Julie does, as well, where we didn't have ... I mean, at the moment, if the information isn't provided to the tax office with the reporting, it's not at your fingertips. But back in the day, we had to request an RBL report from the tax office for a taxpayer and then there was a 28 day turnaround and you'd get that in the post. So, I'm not saying that it's not that different from that perspective, but again, who's going to be monitoring and manage what those different thresholds are? It is going to be a challenge and I guess with this day and age, for example, the fact that we can record this podcast on a virtual platform, things are moving on.

Jemma Sanderson:

So, hopefully that means that that reporting becomes more at your fingertips and all the software systems that invariably are used in the main, across the superannuation spectrum, will be able to record that information. But it's one of those things that again, I said garbage in, garbage out. If you're not reporting that information or the software system doesn't record that, then is it back to the good old spreadsheets that we all still know and love? But you're having to maintain one of them for each of your clients that goes through all of that. It is becoming more and more complex for everyone to maintain all those records, but yes, you're right. That complexity, but really Robyn, 20 years, things would have changed, come on. We won't have transfer balance caps in 20 years. It'll be something new [crosstalk 00:28:07]-

Robyn Jacobson:

Certainly won't be tax free super in 20 years.

Jemma Sanderson:

Exactly.

Robyn Jacobson:

Julie, I want to talk to you about the role that the superannuation system plays in supporting people across society. Do you think that it is failing to support certain sectors? And I'm suggesting people like those who work increasingly in the gig economy. We've also seen a report by Australian Super that concluded that women will generally retire on 42% less super than men will, and lower income earners, we can talk more about the SG regime shortly. But is there a failure to support the more vulnerable people in society?

Julie Dolan:

Yeah, this is a common theme with what we've been talking about before, where virtually the Super Guarantee Administration Act, which goes back to 1992, and is very arduous, and hasn't been updated, and still deals with once again, a demographic world back then, to where our world is now, which is very global. The gig economy, women are coming in and out of the workforce, but at the end of the day are still having to bring up a family to most of the time, most of the situation of family matrix. It is not fair and equitable.

Julie Dolan:

Once again, that also needs to have a rethink around what our demographic looks like in Australia now. And especially as I mentioned around mobility and in and out of workforce, and even on the ... I know there's been changes to contractor versus employer, but there's still a lot that falls outside that. There does need to be a clearer definition or a wider but more succinct definition of being able to capture more of a decent size of our population, whilst also factoring in women, who yes, absolutely, and this conversation around women and superannuation, it's been going around for a long time.

Julie Dolan:

Nothing has actually really addressed the difference in gap. And because of the fact the legislation behind the scene is archaic, and it does need to be reviewed, but yeah, absolutely. Absolutely there's big anomalies that need to be considered.

Robyn Jacobson:

We've already spoken about age limits at the upper end of the age spectrum, but if we go to the other end of the age spectrum, is there any basis today for, I'm thinking two categories of people who may not be getting the support that they really should be entitled to. Those who earn less than $450 a month, and there might have been a basis where it was all check payments and you manually had to attend to it, but we've now got single touch payroll and SuperStream and EFTPOS and all these wonderful ways of moving money around electronically.

Robyn Jacobson:

And the other category of person I was thinking about is the children under 18. There's no mandatory coverage of super for them, either. Have we reached a point that these people are just being forgotten or left behind or are not getting the best start, when they're actually the ones that probably need it the most?

Julie Dolan:

Yeah, absolutely. I think of my children, that are working part time and working hard, and they should be entitled to, as anyone else who's over 18, they're working ... Even kids really, really starting work average 15, 16, and they're working hard and putting aside money. So yeah, I can't see why they shouldn't be getting superannuation. The whole concept that we talk about, superannuation is a whole accumulation effect. Getting the money into there and accumulate. It's also teaching the younger ones about the importance of saving and being able to see their superannuation statement. Because they're losing touch and this is a whole behavioral debate around the touch and feel of currency, to seeing it on a piece of paper, but we need to have more educational metrics for these young ones to be able to see, and also on a fairer level.

Julie Dolan:

The 450, I think that should be scrapped. That's crazy, with regard to the technology, the ability for ... And once again we come back to the gig economy and people moving in and out. There shouldn't be a limit, that concept of 450 is as old as the hills, I believe.

Robyn Jacobson:

Jemma, more thoroughly into the SG regime, there's been a lot of talk about the legislative increase in the rate to 12% and that is set in stone at the moment, so if that were not to proceed, it would require a legislative amendment to prevent it going ahead. We've also got inconsistencies in the way that if you pay the nine and a half percent on time, it's based on one base, but if you pay it late, the SGC's calculated on another base. And I'm referring to ordinary time earnings versus the total sum in wages. We've got inconsistencies, so is it time, 29 years on into this regime, that it really had a thorough, not just a review, but a good old overhaul?

Jemma Sanderson:

I think that you're absolutely right from that perspective, and these days with things like single touch payroll and the systems that we have in place, it should be a lot easier to monitor and manage what those might look like, and it's a real shame that it hasn't really been subject to a review from that perspective. Because there's certainly a lot that can happen there. And I think that our super system has kept Australia in good stead from a financial perspective, back when the GFC happened, the fact that people were getting their regular super guarantee going into the system and then invested was really fantastic.

Jemma Sanderson:

It's got a great basis for it. It's just making sure that it is fair for everyone, and so we want to protect obviously the employees and make sure that they're getting their contributions. But also the employers, so particularly those small businesses, you've got the consideration there that the penalties are heinous if they are late, and of course, no one wants their employees to be paid late. But taking a pragmatic approach from that perspective, particularly with COVID happening, a lot of businesses are certainly struggling from that perspective.

Jemma Sanderson:

Not being as harsh perhaps, if they then make those payments and come good, and the SG amnesty would be worthwhile. I know you mentioned in your article, worthwhile, so extending that. Because COVID stopped a lot of people from just having the capacity and the ability to use that. So, I know that there's a lot of talk out there about the impact of not, or changing that legislation, so it's not indexed to the 10%. What that might look like, because the next step is 10%, I'm testing my memory here. So, that of course has a cost to the revenue, because people are not receiving the salary, the amount as a salary, taxed at their marginal rate, but it goes into super taxed at 15%. I think there is a little bit of a misunderstanding about what that indexation actually means for a lot of people.

Jemma Sanderson:

They think that they're going to miss out on extra pay, where potentially depending on how their overall packages work, it's going to actually be less money in their back pocket. They're getting paid the same, more into super, less in their back pocket.

Robyn Jacobson:

Jemma, do you think there is a misunderstanding out there that the boss is going to pay for this and they will get more money?

Jemma Sanderson:

Yes, I think that that is the case. It depends on the agreement that you might have with your boss, but probably in the main, a lot of people are paid on a total compensation basis, which is $100 is your total compensation, and of that you've got your super guarantee in there. So if they increase it to 10%, then you're still getting $100 overall, it's just that the super amount has gone up, so then your take home, your gross salary that you have your personal tax on is then less, so people think that they're missing out, but really they're not overall. But they will have less in their back pocket.

Robyn Jacobson:

Whilst at first glance it could appear like an innocuous increase in the rate, it's a superannuation measure, it actually has implications under awards and enterprise agreements and the Fair Work Act and salary packaging?

Jemma Sanderson:

Yes, that's right.

Robyn Jacobson:

Julie, observations from you about the SG regime? How could we do it better? On the contribution stage, if I think about we've also got the clearing houses and the timing of when it goes in and it depends whether it got via the ATO or via a commercial clearing house. Why do we have these inconsistencies?

Julie Dolan:

Yeah, it's the timing. It's the timing and depending on what clearing house it goes through. That timing can actually then be very detrimental to the employer, as what Jemma was saying. You only have to be that one day late and potentially that part seven penalty, which is 200% of the shortfall, so if there was a shortfall of $100, well then the part seven penalty is another $200 on top. And that's straight away, so there has been anomalies depending on what clearing house it goes through, to whether the employer would get affected. That needs to be addressed. There shouldn't be an inequality about where it's going through with the clearing house, to be an effect to the employer. Because they are doing the right thing.

Robyn Jacobson:

Is there also an inequality between super and salary and wages? I don't believe the Fair Work Act, and I'm no expert on the Fair Work Act, but I don't believe it has a 200% penalty for not paying salaries and wages.

Julie Dolan:

No, it doesn't. Even just by chance, which just literally been dealing with a few instances where back pay has come into the equation and for whatever reasons, based on an award or an honest mistake with the internal processing or whatever the situation there's been a back pay that's been calculated. And then the superannuation shortfall has been calculated on that.

Julie Dolan:

Because the superannuation shortfall was calculated at the time the salary and wages are paid, there's no charge that comes into play. There's just these inconsistencies in the legislation depending on the situation. And at the end of the day, it still potentially comes back to the employer who's done the right thing, but for whatever reason, there's been an honest mistake. But depending on the scenario around that honest mistake can be a massive penalties and then nominal interest, and then the administration fee, and also general interest charge if for whatever reason, the statement gets put in late.

Julie Dolan:

Now, you can go for a remission on some parts, be it the part seven penalties, but the commissioner has no discretion whatsoever around the others. And depending on how many employees are involved, it can be a very expensive exercise. and very stressful, especially as Jemma was saying, we're coming out of a world that we've never experienced before, and we're coming out of businesses trying and cash flow is king. They've got all of these other now regulatory requirements and single touch payroll and all sorts of stuff that businesses have to actually keep up with, that these things slip through.

Julie Dolan:

It really is once again, a time for a rework of some of the key elements of these legislative pieces, to get up to speed on how we are sitting on demographically as we mentioned before.

Jemma Sanderson:

Can I make an additional comment on that? If someone does do the catch up and tops up those contributions through the SG amnesty or the tax office imposing all of that, that hits the employee's account, and they might end up with an excess contribution. And their ability to apply for that being disregarded is pretty much a non-event. You've got that flow-on effect where again, those contribution rules about those contribution caps are in the tax legislation, and then you've got the SG Act that deals with that side of things, and they don't talk to each other from that perspective, either.

Jemma Sanderson:

Instead of this whole Band-Aid approach, some of these Band-Aids are getting old and disgusting, and I think that we really need to look at it overall, and consider the big picture. That's what when we advise our clients, we have that holistic approach and we're just sort of not really seeing that from the way this legislation flows out, and how they all interact together.

Robyn Jacobson:

Jemma and Julie, I feel like we've only scraped the surface here, and I feel I could talk to you all day about superannuation, but I will need to draw this to a close. Can I get from each of you one sentence on how you would improve the contribution rules to super, the most effective way? What would have the greatest impact on improving the current system? Jemma first.

Jemma Sanderson:

I think the removal of the work test would be quite helpful for those people adding to superannuation later in life.

Robyn Jacobson:

Thank you. And Julie, I'm not sure if Jemma just took your idea.

Julie Dolan:

Look, I totally agree with that one. Yeah, look, and also the ... All the caps. Let's just align the caps. We can't get much in anyway. It's just got less and less and less and less and less, and the small amount that goes up based on [inaudible 00:41:09] versus CPI versus whatever is wrapped around it, is crazy. If that's going to stay, let's just make it simple internally and start to align some of these indexation caps, and just have a big cleanup.

Robyn Jacobson:

Sounds good. Well, if we could start with both of those measures, I think would be a step in the right direction. Thank you so much for your time today, I very much enjoyed having a chat to you.

Julie Dolan:

Thank you, Robyn.

Jemma Sanderson:

Thanks for having me.

Robyn Jacobson:

Thank you, both. Thank you for listening to this episode of TaxVibe. I've been chatting with Jemma Sanderson, CTA, from Cooper Partners in Perth, and Julie Dolan from KPMG in Brisbane. To keep up-to-date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au.

Robyn Jacobson:

Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession, and find out what the best tax professionals have in common. Join today and you'll have an all access pass to the tools, resources, and opportunities that make our members some of the most successful tax practitioners around. For more information, visit membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

TaxVibe Episode 5 — Tax Sleepers for Trusts

Release date: 19 Feb 2021

In this episode of TaxVibe, Robyn chats with Justin Byrne, Queensland Bar about some of the sleepers regarding trusts and the focus areas of the ATO.

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Justin Byrne, CTA, Queensland Bar

Robyn Jacobson:

Hello, and welcome to TaxVibe, a fresh new podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute, and your host for today's podcast. We love the vibe of tax. And here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax professionals, great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Justin Byrne, CTA, who recently went to the Queensland Bar after 20 years practicing as a solicitor specializing in taxation and revenue law. He advises on a wide range of complex taxation issues, including income tax, CGT, GST and stamp duty.

Robyn Jacobson:

With qualifications and extensive experience in both law and accounting, he's uniquely placed to provide practical and commercial tax solutions for a range of clients, from individuals and small business owners to large corporations and government. He's also experienced integration with the ATO in relation to tax disputes and has conducted tax litigation in Administrative Appeals Tribunal, the Federal Court and the High Court. Justin, welcome to TaxVibe.

Justin Byrne:

Thank you for having me.

Robyn Jacobson:

Right. Pleasure. So we thought we'd have a chat today about trusts. It's one of those areas that almost every SME practitioner has in their client base. They have been around maybe hundreds of years and yet they still continue to cause problems out there.

Justin Byrne:

They do. I think it's just one of those areas of law that when you butted up against the tax law, it does, as you say, continually cause problems. And it's still an evolving landscape I think in relation to how trusts are in fact taxed.

Robyn Jacobson:

Do you think the awareness of trusts and the understanding of how they fundamentally operate is something that is always improving the profession particularly for accountants who may not necessarily have been taught trust law in their early university days?

Justin Byrne:

I think so. I think the landscape in that regard has changed over the last little while. I think one of the big factors there was the Bamford decision and what occurred there. So I think that gave practitioners a much broader exposure to how in fact trusts are taxed. We also had the Greenhatch decision that came after Bamford. It looked at whether or not you could strain for example, capital gains through trusts. And the impact of that decision was you can't. And that led to changes by way of introduction of Division 6E and the taxation of capital gains through Division 115-C and franked dividends through Division 207-B. I think practitioners generally have had to come to grips with the taxation of trusts and really get down into the trenches in terms of even compliance in terms of properly wording the resolution so that the tax burden falls where they want it to fall. And coinciding or considering also where the distribution is in fact, going.

Robyn Jacobson:

If you look at the way trustee is in Australia, we are, of course, a Commonwealth country and trust themselves emerged out of common law from the UK. And if we go back to the very early origins we're talking about effectively a separation of beneficial and legal ownership in many cases to avoid the feudal system and the property taxes that were imposed by the monarch of the day. But we're talking hundreds and hundreds of years later, there are over 900,000 trusts in Australia. And I understand, don't quote me on this, that I think there's something like more trust per capita in Australia than anywhere else in the world other than New Zealand. So I use them in a conditional sentence and in investment sense is far more widespread than other countries.

Justin Byrne:

Yes, I think that's right. My understanding of, for example, the use of trusts in the likes of America, they just don't use in the same way that we do here and derive that and you're right. For example, I'm just thinking of farmers have traditionally used trusts and partnerships and trusts as well, because it's got that ongoing nature to it in terms of say that the dad that was running the farm business passing it down to his sons and daughters, et cetera, and from them to the grandchildren, for example, and that was a neat way of holding the assets and having the family involved in the farming business. So it does lend itself to certain scenarios. And I guess the interplay with how trusts are then taxed also provides that flexibility, especially in relation to discretionary trust. So it's probably not surprising that trust is so prevalent in our tax system.

Robyn Jacobson:

You're talking about the use of them in a succession context of passing from the parents through to the children, ultimately the grandchildren. And we will touch on this later, but there are some limitations with trust because of these vesting periods. So they can only run for so long unlike companies that have this perpetual life.

Justin Byrne:

Yes, that's right. And it is interesting. Well, I guess it's all relative really, but in my experience, the proliferation of trusts, since I've been involved in tax has really come to the fore. And I think that a lot of those trusts that were established in the early 80s and sometimes back into the late 70s are starting to get old. And it's interesting to note that when 30 June comes around every year and tax practitioners are looking at the trust deeds in order to determine who's going to get the income and how deed works, it is very important that practitioners pay attention to when that limitation period is going to run out, the vesting period.

Justin Byrne:

Traditionally, you'll see it drafted such that it's either the life in being plus 21 years. That was the old style of doing it. Nowadays, it's more just the 80 years from the date of settlement of the trust is the norm, but in practice, I have seen a number of trust deeds where the vesting period was only 40 years. For whatever reason that was quite popular a number of years ago. So there are a number of days out there that have got a 40 year vesting period, which is going to cause problems. But it's also important to note when you're looking through the terms of the deed, that there is a provision in there, hopefully, that allows the trustee to extend the vesting period. So if there is such power, then it is possible to have the vesting period extended. And if you're going to do that you'd need to pay careful attention to the consequences of doing so, but it is possible to in fact, extend the vesting period.

Robyn Jacobson:

It still couldn't be extended beyond the 80 year limit that is imposed by all state law other than South Australia.

Justin Byrne:

That's correct. Yeah. So at least you get another 40 years if your vesting period was initially 40 years.

Robyn Jacobson:

So we think about all the trusts that had been set up since, let's call it the 1970s, 1980s, if they've got 80 year vesting periods, then they'll start to kick in, in the next 20 to 30 years. But for those that you're referring to that have these 40 year periods, and for example, don't contain a clause in the deed that allows that period to be extended, then some are facing some looming vesting dates if they haven't already passed.

Justin Byrne:

Yes. So what happens on vesting is interesting. Essentially, and let's talk specifically now about discretionary trusts, the discretionary powers vested in the trustee essentially come to an end and the rights of the beneficiaries essentially crystallize. So they become fixed. So what that means is that the trustee in terms of both distribution of income and ultimately capital of the trust becomes fixed and essentially is very rigid. It can't deviate from those entitlements. So if a trust has inadvertently vested, then if there have been distributions made, otherwise, then in accordance with those fixed entitlements, then they're going to be unfortunately invalid. So one is to be very careful about what happens there.

Justin Byrne:

The other thing too is actually ascertaining who is entitled to, for example, the corpus of the trust. Sometimes when one pays close attention to those clauses in terms of who should take the capital at the end of the day, it's not an easy task sometimes to work out exactly who are those beneficiaries, because they can be cast quite widely. For example, relatives that may have changed over the course of time and or thinks through other entities. So you do need to pay some attention to that.

Robyn Jacobson:

Justin, you spoke of situations where distributions can be made invalidly. I recall a trust many years ago that I came across where the vesting date was linked to the death of Mary. And Mary had passed away about 15 years earlier. The trust, as you described, would have converted effectively into a fixed trust, but the distributions continued to be made to all the discretionary beneficiaries in the regular manner that they always had. And I remember having a conversation with the practitioner saying, "Is the client aware of this?" And they said all, "Yes." And I said, "Is there much value in the trust?" And they said, "Yes." I think the figure was somewhere north of seven, eight digit. So we're talking quite significant figures in there. And in terms of where that landed, I remember about 10 years later, I spoke to the practitioner again and the trust had still been operating.

Robyn Jacobson:

So this difficulty where there's not a full understanding by the trustees as to what happens on vesting. And I wonder how many other trusts are out there that decades later are still being wrong. And I've often had the thought that as long as one of three major things doesn't happen to you, then you can probably carry on blindly without understanding the implications. And that is as long as no one dies, no one gets divorced and you don't get an audit. And if you really unfortunate, you couple those three things at the same time. And in all seriousness, it seems to me that if one of those three things happens, everything bubbles up to the surface, and you end up with this focus on what should be properly done and what has been improperly done. And that's when these things really become an issue.

Justin Byrne:

Yes, absolutely. And you've just reminded me, I recall one specific instance coming to year end and we were looking at who to distribute income down to, et cetera. And someone picked up on the fact that for the last six or seven years, distributions had been going out to an individual who everyone thought had been properly nominated as a beneficiary of the trust and this person needed to be nominated in writing in accordance with the trust deed. But in fact, no one could recall when that person was in fact nominated nor could they put their hands on the specific document nominating that person. So there was some anxious times there when you're looking back to see that the eyes have been dotted and the Ts crossed in relation to compliance in that regard.

Robyn Jacobson:

So the vesting issue, I just want to explore a bit further with you. There seems to be this widespread misconception that all vesting it's suddenly a taxing point, and it crystallizes every tax liability. And I'm referring to things like CGT liabilities and balancing adjustment events and stamp duty obligations. And so there isn't necessarily a taxing point on vesting of it. And the commissioner has talked about this in his ruling 2018/6. So I just wondered if you could perhaps explain to our listeners, what happens on vesting from a tax perspective and other potentially delayed tax liabilities that can arise.

Justin Byrne:

Well, I think that's a good point. And I think the default position for most discretionary trust would be as a general rule that there is no taxing point upon vesting occurring. And CGT event E5, which you were alluding to, may only happen sometime after vesting. So at vesting I guess to determine whether or not CGT event E5 occurs, you would need absolute entitlement looking at it from the perspective of the beneficiary and the commissioner-

Robyn Jacobson:

So what does that mean exactly?

Justin Byrne:

It's essentially the right to call on an asset to be transferred to the beneficiary. So in the draft ruling, the commissioner quite rightly points out that if there are a number of beneficiaries that are entitled to that particular asset, then one may say that they don't call on it, which means that you don't have absolutely entitlement in that asset. And that hops back to that old rule in Saunders and Vautier about who is absolutely entitled or can call for assets of the trust, therefore essentially able to collapse the trust. So there are a number of instances where there will not be an absolute entitlement and therefore no CGT event. And as I say, where you've got a wide range of beneficiaries who are essentially going to have an interest in all of the assets of the trust, you won't have absolute entitlement.

Justin Byrne:

It's good to know that the commissioner actually states that in his draft ruling that where there is essentially joint entitlement to an asset by various beneficiaries that there won't be absolute entitlement. That's an asset by asset thing too.

Robyn Jacobson:

So you could have someone entitled to one asset, but not necessarily in respect of another property that could be held on the trust?

Justin Byrne:

Yes, that's correct.

Robyn Jacobson:

I think it's also interesting, Justin, that the draft ruling on absolute entitlement, which is 2004/D25. It must nearly hold the record for the longest draft ruling. So we're looking at what 16, nearly 17 years now, but that's been in a draft form.

Justin Byrne:

That's probably right. I haven't checked it, but it is pretty long in the tooth.

Robyn Jacobson:

Because no any others that exceed that. So things like losses in trusts when at vest and things like depreciating assets with balancing adjustment events, do these things automatically happen because interestingly, they're not covered in the commissioner's ruling on the trust vesting 2018/6.

Justin Byrne:

Yes. I don't think they are covered. And I don't think anything does in fact happen. I'm just thinking through in relation to trading stock. Well, what happens, the trustee still owns the trading stock, the legal interest in the trading stock, there might still be a business being operated by the trust. So the trust doesn't come to an end just because it vests as such. And there's been no change in, as I said, legal ownership of the inventory of the stock. So I don't think anything happens to it as such. Yeah, I think we might be into that gray area. We don't have anything as I am aware that the commissioner has said in relation to that. But I think that's the answer.

Robyn Jacobson:

And it may be in the decades ahead, you can use a hint that the commissioner may feel the need to put out some more public guidance on these questions, because more and more trusts are going to be vesting on mess in huge quantities.

Justin Byrne:

Yes, that's right.

Robyn Jacobson:

So I want to talk now about your upcoming session. You're presenting at the Private Business Tax Retreat on the Gold Coast on the 25th of February. And some of the things that you are discussing in your session what I would describe as sleepers or things that many years on remain on session for those who run Trussell or practice in them. So we know that Bamford, the 2010 High Court case solved two long standing riddles. We know that it confirmed the proportionate approach in terms of how Section 97 works to assess beneficiaries on a share of the assessable income based on that same share of the trust income based on a percentage or proportionate approach.

Robyn Jacobson:

We also know that when we're looking at what is the income at the trust estate, as that expression is used in Section 97, is based on what we term trust law concepts basically drawing on accounting principles, but in the trust deed and any powers exercised by the trustee under the deed. Whilst those two riddles were solved, there are lots of others that remain outstanding. So can you touch on some of those?

Justin Byrne:

Yeah, sure. Well, the first is Section 100A. And I have heard the term 100A used a lot in the last couple of years. So it seems as though the commissioner for whatever reason has had a bit of a resurgence. I'm looking at 100A and its application to taxpayers in the current environment. 100A is a very old section. It was introduced in to the act in 1979. It's a specific anti avoidance provision in relation to trusts and it was introduced to curtail what was termed trust stripping at the time. And that's essentially taking the income out of the trust, taxed to a very low or zero tax rate taxpayer, but the cash or the actual benefit of that distribution somehow ends up in the hands of a high tax rate beneficiary.

