0102TPA_TaxVibe_LP-Banner

TaxVibe

A podcast by The Tax Institute (TTI). We love the vibe of tax and here at TTI we do tax differently. We'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. 

 

Listen to our latest episodes
Available on Apple, Spotify and Google now 

Episode 1 Transcript

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.

Episode 2 Transcript

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 3 Transcript

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 Robin. 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, Robin. 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, Robin. 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, Robin, 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, Robin.

 

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, Robin.

 

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 4 Transcript

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 5 Transcript

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:
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 or any 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.

Episode 6 Transcript

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.

Episode 7 Transcript

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.

Robyn Jacobson:

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.

Robyn Jacobson:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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?

Robyn Jacobson:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Robyn Jacobson:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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.

Robyn Jacobson:

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.

Robyn Jacobson:

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."

Robyn Jacobson:

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.

Karen Payne:

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.

Robyn Jacobson:

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.

Robyn Jacobson:

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.

Karen Payne:

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.

Karen Payne:

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?

Karen Payne:

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.

Karen Payne:

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.

Robyn Jacobson:

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."

Karen Payne:

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.

Karen Payne:

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.

Robyn Jacobson:

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.

Karen Payne:

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.

Karen Payne:

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.

Karen Payne:

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."

Karen Payne:

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?"

Karen Payne:

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.

Robyn Jacobson:

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.

Karen Payne:

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."

Karen Payne:

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.

Karen Payne:

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.

Robyn Jacobson:

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.

Robyn Jacobson:

Not a member of The Tax Institute? Join a collective voice of our about 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.

Robyn Jacobson:

You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

 

Episode 8 Transcript

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 10 Transcript

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.

Contact us 

Email: taxvibe@taxinstitute.com.au