 Tax resilience or what is a resilient tax system for now and for the future? The word resilience is a theme word for the public policy week and resilience is defined in the dictionary depends on which dictionary you look at there are sort of technical and physics and electronic terms It also means though the ability to rebound or recover quickly to be both robust and adaptable to changing circumstances and So as I'm starting to build a research agenda for the new tax and transfer policy Institute and as you would have seen in the media and in policy forums We have a potentially white paper tax reform process We also have a lot of ongoing issues with the way that our tax system is is administered With taxpayers from all levels individuals small incomes small businesses all the way up to multinationals operating globally So what is resilience of the tax system in that context with such a diverse array of sort of Participants beneficiaries and taxpayers of that system and even more fundamental question might be why do you care? We might leave that debate for another day But we can probably assume that our tax system does fund the public goods and services that we have more or less agreed as a democracy that we want So for tax systems resilience includes I think the ability for tax revenues to recover after a crisis Businesses and individuals lose jobs going to losses fail to pay the revenue. That's needed to manage the broad Public service revenues decline in those situations. For example after the global financial crisis We want a system where revenues are resilient will recover Tax systems need to be able to adapt to changing circumstances globally and locally new technologies new currencies We now have a Bitcoin machine in the main mall in Canberra Different kinds of employment different ways of working different ways of caring for family different forms of investment and saving Changing life patterns and longer lives. So we need a tax system that can respond in a productive way to these long run as well as short run changes Following the news you could be forgiven our tax systems under outright attack on the from various angles global tax evasion capital flow calls for a parliamentary inquiry into multinational tax planning or drastic lowering of the company tax rate to be competitive in the region or Struggling with administrative and compliance costs for different aspects of the system So I'm really delighted that I have such a wonderful panel of people here today to Introduce some key ideas for you and help us to have a debate about these different aspects of resilience of the tax system From a range of different perspectives Briefly about myself. So I only took up appointment as director of the new tax and transfer policy Institute a few months ago The Institute was recently established here at the Crawford school with some federal research funds Previously I was a professor at Melbourne University Law School. So I come out of a legal perspective on on tax law and compliance I've worked in academia, but also in both government and in private practice The tax and transfer policy Institute has the aim of building a research agenda both for the short term these short term policy and White paper type processes that are ongoing the BEPS Issues with tax administration, but also for the longer term for the national good and in the region as a whole So of course we can't have a debate about resilience without participants and we do have some really fantastic Participants today. So I want to introduce each of them to you Then each of them is going to speak for a short period of time And then I will come back and we'll sort of open up for significant debates showing back to our members of the panel to bring their perspective from their different areas of expertise So immediately to to my right Mr. Chris Jordan AO who was appointed as the commissioner of taxation federal taxation Just 18 months ago now beginning of 2013 You might be interested to know that Chris is only the twelfth commissioner of taxation In more than a hundred years of administering our federal tax system. So we have a pretty, you know, a stable Administration overall that period of time Chris brings more than 30 years. I'm not suggesting Chris is 100 years old You can tell You can you can tell that he's only Somehow he has more than 30 years of experience In the tax profession in tax policy law development and Implementation he's been an advisor to labor and coalition governments. He had very substantial engagement in public policy and Tax tax reform and administration processes before becoming commissioner when he was In private practice for decades at KPMG eventually leading the New South Wales partnership practice In that he was a member of the board of taxation for many years Which is an advisory board liaising with with business and other taxpayers in the Treasury Chatted tax advisors. So although I'm introducing Chris to you as a leading administrator He brings that depth of private sector experience to that role Next to next to Chris. We have Carrie Setic who's a professor In tax at QUT business school in Brisbane with law and accounting qualifications Carries also admitted to practice as an advisor, but has been a leading academic for many years She recently contributed a chapter on the role of the G20 in tax regulation For CEDA the Committee for Economic Development in Australia for their G20 contribution So Carrie researchers primarily in international tax and tax expenditures Next to Carrie we have Richard Dennis Who is sort of got a very high public profile as executive director of the Australia Institute? Very well known and a highly research-oriented Public policy think tank does do work in the areas of tax and welfare as well as in any other areas of Public policy and I've been very impressed with the work that Australia Institute has done over the years in in tax So Richard a economist by training, but really worked for the past 20 years in policy and political roles Recent years at the forefront of what you might call somewhat heated sometimes and controversial debates About climate change mining industry and we know that in the tax area We did have two quite large taxes that Have recently been removed in those areas Richard is also an adjunct associate professor here at the core for school economics and Government at the ANU and Has published academically as well as engaging in policy and then on the far right. Mr. Paul Abbey Partner at Pricewaterhouse Coopers. I've had the pleasure of knowing Paul for many years He did a lot of postgraduate Engagement and teaching with us at Melbourne University over the years in in tax law Over 20 years experience advising local and international Business and individual clients But Paul has in in recent years taken big steps leading Pricewaterhouse Coopers engagement in tax reform So PWC has a major tax reform project. They're putting substantial amounts of Economic legal and analytical time into researching tax reform Most notably they've been engaging with business CEOs and financial officers chairmen Union and community sector representatives To try to build I'm not sure if you're trying to build consensus Paul Maybe you'll talk about that to build at least communication about the different interests in tax tax policy and potential for tax reform So those are our four speakers and look with that introduction I'm going to turn over straight away to commissioner Chris Jordan to Thank you Thank you Miranda and I was talking to my wife this morning I said I was giving a 10-minute speech at lunchtime and her response will that'll be at first So I'll see how I go in 10 minutes Now Australia wants a tax system that is sustainable and fair Where people choose to participate because they have trust and confidence In the system and its administration a Sustainable system is also a resilient one. So what are the features from my point of view of a resilient tax system? It is one that is designed for the majority where we administer based on risk Transparency and behavior Knowing that most taxpayers are doing the right thing and make it easy to participate by offering contemporary tailored services Resilient tax system is one that fosters willing participation Where people have belief in the system a sense that everyone is paying the right amounts and the administration is fair and has integrity It's also a system that is responsive and adaptable to trends threats and opportunities Where community business the tax profession government and the ATO work together to understand the global environment Explore