Robyn Jacobson:

So the profits go one way and the cash goes somewhere else?

Justin Byrne:

Essentially. Yes, that's right. So a really good example of this was one of the first cases on 100A East Finchley. So there, what happened was distributions of approximately $500 each for example, were distributed to foreign residents, but not just one or two foreign residents, there were about 125 foreign residents that got this distribution. So it was a low amount of income distributed times a large number of individuals. So low or no tax was payable on those distributions. But the real catch here was that the trustee then demanded and the beneficiaries agreed to loan the monies back to the trustee. No cash actually changed hands. So essentially what happened was there was an avoidance of tax by making the distribution offshore, but essentially the real benefit of the cash remained with the trustee who would have paid tax at a higher rate. So it was clearly caught by Section 100A.

Justin Byrne:

A really good other example is for example, where a school of say the principal beneficiary's son is made a beneficiary to the schools, is made a beneficiary, a distribution of trust income is made to the school. The school is generally going to be tax exempt, so there's no tax payable on it, but then there's an agreement whereby the school will provide services to the son where school fees will be waived because of the distribution. So again, 100A would clearly apply to that example. Now for 100A to apply, there needs to be what's termed a reimbursement agreement. So that is some agreement and the definition of agreement is very, very wide. It doesn't need to be legally binding, it doesn't need to be in writing, but there does need to be some agreement between persons that essentially, as you said earlier, the distribution goes one way, the benefits or the cash go another way.

Justin Byrne:

Now, interestingly, that agreement needs to come into effect at or about the time that the distribution is in fact made. So in other words, 100A would not apply where a distribution is made on the 30th of June one year yet say six, 12 months later there is a change or seemingly someone else ends up with the benefits of that distribution. So that temporal issue has been cited quite strongly and it's come through the cases. So that's one limiting factor of 100A. And I guess that goes to almost the intent element as well. So 100A being a specific anti avoidance provision, if there has been no upfront intention. And I use that term in the objective sense, rather than the subjective sense, then 100A should not apply it.

Justin Byrne:

Now, the main way in which 100A is to be avoided, for want of a better term, is if the distribution is made in the course of ordinary family or commercial dealings. So that phrase is quite critical, obviously, because if you can say, look, the actual cash went to so and so through the course of ordinary family or commercial dealings, then ordinarily Section 100A would not apply. Now that phrase has been traditionally considered in the old section 260 cases, that's the old precursor to part 4, right? And there some interesting decisions were made in relation to what does constitute the course of ordinary family or commercial dealings. So some of those old cases actually say that, look, sharing of income between spouses that are running a business is okay, that's an ordinary family or commercial dealing. And if those old cases can be used in the context of interpreting section 100A then you could say that you're within the exception to 100A.

Justin Byrne:

Look, 100A is no that far apart from those old cases which really were all about contrived arrangements and they should have been struck down on the 100A and were struck down. We haven't yet had a case coming through the courts. Let's look at a borderline type fact scenario. So it'd be interesting to see if the commissioner picks one to run even as a test case funded case. But I am hearing anecdotally that there are a number of possible section 100A cases out there at the moment. So we'll see if one gets around in due course.

Robyn Jacobson:

Justin, have we ever had judicial guidance on whether it's an objective or a subjective test? So when we talk about this ordinary family or conditional dealing, how do we determine that threshold? Because what's ordinary for one family or what is appropriate for a commercial dealing may not be for another. So I don't feel we've ever really had clear guidance on who's determining whether it is an ordinary family or commercial dealing.

Justin Byrne:

Yes. I'm not sure that it is crystal clear. But my understanding is that it is an objective test. So as you say, all facts and circumstances are taken into consideration on an objective basis as to what was actually going on at the time. There is one case, I'm getting my facts all muddled up in my head as to which one it is, but the court in that instance was talking about the transaction at the heart of the case. And I think the argument put forward by the taxpayer was that it was a simple case of just, for example, whatever it was, a payment or a transfer of shares. And the court said, "No, you can't just look at and hone in on that one particular fact in the case, you need to look at everything." And when you look at all the other things that were going on as part of this reorganization of business, it did not constitute being in the course of ordinary family or commercial dealings. So yeah, a much more objective holistic approach is taken by the courts.

Robyn Jacobson:

I know there's great interest by a number of SME practitioners in a fairly common practice where a distribution might be made to a family member who then lends the funds or makes the funds available to another family member who, for example, might have had a higher marginal tax from the beneficiary who received the distribution. And there have been questions about whether 100A could or should apply in those situations. We are waiting for a ruling from the ATO in draft form. And I know that is long awaited, and it is still under development, that it will be very distinct when that ruling is released and the reaction of the profession, and whether we feel that the ATO is landing in perhaps the same place that the profession does. And I think there's lots more to be said on this particular issue.

Justin Byrne:

Yeah, I think that's right. And the commissioner does take the view that section 100A can in fact apply where you do have distribution down to one family member and gift over to another. So that is one of the types of scenarios that the commissioner is very interested in. And I think the update on that place is not on the ATO website. I think they're now saying that they're expecting that ruling to come out in April this year. So we may not have too long to wait to see what the actual result is.

Robyn Jacobson:

Let's hope. Another issue that has been gaining some interest of late is a provision that is not well known that is starting to appear in some cases. And that is Section 99B. So can you explain very basically what it does and why this is starting to get a little bit of traction?

Justin Byrne:

Yes. So again, it's one of those provisions in the act, as you say, it hasn't had much airplay over the years, and it was introduced into the act in about the same time as the 100A was, and that is 1978, 1979. And it was specifically introduced into the act to overcome a decision in Union Fidelity. And that case essentially held that there was a gap in the legislation whereby a non resident could become a resident and the accumulated income in a foreign trust was not taxed in Australia. So it was designed to cover that gap that is accumulated income. I think there was also a possibility that you could somehow be a resident and then become a non resident by year end, that is 30 June, and somehow avoid tax on accumulated income offshore. And then in a subsequent period, once again, regime residency and escape tax. So 99B coupled with 99C, I should say, was introduced to cover those scenarios.

Justin Byrne:

I think as the world is getting smaller in a sense, we've got the internet and everyone's connected and that sort of thing, businesses both inbound to Australia and outbound have become a lot more international over the years. So it's fitting that 99B then comes back into the spotlight in that regard. 99B prima facie is a provision of very wide import. So it does catch a very wide series of distributions of income from foreign trusts. So it's important to know when you might be able to escape its clutches and the real escape route, and the only escape route really is the exception for distributions of corpus by that foreign trust.

Justin Byrne:

Now, that begs the question, what is in fact corpus? And so we in Australia, obviously have an understanding of what corpus is according to our law, our trust law et cetera. But you need to think here about this is a foreign trust, so we're going to have foreign laws operating in relation to this entity, if it is an entity, and that might have an impact on what is corpus. So you've got a number of factors at play here. I guess the bottom line is it can be extremely difficult to work out when a distribution has come from corpus. A good example would be what happens if that overseas trust has made a number of investments over the years, there's buying and selling of shares, there's income from the shares and you'd need to really trace through to see, well, this amount is still corpus and that's the distribution that I'm getting. That is a very difficult task, especially when you may not have control of that foreign trust. You may have difficulty getting records in relation to the foreign trust. It might be in another language in terms of equivalent of trust deeds and so on and so forth.

Justin Byrne:

So given that the onus is on the taxpayer to prove that the assessment is excessive that can be a very high bar to jump over. Something else should be taken into consideration too in relation to the corpus exception. And that is the words in brackets in the relevant provision says an exception to the exception. So that is corpus is outside of 99B except if the amount that you receive would otherwise be assessable if it was distributed to you as a resident. Now, a good example of this, think of the case of a share buyback. So if the foreign trust had shares, it has an investment bought back, would the receipt be taxed in Australia? And the answer is yes. Under division 16K, we've got provision to say that it's taxed as a dividend over and above the amount of the original amount of the shares. So that can be a taxable distribution.

Justin Byrne:

Now, if the foreign trust would have its investment shares bought back simply then calling it capital at that point in time and a distribution being made to a beneficiary here in Australia is not going to get the distribution out of 99B. So that exception to the exception would apply and therefore will be taxed on here in Australia. And that was essentially what happened in the case of Howard versus the FCT. So it just needs to be borne in mind that it is quite difficult to get through that corpus exception.

Robyn Jacobson:

I think it will be interesting to see in the months and years ahead, how often we see 99B being used by the commissioner and how taxpayers try to navigate their way around this corpus argument.

Justin Byrne:

Yes. I agree.

Robyn Jacobson:

Interrupting this episode briefly to bring you our 2021 Private Business Tax Retreat. Now celebrating our 10th anniversary. The Private Business Tax Retreat is a significant event held on 25 to 26 February, 2021. Listen to 17 industry experts presenting, including Justin Byrne from the Queensland Bar and many more. For the first time, we'll be offering this event in a hybrid format to ensure we reach all interested delegates in this current environment. Whether you are attending from our amazing venue on the Gold Coast or viewing from the comfort of your home or office, you will experience the same expert driven program that has brought delegates from around the country year-in and year-out. Let's get back to the other side.

Robyn Jacobson:

Another area that is becoming again, a lot more gaining a focus and attention, that is the interaction of the provisions in Division 855 with the CGT discount and predominantly discretionary trust. So we basically have an Australian resident trust that owns non taxable Australian property. So in other words, offshore property, or makes a gain from some other offshore asset like shares, the gain is made by the Australian trust and then the gain is distributed back to non residents.

Robyn Jacobson:

Now, we certainly have rules that say, if you are a non resident individual and being not a resident of Australia, you make a gain that is not in relation to an Australian asset, then you don't pay tax in Australia. We also have rules of fixed trusts that say if you're a non resident beneficiary, often Australian fixed trust that made a gain from a non Australian asset, you also are not taxed on that, because effectively it's a flow through except that you're a non resident beneficiary and you're receiving a share of a gain from a non Australian asset. But we do have a problem when we start putting those arrangements through a discretionary trust.

Robyn Jacobson:

So the Australian discretionary trust makes a guide in relation to an asset offshore and then distributes that gain offshore. We've got this all coming to light in a case called Greensill, which is currently on appeal. So I'm interested in your thoughts. And do you think the Agios approach in a couple of draft rulings is the right approach? Did the Federal Court take the right approach in Greensill? And what does this mean for dozens if not hundreds of these structures that might exist?

Justin Byrne:

Yes. Okay. Well, I guess the first point to note is that the commission does have a couple of tax determinations. They're still in draft TD 2019, D6 and D7. And they essentially are the arguments that are put in Greensill. So I guess they'll remain in draft until we hear the full Federal Court decision on Greensill both at that case and the N & M Martin cases that are being heard concurrently later this month. So that's the commissioner's position. It's interesting in the Greensill case, the argument was porch at first instance before Justice Thawley that the Australia's tax policy was such that no tax should be payable in the event of a foreign beneficiary receiving a distribution from a resident trust in relation to a non tap asset.

Justin Byrne:

And Justice Thawley understood the argument obviously, but put around the other way and said, "Well, no, you've got to start with the legislation first and look at the context in which the legislation has been drafted to see if it does in fact match up with any policy." And he found that it didn't. And he said there was a danger in putting the argument the other way round, you can't pull yourself up by your own bootstraps, in other words, in terms of that argument. So he found that there was no overarching policy that said that such a non resident beneficiary should not be taxed, but most commentators would agree that it really has always been the case that Australia's policy has been that a non resident would not be taxed on non tap assets essentially.

Justin Byrne:

What's really interesting here in this whole debate is how one works into the consideration of this issue, the source of the gain. The source rules we in our now current Section 6-10 subs four and five, so they are present in our legislation. However, what's really interesting is that when you work your way through Division 6 in relation to the taxation of trust, and now obviously amended by Division 6C and then for capital gains Division 115 and then the exemption in Division 855, trying to put all those provisions together to work out what the answer is, is really interesting. And I think what is coming through hence more so the argument was put in N & M Martin rather than Greensill, but the argument was that one needs to give some attention at least to the source rules. And thus far the courts are saying, "No, you don't seem to get there when you look at the actual wording of, for example, Section 855-10.

Justin Byrne:

So if one leaves out that source rule element, and you go through the provisions, you seemingly get to this result that the non-resident is in fact taxed. Another really interesting point is that interplay I think between 855-10 and 855-40. So 855-40 is the exemption for the fixed trusts. And it does beg the question, well, what work then does 855-10 have to do? And in the Greensill decision, Justice Thawley said 855-10 does not in fact cover a non resident beneficiary. It doesn't exempt gains from beneficiaries, it exempts gains from individuals and foreign trustees, but not foreign beneficiaries. So it's very interesting. The landscape is very interesting at the moment. And we'll just have to wait and see what the full Federal Court says.

Justin Byrne:

Just going back to your point, Robyn, about the commissioner's ruling. So I spoke about 2019/D6 and D7, he's also had out for a couple of years TD 2017/23 and 24. And those were talking about foreign trusts driving capital gains on non tap assets. So a slightly different set of facts. But there he does specifically talk about the residency assumption in Section 95, which is Division 6, obviously. And the commissioner takes the view there that, that residency assumption does not apply. So the foreign trust, in other words, you don't get to Section 95. He just says it straight out exempt and not taxed. Therefore, the gains not taxed in either the hands of the beneficiary or the trustee. That being the case when that gain flows through down to, for example, a resident beneficiary, he says 99B may apply. So that's interesting. So that's tying it all together, 100A, 99B and Division 6, but he says 99B may apply.

Justin Byrne:

And furthermore, he goes on to say that because that amount has come into the hands of that Australian beneficiary, not as a capital gain but just as an amount that's been taxed on the 99B, it's not a capital gain. So therefore you can't offset capital losses. So it's rather unfair that when one thinks about it, an indirectly made capital gain by an Australian resident beneficiary suffers that result, whereas had that Australian resident beneficiary crystallize that gain directly, by virtue of an asset, held by directly, then a totally different outcome would ensue.

Robyn Jacobson:

Isn't this the technicality that the CGT event has not happened to the beneficiary? They have not made the capital gain, it's just by virtue of the way that Division 115 works, that it passes the amount of the gain onto the beneficiary and treats them as being assessable on that amount, but it doesn't deem them to have had the CGT event happen to them.

Justin Byrne:

Yeah. And that's exactly what Justice Thawley said in Greensill. He went through it in chapter and verse in terms of how that Division 115 works as that, as you say, artificial construct to recreate the capital gain, essentially. And again, this comes back to the decision in Greenhatch, where you couldn't stream the gain. So the new rules allowing streaming Division 115 then had to make up this capital gain a pseudo capital gain in the hands of the beneficiary that is then altered in accordance with all discounts, et cetera, and ultimately taxed in the hands of the beneficiary. But yes, it's not coming back to it. In Greensill, the gain made by the trustee is one thing, but that was not again from a CGT event in the hands of the beneficiary.

Robyn Jacobson:

It's tricky, isn't it? And trying to get practitioners to get their head around all this, where we'll treat you as if you've made the gain for the purposes of taxing it but we don't accept that you've actually made a capital gain. So it's the whole construct of the law.

Justin Byrne:

Yeah, exactly.

Robyn Jacobson:

Look, it leads us on to a broader observation. You've reeled off a number of provisions and subdivisions and sections of the act that all interact and intertwine with each other. At last count, I counted more than 30 different sets of rules within the tax law. And that's sets of rules, each state will have its own rules within that, of course, that apply to trusts. And between the 97 Act and the 36 Act, and we've got family trust election rules, and we've got TFN reporting rules and we've got Division 6 rules and CGT rules and frank distribution rules. And on it goes. There are so many different parts that are tailored or having to deal with the particular characteristics of trust.

Robyn Jacobson:

And when I start to look at things like the closely held trust rules, the trustee beneficiary reporting or TB statements, as they're known, the TFN reporting for closely held trust and the family trust election rules, which incorporates interposed entity elections and the family trust distribution tax, it all starts to get very cluttered. And I'm wondering is the law actually achieving what it should? Is it doing it in the most efficient way? Have we got duplication? And given that most of the measures that I've just listed then were all introduced at different times to achieve a particular policy objective, maybe it's time to just clean it out or go with one set of uniform or universal rules that apply more broadly as opposed to lots of different sets of rules that each have their own exclusions and carve outs and they're not even consistent across the rules themselves. It makes it very difficult for practitioners and for those who run trusts.

Justin Byrne:

Absolutely. And I recall the old days when we had, I think it was called the ultimate beneficiary statements, that we needed to make. And so this is the further iteration of all those rules. But I do think absolutely there's duplication and one can understand what the commissioner is trying to do here in terms of getting the data in relation to where distributions are going, especially through chains of trusts. So understand that, but I think there is a duplication between the trustee beneficiary rules and the TFN regime in relation to closely held trusts.

Justin Byrne:

Could it be done more efficiently? I'm sure there is a more efficient way of doing it. But that seems to be the whole legislative scheme that we have is bits added on to the beast that we've got in the two acts. And so I don't think anything's going to change unfortunately in the near future in that regard. So yeah, I don't know what the answer is, Robyn, but I do feel for accountants and lawyers at year end having to work their way through these provisions.

Robyn Jacobson:

If I look at the interaction of the closely held trust rules and the TFN reporting, TFN reporting seems to be more robust, it's capturing the beneficiary data before or as distributions are made. And that provides a cost data matching later on. The TB reporting, which practically means labels P and Q on the distribution statement and the trust tax return, label Q, which is termed the untaxed part of the share of the net income, and perhaps on another occasion I can dissect that in more detail, but basically we're already reporting that in the tax return anyway. It's what you're being assessed on as a beneficiary. So that's providing no additional detail.

Robyn Jacobson:

The label pay amount tax preferred is to identify capital distributions that are tax free and other amounts of trust income that are not assessable. So for example, exempt income. And there are many different types. But I don't think this is well understood. And I also don't think that people understand ultimately where this can lead. If you fail to correctly disclose the information in the TB statement or you fail to do it at all, and this is a course where we're doing trust to trust distributions that does include unit trust distributing to Superfunds. I've always said, I think the Superfund is exempt. The Superfund as a trust itself is exempt, but as a beneficiary of a unit trust, well, it's not. So the unit trust has to do a TB statement.

Robyn Jacobson:

Now, I don't know if you're aware of this provision, but if you fail to do a TB statement at all or correctly, on the third offense, which let's assume just that's the third year in a row you failed to do it, you can end up with 12 months jail. And I'm just wondering what the legislators were thinking that this was serious enough to warrant jail time. And I've always had this image of a trustee who fell to do they TB statement correctly and they end up in D block and they [inaudible 00:45:59], they've got much more serious misdemeanors and offenses. And the trustee replies, "I failed to do my TB statement for the third year in a row." Well, I've never seen that happen. I doubt that it ever will, but it goes to what was going through the legislators minds when these provisions were drafted. Are they workable? I really feel that the TFN reporting is probably the most suitable set of provisions to use more universally and closely held trust rules I think they should just be repealed altogether.

Justin Byrne:

I was going to say, let's not forget, as you say, if you fail to TB reporting, after the third failure, you go to jail. But prior to that and during those three years when you fail to do it, the trustee is slugged with top marginal tax rate plus Medicaid.

Robyn Jacobson:

Absolutely.

Justin Byrne:

So it's equivalent to 99A, but it's painful in nature is what I'm getting at.

Robyn Jacobson:

Absolutely. We've also got an issue where joint and several liability is imposed on directors of trustee companies when it comes to family trust distribution tax, that has been a change of directors along the way, then we haven't seen a lot of guidance as to at the point the distribution is made where that joint and several liability risks.

Justin Byrne:

Yeah, absolutely. So the floor is clear in that at the time the distribution is made, it's the trustee, and if a company, then the directors who are liable for the FTDT. But you may in fact be or have the company in a state of flux, not really sure who are the directors at that point in time and maybe change of directorship, et cetera, so that can lead to a further complication in terms of liability for this tax. So yeah, I can occur. And I've seen it happen in practice where this was a real issue as to who may have been liable in terms of the directors for this tax. Thankfully, it was only, I think the commissioner in an audit it was his second line of attack not his first line of attack, and we didn't need to go down that path, but it still is something that needs to be closely looked at if you are facing family trust distribution tax.

Robyn Jacobson:

Justin, I feel that we could have a whole separate conversation about all the errors and incorrect things that are done when it comes to trust. But just in our closing comments, now, things like distributing after the vesting date, distributing to people who are not eligible beneficiaries or haven't been validly appointed using standard resolutions and failing to adhere to they deed. These are just some of the things that I've come across and I'm sure you could well offer a quick list as well.

Justin Byrne:

Yeah, that's a pretty good list. It's pretty common too. I think one of the most common ones I see is that you're distributing to people who aren't beneficiaries, everyone assumes that they were beneficiaries, but when someone goes to have a look and checks with the deed, they either aren't or there's a construct that someone's misread or they can't find the bit of paper whereby the beneficiary is nominated properly and that sort of thing. So that can be a problem.

Justin Byrne:

The resolutions are another big category of where things can go wrong, and that is just the wrong clause is referred to or not really thinking through the definition of income of the trust estate and what's trying to be achieved by way of the distribution. So the two things don't marry up. So yeah, absolute care needs to be taken with respect to those distributions. And also, the way in which either the proportion or the amounts as stated in the distributions are going to have an on flow effect in terms of the tax liabilities for those beneficiaries.

Robyn Jacobson:

You mentioned income at the trust estate, and this leads into a whole other more complicated section, which I won't go into in detail. But things like significant individuals and distributions tax and so on. A lot of these taxes rely on the amount of the income of the trust that was distributed, all the capital as the case may be. And when we're talking about things like the small business CGT concessions, you're building in a four year historical rule about where distributions have gone to determine whether entities are connected with their beneficiaries, to determine whether an asset is active. It gets very complicated.

Justin Byrne:

It does.

Robyn Jacobson:

And so there's whole understanding of the deed and how it defines income becomes crucial for this much broader range of reasons.

Justin Byrne:

Yeah, not only that, but also the forward planning required, especially in relation to the small business CGT concessions. If you're looking to sell the business, then you need to really think through those four years and what it means in terms of connected densities and that sort of thing. So yeah, it becomes absolutely critical.

Robyn Jacobson:

So if you're planning to sell in the next four years, don't distribute to anyone who's wealthy.

Justin Byrne:

That's the general rule, I guess.

Robyn Jacobson:

That's the closing tip. Justin, any final comments since we've taken a walk through a number of trust issues here?

Justin Byrne:

I guess just in closing, it really does come back to knowing the terms of the deed each and every 30 June as it approaches, that each and every trust you do really need to sit down and just spend that 20 minutes, half an hour flicking through the terms of the trustee, just to make absolutely certain who are the beneficiaries? What are we trying to achieve here in terms of our distributions? Are there any special circumstances that need to be taken into consideration in relation to the distributions?

Justin Byrne:

I saw a deed recently that said that someone in the position of someone like an Appointor needs to actually authorize certain beneficiaries to receive distributions each year. I hadn't seen that before, but there it was in the trustee. So you do need to become familiar with the terms of the trust deed before you do anything in relation to 30 June distributions.

Robyn Jacobson:

Justin, thank you very much for your time today. It's been great having a chat to you about the trust sleepers.

Justin Byrne:

You're welcome, Robyn.

Robyn Jacobson:

And if you'd like to hear Justin speak further about issues like 100A and 99B and the Greensill decision, Justin will be speaking at the Private Business Tax Retreat on the Gold Coast on Thursday, the 25th of February. Thank you for listening to this episode of TaxVibe. I've been chatting with Justin Byrne, Queensland Bar.

Robyn Jacobson:

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Episode 4 — JobMaker

Release date: 22 Dec 2020

In this episode of TaxVibe, Robyn chats with James O’Halloran, Deputy Commissioner, Economic Stimulus Branch, ATO, about the Government’s new JobMaker Hiring Credit payment scheme.

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: James O’Halloran, Australian Tax Office

Robyn Jacobson:
Hello and welcome to TaxVibe, a fresh new podcast by the Tax Institute. I'm Robyn Jacobson, senior advocates of the Tax Institute and your host of today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax proficiency great thought leaders that will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by James O'Halloran who is the deputy commissioner, Economic Stimulus Branch at the ATO. Among James's responsibilities are the JobKeeper and JobMaker programs. James has been a deputy commissioner at the ATO since 2007. In various senior executive roles, he's led the implementation of major government policy reforms for GST, Single Touch Payroll, superannuation, and the SMSF sector. Since April 2020, James has led the JobKeeper program and other economic stimulus measures for the ATO. He's held previous deputy commissioner roles to superannuation and employer obligations, indirect tax, and tax practitioner services. Prior to joining the ATO, James held senior management positions in state government agencies in Victoria. James has a bachelor of arts in justice administration and a master of corporate law.

