It may come as somewhat of a surprise, but CEDA and the ATO share similar aims – economic growth and efficiency.
The Tax Office is not usually seen as a catalyst for these national goals.
The World Economic Forum cites institutional distribution of benefits and infrastructure as two of the primary basic requirements in its 12 pillars of competitiveness used to measure countries in its annual global competitive survey.
Australia – in 19th place in the 2007-08 survey – gained its strongest competitive advantages, according to the World Economic Forum, from its financial and goods markets efficiency, the quality of its institutions and its higher education and training.
The importance of taxation in this context is obvious. “Generally, taxation is used as a tool for supporting and paying for the basic functions of government; these include managing the economy, regulation (protection of the environment, the public and vulnerable groups within society), developing society and providing public goods (e.g. defence and education systems).
Less recognised is the role which administrations can play in facilitating economic growth and efficiency. The way the ATO operates can impact on: the relationship between the citizen, businesses and the state,
the level of competition, and
compliance costs.
My starting point today is that a good tax system and a good tax (and superannuation) administrator are vitally important to our economy and to our community. How well we administer the tax and superannuation laws impacts on economic growth and the social fabric of our society.
Speaking about the public service more generally, former Secretary of the Department of Prime Minister and Cabinet Dr Peter Shergold observed:
“A public service that is based on merit, that does have high standards of integrity, that does in a quite fundamental way protect citizens [and businesses] from the arbitrary exercise of executive power, doesn’t happen in most countries in the world today.
This applies particularly in relation to tax administration.
In theory, tax administrators could quash entrepreneurial spirit if they acted in a heavy-handed or draconian manner.
Traditionally, in many countries tax has been collected under a command-and-control model in which the rules are laid out and any infringement is dealt with. This is all the worse where the integrity of the administration is open to question. “The tax man has traditionally been viewed with contempt over the centuries for collecting revenues from societies. Fast forward a few thousand years and while there is still some disdain, organisations such as the Australian Taxation Office are reinventing themselves to become more approachable and community-minded.
Of recent years, the ATO has been a global innovator of a different model of compliance, which academics John and Valerie Braithwaite call responsive regulation and taxation.
The ATO’s compliance model is based on the twin beliefs that most well informed taxpayers will respond positively to a system they believe is both fair and transparent, and act in a self regulatory manner that enables them to get on with their lives and businesses. Basically, it is predicated not only on the cooperation of taxpayers but also the belief that the great bulk of taxpayers comply with tax laws. It is only a minority that pose real problems of tax evasion and avoidance. This is reflected in part by the fact that, of revenue collections in 2006-07 of $248 billion, only about $5 billion were the result of active compliance activities.
“The responsive regulation approach is based on the proposition that effective enforcement requires a dynamic and gradual application of less to more severe sanctions and regulatory interventions. The Australian approach also advocates a deeper understanding of the motivations, circumstances and characteristics of taxpayers…”
Responsive regulation works a bit like a pyramid: at the bottom are the bulk of cooperating taxpayers who enjoy a regulatory strategy based on service delivery, assistance, convenience, access, transparency and accountability.
It then goes up through various levels of self-regulation to the resistance that requires command regulation, and, in the extreme, prosecution.
Obviously the ATO needs to deter, detect and deal with non-compliance with revenue (and superannuation) laws with a high quality compliance program.12 But even here the emphasis is on “prevention is better than cure” and on securing a level playing field. Abusive tax practices distort the market and give rise to unfair competition.
The shift from regulatory formalism to responsive regulation requires a supportive organisational culture. “Before changing what is done it is critical to change the way the situation is thought about.” So it is that the ATO’s Strategic Statement 2006-10 postulates our business intent as optimising voluntary compliance in a way that builds community confidence. The emphasis on voluntary compliance rather than revenue collections is a significant cultural change.
With the emphasis on the proper application of tax and superannuation laws, minimising compliance costs becomes a more prominent objective in supporting economic growth and efficiency. Compliance costs are crucial because they impact on the competitive position of Australian business in the global environment.
It is said that the three key principles of a good tax system are to be equitable, economically efficient and simple.
While the shape of the tax and superannuation systems are matters for government and not the ATO, these principles still have relevance for administration.
For example, a new system of Annual Compliance Agreements has the potential to deliver what large corporates tell us they most desire–more certainty in their tax affairs, with fewer surprises.
If a company has sound risk management processes and enters into full and true disclosure, the ATO will sign off – that is, agree not to audit – on a current, real-time assessment of low risk matters. With any continuing open issues we would encourage the company to use our priority rulings system.
There are two interesting facets of ACAs that illustrate the new compliance model and its possible effect on economic growth.
First, ACAs recognise that tax can be a grey or ambiguous area when applied to dynamic, complex and global arrangements. Both the ATO and large corporates need to bring considerable expertise to bear. But if the ATO can demonstrate – as I believe it can in most cases – that our approach is aligned to the proper application of the law, and that we are fair and professional in our workings with taxpayers, we can foster a more collaborative approach that has the potential of reducing compliance costs.
The cultural change associated with this is a two-way street. “Notwithstanding this positive attitude, which is voiced repeatedly by our government participants. CEOs in most countries still regard government as unfriendly to business and as imposing unnecessarily heavy regulatory burdens.”
Second, ACAs will only be struck with companies which have sound corporate governance. Our underlying assumption is that such companies are not only more likely to be conscious of their tax obligations but may also be more attuned to the sustainability of their market share or profits.
Standard business reporting (SBR) is another initiative aimed at reducing the regulatory burden on business. The ATO and the Registrar of the Australian Business Register (ABR)18 have been strong supporters of SBR from the perspective of SBR’s potential to reduce compliance costs. The application of standard business reporting for tax file numbers, scheduled for next year, will provide an early indication of the benefits of SBR in terms of less paperwork and hassle.
Similarly the ATO and the ABR are taking a leading role in fostering online dealings between business and government.
The ATO’s commitment to making tax compliance as easy as possible is also reflected in our business model.20 For the past five years we have published an annual “Making it Easier to Comply” update.
The hallmarks of this program are based on our 3Cs of consultation, collaboration and co-design which use ‘user-centred design’ thinking to reduce compliance costs.
As part of our transformational change program we are also placing new emphasis on analytics to tell us more about taxpayer behaviour and help us identify groups or taxpayers who may not be complying. This will enable us to better differentiate, focusing for example on specific high risk taxpayers or groups, which in turn should not only reduce the incidence of contact with taxpayers who don’t need to hear from us, but also support a more level playing field for businesses.
Aspects of superannuation are also part of the ATO’s remit, and again our role is not usually associated with economic growth. Yet we are helping to ensure that the system is working in accordance with its legislative intent. The $1.4 trillion superannuation pool will no doubt be instrumental in helping build future infrastructure and productive capacity.
Like CEDA, the ATO likes to keep a weather eye on future economic changes that may affect the way we all do business.
Climate change with its associated emissions trading system, as well as the review of the tax system are two matters high on any future agenda. Where the opportunity presents itself, our contribution to both would be to bring to the fore the practicality and compliance costs of any new measure.
Our regular surveys of business report some positive trends22. Two thirds of businesses surveyed say it is now easier to deal with the tax system, while 77 per cent say the ATO is trying to make complying with tax obligations as easy as possible.
Two of CEDA’s three primary missions are to influence public policy to achieve economic development with social balance, and identify business best practice to improve management decision making.
The ATO – in quite different ways of course – fulfils a similar mission.