opportunities and mitigate risks domestically and internationally So designed for the majority. What do we mean here? People's attitudes to participating in the tax system are influenced by many factors belief in taxes trust in the fairness and integrity of the administration The actual structure of the system such as our pay-as-you-go systems dividend franking and of course the deterrent effect of compliance enforcement actions We know the economy industry practices business and social settings also influence people's behavior Most people do do the right thing and willingly participate because More than 95% of the revenue we collect comes in through the mere existence of the tax system Only 5% of the revenue we collect comes in through active compliance measures So our intent is to design and administer Systems for the majority of people who do do the right thing That means making it easier for those people and providing a lighter touch experience We are currently looking at our levels of resourcing across the ATO to see if they align with this 955 concept We also have the challenge of reshaping and rebalancing our workforce After our fairly significant voluntary redundancy process to ensure that we have the right amount of effort in the right places Now even with these resource challenges, we are forging ahead with our contemporary service offer We're looking at new products and services that will make things easier some examples We've now got an app for individuals a small business and The superannuation 80% of the users have rated the app of four or five star rating in the feedback Has been incredibly positive Also to be able to tailor and link in a lot of the YouTube product we have Rather than that densely tight tight sort of text Information that traditionally we would send out people do want to see a two or three minute Explanation in a very quick way at their convenience. We now have my tax Available by my gov where we have a new simplified tax return for people with straightforward tax affairs More than 2.2 million people have now linked To the ATO via my gov and over 750,000 people have already prepared their returns using this streamlined My tax product some people saying they've been able to do it in three to five to ten minutes Because of the extensive pre-fill all available to them. We have also developed a variety of channels for small businesses We've got an online newsroom. We've got small business assist on our website We can type in a question get an answer back. We've got after-hour callback services from six to nine Monday to Friday We're now piloting a click-to-chat facility on the web We've got face-to-face visits. We've got regional liaison officers appointed outside major capital city centers Rather than the old paradigm that we had the only way you can interact with the tax office was to use a call center Or actually to write a letter so providing a whole range of channels For people to choose what is better for them. We're focusing very much on having a much more early engagement Particularly in applications for rulings and in finalizing some of the larger aged case disputes And for example cycle times for private rulings have reduced from an average of a hundred and twenty-nine days To an average of 40 days just by simply sitting down with people up front to understand more the issues Rather than doing this very lengthy paper process through an application response questions, etc We have made a concerted effort to finalize aged cases either through settlement or if we cannot reach any Position near settlement simply going to court rather continually sort of admiring the problem that we both have We've also used in this sense increased use of alternative dispute resolution ADR and The negotiated settlements have increased substantially since 2012-13 To this year. This is not simply about doing deals But about having appropriate settlement and closure and we use in-house facilitators now for the smaller dispute cases in GST and income tax and Right through to retired federal and high court judges for the much larger Set of large business case sectors We're also piloting a new process called external compliance assurance assurance process where tax payers Who have a turnover of between 100 million dollars and five billion dollars and we Have the option of using their existing statutory auditor to undertake assurance work to us on Matters that are of interest to us. Now. This is not about technical interpretation of the tax law That's simply assuring us around certain factual matters again instead of us asking for all contracts documents Correspondence emails pertaining to whatever the matter is and boxes of material come if the statutory auditor has already gone through that purposes of the statutory accounts They can assure us of certain factual matters Now a light touch experience for the majority needs to be accompanied obviously with the right level of attention On compliance enforcement for those who are not doing the right thing So designing for the 95% that I spoke of does not mean Ignoring the 5% and the work we are doing to address the cash economy risks and in the best area are good examples of where Where there are challenging behavior and we are taking appropriate action now fostering willing participation At the tax office, we have set new directions to 2020 in a statement about our mission and vision And now our new mission is and I quote to contribute to the economic and social well-being of Australians By fostering willing participation in the tax and super systems Few words. They're a very key this notion of fostering willing participation What is willing participation? What is participation in a tax system? How do you foster or increase that participation? How can we affect the position in Australia where people consciously want to do the right thing? It's what our view now is is that when we look at that 95% that comes in through the mere existence of the system all the legislation all the regulation Significant proportion of the investment is all focused towards the 5% So those people that have a demonstrable history of willing compliance year in year out Have to go through a more complex more time-consuming more painful more expensive experience Because all of the law and regulation is designed for the 5% And I should say this is not simply a matter limited to the taxation area But government regulation more generally So the ATO's role is to give people confidence that the system is administered in the most effective and efficient way And that everyone is paying their fair share We know that from experience and research that there's a strong correlation Between levels of trust and confidence and levels of willing participation We also know that positive client experiences great service and strong relationships do make a big difference This means we have to change the way we are working to a client and relationship basis focus It is a transformation that we call it the tax office reinventing the ATO We need to shift our mindsets From revenue protection to facilitating compliance from risk aversion to risk management From silo to whole of system thinking from shared accountability to individual accountability From task to relationship from process to outcome focus from internal to external Focus if we can achieve these mindset and behavioural shifts Not only will we provide a better experience the clients will be able to provide better quality advice to treasury to influence policy and law design now just briefly because I've been given the nine-minute warning on responsive and adaptable I Should mention that the international tax architecture in place today was designed in the industrial age Where goods and services were simply delivered in a local marketplace Today greater economic integration across borders improvements in communications technology reduced barriers to international trade the increasing value of intellectual property and the integration of developing economies in the global value chain has fundamentally changed the way businesses operate Our business can move its intangible and financial assets around the world and earn revenues from customers in countries Where it has no physical presence maximizing return on capital simply through aggressive tax structure Australia does have strong transfer pricing general anti avoidance thin capitalization and controlled foreign corporation rules That do provide defences against best risks However, the taxation of cross-border structures and transactions, especially between international related parties Can be a challenging