Robyn Jacobson:
James, welcome to our final episode for 2020.

James O’Halloran:
Thank you, Robyn, it's a great opportunity and thank you for those kind words.

Robyn Jacobson:
It's wonderful to have you here and to be able to talk through, in particular, the JobMaker program. Just before we launch into that, I thought being the last episode of the year, we could take a moment to reflect on 2020. And when I use words like incredible or unprecedented or extraordinary, it doesn't go to begin to describe the incredible year that we've had. So I want to acknowledge the efforts of the profession. It has been what I am describing as a Herculean effort and I also throw the ATO into that mix. I think the speed with which the ATO have responded in providing the steady flow of continuous guidance that was needed throughout this whole period. I think back to those opening weeks in early April where we had the announcement, we had the law within a few days, and we're all trying to get our heads around exactly what job keeping meant.

Robyn Jacobson:
I think in the main, we've now got a heads around that and we've seen that evolve and become quite a mature program. But of course, now we turn our minds to job maker. So I just wanted your reflections on the year, particularly about that senior administrative role that you hold.

James O’Halloran:
So, Robyn, probably a couple of things. At times, I feel like we're still in March 2020 or March 2020 seems a long time ago. Big year is one way of putting it, and challenging, and also, of course, just so important for your clients, for your members, and for people in the business community, and individuals. So it was a little bit confronting, but it was also important that a lot of real necessities needed to be done and your members, yourself, and the profession really were key to us getting as far as at least the ATOs got, as well as I think, by and large, we've all seen some pretty good outcomes in the terms of both JobKeeper, cash flow boost, and, obviously, as we'll touch on later, JobMaker is the next one.

James O’Halloran:
But against all that, I think it was a bit of pride, to be quite candid, the ATO felt to have been able to get as far as we've got recognizing that it has been important and challenging work but essential to do for Australia.

Robyn Jacobson:
The ATO is traditionally a revenue collector and it found itself in the rather odd position this year of handing out money, quite a different perspective for you and your team.

James O’Halloran:
I suppose we probably think of ourselves more than a revenue collector, but the sentiment certainly sticks. I think what we've done is the government asked us to support the business community through a particular policy. It certainly was a lot of money, but also one of our other expertise is trying to balance and, as we've said a bit internally, the clue has really been in the name of these packages, economic stimulus. It needed to get out there quickly. It needed to still have efficacy and integrity in it. But it was to stimulate the economy each month and businesses to support them in what they needed to do and particularly to keep the employment relationship or to make payment set.

James O’Halloran:
So really, the giveaway, the money's correct. I heard it was done with prudence and assurance, but also it did have a dual policy objective to stimulate the economy through payment in arrears and I think we balance it out okay. It's something which increasingly the government are asking us and other agencies to do and we're pleased to do it and do to our best ability.

Robyn Jacobson:
The sense I get and also that of our members is I think, broadly, it has been a very successful delivery of various programs. There may be some, of course, who in their own circumstances, [inaudible 00:05:20] for whatever reason. Equally, there have been some who've benefited when they didn't expect to that I think if we look at a macro level across those programs, they were delivered effectively, and I think it has made the difference to the economy, and how many jobs have been retained because of those programs.

James O’Halloran:
Look, you're right. I mean, clearly, policy settings have eligibility and they have scope. And so you're right, there are some views, which we've certainly heard, that people felt should or shouldn't have been eligibility requirements or access. Of course, JobKeeper was one of a range of other government measures that were in place to support the economy through COVID-19, for want of a better term. But you're right, on balance, I think subject to other's views, of course, and the program has done what it was supposed to do, it's stimulated, it's also delivered, and by and large, we've been able to get through to people in the right time, in the right way and we're pretty happy with it. And obviously, more opportunities are coming forward, which we will do to our best ability to support people and the economy as the government wants us to.

Robyn Jacobson:
And certainly, it's enabled the Tax Institute to be able to support its members through delivery of various webinars and other technical material to navigate through this process.

James O’Halloran:
Yeah, I think Robyn, one thing I want to quickly touch on is something that was intrinsically important was there was a recognition, as we'll touch on later, that there would be honest mistakes. Most of your members or listeners would be used to a view that the ATO clawbacks money by notices of assessments often to do with historical events. I think the key characteristic difference has been, and hopefully, we've demonstrated that we believe by our behavior. Yes, if we found people, by and large, are ineligible, we would stop or reduce future payments, as one would expect, with the size of this program.

James O’Halloran:
But there was a genuine recognition, and by the profession, that there would be honest mistakes and that a sensible approach was taken quite overtly, sometimes probably quite a liberal sense of honest mistakes. But it was within the settings of the policy that it was really to move the support very actively and predictably so that people could get on with what they needed to do. So we're pretty happy with that and I think by and large, whilst we've had some prosecutions are coming or in place and we've picked up some things that have been quite concerning, they have really been small in scale and certainly not systemic and we're very pleased with that, as one would expect, and the community's reacted very well to that balanced approach.

Robyn Jacobson:
That's the perception I've got as well, but there may be individual cases where a tax payer's missed out for whatever reason, but that would be because they are not compliant or it's been an egregious approach. To me, that's been in the vast minority and most people who have been entitled to the support, of course, have received it so that's something come through.

Robyn Jacobson:
In terms of the job series, [inaudible 00:08:19] with effectively the renaming of the old new start to job seeker and then JobKeeper was announced and we moved through the cash flow boost that was part of all the stimulus as well, but we've now got really the third sibling. So we've got the JobMaker Hiring Credit and this is something that was more recently announced. I wondered if you could just talk us through broadly what the policy is designed to do, who it's designed for, and how it differs perhaps to some of the other programs.

James O’Halloran:
So probably, with some online, clearly, there'd be an interest perhaps in the legislative settings because these measures have had, as you say, I hadn't thought of them as the term you used around being of the same characteristic. But I think there are some important distinctions which led to the speed or perhaps the ability to respond to changing economic conditions. So certainly, the series of economic packages obviously had some special features. Firstly, through the parliament, there needed to be as previously legislation that required rules to be made by the treasurer and those rules were destined to be done speedily because of that mechanism.

James O’Halloran:
And so there's subsequently been and for JobMaker, in particular, the legislation got assent on the 13th of November and was registered on the 18th of November. That's the legislation to allow the treasurer to make rules. The actual rules as they called the JobKeeper and JobMaker rules, for JobMaker in this instance, were registered on the 4th of December to establish the JobMaker scheme. And because of the administrative obligations and the need for clear and concise commentary around the legal basis of how we would administer, as well as some of the discretions that the commissioner would have, there was the commissioners legislative instrument, which was registered on the 4th of December.

James O’Halloran:
If you look at that date series, that's a really harmonization of a parliamentary process. It's also perhaps not for me to comment, but certainly the special circumstances in which the treasurer was able to make rules that had the effect of giving effect to the measures. And then obviously, the commissioner's legislative instruments, which laid out some more details around discretions, reporting obligations, characteristics, et cetera. So that pattern continues and it's certainly an unusual experience, I think, for any of us that have been through this exercise.

James O’Halloran:
And perhaps one thing, Robyn, is this feed was quite confronting in the sense that when there was feedback from people like yourself and others to either the policy to Treasury or, conversely, perhaps to some scenarios were needed to be considered in the development of the rules. I think, Robyn, you might agree too that the speed in which some of the rules could be either changed or mitigated was both an opportunity, but it was certainly pretty speedy. And I think those sort of points were pretty good in relation to the legal basis, but also the oversight basis that comes from that.

James O’Halloran:
Just for the JobMaker hiring program, I think there's a couple of things that struck me. Perhaps a few on the line, I've lived through this as well and very closely. With the JobMaker Hiring Credit, here's a couple of key differences. Firstly, there is a broader JobMaker program that the government have announced, which picks up, if you like, non-treasury, or non-taxation, or non-wage subsidy type of arrangements. So there's a range of other measures. But particularly the JobMaker Hiring Credit, its policy intent is to not only aid businesses to in fact continue to perhaps recover, but it's obviously aimed at ensuring that businesses are able to bring on additional hires, that is to bring on new people under certain characteristics.

James O’Halloran:
Now, the real characteristics for this particular measure is that it's about helping young people to access job opportunities where, in fact, in shorthand, they haven't got a job, perhaps they're receiving certain types of welfare. And it's also aimed at a wage subsidy for employers that will help accelerate that growth. But in particular, in the ages between 16 and 35 years of age, there's a couple of different characteristics here, which I'll come back to. That's not to say that it's the only means of support for, if you like, allowing businesses to recover, but it certainly has a target population of encouraging employees to hire young people between 16 and 35 years of age under certain conditions.

James O’Halloran:
So I think that's an important positive element of the program and also, it has a particular focus by definition. It's not meant to cover everything, it is particularly around that demographic, if you like, and also to subsidize employers to be encouraged to hire additional people under certain circumstances, which I'll come back to.

Robyn Jacobson:
Just on that point, James, it's a concern, even a criticism that's been raised with me by some, and these are, of course, people who are more than 35 years of age and they're saying, "Well, we're out of work too or there are minimum opportunities for certain older people as well and I think it's unfair that it's being targeted at younger people." Now, I know the ATO doesn't comment on policy that is matter for the government. But I think just to reflect on the experience, when we came out of the 1990s recession, the evidence was that the lowest income earners and there's often this younger age bracket were the slowest group to recover and become reengaged in the workforce. So it's not just that the decided to favor this group, it is based on historical experience and trying to make sure that those lessons are learnt and we don't repeat what happened all those years ago.

James O’Halloran:
Look, certainly the policy settings are as you've outlined. I think something that certainly come out in a range of ways through, if I could use the perhaps disrespectful term, the COVID-19 experience because I do stress, we [inaudible 00:14:22] appreciate that there seem some hardship that's quite unexperienced by recent events or probably many people in the community. But I think when you look at a range of government measures, very few of them are in themselves that complete part of the crossword, if you like, or the jigsaw puzzle. Yes, this has a particular focus, but there are a range of other measures that the government's put in place through other agencies, as many of the state governments and territories are, to collectively allow businesses to build.

James O’Halloran:
But I think, like you, I wouldn't underestimate the importance of getting young people, which for these purposes are designed between 16 and 35. I'm not sure at 35 I considered myself young, but perhaps that's relative at all times. But certainly, I think that this has a purpose and one of the benefits for us is we know who we need to support, we can identify some quite specific characteristics and we'll do our best to target that group to ensure that the employers that bring people on actually get the wage subsidy that they're entitled to as quickly as we possibly can to help them and help others move forward.

Robyn Jacobson:
James, you've identified the legislative framework that exists. So we, of course, got the legislation that allows the rules to be made and I just want to make the brief point that this is unusual. We would normally see periods of months, even years for legislation to pass from the date of announcement. We've had exposure draft, which, in some cases, has been made available and with the JobMaker rules, it indeed was. The idea that the parliamentary sitting days was so minimal that they had to at least create the framework to allow the treasurer to do it. And then, unilaterally, he's able to make these instruments, which then will often require the commissioner in turn to make further instruments. So I think from an efficiency point of view, it's hit the mark. I'm not sure that ongoing into '21 and beyond that we'd always want to see more developed in this manner. But I think it's been appropriate in these circumstances.

James O’Halloran:
Look, certainly, it was a unique experience, I suppose, from our perspective, but one that I would suggest without getting into that territory too much. It was fit for purpose and what goes with that, of course, is great responsibility by many to make sure that it plays out. You are right, though, Robyn, I had to, shall I say, perhaps keep my comments to myself, but at one stage, even in recent times, the ATO was criticized for being two days late in getting some explanatory information out and I'll hold my counsel, but I thought 24 to 48 hours after, effectively, the rules are registered is a pretty good achievement and, quite often, it was less than that. And at least with JobMaker, there was an opportunity, as you've said, to have some exposure drafts and to also work through a semi-normalized process. But we at all stages have tried to support as quickly as we could the same speed and efficacy around our advice and administer arrangements because it was appropriate.

Robyn Jacobson:
So that 24 to 48-hour period happened to overlap a weekend.

James O’Halloran:
It always did, I think.

Robyn Jacobson:
Yes. So we've got the framework, we've got the law, we've got the treasurer's legislative instrument known as the JobMaker rules. And we've also got the commissioners legislative instrument, which deals with the reporting obligations. So with that framework in place, what are the key points that people need to know and understand regarding the new program?

James O’Halloran:
I think there's a couple of things, which really at the heart of the eligibility as well as the administered arrangements, and I will come back to it, but bearing in mind that registrations have now opened already as of the 7th of December. But just to recap, JobMaker Hiring Credits are available for new jobs that have been created and that's an important point. And the new jobs that have been created between the 7th of October 2020 and the 6th of October 2021, claims can be made for each additional employee up to a maximum of 12 months from the start of the employment. Now, the program itself runs for two years, but if you're an applicant or a business, which I'll touch on in a moment, can only claim it for that 12-month period. So it does run for two years, but please be clear that you can only claim for up to 12 months for each new eligible employee.

Robyn Jacobson:
James, that would enable me to employ someone say on the 6th of October 2021 and then claim the credit for 12 months from that date.

James O’Halloran:
That's right. Because, obviously, it recognizes that new hires, if I can use that term, doesn't magically happen. So therefore, that's the reason for that that spread. Now, employee JobMaker payments, we're going to continue the pattern, as covered by the rules, that will be paying in arrears every quarter, so every three months. And the first claims, we'll be will be accepting claims from 1 February 2021, and this date frightens me, Robyn, 'til 31 January 2023 with the ATO making those payments. Clearly, at times, we all must feel as though we're wishing the years away. But of course, that's not the case. But that is important, that it's in arrears, it's paid quarterly.

James O’Halloran:
Two important points, there must be an increase in the employer's headcount and payroll. Again, there's a few reasons for why I'm highlighting that. Now, the employer must increase, as I say, headcount and payroll. But just be careful that employers cannot claim JobKeeper and JobMaker at the same time. So just to unpack that a bit, an employer cannot participate in the JobMaker program if it is receiving a JobKeeper payment for a JobKeeper fortnight that begins during the JobMaker period. You can't have overlapping claims is probably the easiest way to put that. So importantly, and different to JobKeeper, my final couple of points are this time, the rules require JobMaker reporting obligations or, in fact, applications to be only made by people that are reporting through Single Touch Payroll.

James O’Halloran:
Now, Single Touch Payroll, at the moment, has about 13.5 million employees being reported through it and, of course, that's across all markets. And yes, it is correct that we are saying to people for reasons which help us for two reasons. One, is everybody on this hookup or I'd like to say 99.99% would clearly expect, I mean, this is still a measure that is in the order of $4 billion from what's been announced through the budget process. Again, not an insignificant outlay of public money, Single Touch Payroll gives us two things. One is it allows us to keep the payments and assurance balance so that we've got an essence of both and, at the same time, it also does allow us to be comfortable that we can probably pass through as quickly as one would expect out of these quarterly payments and be comfortable that the payments are going to the right businesses that, in fact, could forward decline.

James O’Halloran:
So that Single Touch Payroll requirement is important. But again, there's a range of information which many would be familiar with how I'd like to suggest relatively straightforward and it's really accelerated in the last few months here. Single Touch Payroll has been adapted and taken forward by large sections of the business community. Robyn, the registration, I said has already opened. Now, that opened on the 7th of December and that was originally announced by Treasury in their fact sheet and, I suppose as a delivery agency, we're pleased that that's up and running. I won't go into the analysis of what we're seeing, but comfortably, we're seeing that, as I call it, the pipes of working. People seem to be finding the screens useful. Now, this is just a registration. It doesn't trigger a payment. Payment claims need to be submitted from the 1st of February in 2021. But we're finding that there are some things that are working particularly well and the main point is we are receiving registrations.

James O’Halloran:
Going into Christmas, and I will perhaps come back on this with some other things in a few moments, look, we're not saying that you have to register now today at three o'clock or four o'clock tomorrow or anything like that, but we are conscious that people and your clients need a rest and we all know that sometimes, one can procrastinate and suddenly, it's February. And so certainly, we are encouraging people to assess their eligibility or give advice to their clients, register, and then, basically, be comfortable that they won't have any last-minute surprises or perhaps not be ready to submit their claim for the quarterly payment in arrears from the first of Feb. And of course, the quicker the claim comes in, the quicker the payment can be made by the ATO.

James O’Halloran:
And so I think these points are just really allowing people to say it's open for business. I'm happy to support as well as there's a range of information and certainly we're finding so far that that's working okay. But there are some key dates and some other aspects we can come back to, as we look ahead between now and the first payments as well as some of the broader program issues.

Robyn Jacobson:
James, I think there are three things that are worth commenting on here. The first is that whilst the rules say you must register by the end of the JobMaker period, which in the case of the first one ends on the 6th of January, the ATO has exercised discretion or the commissioner has exercised discretion and registration, in fact, is open until the end of the claim period. So that's, in fact, the 30th of April. So as you said, there's no rushing in January or even early February, you have got time to register if you want to.

Robyn Jacobson:
I think the second thing that's notable is that this is a three-step process. One, you need to register to be involved in the program to participate. Secondly, there's the reporting through STP. There's payroll information and other information. And then thirdly, there's the claim process. So there are three distinct points of engagement with the ATO.

James O’Halloran:
Thanks, Robyn. I mean, the pattern is not dissimilar to JobKeeper. We're going to be a bit careful, this is not JobKeeper three. This has a different pitch. I assume most people would be familiar, there's not a wage condition requirement. It is purely a subsidy or a payment in arrears to support the employer to be able to hire people that they've hired. And if you put it into practical terms, and there's two tiers of payments between employees or new hires that are 16 to 29 years of age or 30 to 35, so really what people are able to be paid is in the order of about 10,400 a year for new hires that are 16 to 29 years of age and 5,200 per new hire between those ages, between 30 and 35.

James O’Halloran:
It's not an insignificant amount of money per new hire should you be in that position to be able to do that. And so you're right, the three steps are not dissimilar to JobKeeper approach in that there's three gates and that obviously is good, I think, for the clarity of what needs to be done. It's not everything all at once. But certainly, again, I'll just say to people, the quicker they prepare and the more sensible, they'd be comfortable their eligibility, that allows us to move to payments. And we'll be doing some assurance work behind the scenes, as you would expect. It'd be disrespectful if we didn't, but certainly, I think those couple of points are important just to highlight so that people can be ready and steady, but also, I didn't move through the gates or through the steps.

Robyn Jacobson:
There is a set point that I think is particularly important that I wanted our listeners to understand. This is where it differs from JobKeeper in that in certain elements of JobKeeper and cash flow boost, the commissioner had discretion to allow more time for things to be done. In respect of the JobMaker program, yes, there is discretion to delay the registration process to the end of the claim period, but there is no ability to extend the claim period. And if you register after the end of the claim period, there's no entitlement. I just want everyone to fully understand that these are really strict deadlines and if you don't make them, you miss out.

James O’Halloran:
That is quite correct, Robyn, there is no discretion and that does differ from JobKeeper where there was a fair range of discretions that we chose to exercise. But I also would put forward to people that's one of the reasons for this first period that we did, in fact, give some time for the registration. So the real message, I think, is please make sure that you are aware that any period after that time, we have no discretion to exercise. But that's why we've been saying to people get on to the registration now, keep an eye on the key dates, and I think given that it's a quarterly payment, that should be manageable. But it is certainly correct that the commissioner will not be able to assist you in terms of any of these late claims

Robyn Jacobson:
James, I think it's a reasonable period of time, many months to register and claim is reasonable. I just, to some extent, I guess worry about some practitioners or businesses where they may think it's a similar approach to JobKeeper for whatever reason a claim is not made in time. And then they're just expecting that although there'll be discretion, I'll be able to convince them this is okay. So the clear message is this is not extendable.

James O’Halloran:
No, that's right. The registration, yes, we've exercised but certainly not for the claim period.

Robyn Jacobson:
So without going through the entire program through to January of 2023, what are some of the key dates that people should be aware of let's say over the next month two?

James O’Halloran:
We bear in mind that it is a quarterly payment in arrears, so the 7th of October, the hiring credit scheme started. 7th of December, we've just opened the registrations through ATO online and business portal for registered tax agents or best agents. The 1st of Feb is when claims for the first quarterly payment will be open. So the 1st of February 2021. Again, another key date for 2021 is that the 6th of October is the last day to hire an employee that the employer may be able to claim for. And again, I will wish a life away, but certainly the 6th of October 2022, the JobMaker Hiring Credit scheme will end and any days after this will not be able to be claimed. It seems a long way away, but of course, when you're dealing with quarters, these things can creep and I will put in that from the 31st of January 2023, that's the last date that you can submit your claim form for the last period and that last period is 7th of July 2022 until the 6th of October 2022.

James O’Halloran:
So there's a few key 2021 dates, but I suppose I would put forward that to get benefit, the 1st of Feb is probably the one that most people will bear in mind and we'll do our best to get the payments out as speedily as we can because of the need to provide that money to businesses who are increasing their higher base of the targeted population group.

Robyn Jacobson:
James, we'll touch on some of the eligibility rules shortly and I don't propose to go through all of them because there are many of them and it's one of these things which people are just going to have to go through and tick off according to their own circumstances. But very broadly, there is the requirement that an employee increase both their headcount and their payroll. And by payroll, I mean the amount of payroll, and this is to prevent them off laying staff or reducing hours or cutting rates of pay to say, "Well, yes, I've taken on someone new," but economically, it hasn't cost them any more. So it's an integrity measure built into it. These calculations are complex and I'm aware that the ATO has made available a calculator to assist and I wonder if you could just make some broad comments about the availability of that and what it's designed to do.

James O’Halloran:
There's probably two things. Whilst we have a staged approach or as a stepped approach, as you suggested previously, in terms of registration and claim, et cetera, we have put up, the calculations are complex in the sense that they are probably baseline employee counts and payroll increases can be confronting. So we've put up a calculator not to compete with anybody else who might be putting up similar sort of information, Robyn, just to be clear, but genuinely to put at least an ATO explanation out on how people can estimate what their claim is likely to be dependent on their increase in their payroll.

James O’Halloran:
Two reasons for it. One is we've mapped ours to really replicate what's presented to people on screen so that to stop what's these days called screen shock so that people can see from our website as well as from the calculator what are the fields that they'll be asked to fill out if we don't pre-fill them. And of course, there is quite probably a reality of some people will be doing calculations to say I'm eligible, but do I wish to actually make a claim? Transparency, and visibility, and explanation is important, but the calculator is, of course, an aid, it's not the calculation, and that particularly off the back of Single Touch Payroll, our intention is we've given you visibility on the calculations, but the forms themselves will actually give you other pre-fill information, which I'll go through, and, in particular, then we will do the calculation for people based on that information.

James O’Halloran:
And so between aligning what's on the screens, what people will be asked to provide, as well as a ready reckoner on the amount of payment because some will have had significant hires, it then the game shows how the ATO is calculating it as well as it can obviously bring to life a judgment that people might make in terms of following through on their registration to an application.

Robyn Jacobson:
James, you've touched on the amounts involved. So it's broadly 10 and a half thousand dollars or just over $5,000 for the older tier. So we're looking at $200 a week for those ages 16 to 29 or $100 a week for those aged 30 to 35. That's, in a sense, the easy part. If we just turn our minds now to some of the conditions that must be met and there are some that are applied at the entity or the employer level and there are some that are applied at the individual or employee level.

Robyn Jacobson:
I think important to note too that this is only for employers. So they must be registered with an ABN, registered for PAYG withholding, carry on a business in Australia. This is not something that's open to business owners for themselves in the sense that JobKeeper have the eligible business participants. So this is strictly employees only and, of course, can't be claimed for yourself or for certain associates, so I'll just keep that as a broad comment. What are some of the other rules that apply to the employers?

James O’Halloran:
So I'll touch on the reference for the headcount in a moment, but just given your comments, Robyn, look, in a sense, as you say, for today's purposes, a lot of the exclusions are not dissimilar to JobKeeper, in that sense. Then there are those added features in terms of lodgements up to date, Single Touch Payroll reporting, and those sorts of things. But particularly important for headcount, and again, I'll just cover it off quickly, the baseline employee headcount is as at the 30th September 2020.

James O’Halloran:
So that's your base of who did I and how many did I employ on that date? And the payroll amount is for the quarter between the 7th of July to the 6th of October 2020. And so those two pieces of information are, in fact, given to us and are very important to understand. So again, there's a reference period, there's a baseline, as well as there's those two features, the payroll amount has to increase, as well as the headcount has to increase. And I suppose, not surprisingly, clearly, those features, when they're brought forward, do in fact cover off the normal declarations around the accuracy of those figures as you move from the registration process to the claim process and that's where Single Touch Payroll helps us out.

James O’Halloran:
I think some of the other eligibility issues certainly I just want to focus on logic that it's being up to date, and that's important, as well as, as I say, the enrollment for Single Touch Payroll. I think something that people need to be cautious of, and you've called it out as I've heard you just comment on, that certainly, we don't have an eligible business participant arrangement from JobKeeper and I just want to keep reinforcing, not for any reason other than clarity, that there is also not a wage condition requirement. It is, in fact, a subsidy for the employer to really be able to afford to bring on an additional hire of the employee who's aged between 16 and 35. And also, can be covered by the baseline headcount, can include permanent, part-time or casual employees. So that's also important. It's not by category of employee. And as you say, if you're a sole trader, do not include yourself, if I could put it in those terms. So I think those things are quite important when one's preparing to move forward.

Robyn Jacobson:
Like JobKeeper and like cash flow boost, however, there are integrity rules. Without going into the detail of those, there's certainly the ability for the commissioner to look at egregious cases or if it is determined that a taxpayer had a solid dominant purpose of entering into arrangement to secure the benefit, then the normal rules would apply in terms of being able to recover that benefit and possible interest in penalties. Now, I don't want to dwell on that, but I think it's important to note that those will still exist.

James O’Halloran:
That's right, Robyn. We would anticipate that most people, if not the vast majority of people, will certainly be applying in good faith or taking advice in good faith. But certainly, any actions where we did see an intentional manipulation of payroll amounts to qualify or perhaps incorrect dates of birth or any of those sorts of circumstances, leaving aside blatant dishonesty, whilst we do intend to continue to administer the measure so that it does achieve its policy intent that is to support businesses, that we certainly will have an eye out for those things. And we're also conscious of we'll be looking for reports of anything where there's a suggestion of unfairness that may be happening as a result of any of these arrangements.

James O’Halloran:
And as we have in JobKeeper, we'll continue to work with the Fair Work Ombudsman and other regulators and the like where there might be issues that come out of the decisions that are made through JobMaker. But by and large, from our own experience, we would think that most people and certainly most advisors would be operating in good faith and that will be our starting position and I would have no doubt that that will continue going forward over the coming weeks and months ahead.

Robyn Jacobson:
James, can you comment on some of the broad conditions that apply as far as the individual is concerned? So if I'm a business and I'm looking to take someone on, what do I need to be looking for in terms of the potential employee?

James O’Halloran:
Look, with individuals that are being hired, there are some obligations aside from the age. Certainly, firstly, they have to be employed to work or have been paid for an average of 20 hours per week for a whole week they were employed by the entity during the period. As a precondition of who one may hire, the person who's being hired within those age requirements needs to or needs to have been receiving a parenting payment, a youth allowance or other, there's particular types of youth allowances, or job seeker payment. And this is the bit that's important, for at least 28 consecutive days in the 84 days immediately preceding commencement, i.e., the four out of the 12 weeks. So that notification requirement that is published by the ATO now, that's part of the precondition of the hiring table. The age, the fact that the person being hired was on certain types of welfare payments, and of course, the number of hours that are worked per week or paid are three or four important elements there.

James O’Halloran:
And in particular, we are conscious that these things... we've heard the feedback, which has been fixed up, it's been very clear through the rules and our own advice is that we accept that we've heard feedback, Robyn, that some people are feeling, are you sure they can ask age type questions? Are you sure that they can in fact hire, ask some of these, what might appear quite personal matters in terms of what benefits people may have been receiving?

Robyn Jacobson:
And it goes further. I've even been asked how is it not in breach of, for example, the Discrimination Act?

James O’Halloran:
Yes.

Robyn Jacobson:
It's not just a question about have you been on welfare or social security payments, but are employees are allowed to ask the age? It would be great to explain this because yes, that question has come up a lot and that was even raised in Parliament.

James O’Halloran:
Yes. I mean, the first answer without necessarily quoting the section sitting here, but certainly, there's clear advice that, I believe, has been published, that it is not a breach of the Discrimination Act and it comes under some of the relevant sections there, I just can't quite recall the section to be candid, Robyn. So one can be sure at law and from regulators who in fact cover those sorts of things that there is a clear position that it's not a breach of those relevant anti-discrimination type situations.

James O’Halloran:
Secondly, all regulators operate, obviously, under the principles that this is targeted is probably not quite the right word, but certainly, it is aimed at a particular population that has characteristics of age and welfare payments. There may be a bit of discomfort, but I can assure people that both the rules and the ATO approach, as well as the other regulators to those, acknowledges and asks people to do that.

James O’Halloran:
And that's why the published employee notification document that we've released before, similar to JobKeeper, which the ATO doesn't ask for a copy of, but certainly, it is a record that conforms in a very transparent way both that the employer has in fact hired a person who was eligible and, at the same time, it is a record keeping exercise that protects everybody involved. And one, which, I think, given the positives out of this in terms of growing new hires is an important piece. But we do appreciate there's a bit of bit of nervousness there, I can say. As you say, it's been discussed in Parliament, it's been reflected in the relevant rules, and also from the ATO and from other discussions, that's quite a clean picture that nobody should be concerned about.

Robyn Jacobson:
I'm not saying that this would be the determining factor or decider when you're going to engage someone, but it would certainly come into play for many of these hiring decisions. Even if the employer can get past the discomfort that you've described, I can see on the other side the prospective employee being uncomfortable or even resisting responding to these sorts of questions. Perhaps everyone just needs to understand it's in everyone's best interest if they in fact qualify and they get a job and the employee gets a bit of assistance financially.

James O’Halloran:
Look, I think it is at one level and clearly the ATO and not at the hiring table, as I've described it, but certainly I think that's important. It's not unusual to have schemes that are aimed at particular clusters of the population, apprenticeship schemes, et cetera, et cetera. So whilst it may be a different way of building that bridge, I think, that's the bottom line that the business gets something out of this, i.e., a subsidy up to 10,000 a year, or 10,400. And secondly, the benefit for the person who's been on those welfare payments, if I could use that short term, clearly is they get a job that of which the employer is very comfortable to bring them forward. So I think that's why I raised it. I appreciate that. But certainly, people should be comfortable that that's both lawful and recognized, if I could put it that way.

Robyn Jacobson:
That's an important point. James, what would be the next steps? So if you're an employer or you're an advisor to a business, what are the next steps and how will the ATO be assisting employers to navigate their way through this process?

James O’Halloran:
I think there's, firstly, a couple of things and I won't go into the details now. But certainly, if people have registered as they have, the next experience that they will get when they do their claim form is drawing from STP, which there may be some updating of information, and employee names, and all those sorts of things. We will pre-fill a lot of that information back to people of which they can change or check. So, firstly, that's again a step of STP.

James O’Halloran:
So the hours, the names, the dates of birth, and importantly, a screen that will be there is that businesses will have information presented back to them that shows exactly whether we're comfortable with the information, i.e., yes, we agree that that person has that date of birth, yes, we agree that this is the name of the person, et cetera, et cetera. Yes, we agree. Just the very checklist so that where there is any question, even up until the point of claiming, that's presented back. So my principle there is we will present back what you provided us, but also, we will present back where we're comfortable to say, "Look, yep, we agree that that person looks eligible," tick, and conversely, from your point of view, what you've said to us does in fact reconcile with what we think.

James O’Halloran:
There are a few tips and traps I'll come back to in a moment, but I think there's three things really. Firstly, understand the eligibility. In this digital world, which is accelerated by about three or four years perhaps, there's nothing worse than getting in front of a screen, however brilliantly designed, I might say, that you can get screen shock. So please understand your eligibility well before you come in to really test and be comfortable that you've got your lodgements up to date, your STP, et cetera. Register, as I've said, and there's a lot of information on our web camp, on a website, videos, infographics, and question and answers, and scenarios. But of course, I would be remiss not to equally recognize that the Tax Institute and many other professional associations also have some tailored material to support.

Robyn Jacobson:
James, I just want to remind members in particular that we have got a member-only blog article available. So it sets out all the dates, there's a ready reference, there's a worked example that goes through all the steps and provides a methodology. So members can go to our website under the blog articles and they will find that there.

James O’Halloran:
I suppose having been in this space for a while and, quite honestly, as long as people make informed decisions, we're comfortable wherever they get their information, of course, as long as it works, and it helps people make the right decisions and get their entitlements. The registration step, but do that before the 1st of Feb 2021 to maximize, obviously, the speed of payment, and again, focusing on the headcount in the payroll. So headcount is your employee headcount as of the 30 September and the payroll for the three-month period up to and including the 6th of October. Register and come forward. I've touched on and, of course, the claim form. Again, that's all done online. And again, we will undertake to get those sort of information and the payment out to you as quickly as possible. I touched on there's probably 10 things that we pre-fill, I won't go into them now, but again, this leverages off the Single Touch Payroll. So I think they're probably the things. Eligibility in registering client.

Robyn Jacobson:
Can you briefly describe the ATO's compliance approach? You've made some references to this already in our discussion. Obviously, egregious and quite blatant cases will be investigated and referred to the appropriate authorities. Those who have made honest or genuine mistakes, it will happen. So can you comment on that?

James O’Halloran:
Just a couple of tips at the moment we're seeing from some early applications. We're seeing, and we think these are clearly honest mistakes, so I'm not suggesting anything else, the user experience, particularly those that have come in... we had some come in even the Sunday night on 6th of December, I think it from memory. The payroll's too high or too low for the nature of the business. Not many small businesses actually probably have, shall we say, thousands and thousands or hundreds of thousands of turnover. Now, we think that that's possibly mixing up payroll and headcount in the terms of the forms that are filled out. And I genuinely say we think this is just tuning out of the experience or for us to improve our messaging or, conversely, just use the issues that we all have when we're our using online platforms.

James O’Halloran:
We've seen instances where the headcount is provided, but there's zero payroll. Just doesn't mix, in simple terms. Or payroll's provided, but there's zero headcount. Again, all the headcount equals payroll. So in other words, you've got what clearly is a numeric value and a financial value, for want of a better term, mixed up. So these things we'll be following these up, but I stress, these are just some initial user errors that we think we either need to say, "Well, do we need to add some more information? Can we help the people conversely?" So I think, as always, these things are not necessarily sinister. But certainly, we want to draw that to people's attention.

James O’Halloran:
In the broader compliance approach, look, it probably does cover. The clearly sensitive issues are payroll and headcount. Secondly, obviously, the eligibility of the business entity itself and I do stress the importance of things that might present that contradict are the now and Single Touch Payroll information would be the sorts of things. We get to take a balanced and sensible approach given what JobMaker is, but it is still not insignificant money, but it also is in the frame of the economic stimulus and, clearly, quarterly payments are a bit longer than perhaps monthly payments that people may be used to in JobKeeper. But by the same token, that doesn't take any need or lessen the requirement to want to get those payments out.

James O’Halloran:
The final umbrella comment from a compliance point of view, and I think this will play through okay, but you can't be on JobKeeper and JobMaker in the same period. It's as simple as that. Some of that will be honest mistakes and some of it maybe, I think, the technical word is a try-on. Well, we'll keep an eye on that. And secondly, that we accept. And I think they're the three or four points that will be a rub and most of it, I'm sure, will be explainable or we can improve through this webinar as an example how we highlight things.

Robyn Jacobson:
Where should people look for information? As your website seems obvious that there is quite a wealth of knowledge available there, but what else would you suggest in addition to that?

James O’Halloran:
Well, given the audience, I suppose, clearly, a talk to your professional association or your tax or VAT advisor. But certainly, I think the value in the ATO information, particularly for practitioners online, is clearly we know that you read that intimately as the commissioner's position in the way the commissioner has explained scenarios or case studies. So yes, on ato.gov.au, there's a wealth of information. Depending on how you want to digest that, there's good examples, we believe, a range of examples. There's videos, infographics. And of course, social media, which has embraced us all in the last number of months. There'll be a range of those sorts of things and more coming, particularly as we get closer to the claim period. But we believe, to date, all the information we've put out covers most scenarios and clearly, if there are other things we need to bring forward, we will do so as we learn more or perhaps appreciate some of the questions that are coming up from eligible businesses and so forth.

James O’Halloran:
The balance now Robyn, of course, is in a sense, whilst the registrations are open, human nature says that people also want to know exactly how the claim and process will work and those things. So we are trying to not drown people before the December break, but there are some key dates that we've touched on and there also are some important information and we'll continue to improve that as we go forward either on existing content or through particular campaigns.

Robyn Jacobson:
James, any final comments, tips, words of advice for our listeners?

James O’Halloran:
Look, I think there's probably two things, our stance will remain the same, what I call practical administration, recognizing the economic stimulus element. The importance, in a recovery sense, of this JobMaker are in credit. It's not to be under undervalued nor, in fact, underscored how important it will be. People are eligible for what they should come forward. If people are worried about the complexity, I think as more information is coming through, we believe we've got a good balance subject to feedback from your members and others in both masking complexity, but also being transparent. And the best example there is we're pre-filling back to people where information is that supports them to be able to make a claim expeditiously, but also be comfortable that we're comfortable with the information going forward.

James O’Halloran:
The follow-up compliance work will focus on those areas that I've talked about. But I think the main thing is, as always, Robyn, to keep the dialogue open. Clearly, there'll be nuances that people might want particular information about or further explanation whether it be between us or working with Fair Work Ombudsman and others. And of course, well, I haven't said but just to close off, we'll also be working, as you'd expect, very closely with Services Australia in terms of the eligibility or the history of people that qualify for being hired. And that process will be, hopefully, seamless to most. But certainly, we are working very closely with services Australia in terms of that assurance, which of course protects us all.

Robyn Jacobson:
James, I want to thank you very much for your time today for taking the time to explain the rules to us, for also your support throughout the year. It's been an extraordinary year, as we talked about at the beginning, and your commitment to delivering the systems and providing that practical guidance for your ATO products, and there've been so many of them, I just want to, on half of the profession, thank you, on behalf of the tax office, for everything the ATO has done this year.

James O’Halloran:
Thank you, Robyn. It's been a pleasure to join and I hope to continue this into the new year on any topics or conversely any areas we can help the profession and, obviously, Tax Institute members who have helped us.

Robyn Jacobson:
Thank you. And I do want to remind our members again that a comprehensive summary of the JobMaker program together with worked examples and a summary of all the relevant dates is available on our website for members only. I'd also like to acknowledge the ATO's assistance in preparing that particular content. So again, James, thank you and I wish you a Merry Christmas. I'll just make some closing remarks for everyone else.

James O’Halloran:
Thank you, Robyn.

Robyn Jacobson:
Thank you for listening to this final episode of TaxVibe for 2020. I've been chatting with James O'Halloran, Deputy Commissioner, Economic Stimulus Branch at the ATO.

Robyn Jacobson:
To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcast. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation about member-only community forum at community.taxinstitute.com.au. If you're not a Tax Institute member, we are offering a two-month free membership trial where you can find out what the best tax professionals have in common. Join today and you'll have an all-access pass to the tools, resources, and opportunities that make our members some of them Successful tax practitioners around. For more information, visit taxinstitute.com.au/trial. You can also contact us by emailing taxvibe@taxinstitute.com.au.

Robyn Jacobson:
Finally, on behalf of all of us here at the Tax Institute, we sincerely thank you again for your tireless efforts and contributions this year. Enjoy this festive season, stay safe, and relax, and recharge. I remind you that we have four episodes of TaxVibe available for your listening pleasure, so if you want to get your tax fix over the summer, you can listen or even re-listen to our current episodes.

Robyn Jacobson:
We look forward to seeing you next year as we eagerly return to face-to-face events around the country and bringing a range of exciting new offerings and initiatives to you in 2021. Our office and customer service is closed from close of business on Wednesday, the 23rd of December, and reopens on Monday, the 4th of January. Our greetings for this festive season. Wish you a wonderful 2021 and we look forward to you joining us again next year.

Episode 3 — Where a career in tax can take you

Release date: 9 Dec 2020

In this episode of TaxVibe, Robyn chats with Julianne Jaques, a Senior Counsel at the Victorian Bar and a member of the Board of Taxation and the Tax Practitioners Board, about where a career in tax can take you.

Host: Robyn Jacobson, CTA, Senior Advocate, The Tax Institute

Guest: Julianne Jaques, CTA, Victorian Bar

Robyn Jacobson:
Hello, and welcome to TaxVibe, a fresh new podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax professions, grate thought leaders who will share valuable and practical insights you might not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Julianne Jaques, who is a senior counsel at the Victorian bar, and also has chambers in Sydney. She specializes in taxation law and has appeared in numerous tax cases that have made a significant contribution to tax law, including [Shop Ken 00:00:56], a case dealing with the revenue at capital distinction and Bob Walter investments on corporate residency in the high court and Terrace [inaudible 00:01:06], which dealt with CGT and trusts in the full federal court.

Robyn Jacobson:

Prior to coming to the bar, Julianne spent 10 years in private practice with a major law firm and a major accounting firm. She is a charter tax advisor and a charted accountant. And her doctoral thesis at the university of Melbourne was on the taxation of corporates. Julianne has been a member of the tax practitioners board since 2016 and the board of taxation since 2017, including six months as acting chair of the board of taxation in 2019. Julianne was also a senior tax advisor to the assistant treasurer Senator Roger Kemp from 2000 to 2002. And since 2017 has been one of five members of the Independent Parliamentary Expenses Authority, which monitors capital allowances and expenses of federal parliamentarians and their staff.

Robyn Jacobson:

Finally, Julianne was recognized as the Tax Institute's chartered tax advisor of the year in 2020, and has long been associated with the Tax Institute in various committee and speaker roles, including at the recent the Tax Summit Project Reform. Julianne, welcome to TaxVibe.

Julianne Jaques:

Thanks Robyn. Lovely to be here.

Robyn Jacobson:

It's a pleasure to have you here. And when I look over the background and your experience and the pathways you've [inaudible 00:02:34] in your career, it makes you an ideal person to have a chat to you about where tax can take you in your career. And I'm really interested in your career path and the decisions you made earlier on many years ago, where you were deciding where you would take your career. And in particular, the fact that you've been able to blend both an accounting and a law background. So can you take us back to, did you have that pivotal moment where you felt, I want to be a tax barrister.

Julianne Jaques:

I didn't have a pivotal moment when I decided I wanted to be a tax specialist. Yes, I didn't wake up at the age of six and think this is it, I'm going to be a specialist in tax. That's going to be my career. I really fell into it, I think like a lot of people do. I was studying about to commence economics law at Monash university. I saw that by studying accounting subjects, I could do the precondition subjects to becoming a chartered accountant or a CPA, and I thought that sounded worthwhile. Not that I knew much about it. So I started studying those subjects within my economics degree, and in second year I decided look, rather than working part-time at [Miacheston 00:03:51] it might be a good idea to see if I could get a part-time job in a local accounting firm.

Julianne Jaques:

So I sent off a whole series of letters saying I'm keen. And I was very fortunate that Coopers and Lybrand at the time was just about to open an office in Mount Waverley, very close to Monash university. They gave me a job. It worked very well, 20 hours a week, four hours a day every afternoon. After spending the morning in lectures, I would go and work at Coopers and Lybrand in Mount Waverley. And because I was studying law, they put me in their tax area. And I've never really looked back and never left it since then. I stayed with Coopers and Lybrand for a couple of years after I finished university, qualified as a chartered accountant, did the PY year and then went and worked for, as they were called at the time, Freehill Hollindale and Page, now Herbert Smith Freehills.

Julianne Jaques:

I was there for about five years, was admitted as a barrister and solicitor of the Supreme court. So I got my legal qualification. And then one Friday looking through the financial review at the jail ads as people did whether or not they were looking for a new job, I saw an advertisement for a senior tax advisor to the assistant treasurer. And a friend of mine sent me an email saying, "Have you seen this? You'd be very suited to this role." So I put my hat in the ring on that one and was fortunate enough to get that position and spent two years working for the federal assistant treasurer at a very exciting time from 1999 to the end of 2001.

Julianne Jaques:

So that covered the introduction of GST, the Ralph business reforms. It was a very, very exciting time in tax to be working at the epicenter of what was going on. And then at the end of that, rather than keep going and becoming a political advisor professional, I did what I had always had in mind and always wanted to do, which was come to the bar. And you said at the start, did I always want to be a tax barrister? Well, I didn't always realize I wanted to be a tax specialist, but coming to the bar, I think certainly by the time I was at university and heavily involved in debating, but I think the first step to that was the first debate I ever did at school back in year nine, when I stood up something clicked and I thought I like doing this.

Robyn Jacobson:

You spoke about your time with the then assistant treasurer, Senator Rod Kim. Is that usual that the government would take people and appoint people from private practice or over the private enterprise background in those public service roles to be advisors?

Julianne Jaques:

Certainly in tax, I think it was unusual at the time. I understand that it was an advisor of the prime minister who suggested it would be a good idea to get tax specialists from the private sector to be advisors in both the treasurer's office and the assistant treasurer's office. So at the time it was considered perhaps a little bit unusual, certainly so far as tax goes, but I understand, or I'm aware of other people who have since been tax advisors. In fact, one of them was tax's advisor to Scott Morrison when he was treasurer and is now at the Victorian bar. And he, I understood, worked for one of the large accounting firms in tax before working for Scott Morrison. So I think it's not perhaps as unusual now as it was.

Robyn Jacobson:

Without naming anybody, can you think of mentors in your career, people who have guided you or people who you now reflect on were [inaudible 00:07:33] in the development of your early career?

Julianne Jaques:

It's interesting. I think there's a difference between mentors and sponsors, and I've had both. And sometimes one person can perhaps be a little bit across both fields, but I think the roles are different. I've certainly had sponsors along the way who have helped me. I haven't had one large sponsor who's told me everything to do and where to go. But when I talk about sponsors, I talk about people who have helped me with these pivotal steps. The partner who employed me at Coopers and Lybrand in perhaps an unusual way, employing a second year economics law student to work 20 hours a week was out of the box. It wasn't part of their normal program. I think of the partner who recruited me across the Freehills when perhaps the movement in tax between accounting firms and law firms was not quite as large as it is now.

Julianne Jaques:

And that required also once again, going outside the box, recruiting somebody as a more senior advisor within the revenue group of Freehills, but who wasn't actually admitted yet and still had to officially be an article clerk. And I think of course Rod Kim, who took me on in that marvelous role. And the partner at Freehills who recruited me also was the one who said you should join the Tax Institute, and I did. So that was terrific. And then those who have supported me since I came to the bar, leaders who have put my name forward to junior them and those more recently who have supported me and put my name forward for board positions. And most recently in my application for senior council, those who supported me in the consultation on that.

Julianne Jaques:

And of course those who supported me very, very significantly this year for my award as chartered tax advisor of the year. So they're the sponsors. So far as mentors go, probably my greatest mentor and the one I've learned the most from about the way that I think was a fellow advisor in the assistant treasurer's office. Probably has had the greatest influence on the way that I think. Not a lawyer, not an accountant, not a tax expert, but somebody with a very wide perspective, a very clear thinker about issues, about cause and effect, about how people will react to different matters about what matters and what doesn't, about how to communicate properly. And the importance of having, when you do reach the more senior levels, a deep and wide knowledge of current affairs, what's happening in the world, what's happening in Australia, what the thought leaders are thinking and what are the pressure points on them to tap into.

Julianne Jaques:

That's probably the greatest influence on my thinking in my approach to my career and just broader life, I suppose. Apart from that, leaders I've been fortunate to work with at the bar, from whom I have learned so much. Some of the leaders of the tax profession and not only the tax profession, but also the leaders of the bar, which has just been absolutely marvelous, taught me to focus on the real issues, taught me, I think, that the greatest issue that we as barristers, we as tax advisors, practitioners, lawyers, accountants, can bring to our clients, the greatest gift that we can give them is good judgment, what they should do, what they shouldn't do, and then explain to them why.

Julianne Jaques:

And that goes beyond being able to think up a good legal argument and how you might be able to do something tricky to their advantage because sometimes doing something tricky to their advantage in the short term is going to be very bad for them in the long-term or even just leave something hanging over them with a big question mark over whether it's going to be successful if it comes to light. That's not the sort of position you want to put your clients in.

Robyn Jacobson:

And this is about integrity and maintaining probably high standards, which we strive to as professionals. Do you think there's also a role as we become more established in our careers and we've had mentors and people that have assisted us throughout our careers, to then pass that down to the next generation? Do you think there's almost a moral obligation to look out for, assist those that you see coming through the ranks who show enormous potential?