issue even within the existing guidelines legislation and treaties Action is needed on this front because four points and I'll finish one Australia's current tax system relies more on corporate income tax than all other countries other than Norway and uneven international playing field may harm the competitiveness of Australian businesses long-term prosperity the global reaction to avoidance could result in breakout of Unilateral action taken by other jurisdictions and increase the risk or incidence of double taxation and To go back to my earlier point about willing participation Lack of action could result in a lack of trust in the legitimacy of the tax system a Perception of unfairness has the potential to undermine the voluntary ethic in the broader tax system So there's a lot on and we're the tax office can't sit still The ATO does have a critical role in ensuring Australia has a resilient tax system We will do what we can that is within our control. We will adapt Improve and move with the times Because obviously there's been a great deal of publicity around the problem in our International tax regime as well as the role of the G20 and the OECD The the role that they were playing in addressing these Bex problems So I'm going to briefly speak to you about regulatory reform in relation to the G20 and If you are involved in this at all You'd be eagerly awaiting the first of the OECD BEX recommendations that is released at 10 p.m. Tonight So if you're up at 10 p.m. Tonight are much better things to do than watch television now I'll go back to what treasurer Joe Hockey said on the fourth of September mostly positive statements When he considered resilience in our international tax regime He made a few statements I'm going to read out to you top parliament that the commissioner of taxation has been asked to double his efforts to stamp out profit Shifting by conducting more extensive inquiries and audits of multinational companies Considered a risk to Australian tax collections He then went on and said there is a small proportion of multinational businesses that set up sophisticated arrangements to avoid Australian tax This is patently unfair Unfair on the Australian tax payer and unfair on local businesses that are doing the right thing Finally another statement this government won't stand idly by while this is happening We are firmly committed to ensuring that Australia is paid on profit Australian tax is paid on profit in Australia General public may consider these statements positive and that is very much a truncated version of the speech to parliament And I've extracted what are quite sensationalist parts of the speech But I would actually argue from the tone of the speech that if we are to genuinely ensure resilience in our international tax regime There are three key flaws in those statements first it is very Australian focused and that deals with the issue of fiscal sovereignty fiscal sovereignty is central to any international tax issue But we need to increasingly ask ourselves what we mean by fiscal sovereignty because a unilateral stance isn't terrible So if fiscal sovereignty isn't just about a right to design the tax regime any way we want it also Holds an obligation a duty and an obligation to protect and promote the welfare of our citizens and That can be done not necessarily through competition with other nations But also with collaboration to avoid that race to the bottom so in my view a resilient tax system is one in which we recognize that there are both rights and obligations attached to fiscal sovereignty and Our obligations extend beyond the domestic level to a global level If we don't start thinking globally our obligations to taxpayers are not met Doesn't mean we don't hold on to our core values. I firmly believe that we do hold on to our core tax values second The Treasurer has suggested that the ATO has a job of stamping out tax avoidance Dr. Parliament to legislate a robust and adaptable international tax regime It's not up to the Commissioner of Taxation to stamp out which is what is probably legal and the best OECD reports state this The multinationals are complying with the law It just happens to be considered profit shifting because we have a broken international tax system now Morality of these multinationals is another question And the sake of time I won't go into the morality issues but in the context of Audits etc. In cases we've seen these kind of cases fail. We saw a transfer price in case Which was run and the Commissioner lost and it resulted in our transfer of pricing laws being amended What did we do? We actually ended up embedding the OECD transfer pricing guidelines into our current regime We've seen a failure in terms of TPG Maya with private equity exits if you follow the media on that We don't know the answer to the TPG Maya case Which involved the use of tax treaties the money left the country wasn't much more we could do But do we really want to be running part for a cases when the problem is with the substantive wall our Tree provisions, which are allowing these things to happen Thirdly talks about an unfair result Maybe it's the semantics of an academic But I think unfair is the wrong word to be using and I was so pleased to see the Commissioner talking about fairness because that is a very Different concept to saying that the citizen is unfair because people aren't paying their fair share We're talking about fairness, and I absolutely agree that at a grassroots level fairness is the core core to a robust tax system But in a global economy, it's not just about ensuring Australia receives its fair share But that all nations receive their fair share developed countries developing countries Fairness also needs to be considered as a concept What do we mean by fairness and I think what we're saying is that if companies are making sales here They're earning profits here. It's fair that we get some of the tax and that is the root of our International tax regime. So where does that leave us? Paul Abbey, I'm hoping will provide an insight into the PwC series on protecting our prosperity With their latest report talking about how we fix a tax system But that report actually talks about some key points in relation to what we must do and a list three Governments must take a stand and make it clear instead of position on tax reform and that means making hard decisions Second all options need to be on the table We can't limit our discussions and thirdly, and I think the commissioner made this point in talking about fostering willing participation Everyone must have the opportunity to be involved You and thanks Miranda for inviting me along and I don't know which joke to start with no such thing as a free lunch Inevitability of death and taxes Australians don't care about tax. Well, you know today's event blows a few minutes away So my name is Richard Dennis. I'm from the Australian Institute. I'm an economist. So apologies I seem to be in a room full of accountants and lawyers People usually disagree with me, but they particularly disagree with me when they're accountants and lawyers So I'll talk about economics. I'll leave accountancy and law to you guys I hate to say it, but I think the resilience that shares the Latin root of the word resile Which is to run away from So if you want a resilient So yeah, I'm not sure that we actually want a system that we resile from I want a system that we embrace I like tax. I like paying it. Indeed. I think I pay more than I'm required to entirely voluntarily Now I'm an economist I Disagree I know lots of people like me In fact, my organization is funded philanthropically every sin that the Australian Institute gets is given to us by people Who get nothing in exchange except some loudmouth pushing for higher taxes? So this idea there's an economic assumption that Rational individuals always want to pay the lowest price. It's contradicted by history and evidence It's great fun and greedy people love to tell everybody that that's normal But my organization wouldn't exist if there weren't lots of people who actually want to pay for good service I pay more tax probably than I have to my accountant tells me that anyway I Also pay far more for lunch than I need to because I like good service You know I could make my own sandwich But look you offer a free one and some of you guys But I actually pay far more for lunch each day than I need to I used to work at a petrol station That's how I got through uni and I would watch people do a u-turn over a double yellow line on the rare day That we were half a sin to leave cheaper than the people the other