Julianne Jaques:

Absolutely, but I'd put it even more broadly. I'd say we have an obligation to the profession as a whole, and that includes those coming on, to maintain the standing of the profession. So that's a question of ensuring or assisting those coming on, but also those currently existing to understand the significance of their own integrity, the significance of their own reputation and the significance of all of this to the profession as a whole. It's very important that we are trusted. That we are trusted not only by our clients, but also we're trusted by the authorities to not do the dodgy thing, because if the authorities trust us, then that will only help our clients.

Robyn Jacobson:

I would go broader again, and I think there's a role as far as the community is concerned, that we need to make sure we maintain our standing in the broader community.

Julianne Jaques:

Absolutely. And in fact, in my role as a tax practitioners board, one of the objects under the legislation is to... and now I'm going to be in trouble because I can't remember the precise words of the legislation, but it's certainly to look after the interests of the community. And so that's a legislative obligation on the tax practitioners board that needs to feed through into all of those who are registered as tax practitioners, but it's also something that we as professionals should do anyway. That is what distinguishes a professional, somebody who is worthy of that level of trust.

Robyn Jacobson:

As you speak of your role on the tax practitioners board, could you comment on your two major roles that sit outside, of course, your professional practice. And that is with the TPB and the board of taxation. There may be some listeners who are not familiar in detail with what these two authorities or agencies undertake and what your role on the boards is, what you're striving to achieve as far as the work is concerned there.

Julianne Jaques:

There are very different boards. The tax practitioners board is a statutory board and its task is to regulate tax practitioners, that's [inaudible 00:14:14] agents, tax agents, and now tax financial advisors. There's a code of conduct set out in the legislation which has got different elements to it that practitioners need to meet. And there's also an overarching requirement that they be fit and proper people. And once they meet these requirements, then they can be registered as tax practitioners and therefore authorized to prepare tax returns and provide advice. The only people who don't need to be so registered are lawyers but their job doesn't extend so far as tax returns, it's just providing that tax advice. So our task, I see our most important task on the board and the board is made up of people appointed by the minister, not employees or public servings.

Julianne Jaques:

I see our greatest task is being to bring an outsider's view and in most cases, a tax advisors view to the regulatory aspect of what the tax practitioners board does. And one of our biggest roles there is we are the ones who determine sanctions on tax practitioners who we find have not done the right thing. And they of course are appealable to the administrative appeals tribunal, and some of them are appealed. So that I think is, that's a very important role in maintaining the integrity of the tax system to ensure that those people advising on it do have that level of integrity. The board of taxation is not a statutory board. The board of taxation is a board that advises the government and has been established to advise the government to bring a business and community perspective to tax policy in Australia.

Julianne Jaques:

So we have a direct line to the treasury ministers. The chair of the board of tax meets with the treasurer, I think, at least a couple of times a year and we also prepare reports and undertake reviews for the government. And you can see these published on our website. Some of those we prepare at the request of the government and others are self-initiated reviews. And some of the more recent reports that you find on there are the review into small business tax concessions. And one, I will note... And the fringe benefits tax reform, one I will note that went through very, very quickly and has actually had an effect was the review into corporate residency, following the Bywater case that you mentioned earlier, that I was involved in and the ATO's response to that, the government asked the board to undertake a review of corporate residency.

Julianne Jaques:

And of course in the recent October budget, the government announced that the primary recommendation of the board in that review would be adopted by the government. So that's what the board of tax does. And I find that one a very... tax practitioners board, I would say is a very important significant role in the tax system, the board of taxation is very exciting and important in a different way to assist the government, to hear not only from treasury, not only from the ATO, but also from the private sector and business and the community.

Robyn Jacobson:

In relation to the TPB, there's been some observations by the profession in recent years of what seems to be a much closer working relationship between the ATO and the TPB. And this seems logical, but if I think about, for example, the work-related expenses area, where the AGR has typically, and traditionally looked at the claims made by tax payer, and if they were an appropriate to the [inaudible 00:18:22] audited and potentially adjusted as well. But then that also seems to be a much more close relationship with the TPB that if there are a number of taxpayers within the one tax practitioner, so the one that agent watching returns, where that becomes systemic issues, then this seems to be a focus of course, on the behavior of the agent.

Robyn Jacobson:

And we've seen increased funding going to the TPB to allow more of this activity to continue. So I think this adds to the integrity of the system, but it's also interesting to observe how that has been perceived by the profession. And I'd also like to hear the comment that we've seen a number of people watching returns were not even registered tax agents. So when we talk about the TPB regulating agents, they're actually having to deal with people who are actually outside the system.

Julianne Jaques:

Yes, that's very true. And look, there is a close working relationship between the TPB and the ATO. And you can see this in a few even legislative measures. The ATO and the commission that provides the TPB with the secretary and the TPB secretariat certainly draws on information that the ATO hold. Now the work-related expenses issue has become a more prominent issue in recent years. And it is not only for the community, but it's also actually for the tax practitioners who are doing the right thing, that we are actually taking these steps. Because it's not unusual that we'll get a tax practitioner who is doing the right thing come to us and say, I'm losing all of my business because Joel or Jane Bloggs down the road is advertising that they will get bigger refunds than anybody else. And I'm having my clients go to them. And they're coming up with these massive refunds, which can only be based on spurious claims.

Julianne Jaques:

Now in those circumstances, everyone suffers. Everyone in the community suffers because if one person doesn't pay the right amount of tax, and if that becomes bigger and bigger and bigger, then there's a lower amount of revenue or those people who are paying right amount of tax have to pay more. And it also affects those practitioners who are doing the right thing. And ultimately, I would say it also affects those clients who... let's face it, tax is a very complex area. People go to a specialist and say, please take care of my affairs for me. And if they can't trust the specialist to do that, then it could be that three, four years down the track, the ATO will come back and hit them, not only with having to pay the tax at that time, but also with interest and possibly, the penalties. So it's in everyone's interest to stamp out that sort of behavior.

Robyn Jacobson:

I'm still bemused by advertising that says things like guaranteed refunds.

Julianne Jaques:

Yes, yes. We're all bemused by that. And that's certainly the sort of thing that I think is perhaps jeopardizes a little bit, the tax system. And the interesting thing about tax is it seems nobody really minds paying it so long as they know and believe that everybody else is paying it too, the problems start happening when people think oh, somebody else isn't paying their fair share.

Robyn Jacobson:

There is a strong sense in Australia about what's he getting that I'm not.

Julianne Jaques:

Mm-hmm (affirmative). Exactly.

Robyn Jacobson:

The other guy is getting more. Also with mentioning that Friday the 27th of November, the long awaited review of the tax practitioners board and the Tax Agent Services act, the independent review was released by the government and was accompanied by a government response. So everyone is still making their way through that report and what it means, but there are 28 recommendations.

Julianne Jaques:

Yes, there are. And some of the issues in there in the Keith James report was very comprehensive. And Keith Jones and Neil are both prominent tax practitioners, did put a lot of work into putting together those recommendations focusing on ensuring that the TPB has the resources, has the independence, has the information that it needs to best do its job. And look, I think the importance of the TPB has only been accentuated by all of the COVID issues and the extra money that the government has been... perhaps throwing out there is not the right word, but it's one that some use, to support Australians to get through this. It's important that we all also see that there's not too much wroughting of that system either. So I think that the recommendations are going to support that and it's encouraging and great to see that the government has supported so many of those recommendations,

Robyn Jacobson:

Julianne, I'd like to take you back to your 2020 award, charter tax advisor of the year.

Julianne Jaques:

I'm always happy to be taken back to that. Thanks very much [inaudible 00:23:34]

Robyn Jacobson:

Very fun moments in your career. When we think of that designation to be the best in your tax career, you need to be able to innovate, to be curious, and I love that word, to think on your fate, to synthesize large amounts of information so you can provide the right technical advice in a way that adds real value to clients. And of course, in my mind, this overarching issue of integrity. So I want to ask you, firstly, what does the award mean to you and bearing in mind that the CTA designation, and I'll say a little bit more about this in the moments ahead, the CTA program was not available when you went through the other stages of your educational requirements of your career. So what do you see as the main benefit for someone who would like to participate in this or add that designation to them? What weight does it carry?

Julianne Jaques:

Perhaps if I can first... I'll take that into two parts in the order in which you've asked it. I don't feel as though I am, because I received that award, the best, the best which I think was the adjective that you used, Robyn. I feel that it's a marvelous recognition and I still pinch myself that I actually received it. What it actually means to me is it means I've been able to go and say thank you to so many people who have helped me along the way, and given me the benefit of their wisdom and the benefit of their judgment and their knowledge about tax. And it means a lot to me also that it has been given to me as one. And I know it's not something that one likes to play on too much, because I think in this world, we're gradually moving to a stage where that doesn't need perhaps quite as much emphasis as it once did.

Julianne Jaques:

But it still does mean a lot, and it means, I think, that I can say to other women coming through, yes, you can do it, and don't think that you can't. It means a lot to me, Robyn. So far as the Tax Institute, I'm still grateful. I've now being a member 25 years. At the same evening which I was announced as the award winner, I also received my 25 year award, which also meant a great deal to me. I first joined the Tax Institute, as I said earlier, at the encouragement of the partner who recruited me to Freehills. And he encouraged me also to join the committees of the Tax Institute.

Julianne Jaques:

And I'm so glad that we did because I met very, very significant tax practitioners going back then, at the leadership of the profession. And perhaps sometimes I think when you come from one of the [inaudible 00:26:27] which has got a very large tax practice already, a lot of your CPD, a lot of your learning comes from within the firm. You're quite as aware of what the Tax Institute can offer. But now I look back and I see myself in junior people who have had their own initiative joined the Tax Institute, even from the [inaudible 00:26:47] and what they are getting out of it and the role that they're now playing on committees of the Tax Institute and having their voice heard and learning at such a higher strategic level, about our tax system is quite extraordinary and I'd encourage everybody to do it.

Julianne Jaques:

It has been very, very significant in my career development and what I've learned. So I would encourage anyone to do it. So far as the CTI program goes, the CTI program wasn't around when I became visible fellow of the Tax Institute, which I became when I first joined by reason of being... is either being a chartered accountant or a solicitor at the time, I can't quite recall which one it was. And of course the CTA program was introduced. But I have been through, as I said earlier, a professional association program, which like the CTI program, is taught by practitioners and it's a whole different ballgame to doing a university degree. You're actually learning practical on the ground work, which is going to help you in your day to day work.

Julianne Jaques:

And the beauty of the CTI program is of course, that it's solely on tax. So if that is what you are doing, you won't be learning subjects, which are interesting, helpful perhaps on the margins, helpful background, you're actually learning things which are crucial to the job that you are doing.

Robyn Jacobson:

I think the point that it's written and presented and assessed by practitioners by industry experts removes it from any sense that this is merely an academic qualification. It is certainly recognized as one, but it is absolutely a practical designation. I think it's also important to note that it's internationally recognized and is considered a respected mark of what we refer to as technical excellence and professional integrity. It really is the pinnacle of the tax profession and the Tax Institute is the sole designator of the CTA program in Australia. So we're very proud to offer it. And when I go to events, not the reflectivity of those this year face to face, but when you look around a room of industry experts are at the top of their game, and you're watching the emerging leaders coming through who are aspiring to achieve that level of success and professionalism. I think it's marvelous to say.

Julianne Jaques:

Yes, it is. It's the eminent qualification for a tax practitioner today.

Robyn Jacobson:

Absolutely. Also to mention, of course, that it is a tiered structure, so it's not just a one subject or one course, there are broadly three levels then you work your way through the entry level up to the experience tax professionals. So as your experience grows, so does the level of the issues that arise throughout the course. I want to refer to your recent facilitator role at the tax summit project reform and your session was titled Running the Gold [inaudible 00:29:43] Effect Change.

Robyn Jacobson:

And it was the culmination of what had been two days of wonderful and robust and very insightful discussion about how we can reform our tax system, of course, leading to a case for change, which we will be presenting to the government. I want to firstly remark on the caliber of the guests that you had in your panel, because any one of these individuals aligned, you could have spent [inaudible 00:30:10] understating it several hours speaking to them. And to gather all of them together in one place virtually, it was like being a kid in a candy store.

Julianne Jaques:

It was extraordinary. It truly was. I was first asked, I remember I received a phone call one morning when I was about to head off the court, and about 15 minutes after I found out I was appointed to [inaudible 00:30:35] counsel. And the person on the other end of the phone said, "Could you facilitate a session as part of the tax summit?" And I said, "Yes, sure. No worries." And thought I'd better find out who's going to be on this panel.

Robyn Jacobson:

[crosstalk 00:30:49] lined up for you. I'm going to drop these names as if I know them personally, but of course, I don't. The right honorable Sir Bill English, the former prime minister of New Zealand, who was, of course holding that role when tax reform was implemented in New Zealand. Viva Hammer... And I will ask you to comment on these individuals and what they mean in terms of their tax experience, who was at Brandeis university, in Boston, Massachusetts in the US but an Australian lawyer who left Australia soon after her graduation to move to the US.

Robyn Jacobson:

The honorable Dominic Perrottet The current New South Wales treasurer and the honorable Dr. Andrew Lee, the assistant minister for treasury and charities. So when you look at that lineup, I wanted to get a comment from you, firstly, in terms of the caliber of the panel and what these people have brought to the tax conversation. But I will take you beyond that in terms of where does this mean tax can take us? If I look at the diversity of these people, it just opens up several possibilities as to where your career can head.

Julianne Jaques:

Oh, look, it does. And as I said, the panel was extraordinary and the Tax Institute brought them together because they were all involved in tax reform, but all in different forums. To internationally, Sir Bill English from New Zealand, Viva Hammer from US, and then of course, Australia, both federally with Dr. Andrew Lee and then statewide with the treasurer of New South Wales, Dominic Perrottet. So all very different, but all really, really at the center of it. And Viva Hammer, for example, she worked in New York and in Washington, had been a partner of a major accounting firm and a partner of a major law working in tax. It's Australian, but still did all of this. She worked in the US treasury in tax policy.

Julianne Jaques:

But then as I understand that she was actually recruited to join the joint committee on taxation which is the joint committee on taxation is something that doesn't exist in Australia, but it's the body that works only for Congress. And it advises members of both the house of representatives and the Senate in the US on tax policy. It oversees the legislative drafting and procuring revenue estimates. So she has got a fascinating insight. And of course also into... can perhaps see a little bit about the cultural difference to tax, reforming tax policy in the US and in the antiquities.

Julianne Jaques:

Sir Bill English, in 2010 New Zealand implemented a range of very interesting policy reforms with a very strong foundation in a policy of encouraging private savings and trying to balance the books, but also to look after the people who perhaps were struggling. Recognized, I think as one of the very successful center [inaudible 00:34:03] governments to actually achieve the reform that they did before which included increasing the GST, but dropping other aides.

Julianne Jaques:

And Dr. Andrew Lee was very, very generous with us, generous with his time and in talking about the tax reform that didn't get off at the last election. And as I say, generous in talking about what is needed to effect policy reform, and then to get Dominic Perrottet, treasurer, New South Wales within a week of him handing down the new South Wales state budget in circumstances where they're looking and proposing and they're consulting on shifting from stamp duty across to a property tax was quite extraordinary, and I think a terrific way for the penultimate session of the tax reform summit. It was such a privilege to facilitate those four.

Robyn Jacobson:

It was also a privilege to listen in on [inaudible 00:34:59] the discussion. So if we look at, for example, these four remarkable individuals, and I add you to that list as well as the fifth one in this discussion, where can tax take you in your career? We can hit into a course practice, whether it be a legal practice, or an accounting practice, you could become a politician. I'm not saying you need a tax background to be a politician, but you would surely be a better politician if you've got a tax background, particularly if you're working in the treasury space. Academia, government advisors, litigators, regulator, whether it be on various boards, agencies, the tax office itself. So I'm interested in your thoughts on just the scope of where this can go. And by no means is that an exhaustive list.

Julianne Jaques:

Well, tax is all encompassing. The old cliche, [inaudible 00:35:51] two things. I don't mean two things certain in life or death in taxes. Tax is absolutely all encompassing on a micro level and on a macro level. It's a business's, hopefully if they're making profits, largest item of expenditure. It's an individual's largest item of expenditure when they're earning an income, even if their employer takes it out and they're not actually aware of it, so they don't have to send off that kinds of check regularly. So on a micro level, it is of absolute significance, but it's also of extreme significance on a macro level because the right tax mix, tax balance means that the economy isn't going to be stultified as much as it will be by the wrong tax mix and an inefficient tax.

Julianne Jaques:

That's hence New South Wales moving from what is broadly recognized and has been for decades recognized as the inefficient tax of stamp duty, which impedes the economy and impedes movement and housing towards an annual property tax, which would give the government an annual revenue stream that would be far more reliable and wouldn't be procyclical. Those sorts of things are crucially important on a macro level. The move to a GST, rather than relying entirely on income tax, a very delicate operation to ensure that the people below are not affected by what is a regressive tax, economically speaking, but also a ship that is needed because Australia's income tax rates were, and still are significantly higher than a lot of our competitive countries.

Julianne Jaques:

And also you've got to strike the right interest, the right income tax rate, which is not going to cause people to think, I don't want to work to pay most of my income to the government. I mean, you go back before [inaudible 00:37:41] for example, with higher rates of tax and people who received dividends through companies, most of it was taxed. Most of their income was going to be taxed. So on a macro level, once you start tweaking these things, there can be a massive effect on the economy. So I haven't actually answered your question yet, but that's the background to the answer. It therefore permeates everything that we do in our society on an individual level and a collective level. And that's why it's so important and [inaudible 00:38:13] by the government.

Julianne Jaques:

That's why academics look into it. And that's why there are so many people needing practitioners such as us to help look after their tax affairs. Once you understand that background, tax will take you almost anywhere including, and my one... not regretting my career, because it meant I did other things, but one thing I didn't do is I didn't work overseas. And I know people who did, and I think that's a marvelous opportunity. I know somebody who worked in the Netherlands for the International Fiscal Association for a couple of years, and then came back here and with that [inaudible 00:38:46] world view, didn't take long to reach partnership in Australia. So it can take you overseas. But within Australia it can take you academia. I didn't mention earlier, I commenced my masters then discovered halfway through my masters after I'd done four subjects that I had the results to convert to a doctorate if I wanted to.

Julianne Jaques:

But I thought at the time, oh, it's only 80,000 words, surely I can look that up in a year or two. Eight years later working part-time, got my doctorate, but had the exposure to the academic world. And we have some superb academics in both economics and law faculties in Australia. And now predominantly, I think into more faculties working in taxation, thought leaders in the area of taxation. It can take you there. And in fact one of the tax institutes awards given in March to the up and coming, you might be able to help me out, Robyn, I think that's the right terminology. Is it up and coming?

Robyn Jacobson:

[inaudible 00:39:52] emerging later.

Julianne Jaques:

Emerging later in the tax profession was given to a tax academic who's done some marvelous things with the tax [clinics 00:40:01]. So it can lead you into academia. I agree with you in politics, a background in tax can only help. It won't necessarily get you there, I think there's other ingredients that goes into getting you to be a politician. And look, government advisor, which is what I did, which is a marvelous opportunity. A business advisor, an advisor to business. Now in my boards, I'm working and have worked in the past. The chairs of the board of taxation have been very, very eminent in the tax field.

Julianne Jaques:

You can work in corporate, you can work as I do as a litigator, you can work as a regulator, tax practitioners board, or working for the Australian taxation office, which is a crucial. If we didn't have an ATO, the government would collapse. So I think possibly, the significance of tax and the fact as I say, that somebody who can do tax can do anything. As if you look at the makeup of our high court, and the fact that with the recent announcements from February of next year, there are going to be on the high court, three high court judges who had significant tax practices when they were at the bar.

Robyn Jacobson:

Is that a [inaudible 00:41:17]

Julianne Jaques:

Not to my knowledge. [inaudible 00:41:21] is in there. One of them is that in the last, probably 20 years, about 20 to 30 years of the bar, specialization has become a much stronger thing in the past. People with specialist, barristers specialist, tax litigators. Now there seem to be... now there are subspecialties within practice at the bar. So in the past, a corporate litigator might do a bit of tax, a little bit of everything else and end up on the high court, but be their specialists was corporate law or commercial law. Now though, there are three high court judges with significant tax practices. Michelle Gordon, who's been there for several years, Simon Steward, Jacky Gleeson. So I think that also sends a message about how court [inaudible 00:42:14] to so many things. And of course, with tax backgrounds, in my view, you can do anything. If you can figure out tax, you can figure out anything, I think, Robyn.

Robyn Jacobson:

Well, it is always a challenge, and I think that's what keeps us interested in it. To close off this discussion, I want to ask you whether you think it's going to take enormous political courage to reform our system. You talk about an efficient or inefficient tax system and how an inefficient system does affect the productivity of the country. When we look at a good tax system, a well-designed tax system, it's really trying to balance the ideals of simplicity and efficiency and equity. Now, you're never going to achieve the perfect in all three, because if it's really simple, then you probably don't have all the equity. If you want more equity, then is by definition got to be a degree of complexity. But we seem to have gone beyond what is workable in terms of the tax system. So in order to make it work, does it require political courage to make the changes we need?

Julianne Jaques:

Absolutely, it requires political courage. And we saw that at the last election, which sent that message very truly, it requires political courage. As well as paneling that session in the tax reform summit, I also was fortunate enough to facilitate another presentation with Peter Costello earlier in the Tax Institute's project tax reform. That was back in October. And he went through the story of some of the pressures that were on the federal government back then, and some of the things, and how much work was involved in actually getting tax reform up and getting it to last. And that government was actually reelected following tax reform, which was at the time, a marvelous achievement because Canada, when it introduced the GST, its government was throwing out well and truly. So it takes immense political courage to implement tax reform.

Julianne Jaques:

Sir Bill, I think, made the point that it... I can't remember the terminology, I think he said it requires courage and it requires a crisis, or perhaps he used another word. And then it was Viva Hammer who extended that and said, it's a crisis, it requires a crisis. Question is whether or not COVID-19 is a crisis. I don't know that it's a crisis at the moment, and I'm very pleased to say that the economies around Australia seem to be bouncing back at the moment, which is terrific. Australia and Victoria, I should say, Meghan, which is my state, Meghan will be behind, obviously because of our second lockdown, which was fairly severe. But it does seem that the government is [inaudible 00:45:12] is throwing the money around, seems to have kept people's, not only a lot of their businesses going, but a lot of their personal willpower to keep working, going, and that's probably just as important.

Julianne Jaques:

So that's very good. We do have the significant [dish 00:45:29] and the repercussions of that will probably be only felt when interest rates go up, as one must expect them eventually to, even though it's difficult to envisage at the moment, but there is a cycle and eventually things do turn around and interest rates will eventually go up. And then that is something that we're going to have to deal with because for every increasing interest rate that's several hospitals that can't be built the following year. That's why debt is bad because it does actually have long lasting effects. Long-term debt is bad. Although I would say that debt at the moment is essential to get us through this crisis. So I would say at the moment, we're not necessarily in a crisis, which says if the government doesn't do something about tax reform now, the whole country is going to fall apart. We're not in that situation.

Julianne Jaques:

But I think I can see the journey that we're on reaching a stage where a government says we have to do something. And then it depends on how much support they're going to get through what is a much more complicated Senate than it was back in the year 2000, and what could be done about that.

Robyn Jacobson:

And perhaps the key to successful reform is making sure that there is that groundswell of support that everybody, all the stakeholders have the will to make it work, because if it's one organization or one political party or one individual who wants change, it won't be effective. It's got to be supported by everybody. You can truly make a difference here.

Julianne Jaques:

I think that's right. And I remember back in the year 2000 when I was working for the government, that a point that was made by certainly my minister in particular, I remember him making this point that often when you go out [inaudible 00:47:16] with a very strong reform agenda, people before you do it say, yes, we'll support you ,we'll support you. Yes, yes, yes, that's all right. And then when you're there in the middle of it, and you're taking fire from all directions, you turn around and discover that there's nobody behind you. But what made the difference back in 2000 was that the government turned around and the business sector was behind them saying, yes, it's the right thing to do for the country.

Julianne Jaques:

And I think that the Tax Institute does have a significant role to play in that. The point Peter Costello made, which is not coming from a vested interest perspective or representing a particular business or a particular industry, but coming from a, we understand the tax system and we can see the improvements in it. I think the Tax Institute, I endorse those comments. I agree with them. I think the Tax Institute has a big, big role to play. And I assume that people can still look at sessions from the tax reform summit by logging onto the Tax Institute website. I hope they can because watching... I didn't watch all of them, but watching the ones that I watched, it was a supper program.

Robyn Jacobson:

Okay. It's still available. So it connects us through the taxsummit.com.au. So all the sessions are still available there.

Julianne Jaques:

So there's the tax summit, and then there's also the project reform that lead up to it for a couple of months. And all of the sessions that came before that with the keynote speakers, one of whom was Rosheen Garnon who's now the chair of the board of tax. By the way, Chris Richardson, he got the first [inaudible 00:48:50] I think I've quoted him so many times to people in the last month or so about the economic effects of COVID and what can be done in terms of tax reform. They were terrific programs. So I encourage anyone who can, to log on whenever they have a spare hour [inaudible 00:49:05] and to watch them. And good luck to the Tax Institute with the final report to government, which I understand is being compiled at the moment.

Robyn Jacobson:

It is being compiled and we look forward to 2021, where of course we hope that the government announces that it will commit to tax reform. That is our hope and our objective. We want to make sure that we can effect change for the whole of the country.

Julianne Jaques:

Mm-hmm (affirmative).

Robyn Jacobson:

But Julianne, thank you for this very enjoyable chat. It's been lovely looking at your pathway through your career and the people that have had an impact on you and also looking at how, of course, younger members and younger practitioners out there can start to forge their careers in a grand way. So thank you very much for your time.

Julianne Jaques:

It's been a pleasure. Thank you, Robyn.

Robyn Jacobson:

Thank you for listening to this episode of TaxVibe. I've been chatting with Julianne Jaques, a senior counsel at the Victorian Bar. To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts.

Robyn Jacobson:

If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. If you're not a Tax Institute member, we are offering a two month free membership trial, where you can find out what the best tax professionals have in common. Join today, and you'll have an all access pass to the tools, resources, and opportunities that make our members some of the most successful tax practitioners around. For more information, visit taxinstitute.com.au/trial. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time (silence).

Episode 2 — Advocacy, the tax profession and 2021 outlook

Release date: 18 Nov 2020

In this episode of TaxVibe, Robyn chats with the CEO at The Tax Institute, Giles Hurst, about the power of advocacy and the role of The Tax Institute and the broader tax profession in improving our tax system. They discuss:

Our Tax Policy & Advocacy team and their role in policy design
The Tax Institute's Jounrey through 2020 and the impact of the COVID-19 economic stimulus measures on the profession
What’s ahead for 2021

Host: Robyn Jacobson, CTA - Senior Advocate, The Tax Institute

Guest: Giles Hurst - CEO, The Tax Institute

Robyn Jacobson:
Hello and welcome to the second episode of Taxvibe, a fresh new podcast by The Tax Institution. I'm Robyn Jacobson, the Senior Advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of Taxvibe.

Robyn Jacobson:
Today, I'm joined by Giles Hurst, the CEO at The Tax Institute, a role that he has held since April of 2018. Giles has many years of senior leadership experience. He's laid businesses in financial services, travel, digital retail, publishing and software. He's well traveled both personally and professionally. The Tax Institute has significantly developed and strengthened under his leadership. Giles, welcome to Taxvibe.

Giles Hurst:
Robyn, thanks for having me and may I congratulate you on your fine radio voice. I didn't realize just how good that radio voice is. I'm not sure how I'm going, but I'm going to keep my fingers crossed.

Robyn Jacobson:
You are doing very well. I have been looking forward to this episode. You've always been a good storyteller and I'm sure throughout our discussion, there'll be a laugh or two. What are we chatting about today? I thought, given... I'm not sure that your tax knowledge goes quite as deep as some of our members. That's not supposed to be derogatory in anyway, it's just a practical acknowledgement.

Giles Hurst:
Wow. Get the feedback. Yeah. Okay.

Robyn Jacobson:
I thought we could have a chat about the role of advocacy and the positioning of The Tax Institute in the profession and how we contribute to the tax reform debate, but also looking at the year that has been and an outlook for 2021. Perhaps a little bit of crystal ball gazing as we progress through this episode. I might throw to you first in terms of some of the recent changes at The Tax Institute. I'm referring particularly to the tax policy and advocacy space. There have been some changes and I wondered if you could talk us through that.

Giles Hurst:
There have. In fact, Robyn, it's probably fair to say that, because I'm not from a tax technical background, although there are many members who speak to me on a daily or weekly basis who occasionally forget. I put that as a bit of a disclaimer at the start of most of my conversations with them to remind them that I'm not from a tax technical background. But I think good leaders surround themselves with the people that have the things that they don't. If ever, there was a need for somebody, as a leader of an organization to do that, it's definitely me at The Tax Institute.

Giles Hurst:
Thanks for the introduction by the way, I really appreciate that. I'll say this. The tax policy and advocacy work that we do as an organization is critically important, not just to the profession, but it's actually critically important to this organization. A lot of things hang off what we deliver for the profession through that advocacy and policy work. I think I'll say that from the get go, we've wanted over a long period of time but of course, you have to be able to afford to do everything in life like any business leader, we wanted to really turbocharged to boost the offerings that we put out into the world of policy and advocacy and tax. We wanted to do that with people who could bring a fresh perspective, a fresh voice, a fresh energy, a proactive energy to the debates that swirl around in tax.

Giles Hurst:
I say swirl around because there's no shortage of opinion at the moment in tax. I think that's a fair comment. As many people know, although Bob is still working with the institute and I would imagine Bob Deutsch will be working with the institute forevermore. He's been an incredible close confidant of mine and a supporter of the organization for a long period of time. But he's probably working a day, a day and a half, a week. We're very grateful to still have him on board. Also, we brought in some new fresh talent in the form of course, no greater than Andrew Mills, who has really had a big impact on how we operate.

Giles Hurst:
Yourself, Robyn, I've lost count of the number of times that people have said to me, "Goodness me, you guys are putting out some fresh and exciting stuff." And, "Isn't that Robyn Jacobson good?" And I simply say, "Yep, she is." But we've also now recently brought on two very exciting new recruits in the form of Julie Abdallah as our tax counsel and Michelle Ma as an associate tax counsel here at the institute. We've really, really made a big splash and a big play. And of course, news that I think most people know, finally, is that I think it's Monday, Scott Treatt joins us from the ATO.

Giles Hurst:
I'm very excited that Scott is going to be at the helm of our tax policy and advocacy strategy over the coming months and years. I'm looking forward to welcoming him to the institute on Monday.

Robyn Jacobson:
Certainly Giles. Look, all this new power and resources behind this part of The Tax Institute allows us to move into new initiative. So something like the budget report that we produce this year was the first time the institute had published something that was internally generated effectively. The tax reform project, which is an incredibly ambitious project and I was asked some months ago by one of our technical committees, "Is this an ambitious project?" I said, "Absolutely. It is." That if we don't dive in with everything we've got, then what's the point of doing it? We need to give it everything we've gotten and be committed to that process.

Robyn Jacobson:
Obviously, this new podcast is another way but how would you describe what we're doing in terms of perhaps the positioning of the institution in various initiatives?

Giles Hurst:
Robyn, of core importance here is the acknowledgement that if you want to be a proactive member body, representing the interests of the people who kindly bestow upon you their membership fees every year, for good reason, you've got to earn the right to advance towards a position where you can say that you're really delivering against the promise that you make on an annual basis.

Giles Hurst:
I feel it's not as though there has been a period where we haven't delivered on that promise. But I do feel that we can do a lot better. What I also welcome, however, is the counter feedback that sometimes comes your way, when even only this morning, a member in South Australia who I was talking to asked me the question, "Some of my colleagues Giles, were asking me, and I didn't know how to answer it. Why is the institute getting involved in this big tax reform series?" I did have a good laugh at him. I said, "Well, what you've got to understand is that the debate around how this country is going to pull itself out of a very, very challenging fiscal situation in the years ahead, it all really does boil down to one thing and that is how you use tax as an instrument by which to resuscitate the fortunes of your macroeconomic capabilities." If you can't raise the revenues to be able to run your country, you're going to be in a heap of pain.

Giles Hurst:
The Tax Institute needs to be the organization that entices I think, federal politicians out of the cave to have the confidence to know that there are organizations out there that want to posit thoughts, ideas, opinions, beliefs about what could be done to put us back on a real trajectory of positive growth and performance as a whole country. There is no better organization than ours to be that catalyst.

Robyn Jacobson:
Is it going too fast describe it as an altruistic motive? That there isn't a vested interest that we particularly hold on this, we just want a better tax system?

Giles Hurst:
I think every member of ours with would wish me to say that there is a need for the tax machinery to be simplified, to be streamlined. I think that that comes first and foremost, but yes, there is the importance of understanding what we're here for, what is our raison d'etre. Our raison d'etre is to educate, because here, we've got to provide the tools by which to make sure that everybody who comes in to be in tax, it's not exactly a...

Giles Hurst:
Not for the light hearted academically to get into tax, let's face it. They've got to be tooled up and skilled up to be able to do their job to the best of their abilities. We have to provide that. We also have to provide the direction as to how to make better tax law. We need to act as a catalyst for thinking and for execution, both at the federal and state level. I think the tax reform initiative that we're running at the moment is a precursor to a much more elevated contribution to that debate here in Australia.

Robyn Jacobson:
Which I think partly answers my next question, why does advocacy matter?

Giles Hurst:
People have advocated for me in my life and in my professional existence. Every time you give a reference to somebody for a job, you're advocating for them or they are advocating for you. When you are on the receiving end of positive advocacy by somebody else, there is possibly no better emotional response that's created in a human being than when somebody advocates for you. I'm looking at it through reverse lens to say that if I was a member of The Tax Institute and I was dealing with some of the pressures that have been applied to me as a professional in this space in the last six to nine months with COVID-19, there is no more important thing to know than the fact that there is a body of people behind me that have got my back. I think that that is what advocacy really boils down to in the end, it's about operating on behalf of a group of people to make sure that the best outcomes are reached for them, but also for the entire system as a whole.

Robyn Jacobson:
That plays into the idea that advocacy isn't solely about representing the members, which we absolutely do and we're committed to doing, but it's also about advocating for a better tax system. I've often described the flow of ideas and information being four way. It comes from members, it is fed up to government through feedback. They then provide us with often confidential information or access to documents before they're publicly released.

Robyn Jacobson:
When publicly released, we then take that back to our members and this is a continual cycle, where information flows backwards and forwards. And I think we're pivotal in that communication of information.

Giles Hurst:
Yes. I think with 11,500 people behind The Tax Institute, one thing you can be assured of when I was growing up, Robyn, in England, my dad used to say to me, "Look, there's no point in asking one person when you're in a town that you don't know what the directions to the Red Lion are, you need to ask at least four or five people to get the right answer to make sure that you arrive at the pub before closing time." Now, this humorous anecdote is simply to say that one of the great things about The Tax Institute is that 11,500 of the sharpest minds, when you get so many of them involved every year in what we do and there are 1000 people every year that do something in the form of advocacy or tax technical contribution, you get the right answer, you get the middle ground and you get the people that are most likely to know the answer to where the Red Lion is. That's important in life, right?

Robyn Jacobson:
Well, getting that drink before closing time is important.

Giles Hurst:
Vitally important, Robyn. Vitally important. I'm saying this to somebody who's been locked down socially for weeks. So I think you understand the importance of this.

Robyn Jacobson:
Let's turn weeks into months. But anyway. To those out there that would question the goal, the objective, when we're talking about advocacy, we've seen tax reviews come and go many times, not just over the years, but over the decades. And there are those out there who question, "Is it worth it? Is it simply going to fall on deaf ears again?" How would you respond to those who might be watching perhaps in more cynical light?

Giles Hurst:
Well, maybe I'm acidic as well. You don't know that. One could be forgiven for feeling as though the efforts to reform tax have to some degree... Maybe it's they fall on deaf ears, or maybe it just wasn't the right time or maybe the people that were in play at that time... I really listened with interest to Peter Costello's comments about... It's similar to something he says, "Not for the faint-hearted." Well, no, it's not. If tax as a career as not for the faint hearted, then tax reform, surely that to say though, that's the Holy Grail. But what I would say is this, in order for us to be really serious [inaudible 00:13:20] about what this country and other countries around the world, of course, are going to need to get through what we are dealing with, it is going to need a fresh approach.

Giles Hurst:
I do believe, actually, that politicians and economists and people in civil society, people in trade unions, people in associations, people in the world of accountancy, now is the time to come together and start to work through some of these complex issues. Yes, okay, it may be all for naught. But the reality is, for me as a member of society let alone the head of The Tax Institute, we can't go into it with that attitude. We've got to work on the art of the possible and I do think this is... It's on our watch. I don't want to send a message to the world that I'm prepared to mortgage all of my children's futures and the futures of every other family for years to come.

Giles Hurst:
We've got to be really sensible about this. Let's be a little bit more cup half full I think, rather than cup half empty.

Robyn Jacobson:
We can talk shortly about some of the challenges of this year. But do you get a sense that the stakeholders involved and if I think about who their stakeholders are, it's obviously our members. It's the broader tax profession, the other professional bodies. It's the regulators like the HEO, the Tax Practitioners Board, policy advisory like the Board of Taxation, and then of course, we get to the government itself and that includes the Parliament and politicians as part of that. Is there perhaps this pivotal point we've reached were finally realize the system isn't working, it is broken and it does need fixing? And it's only until you reach that realization, that change can actually begin to happen.

Giles Hurst:
I think improvements can always be made to any system or any machinery, any process. I think people who think the opposite, maybe they'll never enjoy an improvement. But I do think there's a lot of noise out there quite justifiably so that the things can be better in our tax system.

Giles Hurst:
I think that I've heard a lot of comments from people to say that we missed opportunities as a result of the, I think the Ken Henry endeavors that were made years ago. I've heard that comment made. I've heard others say, "Well, look, it is what it is at the moment. We're just going to try and make it work." And I'm thinking well, okay, there's this such polarized views dropping. The reality is that we probably wouldn't have had the impetus and the catalyst happening if it were it not for COVID. But I think even without COVID-19 happening, the need for simplification in our tax system is a common and well versed theme that comes from every event that I've been at since April 2018.

Giles Hurst:
That is the one thread that is through everything that I've heard from all the people, from all the different angles, simplification. I do not know honestly how our members have coped since COVID-19 hit the whole country and then I do not know how they have coped dealing with the additional workload of effectively being a pseudo minister of social policy through an intermediary with Centrelink and Jobkeeper. I don't know how they've done that and dealt with the residual and existing complexity of the tax system. It beggars belief, quite honestly and I take my hat off genuinely to those people who are in tax and accountants, by the way, because let's face it, they're all facing similar challenges dealing with some horrific situations. We do need to reform our tax system for that reason alone.

Robyn Jacobson:
I do want to acknowledge the incredible pressure that practitioners have been under since [inaudible 00:17:07]. I don't think I'm overstating when I say they've been absolutely slammed. Now, the government chose to deliver the bulk of its stimulus package through the Jobkeeper program, and also through cash flows. But it's really the the Jobkeeper program more than cash flow boost that's pressed the demands on practitioners.

Giles Hurst:
Certainly, the board of The Tax Institute have been at pains to continually reflect and draw attention to me to remind my team as well as me that there are some people doing it real tough out there. Yes, it's not just members who are having these problems. It's also their clients and the manifestation or the sort of upstream impact. If you've got a client that you've served for 20 years and they're unable to pay their bill to you, guess what a lot of these accountants and tax professionals are doing? They're doing it to keep that business afloat, to keep people employed, to keep food on the table and keep people going. That is to be lauded. That is absolutely to be celebrated.

Robyn Jacobson:
There are so many practitioners that have put in hours and not billed for it. [crosstalk 00:18:13] Service to clients, community service, because they felt it was the right thing to do.

Giles Hurst:
Yeah, absolutely. I don't think we fully understand the implications of what will happen as a result of this. I think it'll be a while yet before we see the bruising come out of the business community in Australia and around the world. But I'm more concerned at the moment about how we're dealing with things here in Australia. I think the bruising is yet to come out fully as a result of what's happened.

Robyn Jacobson:
Do you remember of course, Giles, that next March Jobkeeper ends. There's that support keeping people essentially afloat for a few more months. But once that ends at the end of March, it will be... Look, interesting is not the right word to describe it, but it's going to be something that we hope will not be as bad as some fear.

Giles Hurst:
Agreed.

Robyn Jacobson:
Shout out to all the Victorian practitioners who've spent over 100 days in lockdown. We are emerging. I think we're all stronger for it, but it's certainly been incredibly tough time for the Victorian based and Sydney, the Melbourne based practitioners.

Giles Hurst:
I agree.

Robyn Jacobson:
Onto brush a note, having hopefully got through the worst of all this, CPD, we at the institute completely changed the way we did things as every organization in the country and for that matter, the world did. CPD was predominantly face to face for us prior to mid-March. In fact, if I think about the closing hours of the Tax Summit in March in Sydney, we had 1,500 people gathered and to this day, I don't know how we snuck that event in before later that afternoon, the government announced that they were limiting gatherings of people to just 50. We all looked at each other and thought, "How did we sneak that one in?"

Giles Hurst:
Timing is everything Robyn, timing is everything.

Robyn Jacobson:
Absolutely.

Giles Hurst:
I don't know either how we did it. I think a lot of members who went to the event were at pains to say, "Well, we were so fortunate." Yes, we were. What a great event. I had such a great time there. My team had such a great time and to have 1,500 people was just fabulous. Long way, we continue to work to get back to these kinds of things in time, in time.

Robyn Jacobson:
Absolutely. Given we're not quite at that face to face yet. We are running the [Newser Event 00:20:23] next week and that combines with the [Terrigal 00:20:25] alternative location. And I believe there's an event running in Darwin at the moment as well face to face and both Perth and Hobart have had some face to face. But moving into next year, what does CPD look like? Is it all face to face that we strive to get back to? I suspect, they'll be many that will still prefer or desire as an alternative, this online access. Is it a combination of the two?

Giles Hurst:
Yes. I suppose all things being equal. Whilst I don't have a crystal ball, so I'm not able to predict how well, Australia will fare in six months from now in relation to COVID-19. But I've been the so many members of The Tax Institute that understand the value of collegiality and of networks and of relationships. Some of these relationships, they're long, well entrenched relationships that are very important to the fabric of how the institute has held together over the years.

Giles Hurst:
I think the unique nature of the institute with its volunteer, I'm going to call it a culture, it's a voluntary culture, because it's a network of people who... It's not the same people every year. It changes depending on the skills and the capabilities required at any given time.

Giles Hurst:
You mentioned Terrigal. I think Andrew Mills and [inaudible 00:21:53] are going there. These people are... They're stalwarts of the institute. They hold people in the palm of their hands. Younger members who are coming through The Tax Institute, they look up to these people, they want to go to events, they want to meet Professor Bob Deutsch. They want to meet... Yeah, the academics is a great example, actually. I was in Perth a year and a half ago. A so young lady came up to me and said, "Excuse me, is that Michael Walpole over there from UNSW?" And I said, "Yes." I said, "Do you know him?" "Well, I'm about to study with him next year. I'd just love to meet him." What a brilliant thing.

Giles Hurst:
I go up and introduce the two of them and then within a half an hour, they're lifelong friends. That is why events are so important and it's why they're so important to The Tax Institute and if we can get back to people traveling and I don't know if they're going to be shaking hands or not. But I bet you, they'll be bumping elbows or whatever it may be that we were doing at the Hack Summit, the namaste and all this stuff. I know that people want to get back to it and I want to find a way of getting them back to it. But it's all dependent upon how we go. I'm talking to you who've been locked up all these weeks and fighting to balance and stabilize all of you in Victoria, the position in relation to COVID-19.

Giles Hurst:
That's so difficult. Imagine if that then happens somewhere else in the country. I don't know. I don't have a crystal ball. But I do know that I want to get people back to face to face meetings when we can.

Robyn Jacobson:
I'd like to tap into your past experience in your various business leadership roles. You are the CEO of the institution and you are effectively responsible or look after not just The Tax Institute staff but obviously members as well. But we also need to acknowledge that our members are often themselves running their own business, their own practices.

Giles Hurst:
Yeah.

Robyn Jacobson:
Yes, they're devoted and dedicated and committed to their clients, but they themselves are running a business. If we look at what the role of a leader is and I want to quote about Napoleon. I think you were chatting to me a few days ago and you talked about defining reality and giving hope, "Is this the best way that a leader can lead staff through these difficult times?" Against that backdrop, I look at whether the narrative has changed, where the paradigms have shifted so much that the way we used to do things is not going to be the way we keep doing them, for better or for worse.

Robyn Jacobson:
If we look at returns to officers and how staff culture may change, I wonder if you have any insights about what that looks like for our members who themselves are running their own business and have to look after their own staff.

Giles Hurst:
I should tell you the, if I mentioned, but the Napoleon quote it's about, "The job of a leader is to define reality and give hope," I think is the quote. That was shared with me and many other people who worked at American Express by Ken Chenault who was at the other time the chairman and CEO of American Express globally. He actually stayed American Express through the 911 crisis when the offices in Vesey Street were severely damaged and American Express lost employees in that disaster.

Giles Hurst:
If ever, there was a time when the quote that he... It was one of his favorites, the idea of a leader being able to define reality and give hope, that came to the fore and shone out from him. The reason I use it and it is particularly true for COVID is that you've got to be straight and fair with people. I think a lot of our members, you've made the point that they are running practices. They never mind about just the downstream impacts of having to deal with their clients, they've also got to balance the book. They've got to deal with a complex set of matters that suddenly come their way for their staff and how they run their business.

Giles Hurst:
Let's face it, if you're not being paid by your clients, it can be a little bit challenging to sometimes then pay your staff. These problems were around us all the time. But my job, I think at that time was to really make sure that we communicated as effectively as we could within The Tax Institute, not just to our staff, but also to our members about what it would be or what it would look like 2-3-4-5 months down the track and what changes we needed to make in order to make sure that we stabilized the institute for the members.

Giles Hurst:
I think we did that pretty well. It was a tough job to pivot so quickly. But we did I think do a great job. The work you did Robyn on Jobkeeper, and all of the webinars, same with Andrew, as the team was getting involved, it was a pivotal time I think for the institute. We did come to the fore. I'm pleased that we offered a lot of these this stuff completely for free with good reason. The most important thing that you do in times of crisis is you offer support.

Giles Hurst:
If you offer support to others, you get it back in the long term. But you also get a sense of what you're here for and what really matters. For me, staff at the institute and first and foremost, I needed to make sure that they were safe and that they were looked after and we gave whatever security we could to them and then straight away its members, and how do we make sure that we do what we can to support them. We have so many great pieces of feedback about what we were doing at that time to pivot the organization.

Giles Hurst:
We've subsequently had a lot more about what are we doing to get back to where we'd like to be. I welcome all the feedback because actually, it's all relevant. I don't know when we're going to have our next big gig, our next big ICC-like Tax Summit but it can't be too soon for my liking. Wouldn't it be great if we could as well do it in Melbourne? I really would love to be able to take it down to Victoria and make a real fuss actually at the members down there for that reason. But life has changed a lot. But I don't think it needs to change forever Robyn.

Robyn Jacobson:
Something that I have been sharing with a few others and I did make this reference in my discussion with Andrew In the previous episode, but in terms of 2021 before I sign up for the year, I do want to see all the terms and conditions.

Giles Hurst:
Yes, yes. I'm with you.

Robyn Jacobson:
I certainly didn't sign up for this year. When we look ahead for 2021, it's going to be a new year in many, many ways. Economically, socially, I think we're going to say mentally. I think a lot of people are going to be very happy to say goodbye to this year and welcome in the new year. My God, are the expectations going to be up there for 2021.

Robyn Jacobson:
Nostradamus was a French astrologer, and physician, and the name may be familiar to most of our listeners. If you've not had Nostradamus, go and Google it and you'll see what amazing predictions he did and what he said about the future. What do you see as the challenges ahead for next year in particular? I don't think we can look more than six or 12 months out at this stage.

Giles Hurst:
No. Which challenges of a Tax Institute, a macroeconomic level internationally, intergalactically? Come on. Narrow it down for me a little-

Robyn Jacobson:
Look, I think we can prep up some intergalactic. I think economic, maybe we could start there but I think we could also maybe set some of the social expectations about what a workplace looks like and the return to work and getting people back into offices and the profession, reconnecting with each other and reconnecting physically with clients. There's just a few thoughts.

Giles Hurst:
Well, first of all, what an amazing... You're talking to me on the day when they're still counting the votes in the US election and I've been... I've sort of had one eye on the television while I've been doing other things going, "Wow, can it get any closer? Can it get any more nail biting? Can it get any more exciting?" The answer is I don't think it can.

Giles Hurst:
But there's so many things up in the air at the moment in the world. You can't blame it all on COVID. But let's face it, a lot of it is down to the instability that COVID has caused for the world. We'd be mad to discount. But I think the relationship that we have with with China is changing. It concerns me to some degree, when I hear some of the commentary around that. I think it's a very uncertain world in this region. I think it will be for some time. I think our relationship with the US is almost inevitably going to change, although nobody in any country is brave enough to actually say that ahead of the election result. I think there's good reasons for that. They're trying to have a bet each way as as you'd expect a politician to or politicians to.