side But they'd risk a $200 fine put 40 litres of petrol in their car and save themselves how much? 20 cents and then pay 10 bucks a liter for bottled water Now I know you wouldn't do that But other people are that stupid Well, I'm one of them because I pay more tax than I need to and we need a tax system for a simple reason We need a health system when an education system We need a transport system and these days it seems we need a military system these things cost us a lot of money And if you don't like them, then you don't like tax But if you do like them then a rational individual of which I think that one must like tax That's it. We need tax reform It's very rare to hear someone disagree with that statement very hard However to get people agree on what the hell that might be. I think tax reform would be collecting more tax I'm like Menzies All right Menzies increase the tax to GDP take quite substantially. Remember him? He was a lefty pinko And tax to GDP rose quite steadily. He also ran deficits for his last nine years History is not all that we think it is Now unfortunately in Australia debate about tax reform often hinges on debate about the GST Should we have a GST of 12? Couldn't care less Let me just put it to you this way if the answer to tax if the answer to the question is Increasing the GST then it can't be a very interesting question All right, you increase the GDP from 10 to 12 percent you collect yourself one another five seven billion a year Who cares that's rounding error Okay, we spend 40 billion dollars a year on tax concessions for superannuation If you think we can fix the tax system of the GST then I think you're asking little tiny questions Okay, Australia is one of the richest countries in the world living at the richest point in world history We have one of the lowest tax to GDP ratios in the developed world If you think we're high tax then you are wrong internationally and you are wrong historically You might be right morally because I don't know what the moral answer to how much tax we should pay is But we don't pay very much and if and it's a big if you want to spend more on health Education you want to tackle climate change and you want to have a war over the seas You're gonna have to spend some more money on tax or admit that you don't really want to do some of those things Now time I'll just end with this the GST might have made sense and I don't hate the GST and glad we've got it But increasing it bores me Increasing that the GST was going to end the black economy. Do you remember that we're gonna scrap There was going to be no cash economy after the GST came in it actually gives Produced service sector providers and consumers more reason to avoid tax not less and 20 years ago We thought that consumption was geographically confined We thought labor might be mobile and profits certainly are but we knew consumption was right here Right the GST might have been a great idea 20 years ago It's made the black economy bigger and there's nothing Geographically confined about consumption anymore tax reform is bigger than the GST. Thank you Thank you very much for attending this afternoon. I'm very So I'm very impressed as a Formist actually a former student of this university and in fact someone who grew up in Canberra was born in Canberra It's so impressive to see so many Canberra's come out for a subject like this this afternoon Um, I'm the commissioners talked about administration of the system. I think Kerry's talked about the corporate tax system in many ways Richards just talked And I thought I'd talk about tax reform ah Miranda's definition of resilience is very interesting in that she just Discusses the thing about being adaptable and being robust and being able to recover quickly because the challenge for our tax system In many of those qualities is about to arise If you think about what our tax system is meant to achieve you might say in particular three things first thing Which I think Richard actually touched upon is the fact that it needs to be able to deliver Sufficient revenue so the government can provide all the services that we want to obtain The second thing it needs to do is it needs to provide some measure of equity No can do that either in a redistributive map way or it can also do that in in the way of capability And capability is actually what you're demonstrating here today the tax system or by raising taxes and allowing us to have a sophisticated education system means that we can create social mobility We can improve the quality of people's lives by educating them and giving them access to better jobs And so the tax system delivers the revenue to provide that piece of equity And then the other thing the tax system needs to do is the tax system needs to do all of that in an economically efficient way The tax system doesn't of itself generate economic efficiency But if it's structured in the wrong way it can harm the way our economy operates And if it does that then the job opportunities provided the work opportunities the incomes for the people who are part of that economy Constraint so we need to be conscious of those issues When we develop that and structure our tax system So if you look at this country right now in regard to our tax system And you take up Richard's challenge of why do we need reform? There are two particular challenges we have to think about the first challenge is our ability to deliver revenue in In recent years our tax system and especially post-GFC Our tax system has failed to deliver sufficient revenue for the delivery of services And so our governments at state and federal level have run deficits and they've grown their debt levels compared to what those debt levels were Pre-GFC and so we can continue on that path and we can accumulate more debt But it will be a point in time where economically that will become a palatable situation for us as a country And so the first challenge that we need to embrace is to think about how we structure our tax system to deliver the sufficient revenue We need to finance the services we intend to obtain from government And then the second challenge which is thrown at us in regard to our tax system right now Excuse me is the fact that our living standards Have suddenly faced a challenge and that challenge has been because we have lived upon what you hear referred to a lot As terms of trade for the past 10 years But those terms of trade existed when we had a mining sorry I should say an iron ore price of a hundred to thirty dollars plus a ton And now we have an iron ore price of eighty dollars or approaching eighty dollars a ton And you wonder why I talk about that But the health of the corporate tax system in Australia is actually not necessarily going to be driven by what happens in regard to international taxes and base erosion and profit shifting The health of the corporate tax system in Australia The corporate tax system is driven more by the iron ore price than by any other feature If the iron ore price rises by approximately ten dollars per ton over the course of a year That is two billion dollars in the corporate tax system So a reduction in the iron ore price of an average fifty dollars a ton over the course of a year Would be a ten billion dollar loss for a corporate tax system which would only collect sixty billion dollars So the challenge for our economy and the challenge for us now is that what drove our incomes Which was our terms of trade the price at which we sell things compared to the price at which we buy things has collapsed And what we need to ensure that national incomes continue to grow at the rate that grown over the past twenty years Which is a rate of income growth of approximately two percent per annum What we need to do that is we need to drive the things in our economy which are going to make our economy perform strongly And that is in particular labour participation and labour productivity And the tax system impacts upon those things Does the tax system encourage you to go to work or discourage you to go to work And then in the work you do does the tax system encourage the economy to be structured in a way to make that work as productive as possible And that is what we need the tax system to do We need to do those two things well so that we drive up and ensure the continuing growth of incomes across the entire economy And so that system or those challenges are our challenge for the next year Because our federal government has announced that it wants to conduct a tax reform process It will do that tax reform process through the release of a green paper and a white paper Those papers