Giles Hurst:
Economically, I think the instability that's that's obviously caused by borders closing. Yes, we need to do that, but I do think it has incredible impacts on how countries can hold it together in the medium to long term. I think that is... That concerns me a little bit. I don't see the borders opening up anytime soon, by the way, for Australia and New Zealand. Let's call it our little bubble. I think we'll probably come together and be a real Bledisloe-like loving for a prolonged period of time with New Zealand. But other than that, I think people will restrict and restrict and withhold their aspirations to go beyond Australian shores. I'm pretty sure that's going to stay.

Giles Hurst:
Inside Australia, I'm really confident that things will open up. I really... I will say this and the sooner that we can get our in-person contact with members and with people who we work with on a day by day basis in all of those different organizations you spoke about earlier, the sooner we can get back to building those relationships and having really strong discussions about what we need to do, the better. I am a cup half full person.

Giles Hurst:
Contrary to what I did say earlier, I'm not a cynic. I'm a real believer that you can affect your destiny and I do think that everybody that is a member, everybody that is an employee of the institute, if we go into the next year or two with that mindset, we'll be okay, we'll be okay. But the institute does need to really look at what it's going to do in the future in terms of its representation of members and how we provide support to members who've had it quite tough. I think there's a big issue around I think in six months from now, we don't really realize how many mental health challenges have been caused in the rear view mirror of all professionals and all businesses.

Giles Hurst:
It's not just in tax. But I think that a lot of people in our institute have had a particularly hard time in recent months. I'm aware of some of them. I would like to say this right now, if you know a member that is struggling because of what's going on around them, put your arm around them in a metaphorical sense and allow as well organizations like The Tax Institute to play a role in helping them because that is what we should be doing for our members. It's all very well being there when times are good. You've got to be there when times are not so good.

Giles Hurst:
I would say that's probably the most important thing that I'm concerned about over the next six months is stabilizing the institute, its membership and how we operate all together. It's really important.

Robyn Jacobson:
Giles, I've seen both firsthand and listening to experiences of other members the support that members have been giving each other has been remarkable. It makes me very proud to be part of this amazing profession, which I've loved for nearly three decades. But I think this year in particular, it has tested us but it's also allowed us the opportunity to bring out what I think is some of the best in humanity.

Giles Hurst:
I agree. It's so important that we keep thinking along on those lines. So important.

Robyn Jacobson:
I just wanted to perhaps provide my own insights into 2021. I don't expect too much comment from you on this one, but please feel free to jump in anytime you like. This is more technical observations. If we look at what we've taken out of this year, in particular, the budget that was announced in October, we are expecting at this stage, there'll be the May budget for '21/'22. Now, that would be the normal timeframe for the delivery of the budget. Of course this year was delayed six months, so I'm not expecting the government would delay next year's budget for any reason.

Robyn Jacobson:
What would I be looking for in next year's budget? One of the measures that has been announced and which is of great interest to a number of members is the lost carry back and I'm not going to go into any technical detail now and particularly with you, Giles, but it's something that has been bought in temporarily, yet other countries around the world have it as a permanent feature of their law. That is something that we would be looking for in the tax policy and advocacy team when we're preparing our pre-budget submissions for next year, to seek the government's interest and when they're open to the idea of this being perhaps a permanent feature. Similarly, the immediate write-off of depreciating assets and full expensing is something that perhaps we would like to see as a permanent feature. We have been calling for that for some time. It's a measure that clearly works.

Robyn Jacobson:
I'm not criticizing the current policy, because I think it is a good policy. However, they keep changing it and every time they change it, I come back to the idea that you spoke about before, simplification. It's one thing to have a good policy, it's another to layer it on top of $10,000 other layers of sedimentary rock and you end up with something that is just so difficult to work with. We are still seeking certainty on the division 7A reforms.

Robyn Jacobson:
It's now been eight and a half years since the then assistant treasurer announced that the provisions would be reviewed. They have been reviewed, changes have been recommended and there's been great concern around the profession about what Treasury put up as a proposed idea back in 2018 when we got more of the details. We're certainly keenly following that one, we still have a bunch of announced and other active measures. They came to see those and see where we stand. And then of course, we've got a big tax reform commitment. Now, what I would be seeking from the government, what we are seeking as The Tax Institute is for the government to at least table its commitment to that. You were watching Peter Castillos keynote, of course, and he spoke about the timing.

Robyn Jacobson:
That if you're going to enact change, if you're going to bring in something as significant as genuine and holistic Tax reform, it can't be done in a single term of government. You've really got to make the commitment to do it, put a package to take to the next election, get yourself re-elected. I don't care which side of politics is as long as someone can actually see this through from one term to another and then you implement that package in the subsequent term of Parliament. It's that really long term thinking we need here.

Robyn Jacobson:
Now, you'd spoken before about tax not being for the faint hearted. You've got to have stamina and commitment and the reason to keep on going when it seems that this is going to be futile, but it's something that we just have to commit to. Perhaps in our closing minutes, your thoughts on the government's approach to tax reform and whether this has any chance?

Giles Hurst:
Mm-hmm (affirmative). Well yes, you do need a standard commitment. But you also need to take a slightly I think in America, they call it playing the long game. In order to... I've got shades of the tortoise and the hare here. Maybe this is a metaphor for Biden and Trump at the moment today with how the votes are being counted. But you've got to have a longterm confidence that what you've done is going to come to fruition and deliver. I do think that if you believe that where there's a will, there's a way, there's a very strong will at the moment for people to see some progress in tax reform.

Giles Hurst:
Maybe, it's a once in a bit of a generation opportunity to actually entice I think particularly federal politicians and federal bodies out of their areas of I think it'd be wrong to say comfort because there's nothing comfortable, quite frankly. But it's like that we need them to come out and say, "Yes, we can see the opportunity and we can see this is probably a good time to do something." If we can get that and there are discussions going on behind the scenes. I'm very happy to say. I always think advocacy is sometimes a little bit like diplomacy.

Giles Hurst:
You don't always know it's going on, but I'm pleased to see that it is going on. I think the subtlety of the messaging that's starting to show would seem to indicate that there is an appetite at least to give the kind of concession that you've just delicately alluded to. I think this is a time for us to double down and make sure that we don't miss this opportunity.

Robyn Jacobson:
You spoke about the tortoise and the hare but my mind at that point went off into the grasshopper and the ant. I think it's also apt to make sure that we have a system that can see us through long, hard cold winters and not just enjoy the fruits of our labors when times are good and the sun is out and it's warm. There's always been, and maybe I'm just overstating that, but there's often been a tendency to look at this short term electoral cycle.

Robyn Jacobson:
It's a bit like... I'm speaking to a CEO and I'm mindful with this next statement, but sometimes CEOs have been known to have a very short term focus on their own role. It's a contractual position. If I butchered the company, it doesn't matter because five years from now, I'd be involved. We've seen that in a number of companies over the years. I'm not suggesting difficult that's The Tax Institute at all. When we talk about making sure the system is sustainable, then we've got to make sure that we do build something that can last us well into to those darker times when it's not so rosy.

Robyn Jacobson:
If you think about the value, the commitment that the federal government has made this year, we're talking over $300 billion worth of support which is going to push our gross debt into the trillion dollar figures.

Giles Hurst:
Exactly.

Robyn Jacobson:
It's astonishing. I don't know that there's a buffer to do that again, in two or three years time if we have another pandemic and maybe I shouldn't say if it's a win, because it's almost guaranteed to happen again at some point.

Giles Hurst:
It is provided. Well, I'll say it is unless people actually really take seriously the appearance of what's just gone on in Vic and in other parts of the world. Back in the country where I was brought up in the UK, I'm aware of just how stark it's getting in Europe, and there as well. Let's not forget how fragile what we currently enjoy and for you, Robyn, and everybody else who's been in Victoria in these recent months, it's a 'newfound' freedom. Let's call it that in inverted commas. But for everybody else in Australia, it's been going a bit longer, we need to defend and protect that because you're right, there may not be the same...

Giles Hurst:
We're not a bottomless pit and we may not have the same opportunity to do that huge stimulus, which was absolutely the right thing to do in my view. That's just my opinion. It was 100% the right thing to do, we may not have the opportunity to do that again. That's probably one of the reasons why governments, state governments, so much tension between the state and federal governments, because they know that was the one bullet in the holster. I do think that is a deep concern. We need to cherish and look after the freedom that we've created by making sure that we're eternally mindful in the future.

Robyn Jacobson:
The role of government to make sure that they are focused on the long term sustainability of the system and not just looking at their short term electoral cycles.

Giles Hurst:
Well, that's one of the perils of having cycles of elected governments. One would hope that they'd have a long term view. If COVID-19 has taught us nothing, it's taught us the importance of four year slots have no bearing quite frankly on future policymaking. It's actually irrelevant.

Robyn Jacobson:
Any closing observations from you, Giles?

Giles Hurst:
I would say that I love the idea. I love what you're doing with this podcast, Robyn and I hope that our members and our listeners enjoy it as well. I think that I'm right in saying that had Andrew Mills in the last episode, is that right? Who have you got on next? Have we got it lined up yet? Are we allowed to say?

Robyn Jacobson:
Well, I have arranged to speak with our new General Manager of Tax Policy and Advocacy. So just to confirm a date but I will be having a chat with Scott Treatt.

Giles Hurst:
Brilliant.

Robyn Jacobson:
Also confirmed and maybe I shouldn't reveal this yet, but I'm, I will do so, our chartered tax advisor of the year, [Julianne Jakes 00:43:37]. So she will be joining us for a forthcoming episode as well.

Giles Hurst:
Julianne is a fantastic contributor to The Tax Institute. So has Scott Treatt been over 15 years prior to him joining us. Listen, Robyn, thank you to you, but also to the broader team. I know that you've got a team of people in the background there. It's Jamie and Kelly who are working. Well done guys on a great new production, and I'm really looking forward to hearing the episodes as they come online. Thank you for inviting me on today, Robyn.

Robyn Jacobson:
Terrific. Giles, I've really enjoyed chatting with you.

Giles Hurst:
Likewise.

Robyn Jacobson:
Thank you for listening to this episode of Taxvibe. I've been chatting with Giles Hurst, CEO at the Taxvibe Institute. To keep up to date with Taxvibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Instagram, and Twitter.

Robyn Jacobson:
You can join the conversation on our member only community forum. If you're not a Tax Institute member, we are offering a two month free membership trial where you can find out what the best tax professionals have in common. Join today and you'll have an all access pass to the tools, resources and opportunities that make our members some of the most successful tax practitioners around.

Robyn Jacobson:
For more information, visit taxinstitute.com.au/trial or find the link in the show notes. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 1 — Tax Reform: The Case For Change

Release date: 3 Nov 2020

In this inaugural episode of TaxVibe, Robyn Jacobson, CTA chats with the Director, Tax Policy & Technical at The Tax Institute, Andrew Mills CTA (Life) about The Tax Institute’s major endeavour for 2020, The Tax Summit: Project Reform. They discuss:

Why tax reform is necessary and why now is the right time to advocate
What genuine tax reform looks like
What is needed for successful reform

Host: Robyn Jacobson, CTA - Senior Advocate, The Tax Institute

Guest: Andrew Mills, CTA (Life) - Director, The Tax Institute

Robyn Jacobson:

Welcome to the inaugural episode of Tax Vibe, a fresh new podcast by The Tax Institution. I'm Robyn Jacobson, the senior advocate of The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of Tax Vibe.

Robyn Jacobson:
I'm joined by Andrew Mills of CTA (Life), who was the director of tax policy and technical here at The Tax Institute. Previously, Andrew was the second commissioner, law design and practice, at the Australian Taxation Office from 2013 to 2019. He has 40 years experience in taxation, including periods in the ATO, commerce and the tax profession. Andrew was a director at Greenwoods and Freehills for more than 20 years, and managing director of the firm from 2006 to 2011. Andrew was president of The Tax Institute in 2006 to 2007, and a former governor at the Taxation Research Foundation. Andrew was also a senior fellow at the Melbourne University Law School and a member of the Tax and Transfer Policy Institute Advisory Board. Andrew holds a Bachelor of Business, a Master of Laws and a Graduate Diploma in Tax Law. Andrew was a chartered tax advisor (Life), a member of the Australian Executive Committee of the International Fiscal Association and a graduate of the Australian Institute of Company Directors. Andrew, welcome to the inaugural episode of Tax Vibe.

Andrew Mills:
Thanks Robyn. Great to be here.

Robyn Jacobson:
Well, look to kickstart the series we're going to be having lots of chats with tax professionals in the months and the years ahead. But you are a very logical place to start and person to start with. You're, of course, recently appointed to The Tax Institute around the same time that I was earlier this year, and I think it would be useful perhaps, just very succinctly, to explain to my listeners what your main role is and how this plays into the subject we're talking about today, which is all about tax reform.

Andrew Mills:
Well, my main role really is to help spearhead the work that The Tax Institute is doing around tax reform, which is a process that started before I arrived, but I picked it up and running, or taking the lead on it, at least. I have a bit of a roving role, which was why I was attracted to it, which allows me to go across a lot of the technical things that we're doing. And now I've been able to make contributions across CPD and also the education side of what The Tax Institute's doing now, with a view to looking at the way we do things and how we might be able to do them even better and deliver more value to members.

Robyn Jacobson:
The big topic and the really ambitious project that we have launched into is tax reform. Its formal name is The Tax Summit Project Reform, which of course borrows its name from the very large events that we ran back in Sydney in March pre COVID, before lockdowns. So, I wanted to start by asking you, why is tax reform necessary, because we seem to have been having this debate, not just a lot, but for many, many years? So, why is it even necessary?

Andrew Mills:
Great observation. Yes. And I must admit that the amount of talk in the last 12 months around tax reform has been a lot, and it's a bit like apple pie if you like, that Americans talk about. Motherhood and apple pie. Everyone wants tax reform it's just that not everyone agrees on exactly what that means. But, look. Why talk about tax reform? Everyone is looking at the current system and going, "It's just not quite right. There's something fundamentally wrong with where we're going." And the reality is, when you start to peel it back, it's not meeting those fundamental criteria of fairness, efficiency and simplicity. They have been the themes that have run through every tax reform approach since, I think, Adam was a boy effectively. But certainly since Adam Smith was a boy, because he's the one who coined them in the 18th century.

Robyn Jacobson:
Andrew, does it meet any of those objectives?

Andrew Mills:
Well, I think that's the point. I'm not sure that it does. I mean, it's perceived as being unfair, so fail on the first one, the effective marginal tax rates that people complain about when you put the social security system in with the tax system and their interaction, is obviously an area that is ripe for reform. It's just crazy. Some of the things we've heard about the effective tax rates exceeding a hundred percent for women taking on that extra day of work in a week. It's not efficient. We've chosen, or we're stuck with perhaps, some of the most inefficient taxes there are. So, stamp duty, classic example. The [inaudible 00:04:58] report earlier this year that the New South Wales Government Commission came out very clearly showing that stamp duties are the most inefficient tax in terms of the impact that they have on the economy.

Andrew Mills:
They're actually quite negative in terms of, for every dollar raised, something like 80% impact on the economy, so that the net benefit to the economy of raising the tax and being able to spend that money is only 20%. That's nuts. We shouldn't have that. You put it at the other end and look at land taxes, they're highly efficient. But we have an open door alliance and everyone's recognized, we have an over-reliance on company taxes and income taxes, and an under-reliance on indirect taxes like GST. And when you look at that and you look at what the rest of the world has done, well, if the rest of the world has gone there because the economists all tell us that the efficiency of the taxes is in that direction, then you've got to wonder why we're lagging on that. And it's ridiculously complex.

Andrew Mills:
So, we fail on the simplicity one as well. There's more than 10,000 pages of legislation again, after all those efforts 15 years ago to reduce the size of the acts. We have multiple tax laws and that's not just the Income Tax Assessment Acts, but also the fact that we are having 125 different taxes that Henry counted up, and that's a real issue. But added to that is the $40 billion per annum in compliance costs that are imposed upon the Australian economy. And that's really, that's Australian businesses and individuals who are bearing that cost. So, fail, fail, fail. I mean, if this was a test, you wouldn't be able to progress to the next level.

Robyn Jacobson:
I think the tax system has been a bit like a road where a brand new road, we'll think of a beautiful new freeway that's just been opened up. It is so smooth to travel on, and the bitumen is a delight, and it's all exciting and fresh. And then you start to get potholes. And so, the council will put some more bitumen over that particular pothole and patch it up. But we've now got a road that is so covered in these patches of bitumen, you can't recognize the original asphalt. It's really uncomfortable to drive on, and the whole experience becomes really unpleasant, as well as being really inefficient. Is it time to rip the road up? And we think back to what Kevin Rudd said many years ago when he was prime minister. He wanted what is called root and branch tax reform. Now, for those that have not heard the expression, you're talking about not just pruning the tree or the branches, you're talking about ripping the thing up from the roots and starting again. Is that what we need to do here?

Andrew Mills:
Look, I think that we've had some of that paved already for us, in a sense. So, if you look at some of the work that was done by Henry, there is certainly things that we can pick up, that was meant to be root and branch, although that was severely hamstrung by not having a GST as part of it. And that needs, obviously, attention.

Andrew Mills:
But, yes. We do need to seriously rethink a lot of what we're doing. We need to go, "Well seriously, why do we have fringe benefits tax at all?" What a messy tax that is. What an anachronistic tax in the sense that it was built in the 20th century, and is just so inappropriate now and we'll hear more about that from some of our other speakers in our program around tax reform. There's just so many fundamental issues associated with the way in which we've gone about things. Why do we have a corporate tax system that is so complex? Why do we think it's okay to just simply implement brand new systems when there are other tried and true systems that have been in operation for decades in other countries? We really love to do things in our own unique way and often it just doesn't work, but we find that out down the track.

Andrew Mills:
When there are thousands of pages of explanatory material and thousands of pages of guidance that support particular parts of the law, and here I'm thinking about in the corporate field, things like consolidation, but there's certainly an enormous amount of clarification around what's in and outside of the GST net. Have we just got it wrong in some of the fundamental design?

Robyn Jacobson:
Just on that point, I can recall a comment years ago about the provision 38190 within the GST Act. This is the one about where you export services and whether they're subject to GST. There are a host of rulings that have been issued by the ATO on that, but I think there's something like two and a half thousand paragraphs of guidance from the ATO to explain one provision in the GST Act and that's nuts.

Andrew Mills:
Yeah, absolutely. That's one of my favorite expression, that's nuts. Well look, I think we're in heated agreement about, is that there is something fundamentally wrong with the system at the moment and it needs fixing. Look, it's not just simply that it's hard to deal with and it's complex and we think it's inefficient, that all then the leads to the cost of administering the system. I do recall my time at the tax office where some people were saying, "Well, part of our role is to paper over the cracks, to paper over the complexity of the system and make it easy for people to deal with. That's a very laudable thing to do, but you've got to stop and ask yourself, but shouldn't we also be looking at how we can fix the fundamental system in the first place, so we're no longer just bumping from pothole to pothole, but we're actually back on a smooth path?

Robyn Jacobson:
But we'll speak more about our project reform in the episode, but a recent session that we ran on the small business tax concession, we identified 25 different small business concessions. Now I've got to say the expression again, this is nuts. There's got to be a way of providing the necessary benefits to businesses, or the target taxpayer that you're trying to provide that benefit to. Sure, there are integrity provisions and we're not suggesting there shouldn't be integrity provisions, but it's got to be balanced with workable practical legislation and it just doesn't seem to be either of those.

Andrew Mills:
No, absolutely, I couldn't agree more. Then you've got to question why the particular concessions exist when they do. So the board of tax did a report around the small business concessions and pointed out that a lot of concessions are actually at the wrong end of the business cycle, they're at the end, most of the time the businesses need the support at the beginning. So we really should be thinking of the types of support that we provide small business in the startup phase. The way in which we're provided incentives around venture capital is incredibly complex, we really haven't gone about that in the smartest way.

Andrew Mills:
Our research and development tax credit requires two different agencies to administer it. One for registration and one to check that it's actually being followed and you just go, " why is that the case?" It's just so back to front and overly complex and then people wonder why they end up with the large tax bills, because they got something wrong, not [crosstalk 00:11:34].

Robyn Jacobson:
As anyone who's followed my public commentary on the superannuation guarantee regime will know that I have been advocating for change to those rules for some time. They're unfair, they are draconian. We have harsher penalties, 200% for not paying super, which certainly exceed penalties that would apply to the non-payment of wages. It doesn't provide an incentive for an employer to come forward and someone who pays their super one day late is treated the same way as someone who never pays it.

Andrew Mills:
[crosstalk 00:12:03].

Robyn Jacobson:
There seems to be something wrong with the system where we have such an enormous gap and this is regularly identified by the ATO as being several billion dollars a year, it's not working.

Andrew Mills:
No it's not. Great example, because super guarantee has all of the flaws that you're talking about, but I want to pick up on one aspect of it. A good tax is one that is designed to be easy to administer, easy to comply with and encourages the right kind of behavior. I think that the super guarantee fails on all of those criteria. It certainly does not encourage people to come forward if they're a day late, they may as well be hung for sheep as a lamb, as they say, the amount of penalties just completely discourage people trying to get it right. But add to that, it draws in the classic problem that we've got across many parts of our system and that is the distinction between an employee and other kinds of workers.

Andrew Mills:
Of course, it's not straightforward that it only applies to employees because it does apply to some other types of workers, but not all. So you have this disparity between super guarantee and other forms of employment taxes, whether it be FBT, the PAYG withholding payroll tax waiver, so that's a bad design.

Robyn Jacobson:
Well Andrew, I think it's fair to say that between your comments and mine, we've mounted the case as to why tax reform is necessary. So if we were going to go down the model path, if we're looking at the beautiful gold star standard of what tax reform should look like, how do you map that out?

Andrew Mills:
Well look, I think as I said earlier, minds can reasonably differ on what the detail could be, but at a big picture level, there's a few things to keep in mind. Historically, we had had some form of review to almost every decade since federation on tax. It's not that you need a review every decade per se, but what it does reflect is that any system needs to be consistently maintained. It needs to be adjusted to meet the needs of the economy. It needs to be kept up to date with changes in technology and that's one of the most important reasons for ensuring that you are constantly reflecting on the system and saying, "Is it fit for purpose? Is it going to help us develop and build the economy into the future?"

Andrew Mills:
The way in which you go about it is really important as well. So if you look at the changes in the 1980s and the late '90s, and that covers each side of politics, the Hawke-Keating ones, with the reform of the Australian tax system and the ANTS package under Howard and Costello, each were successful, because while they didn't necessarily change every aspect or address every aspect of the system, they addressed quite a significant chunk of the system. Each person was a winner and a loser in a sense. You could see where you were going to pay more tax, but you could also see where you going to be compensated as well, either through the social security system or lower income tax rates. So, one of the tricks I think we've seen with those, is to overcompensate most of the time, but you need to also build a consensus around it. I think it's really important that people understand that A there's a problem and B, this is part of the way of fixing it.

Andrew Mills:
I guess the question is where do you start? For me, you start at the highest levels and that is you have to look at the system as a whole. The income tax system doesn't sit in isolation. There is all the various indirect taxes. There's the federal versus the state taxes. There's a social security system. There are different taxpayer types and we need to be conscious that when we deal with all of those things, and we put a package together, that we can explain why different things are taxed in different ways.

Andrew Mills:
Let me take a very simple example. Business income is taxed based on the nature of the vehicle that's chosen. The nature of the vehicle that's chosen shouldn't really be driven by tax considerations, but rather by what's fit the purpose for the nature of the business and the size of the business. We tax limited partnerships, we tax them as companies. For many small businesses, they would be the perfect flow through vehicle, the smallest businesses, the ones that's just a couple of partners or a sole trader with a couple of employees.

Andrew Mills:
That would get the right amount of tax being born at the right level, consistent with the way an individual is taxed. That would provide the level of limited liability that a business might be looking for. And yet, for some reason along the lines of, "If it's got limited liability you should in fact have some kind of corporate tax system applied to it", seemed to be the logic at the time. We've missed an opportunity to have a lot of our small businesses in that kind of regime rather than stuck in a very complicated trust regime, which provides them with the flow through, but then has a whole lot of attendant problems with it as well, or that doesn't really work for small businesses so much.

Andrew Mills:
So it really does require some thinking about. And I go, what are we trying to achieve here? And how does each part interact with the other? And how do we get a really sensible outcome across different kinds of vehicles, different kinds of taxpayers?