will set out proposed changes to our tax system Those changes will undoubtedly address the challenges which I've described to you And then the challenge which arises to us is to be sufficiently flexible in our political process That we can embrace making change to our tax system Which will ensure that it is sufficiently adaptable and sufficiently robust To deliver on the promises that it needs to meet of ensuring sufficient revenue for the delivery of services And ensuring a healthy and vibrant economy Time I feel like I've done my job, they've all presented and they've kept to time So I can leave and you can talk to me yourself Now we move on to what I hope is we've got plenty of time We've got more than half an hour to really have good engagement and discussion I have promised my panellists because I've forced them to such short periods of time that I will throw it back to them To perhaps deepen some of their comments on a few of these issues at some point But I would be very happy first of all to open it up and to see if anyone would like to start with questions or comments to get us going So I've got one down here so please wait for the mic Probably what I'll do is I might take a couple at a time and then sort of throw to the panel or come back to me So one down here, is there anyone else who'd like to ask something or make a comment after this one? Just raise your hand if you do If you could say where you're from, where you're named and where you're from, that would be great My question was about political settings for the whole tax reform process I noticed that none of you mentioned the other green paper white paper process Which is about federalism And it seems to me there's a very close correlation between the work that needs to be undertaken in this context The tax system and the way in which you interact with the way in which our federal system works And also needs to be changed I just wonder if there are anyone getting any comments on the extent to which those two things need to happen in the last step Thank you So the comment was about federalism, links between tax reform and federalism So we might just see if someone else has another comment or question Before we up the back Thank you I'd like to just make a suggestion, isn't tax sovereignty fundamentally like all sovereignty territorial And therefore maybe we should go back to Adam Smith and consider there's only three things you can tax in the end Income from land, labour or capital And there's only one of them that can't run away, die out, wear out or hide herself in a bank account Would that be land? Just checking Good point about mobility and sovereignty So I might come back to see if anyone would like to jump in first Kerry and then Richard, please Go ahead I'm happy to address the second question first Absolutely I think we need to be a little more sophisticated than that in terms of sovereignty But what you're really talking about in the sense of tax fairness is looking at what we want to tax So getting back to the international tax regime, what we're saying is we want to tax where sales are happening Where labour is occurring, etc So they are very much the Adam Smith principles So are the fairness issues that we're talking about And I did make a comment that we need to stick to those fundamental norms of tax We keep increasing the complexity of our system and then we keep putting band-aids over that system So I think you make a very valid point that we need to go back to those fundamentals And think about the building blocks for a robust tax system I agree and I'm trying to join the two I think that the economics of tax reform are entirely unrelated to the politics of tax reform And the politics of tax reform these days are maintenance of the status quo For groups that are powerful enough to prevent change So we just saw a resource ring tax, perfectly good tax Collecting revenue from an immobile resource In fact we were taxing it as we tried to make it mobile That is when you profit from digging it up and selling it And even though we've got a government complaining about budget deficits It's just scrapped a perfectly good and entirely economically efficient tax So whether it's a debate about federalism Or whether it's a debate about the basis of tax we should choose And of course as an economist I disagree slightly I think tax system can increase the efficiency of the economy When you tax bad things Well if you believe in climate change you'd sort of think shifting the tax base towards pollution And shifting the tax base towards resource rent profits would make sense But it gets caught up in federalism And it gets caught up in groups that are powerful enough to veto change So yeah of course we can have a white paper about federalism And yep we can talk about land tax and resource rent taxes But let's be clear in Australia today You're not going to get any change that upsets a powerful group How did it not get any change? I'm an optimist by nature, I'm a glass half full person Paul or Christy, what would you respond to either of those points? In response to the first question I was just going to say that it is the government's intention That the tax reform process and the federalism process do run hand in hand If you look at the terms of reference for the federalism process There are elements in the terms of reference there which concern the tax basis of states Last week the government put out the first discussion paper in regard to the federalism process In that discussion paper there are chapters which concern the tax basis of the states And there are chapters which also concern horizontal fiscal equity The desire to ensure that between the states we have the same level of service Provided out of government services So it is very true that those things need to run together And probably the broader comment to make about that is And it relates a bit to the second question Is that when you think about the tax system You need to ensure that you don't always just think about the income tax system And particularly the income tax system as it applies to corporations The tax system is a multifaceted thing And it's not just the taxation paid by corporations Which in Australia is about 60 billion dollars as I said The taxes we collect We collect about 420 or 430 billion dollars annually of tax And the income tax system on individuals is about 160 But then there's about 50 of GST And then there's a whole range of other things Land taxes, payroll taxes, mining royalties There's a huge range And when we come to talk about tax reform What we need to keep in mind Not withstanding Richard's disappointment He's going to experience soon and there's no change But what we need to keep in mind Is that what we need to actually do is think about each one of those taxes And the efficiency or the effectiveness of each one of those taxes And then we need to keep in mind how we structure Delivering the necessary revenue between those taxes To get the best possible outcome And that's what the federalism process is in part about And that's what the tax reform process is also about So they are connected in that way So just quite right about that white paper The issues paper I think probably went up on Friday night at midnight I saw it was dated the 12th which was Friday But that first white paper issue paper is now out in federalism There are no terms of reference issued for the white paper on tax reform And it seems that that may not happen There'll be a series of discussion points Or issues papers and a green paper in this political and policy process Questions? Oh, we've got one floor, yes? Miss Jordan, you mentioned before that there really needs to be a multi-lateral approach To effects and transfer pricing And the consequences of that doesn't happen I wonder whether you could explain how the common reporting stand Will work for Australia in terms of clamping that down And whether you think that it is possible to ever get A really multi-national response to it when there's benefits For those countries that don't sign up to it So I might just repeat, just so that I'm sure you heard of some amplify But really about this new administrative cooperative process That's part of the OECD based erosion profit shifting project Maybe you could actually just briefly say what the process is as well Just to make sure that people know Yes, the automatic exchange of information Is one of the three sort of major planks of the G20 tax agenda This year and I would suggest probably for a year or two or at least more And part of this was driven by the US They had this FACA, Foreign Account Tax Compliance Act Or something like that Which required any financial institution Registered or raising funds in the US To provide information to the US in terms of the tax residency Or the people who had deposits with them wherever it was in the world So that was sort of a useful thing for US purposes to get that information So that's been broad and there's a similar sort of thing within the EU Already exchanging of information of the tax domicile Of the account holders of financial institutions So this has been broadened out to a large number of countries now I think about 100 or 110 countries have signed up expressing intent To adopt the common reporting standards So the beauty of this is you can transfer bulk data between countries And that's sort of useful but very manual If it's not in a particular format Every piece of information you get You've got to drill down in And it's an incredibly labour intensive sort of process So what it is, it's a lot more than the US FACA It's extending the EU to be basically automatic exchange of information Using a common platform that we here in the ATO Any revenue authority in any country Can then design their system around that platform So we can run the analytics over the top of it Draw out what information we need Match it against anything else that we have We're getting a lot better with the vast amount of data we are A lot better at using that information In terms of profiling people But also aggregating It's one thing to say well what do we know about you Your associates, your family members Your entities, trust that you're a beneficiary of That's quite a different picture So this is an important piece of that overall puzzle To basically get data in a format that we can easily manipulate I think it will be quite well supported In the forthcoming G20 It's simply a matter of the timing What year are people going to sort of start The reporting of this information There are some in Europe that are starting as early as 2016 Because they're pretty much the systems are there anyway It's a lot easier to adapt the whole system In Australia we've never really had to do this Some of the large banks were well advanced In the FACA reporting But the common reporting standard in this exchange of information Goes beyond the traditional large banks It does hit some of the insurance companies And some of these other bodies That were originally caught up in the FACA So I think it's going to be a useful piece of information Mainly for individuals Sort of useful for corporations To actually understand the flows To when monies end up So if there's a lot of money Sitting in a particular tax haven That we didn't really know about previously That might be of interest But the most major impact of this Will be on individuals Who have attempted to sort of put money offshore And not to slow the return on that We've announced a project called Project Do-It Which is to slow offshore income today Which runs through About the middle of December Because our view is We will eventually We've now tracked it out Through this exchange of information Or we've signed a new tax treaty With Switzerland last year That provides for the first time For the exchange of information So we've said let's do it quicker Sooner Provide a concessional base for you Come forward And we'll tax you online To come forward And we'll tax you on the last four years Of income Put a flat 10% penalty on And charge you the normal interest Charge on that But bring the assets back into the system So one of those things That very powerful administrative Cooperation raises for me Is one of the tensions in the system About how the individual And individual Privacy and taxpayer rights Sit with collaborative Revenue agencies I'm a fan of automatic information exchange But I do think this is one of the tensions For legitimacy in our system We might feel confident Recently confident About Australia's privacy settings For individuals But we might feel a little more concerned About that for other countries The other tension that it raises We've got another question coming here Is that of course it relies on Financial intermediaries To bank some financial intermediaries To be in the system For this to operate But what if you have Bitcoin transactions Which take place outside Financial intermediaries So you can see that there is a temptation An attention there Certainly a temptation for creative Development To kind of then again Potentially move outside systems But I do think this is a very impressive Achievement if this comes out of the D20 Now we have another question here This question is very Australia focused But a big feat Of our Australian social structure Is the Shifting demographic The ageing population Richard made a very brief Reference to our superannuation System But with the emphasis on equity Through our presentations I just wonder whether any members of the panel Will have some comments About the age Of your What it was coming through And whether Our superannuation arrangements Will go into the system So the comment about Demographic change, the ageing population The cost to revenue of that And also potentially the fairness And efficiency implications You will refer to Richard Shall we throw to you? I think that Our superannuation system Is fundamentally broken And in 20 years time Will not resemble anything like What it looks like today That's there You've got an industry that's making More than $20 billion in fees But a pretty discernment To keep the status quo the same Now it's interesting the It costs seven times more To administer our superannuation system Than it costs to administer the entire Well done The total administer You're doing well The transaction costs Of the tax system are remarkably Small compared to the incredibly Expensive coupon clipping That is the superannuation system So we've got Tax concessions Next year will be greater Tax concessions to super next year Will be greater than the entire cost of the age pension We saw Joe Hockey admit He now accepts as treasurer always has He's just the first treasurer to say it That the percentage of people On the age pension will be no lower In 30 years time Than it is today What the superannuation system is Is simultaneously a wonderful middle class Top-up to the age pension Top-up not substitute And the best Legal tax minimization Strategy ever invented Because if you're over 65 You can pull millions of dollars out of super Entirely tax free I mean this is a fantastic system Why would you go to Switzerland Why would you go to the Bahamas If you could engineer 100 million dollars In your self-managed super fund When at least one person happens Then you can pull 10 million a year Out tax free Fantastic Not going to last And the industry is going to fight Tooth and nail to keep that A big dollar transaction cost And could I just Have a comment on that I talked about the design of the system For the majority The 95% I think this debate has skewed Some what We're the ADO regulators Of the super fund area You know there are limits On what does go in annually If someone has hit a jackpot somewhere And got 100 million dollars There's like There's 550,000 super funds Right, the self-managed super funds The average Member balance is 480,000 So at 5% return there's 24,000 a year Now I'd hardly say That's wealthy Or you know Extravagant In it There's 1.5% of super funds Have assets between 5 and 10 million Right, so 100,000 super funds Have assets below 2 million dollars Right, so the average fund balance Is 930,000 dollars The average member balance Because many of those funds have At least two members So the average member balance Is 480,000 So where's the majority Where's the 95% of design For the system that I'm talking about It's with those people That I get a 24,000 dollar return On retirement You know, and so I do sort of Let's be careful about shaping A tax system for one person Self-managed super funds If someone somehow Got an advantage Good luck to them Let's stick with the people The majority, the 500,000 plus So I'd just be a little careful Jennifer Hewitt wrote this article She does the page 2 of the FIN review Where she systematically Went through and debunked A whole lot of this The Treasury costings, for example Assume the Treasury themselves Say they are, I guess At what this is It assumes that if there was no money In the surplus, people would simply pay Full marginal rates, 49% Tax on that, whereas people would Clearly do something else You might say well you should do something there But that's a different argument It's a different argument I just want to make