Robyn Jacobson:
I think of the small business space, and I go back to when I began my career, there was a single tax rate, which of course was the case until quite recently. And the trust rules... Were they perfectly workable? Probably not, and very few people sent you their resolutions by June 30, so to that extent that's been improved. But I look at all the reporting rules we've got in place and the different regimes, between family trust elections, and TFN reporting and trustee beneficiary non-disclosure tax. We've got all the obligations that are in the tax return itself. The company rules aren't much better because we've now got this two tiered system between the base rate entities and the other companies. Where, have we actually achieved a lower tax rate? Potentially, yes, but for those that are paying dividends out to shareholders on high marginal tax rates, who pay tax at 30%, they're actually paying more tax because the franking credits are trapped in the company's franking accounts and you can't get access to them.

Robyn Jacobson:
So I feel like all this has just become so much more complex, hasn't achieved the objectives that they set out to achieve and there's absolutely space to reform this. I look at the interaction of Div 7A and Div 6, for example. We could spend all our time down in the weeds, as I call it. And coming back to your earlier comment about, "The place to start with tax reform is at the high level at the top, not down in the weeds." So if we look at how Div 6 and Div 7A interact with each other, what if there wasn't a top marginal rate under 99A? I question how many corporate beneficiaries would exist today if the 99A rate was the same as, or close to, the corporate tax rate. I think it would have solved a whole lot of issues and we would have had far less corporate beneficiaries today as a result.

Andrew Mills:
Absolutely, and you've got to ask, you say, "Why do I have this problem in the first place?" That's one of the things that I think is most important, we just need to keep challenging with why, why, why is that the case? Why is that the case? And when you get an answer, you have to ask again, why is that the case? And ultimately you'll get to the root cause. This is a perfect example of peeling it back to the root cause. And the solution is found in part in the kind of thing you were talking about. But you could peel it back another layer and say, really, should we have businesses being run by trusts at all? And should we do what other countries do, which is to say, trusts can't run businesses, that's not part of what they do. That needs to be done in another form and force it out.

Andrew Mills:
So I think that we do need to keep peeling it back. One of the things I love... You mentioned trusts and all of the reporting and so on, but trust loss provisions are classic, they don't really work. But then you say, okay, well, they're meant to be dealing with the fact that we have trust losses accumulating. Why? Well, that's because people run businesses in trusts. You have to get the corporate kinds of loss rules. And you go, maybe you've just answered the question, because if you didn't have businesses in trusts, you wouldn't have the problem. I'm talking heresy a little bit, because there are thousands, hundreds of thousands of businesses that are run through trusts. But if you could find the right vehicle for them that provided most of those same benefits, I think people would jump at it.

Andrew Mills:
The other aspect I think about that... it's triggered because you look at the trust loss provisions and you go, they're replicating the company loss provisions. You think, why do we have all those company loss provisions? And why are they so complicated? They're so complicated because a lot of it is designed to actually take people out of the system. Large listed companies in particular are meant to come out and you just start to challenge. You go, if you're trying to take most people out, maybe this isn't a really well-directed piece of legislation in the first place, and maybe I should be asking, why'd we introduce company loss rules in the 1960s? And it was to deal with some perceived trading. And you have to say, why is that a problem necessarily? And start to challenge whether or not we really should be too concerned about some of these things. And maybe we could simplify the system if we were less concerned about certain kinds of things.

Andrew Mills:
Again, we have a generation of people who have only ever grown up with loss rules and the mantra that you can't trade in losses. And you go, but why? Maybe we should be challenging why? Should we always just take things on faith, that shouldn't be? Maybe we should be questioning whether or not that fundamental premise is correct. So that that way we can start to peel back things and go, do we need some of these rules? Can we simplify things that we don't have some of these rules?

Robyn Jacobson:
A more recent example. We, at the Institute, support the recent changes in the budget, and recently legislated to allow full expensing of depreciating assets. It's a good measure, but if I look at the way the law is designed, couldn't they have just removed the $150,000 threshold that exists at the moment for the instant asset write-off. And then lifted the threshold of 500 million up to five billion. It seems to me that would achieve the objective of the policy, but instead they've created a whole new subdivision with exclusions, which now need to be considered in connection with existing rules. And we ended up with layer upon layer of these rules. And they have been summarized recently, I put together an infographic which is now available to our members. And it took six pages to summarize these rules in an infographic. This isn't a big technical paper. This is an infographic, it's supposed to be brief.

Andrew Mills:
And it proves the complexity of the system. And if we can design things in a complex way, we seem to choose that path. It's a bit like, taking your expressway analogy, deciding to get from, I don't know, from Canberra to Sydney via Queensland. We have to take the most circuitous route to get there. It's badly thought out in terms of the new policy interacting with existing law. And I think that that's a fundamental problem we have. Now, that may be because people don't have time. I'm always reminded of the Winston Churchill, "long letter would have been shorter if I had more time", but I think maybe that's part of the problem. But I do think that we also have a tendency to over egg the omelet. We tend to start with the premise and then put all the exceptions in, rather than going, what are we really trying to attack here?

Andrew Mills:
And if you think about that measure in particular, there is a whole raft of businesses that currently probably are getting pretty close to cashflow taxation. And you have to ask yourself, for a whole lot of businesses, would that not just simply be a better way of going. [crosstalk 00:23:48]

Robyn Jacobson:
For the benefit of our listeners, Andrew, could you briefly explain what you mean by cashflow taxation? Because we certainly don't have that in a pure form at the moment.

Andrew Mills:
We do not, but I'm thinking that smaller businesses, and you'd have to get the threshold right would bring to account all of the money, all of the cash that they received, their respective of how they receive it. And they would offset against that, all of the cash they pay out.

Robyn Jacobson:
So whether or not it's [inaudible 00:24:13] in nature.

Andrew Mills:
Correct. And so you wouldn't have the capital income distinction in that kind of environment. Now, do I think that that can apply across the board? I'm not sure it works for business premises, for example. And you may have to have some exceptions to the rules. Now here I'm creating exceptions already.

Robyn Jacobson:
Or good will.

Andrew Mills:
Well, maybe not. Maybe not for good will. Maybe you just go, no, that's okay. I'm not that wedded to one thing or another. But even on the business premises, maybe that's possible to say, well, up to a certain value. That's okay too. The biggest issue for small businesses is the fact that 80% of them fail in the first five years. If you can create an environment that allows them to focus on the cashflow, because they say that as long as you manage your cashflow, that's the thing that will ensure your success, then why not have the tax system that supports that? And we will support the success of more businesses, I think, if we start to think in that kind of way.

Andrew Mills:
I'm not saying this is a panacea, by any stretch of the imagination, but it's just an idea to throw into the mix about how we might be able to start taking different approaches to the way we design our law and the things we think about. When you get 90% of the way there by all of the different concessions, with a lot of complicated law, you've got to stop and go, well, maybe we can achieve the same outcome or near enough to the same outcome by taking a different fundamental approach to the way in which we tax these businesses in the first place.

Robyn Jacobson:
If we arrived at the position that tax reform is necessary, and we have a broad idea of how we should go about it, and we can delve into that further in the discussion, why is now the right time to take on tax reform? And if I just look back on 2020, it's been a hell of a year. And in fact, I have been seeing on social media, and have indeed shared it myself with my colleagues, this idea that before I sign up for 2021, I do want to see all the terms and conditions.

Andrew Mills:
I like that. I wish life was like that. That would be nice.

Robyn Jacobson:
So given the year we've had, and it's been tougher for some than others, why is now the right time to actually look ahead? And how would we go about this from a political perspective, and mindful of the electoral cycle as well?

Andrew Mills:
Look, it's a great question. I'm always reminded of that adage, never let a good crisis go to waste. And we do have a good crisis [crosstalk 00:26:26]. There's been a lot of talk, as I mentioned at the beginning, that a lot of people have been talking about it. So it's a bit like the crashing together of two different things. Building recognition that the tax system needs reform, but at the same time, a crisis that is not only a health crisis, but an economic crisis, that has given us the impetus to go, well, what are the kinds of microeconomic performance that we could be doing in this country? And boy, the tax system is a significant microeconomic reform that needs addressing.

Andrew Mills:
So I think that certainly the way we think about what we do, the way in which we operate, the increased adoption of technology that COVID-19 has caused, the way in which health technology's moved on. There's a lot of things that are happening in the broader economy that says, well, okay. The paradigm shifted for us, the way in which we work is shifting. With the spike in unemployment, people are probably also shifting work patterns, not only in terms of whether they're actually working in an office or not, but also the way in which they engage in the workforce. They may have multiple jobs. [inaudible 00:27:41] economy on steroids almost.

Andrew Mills:
It's really important to start thinking about the tax system, the way in which it can respond to a 21st century environment, which we've failed to do so far. And it's really important to remember that the tax system is part of the overall social fabric that we have. It's part of our business lives, it's part of our personal lives. It draws on law broadly, the business law. If you think about all the different parts of commercial law that it draws on, industrial law, it interacts with the social security system. When we talk about superannuation, it starts to interact with the industrialization system. It just can't be taken in isolation. And yet, it has an impact on all these things. And I've already spoken about the potential for it to drive behavior. But we want it to drive the right kinds of behavior, not the wrong clients.

Andrew Mills:
So for me, there's never been a better time than now to start talking about it as we rebuild the economy. We certainly need a better system than the one we have at the moment. We need one that is capable of adapting to the times. And if the one lesson we learned from what's happened over the last 20, 30, 40 years, is that when we build something, we really should be thinking about, is this going to deal with changing circumstances and changing economy and changing technology? And there are provisions in our law that have been around since 1936 and still work okay because they've been drafted in a way that just is indifferent to what the economy is really doing in one sense, because it lays out principles about the way you do it. It's not overly laden with lots of rules. But there are other parts that are so clearly out of date and not fit for purpose anymore, that we really need to tear them up and start again, or rip up the road, as you put it.

Andrew Mills:
So how do we do that? So when it comes to the timing question that your raised and the electoral cycles, and so on, Peter Costello gave us a steer on that because he said, look, you really have to start mid an election cycle thinking about it so that you can work out what it is that you want to take to the next election. Get the endorsement of the election, because it's still going to take you another cycle of the elections to actually implement it. And I think one of the observations there is, if everyone agrees that there does need to be change, and we've communicated that and the community is supporting that, I think then the next thing that has to be nailed down is, well, what does that look like?

Andrew Mills:
And one of the things that gets in the way is politics, and each side of politics has their own view about the detail. But I think when you tear it away, there's actually a lot of common ground around a lot of things as well. And when people's feet are put to the fire, while they might really like the concession that they're getting, they probably can fairly say, yeah. Look, I can see why that probably doesn't make sense in the long run and we should be really revisiting some of the ways in which these concessions work. And the one that comes to mind for someone like me, who's close to retirement, is the superannuation system. And I look at the concessions that are there and I think, wow, they're pretty wonderful, but are they really appropriate and are they sustainable long-term? I'm not sure they are, particularly with an aging population. And there's another aspect. We keep having intergenerational reports on things, but have we done anything about that to respond to those? No, not really.

Robyn Jacobson:
[crosstalk 00:31:10], I'm slightly younger than you. I have no expectation that by the time I get to retirement, there'll be tax free after age 60. I just don't to expect that to be sustainable for another number of years. But it's something that does need to be looked at. Also, in terms of making sure we've got a system that can sustain us into the decades ahead, we look at, is the time right now? If we don't do it now, then when will we do it? When is there a better time to actually take on this huge challenge? And there's been so much talk for so long. Is it time now to just get on with the job?

Andrew Mills:
I think so. Look, I always fear the Argentinian problem, and everyone who's a student of economics will know at the end of the 19th century, the two leading economies in the world were Argentina and Australia on a per headed population; the richest countries in the world.

Andrew Mills:
We know which way Argentina went, and I don't want to go the same way. We've still got a thriving economy, it's still pretty healthy. But we don't want to allow things to get in the way that make it difficult. And to me, the larger the complexity, the more chance there is that we will wrong step, that we will do things that actually hamper business, either in the administration or the application of those laws, the unintended consequences. We see courts come out with decisions, and when you look at them you go, "Look, that's actually probably the correct interpretation of the law, but geez, that's a bad outcome."

Andrew Mills:
And so there's no fault of the courts, but it is a fault of design. It's also sometimes the fault of administration or maybe sometimes the administrators' hands are tied where they had no choice but to take certain kinds of paths. But I think that there may need to be greater flexibility built in for the administrator to be able to deal with strange outcomes. They need to be doing something that can shift the paradigm, so that we do have something that's healthy, but something that's sustainable into the future. And it has to be now, it really does.

Robyn Jacobson:
I want to turn our discussion to our current project, the Tech Summit Project Reform. It's an ambitious project and it runs for many months, and I suspect it will continue on into next year in some form, maybe not quite as unstructured as we've got this year. But we have a series of focus sessions and keynote sessions as part of our leading series. And then we culminate to this big event, the virtual event, on the 24th and 25th of November. It's not confined to our members, we're certainly making registrations available to anyone who wants to come along. But can you talk about what we're trying to achieve out of these sessions and the sorts of people that we're getting to contribute to the discussion? We're bringing in quite a wide range of people, and also the efforts of our volunteer members.

Andrew Mills:
Well look, can I start with the volunteers, because we have a number of technical committees across national and state levels who have put their heads together, identified problems in the system, and come up with suggested solutions, or options at least, for the kinds of ways in which we can address some of those problems. Every time we peel back one area of the tax law or another, we keep finding more and more issues. And one of the great things about what we've been doing and the volunteers who have been involved, not just in writing papers but those who are also involved in the focus sessions and doing presentations through the webinars and so on, is that every time we touch it we also see the connections to the other parts. And so it does prove that the tax system isn't an ecosystem, a whole ecosystem, and you pull on one thing, you need to push on another. So that was incredibly insightful, I guess, and the value of having the focus sessions.

Andrew Mills:
Asking our volunteers to write things has been incredibly valuable. Having an academic panel who we can rely on for some of the things that we may not be experts on in particular, but also the value they bring from their research more broadly, as well as internationally. We've got some great people there who are helping us. So, fantastic volunteers. We've called on people, in particular with the keynotes, who generally for the most part aren't members, but they are high-profile thought leaders. And we've had Danielle Wood from the Grattan Institute, who's also the President of the Economics Society of Australia, talk recently. We'll have Rosheen Garnon, down on the Chair of the Board of Tax. We've had Peter Costello. We'll have economists like Chris Richardson talking, and others. Some great lead thinkers in that space. And we've had many of our own members and others do the focus sessions for us. People who are also thought leaders in their own right.

Robyn Jacobson:
[inaudible 00:35:46] is also going to provide an interesting perspective with the demographic background.

Andrew Mills:
Yes, absolutely. I think that's going to be fascinating. It's fascinating in the way in which he can look at the demographics and draw conclusions. And that's incredibly important in terms of designing a future system. Where are we headed with some of those things from a demographic point of view, and what does that mean for us? So we have all of those and then we are developing round-tables that will be happening in early to mid-November, that will draw on people who are from a range of different backgrounds. So, in one of the round-tables, it will involve people from a range of industry bodies. For another, that will focus on the individual. It will again bring in people who work in that space, combination of society types of groups, as well as academics. Then there'll be others as well, including trying to get all the professional bodies together.

Andrew Mills:
And the aim of the round-tables is as much to say, "Okay look, we all come from different points of view, but can we identify those areas at least that are common, and understand what the differences are and why they exist?" I think that's really incredibly important to get as wide a field of people as possible contributing to the debate, turning their minds to it, and helping build the momentum that's necessary to get politicians' attention, I think, on some of this as well. And then...

Robyn Jacobson:
If politicians, if we look at the form over the past 14 years, the major successful forms seem to me to be the [inaudible 00:37:19] and then the Howard Costello about 15 years later. We've had other reviews since then, but really for 20 years nothing substantial has really happened. And I acknowledge we had big changes to super in 2007 and again in 2017, but it wasn't wholesale reform to the whole system. What do we need now to make this work? How do we get the buy-in and who do we need to get that buy-in from?

Andrew Mills:
Really good question. If I use those as examples, and I think that they are good examples, each of them used crisis. They sold people on the need for reform. In both cases, there had been a recession preceding it. And Greg Smith has made this point, he's one of our other keynote speakers coming up. He's definitely clear on the view that it's about five years after a recession that you start to see this kind of reform happening, which is why I think this is the time to start the work in the hope that we build the momentum, draw together the right kinds of people to work out what the right answers are for the future, and then be able to get it through parliament. So I think we'd need that timeline to have started earlier this year. And so that by 2025, it's been truly bedded down.

Andrew Mills:
And that may be a bit daunting for some, but it is a long haul. It's a slog, it's going to take time. Because you have to win public support. Politicians have to be convinced that it's the right thing to do. And they'll be convinced when the voters think that that's the case, and so that you get the groundswell offered. But you need to bring people together. And that's what we're trying to do as well. So across the spectrum, get people thinking about it, try to see each other's points of view. And of course you need to try and get it through parliament. And in each case there's some compromise along the way. In those two examples that was compromise.

Andrew Mills:
And it's really important that people overcome the skepticism and cynicism that has reasonably built up, because over the last 20 years, we haven't had that success. The 2015 rethink process died in its tracks pretty early, even though it was a terrific process that got started and the call for submissions and the tax Institute certainly put theirs in. And it's really important that we get that skepticism put to one side as soon as possible because there are examples that you can point to where it can be successful.

Andrew Mills:
But people need to acknowledge that it's not going to happen overnight. We need to do tax reform holistically in the sense that it's not just a bedrock. We spoke about the Costello. And the [inaudible 00:40:01] ones. And I think in each of those cases, they were substantially federal, but there was an element of state in this case of the Costello one, there was obviously, it was much more evident with the GSTP going to the states in exchange for the abolition of a whole lot of state taxes, not that all of them were.

Andrew Mills:
You need in a sense and acknowledgement from both sides of politics as well. And I think I've mentioned this previously, that even if you can't agree on all of the details, but there needs to be something to be done and try to find the common ground. And if we can get them and all of that and the profession and the business community, and more broadly the voting public, if you like, them all sort of pointing in the same direction, then I think that we can, in fact, achieve something. But it is very much a communication set that as much as anything else. You have to build that case. We have to show why we're in the mess that we're in at the moment, and what needs to be done to try and fix it.

Robyn Jacobson:
[inaudible 00:40:58] is still loving his keynote at our event, which was one of the keynotes a couple of weeks ago. He spoke of two things that struck a chord with me. One was, of course with any reform to GST, they must be not just the support of a bill through the federal parliament, but it has to receive the support of the majority of the states and territories around the country. Now, that mechanism was putting place as a safeguard so that it wasn't easy to change the GST law. But as Peter Costello reflected, it's actually far more robust than perhaps he ever expected.

Andrew Mills:
Yeah.

Robyn Jacobson:
So as he fills in a mechanism that is perhaps too safe a safeguard, it's impossible to change it.

Andrew Mills:
Well, I think that the point is it's never impossible to change. If you prepared to have the courage to do so, you can walk away from it. There's nothing to stop a government saying this is not going to work anymore. And if we really are serious about change, we can't be beholden to one or two States saying we're just not going to do this. That just doesn't work.

Robyn Jacobson:
And I think of the current situation with border closures, how easily that can translate into a bit of a blockage in terms of reform to GST.

Andrew Mills:
Absolutely. And even when the New South Wales treasurer came out with his report from [inaudible 00:42:14], immediately parts of it were criticized by other treasurers in other states who are sitting on the other side of politics. Well, I think that kind of politicking doesn't do anyone any good in the long run and it's certainly not helpful. But what we do need to do is to actually sell people on why tax reform matters. And for me, this is a story about productivity. It's a story about the prosperity of the nation in the future. And if we can focus on those two piece, productivity and prosperity, I think that people will be able to go, "Okay, I get why we're doing it." It's important to understand the why.

Andrew Mills:
And I think that the other thing we need to do is either tear up the current GST agreement, or just say to people, well, states, that if you're not prepared to sign up to a different kind of GST, then there'll have to be adjustments in other kinds of federal state relations. It will just have to be forced. There really does need to be a more holistic national approach, something where people actually care about the productivity and the prosperity of the nation, not their sectoral interests or their state interests. And that is a big ask, but it really has to be pushed for. And I think that it can be done. People can come together. The national cabinet has proven that it is possible for people to agree on somethings at least when necessary.

Robyn Jacobson:
To draw this to a close, Peter Costello also spoke of, when trying to sell this, whether it is selling it to the opposition or to the public or to the business community, there's got to be this big idea. So you and I have tossed around a lot of ideas during this discussion. And I'm not holding you to this because this could be something that evolves over time as we formulate our case for change, that we've going to present to the governments and it could evolve into next year. But you're thinking at the moment, what's your big idea of all the things we've talked about today?

Andrew Mills:
Well, as I say, my big idea is that it's a national productivity and prosperity statement. There is nothing more important to the future of this country than ensuring that we can improve the productivity, which has been lagging for a long time, through things like reforming the tax system and other potential macroeconomic reforms. But importantly, you don't do it for that sake only. The idea is to make everyone better off. And a society is often judged by the way in which the least well off are treated. And I think that it's an important indicator for us all to remember that we can't just be helping one section of the public, this must help everyone in society. And if we can get the right pieces together, I think that's achievable.

Robyn Jacobson:
Very direct question, if I may. Are you confident that we can make a difference here?

Andrew Mills:
I think we can. Yes, I really do.

Robyn Jacobson:
On that note, thank you very much for your time.

Andrew Mills:
Thanks.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Andrew Mills, the director of tax policy and technical at the Tax Institution. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow the Tax Institute on LinkedIn, Instagram, and Twitter. You can join the conversation on our member only community forum. If you're not a Tax Institute member, we are offering a two months free membership trial where you can access all the member benefits. You can also contact us by emailing taxvibe@taxinstitute.com.au.

Robyn Jacobson:
Next episode, I'll be chatting with Giles Hurst, our CEO, about the role of advocacy in the design of our tax laws and how the tech system is administered. We look forward to you joining us next time.

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TaxVibe Podcast

Division 7A under the ATO microscope

Release date: 11 April 2025

Listen below, or on your favourite podcast platform.

Previous episodes

Episode 48 – Division 7A under the ATO microscope

Division 7A under the ATO microscope

Episode Transcript

Episode 47 – Federal Budget 2025–26 Reflections & Insights

Episode 46 – Beyond Bendel: decoding the decision

Episode 45 – Spotting client risk before it bites

Episode 44 – 2024 hits and misses, and expectations for 2025

Episode 43 – Tax Wars: the tax reform story

Episode 42 – Supporting clients amid firmer action on ATO debt collection

Episode 41 – Can AI replace tax professionals?

Episode 40 – Financial abuse – What’s tax got to do with it?

Episode 39 – Talking TASA with the TPB

Episode 38 – Top Tax Time Tips for 2024

Bonus episode – End of Year Tax Issues 2024

Bonus episode – Federal Budget 2024-25

Episode 37 – The tangled web of tax ethics

Episode 36 – SMSF shift: gear up for the latest changes

Episode 35 – Insights into the world of offshoring: is it for you?

Episode 34 – The 2024 tax terrain – treasure and traps included

Episode 33 — Shifting tax payment culture for taxpayers and employers

Episode 32 — Improving the administration and integrity of the tax system for all taxpayers

Episode 31 — The Superannuation landscape: an ATO perspective

Episode 30 — Uncertainty vs. certainty in death and taxes

Episode 29 — Getting tax returns right the first time

Episode 28 — Why your favourite colour matters for data security

Bonus Episode — Federal Budget 2023-24

Episode 27 — True crime, tax and reform — oh my!

Episode 26 — Championing small & family business

Episode 25: Tax clinics — making a real difference

Episode 24 — Raising the bar of tax teaching in Australasia | 27 Jan 2023

Episode 23 — Companies v Trusts – the victor | 4 Nov 2022

Episode 22 — Superannuation Guarantee landscape: an ATO perspective | 19 Aug 2022

Episode 21 — Top Tax Time tips for 2022 | 8 Jul 2022

Episode 20 — The latest changes in superannuation | 1 Jul 2022

Bonus Episode — Post-election reflections | 3 Jun 2022

Episode 19 — Bitcoin, NFTs and crypto assets: tax treatment explained | 20 May 2022

Episode 18 — Unpacking the ATO’s section 100A draft guidance | 6 May 2022

Episode 17 — Tax and technology: transformed | 22 Apr 2022

Episode 16 — 2022 In Our Sights | 10 Feb 2022

Episode 15 — Taking a wellness break and 2022 vision | 14 Dec 2021

Episode 14 — What’s on the radar with SMSFs? | 11 Nov 2021

Episode 13 — Delving into trusts and unpaid present entitlements | 28 Oct 2021

Episode 12 — Walking the tax dispute pathway | 14 Oct 2021