sure This super thing, because I read this So often that the wealthy Are getting a big advantage here And I look at the figures And when I look at this stand back Let's design things for the majority This is a classic example The average Australian has less than Two leagues The number of one-legged people Is far greater than the number of Three-legged people And the average Australian Has less than two leagues The average Israel We're talking about the fact That very wealthy Australians Have been handed an incredible tax Minimisation gift In the superannuation industry And more than half of Australians Will retire with less than $150,000 in super More than half Women who take a silly enough To choose to take time out of the Workforce to care for adults Will retire with far less In super And perversely If the current government's reform Agenda is complete Low-income earners will pay more Tax More tax on their super contributions Than they will on their very low Ordinary income You could not design a system That does more to take from Those with the least To move to those with the most And to defend that system By saying, ah, there's only a handful Only four or five percent Making out like bandits I think, I hope you keep that defence up I hope the industry runs that line Because that will speed up Change quite a bit I'll just stick to my design For the majority of people As an administrator You're administering for the 95% Now, we did have a question over here In the suburb of the College of Law I'd like to address something to the commissioner I think Rich and my old Soviets Mentioned fairness There's a Commonwealth agency Called Salank Which prosecutes low-income Solve parents Who have a debt of about $15,000 That is the policy From my experience as a lawyer The tax officers have negotiated $100,000 in a commercial sense They will accept the bankruptcy With a low-income recovery They will negotiate to avoid the bankruptcy Of right of debts in the vicinity Of hundreds of thousands of dollars for individuals Where's the equity amount? So again, just to repeat that On the issue, really, is the Different enforcement and compliance Approach that we take in our two big Cash-in and cash-out systems Leaving super aside for a minute, I guess Being social security system Compared to the tax system So that is a question for you I don't know what the situation Incidentally did So I can't comment on that What we do at the tax office Is try to work with Small businesses in particular There's a lot of Debt around the small business And the quarterly instalments We try to work with them, A, to make sure They don't get into debt B, how can we Work with you if your business is viable How can we work with you To get yourself out of that debt? I'm very strong On the basis that my primary aim Is not to bankrupt people Not to put people out of business If they have a viable business To run, and if Typically people get themselves into trouble Because of large one-off events Either in their life as individuals Or for businesses That they haven't quite Monitored their operations So we try to work with people To stay in the system Rather than Work to sort of Penalise people And bankrupt people So that's not our primary aim How do we make people stay in the system Work with us jointly Not to get in the debt in the beginning And to provide the relevant Man of information, education And help And secondly, if in debt What sort of arrangement can we Come to? Typically that's a payment Arrangement We get criticized On the other hand for those people Who refuse to work with us Who we do bankrupt Or put into liquidation So it's sort of both ends of the spectrum Here we get comments around So we very much try To work with people, not to get in the debt And to work through the debt I just want to see if Carrie Paul would like to make a comment On that Look, I think it's a really important question And I applaud the ATO I run a small business And after our Bookkeeper left a couple of years ago We outsourced our bookkeeping temporarily And didn't put in a bass And the first thing that happened Was the ATO rang and said You guys are putting your bass in on time For the last 15 years, is everything alright? Can we help? Fantastic response Couldn't ask for better So I think your question Highlights something we don't want to talk about As a society and that is that Decision making the ATO is made On a basic learner Revenue maximisation model What's the smart, sensible thing to do? Decision making in welfare Not just in chasing debts Is explicitly designed to be punitive We actually Want to not just hurt people But we want people to see That they are hurt Unreasonable, the hurt is The kind of more successful The example making was And the fact that the ATO Adops an entirely different approach I think makes perfect sense But it highlights something really important That for example If you were ignorant Of your welfare rights And were slow to apply For money that the parliaments Are entitled to, there is no back pay When it comes to welfare You're not entitled until you've asked Whereas if you can retrospectively Get your tax affairs Kind of renegotiated Well good luck to you, you're a genius So it's not just When it comes to penalising That there's an incredible asymmetry In the way we deal with the most vulnerable Poorly advised people And the way we deal with the wealthiest Best advised people The other thing there though The real issue is not to allow The Centrelink person to get into $15,000 debt That's the real issue, how did that ever happen In the first place? Well no, what it is What it normally is Is someone's gone to do Some part time work And quite rightly at times Citizens think government agencies Exchange information So if Centrelink keep paying someone An amount, they are I'm entitled Not realising that the systems Are only run after the year in To match and then throw up Ah, we know you've earned this much From the tax office now We've overpaid you Whereas people often quite rightly think I got given this money, it's mine You wouldn't have given it to me if I wasn't entitled So we've got to move to a system With less churn in it With more real time Data matching so that that Debt never arises And that's part of the truth That is the way data runs But it is a mixture of error On the part of assembly And error on the part of individual And would live in fraud But it would be very difficult to maintain Those reporting regimes as an individual Even with respect to fraud There's good evidence as a big research project Being conducted in New Zealand At the moment by a researcher Lisa Marriott at Victoria University Empirical study of the approach To fraud in social security Compared to tax in New Zealand And the differences Are what you would expect That very small Debt where there is Accepted to be fault in both cases Fraud in both cases Very small debts are pursued to the Enthedegree in social security system In quite punitive circumstances And are forgiven Or not chased in the tax system Because a bigger systemic risk approach Is taken. So it's an interesting question For us about our relationship with government And how we see tax and transfer Systems operating Are they always fully integrated or not Do we have any more Questions or comments? We're almost a full business cycle On from the GFC So I just wanted to Hear your thoughts on whether we Do have a resilient tax system And we're also just about to start A period of tax reform And I'm wondering how we go about Measuring whether this round of tax reform Delivers a more resilient tax system It's an interesting question about What would be good tax reform And I might throw that to each of our Panelists actually before we close In terms of from the GFC And revenue trends The Parliamentary Budget Office Produced a structural report recently Where they looked at revenue From 1980 onwards More or less the last 30 years And they showed that federal Revenue oscillates around an average Of 24% of GDP And that makes It seem like it's fairly stable But actually if you look at those 30 years which have been almost entirely Of substantial growth As Paul was saying substantial Income growth largely in the last decade Especially on the sort of mining Terms of trade We've had substantial increases In revenue in line with growth And there was a German economist In the 1860s Who posited a theory Called Wagner's Law Which is that revenues and spending Basically grow with growth No one's ever proven Or disproven this theory But it does seem to match the experience Of many countries What we're seeing more recently though Is the spending increases with growth But revenue is not keeping up So in my view we haven't Fully recovered from the GSE It's not surprising we had a dip But I do think there's some Potentially some cause for concern Because we have had the benefit Of a fast growing economy As that growth slows We might really struggle then To have enough revenue to cover The kinds of services that we want So for me, tax reform would involve Some increase in revenue And what you might have heard Is overall package I might throw to the panel starting With Paul to respond to that question About resilience past and then After tax reform Look, it's a very good point about The impact of the GFC in regard to the tax system Because if you look at Say the federal tax system In the pre-GFC period We had budget surpluses And we had Because of the health in particular Of the corporate tax system And the personal tax system Coming out of the GFC we had a collapse In all of those revenues But in particular we had a Collapse in GST revenue And GST revenue As a proportion of GDP has declined Over the past five or six years And that's been driven in part By the fact that post-GFC People tend to save a lot more Whereas pre-GFC and boom times People consumed a lot more Of their income So we've had an impact From the GFC on GST collection A GST collection Declining as a percentage of GDP We've also because of the mining boom What's happened in regard to corporate tax revenues As opposed to GFC The corporate tax revenues Having declined in the GFC Didn't federally recover As much as they were otherwise expected to And probably that's because What the mining boom did Was then create a huge Pool of capital investment So we've had a massive Level of capital investment in our mining Industry in the past Ten years especially compared To say the past 50 or 60 years And that has then suppressed Corporate tax revenues as a result Of that happening So post-GFC we also don't have The same strength in our corporate tax Revenue so your comment is right That we've had those weaknesses Arise and then the compensation To those weaknesses has essentially In bracket creep that we've allowed The income tax system to sit Still and we've bracket creeped Our way into income tax growth In regard to personal taxes And that sustained the health Of the income tax part of the tax system By essentially allowing people To rise in terms of the The average personal income Tax rates that they pay And so all of those Points go to your very question Which is they are all challenges Of the current system And equally when we move into This reform cycle to the extent To which we successfully do Or don't do this reform cycle One of the challenges is for each one Of those areas so for Recovering the amount of corporate tax For trying to recover GST as a percentage of GDP And then also not Rely entirely on income tax growth To sustain the health Of the tax system and be dependent On that we need to take on Each one of those challenges as part Of the tax reform process I think it's Unfortunate that the The GFC happened just when it did Because it conceals That cyclical shock conceals Some structural problems The last thing John Howard did In his term was significantly cut Income taxes. Go back 10 years 14% of Australians Were in the top tax bracket Maybe 3 So don't worry about bracket creep Far fewer people were in the top tax Bracket than we've ever had So when the terms of Trades were on the way up When the mining boom was on the way up We made permanent cuts Very expensive cuts to income tax Cumulative cost more than $200 billion We doubled the assets Test for claiming the pension That's how afraid we were of the cost Of aging. We thought quick People claiming the pension That's you know and so One of the reasons that tax concessions Were super having so little benefit In terms of savings on pension If we doubled that assets test So I don't so We made some long term structural Decisions pre GFC And some of yes That's true about the massive Investment in the mining industry Suppressing corporate tax payments But we're not going to collect Those permanent changes The pinker lefties at the IMF Said that our fiscal policy Changes at the peak of the boom Were reckless You know I don't think we've got structural Problems with the resilience of our tax system I think we've got structural problems With the resilience of our politicians And structural problems With the resilience of companies That are asked to pay tax And until we Until we overcome That problem Then we're going to be stuck with a much lower tax The GDP ratio than we previously had And if coming back to You know why the GST revenue is not growing Massive spending on private schools Massive spending on private health Both exempt from the GST You want GST reform Put the GST on private school fees Put the GST on private health insurance Good luck with the politics of that Carrie don't feel like you have to engage Richard I'm just The super in the housing I asked you to talk about international challenges You're welcome to focus on that No I'm happy to discuss It more broadly I think the tax agenda Is actually something good That has come out of the GFC I don't believe we would have the same amount Of people here today if it wasn't for the GFC It clearly Caught tax reform on the agenda Especially in the international tax setting It does raise issues like superannuation And I tend to favor Richard's argument a little more I'm sorry commissioner So to the 95% I'm just dealing with facts I'll leave that one alive But I think Richard raised a really good point In relation to the NRRT Which is a really Solid good tax It happened to be captured by big mining companies And that's in my opinion Why it failed But the public Is engaging in these conversations And the commissioner said That we need to foster willing participation And he was talking in the context Of the 95% who pay But I think that's broader And I think it's willing participation In discussing tax issues And working out what we consider Is a fair tax system What are our core tax values What makes up a robust system And the G20 Did a lot in terms Of overcoming The consequences of The GFC And they're carrying on with that We've already seen a tangible outcome In terms of the common Reporting standard being adopted And it is one of the three Agenda items for the G20 In relation to tax Fingers crossed we see some more Outcomes coming out tonight And over the weekend At the finance minister's meeting In Cannes because I think something like The common reporting standard Is a fantastic start But it's just a start But I'm not convinced that would have Happened without the GFC Commissioner I'm going to give you nearly I've got the last word actually I'm going to give you the second last word In our session I'll come on No, no, it feels like it's true I did warn them all that this was Live streamed that we would have Media present that it is going to Stay live on the web, you know For posterity or at least for a period of time So that they would need to commit And we might have strayed into Slightly to controversial territory So look I think we're actually Just more or less Wrapping to a close here I think that This audience here shows that We do have a substantial amount of interest In this white paper process in spite Of the fact that one could come to it With a great amount of cynicism We do see in Australia I agree with Richard That there are vested interests Might be the wrong word or it sounds I mean I've got vested interests Right we all do those of us who are Working full time in good jobs Have very substantial vested interests In the current superannuation system If we've got enough money To have investment properties which Large proportion of the working Population of Australia in the middle Level actually do They have a very substantial vested Interest in negative gearing And we can see that all the way Across our system And so we do have a difficult Reform process because we have Large sections of the population Who are heavily engaged with Particular winning and losing Outcomes from reform In the corporate sector we have Australian companies who are Providing mutation credits, paying Substantial amounts of Australian tax sometimes Engaging in competition with Multinationals who Have different interests but Bring substantial technology and benefits To our shores, don't forget that So we've got a lot of packaging To do I can't entice him tonight He's not going to give you a last word so I'd like if you would join me in thanking My panel, Paul, Richard, Kerry And Chris