8 February 2018

The Hon Scott Morrison MP Treasurer House of Representatives Parliament House Canberra ACT 2600

Treasury website online submission

Dear Treasurer

2018-19 Pre Budget submission

Chartered Accountants Australia and New Zealand (Chartered Accountants) welcomes the opportunity to respond to the invitation from the Assistant Minister to the Treasurer, the Hon Michael Sukkar MP, to make a submission on the 2018-19 Budget.

Here are the key themes in our submission:

Sustainability of the tax base

The need for fundamental tax reform will not go away even if politically, it all seems too hard.

The impact of intergenerational factors remain a concern from both a spending and tax collection perspective. Technological change has enabled greater globalisation and facilitated new business models which are placing pressure on traditional tax collection mechanisms.

Our corporate tax and personal income tax settings are seen as uncompetitive in a world where other nations are lowering their rates. These trends support realigning the Australian taxation system to reduce our heavy reliance on income tax (both individual and corporate) and increase reliance on GST and environmental taxes.

This realignment needs to be accompanied by a reinvigorated discussion of how government services can be provided equitably and efficiently through our federal system of government in the medium to long term.

The government prides itself on its economic credentials and the hoped-for return to surplus over the economic cycle must remain a credible goal. Any further tax rate cuts should therefore be carefully justified on economic and distributional grounds which use realistic assumptions.

Chartered Accountants Australia and New Zealand 33 Erskine Street, Sydney NSW 2000 GPO Box 9985, Sydney NSW 2001, Australia T +61 2 9290 1344 F +61 2 9262 4841 charteredaccountantsanz.com

Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ. 2

There are longer term risks of reducing tax collections at a time when Australia’s:

 Return to surplus is only barely in sight, with spending pressures difficult to contain  Commonwealth debt is at historically high levels as a share of GDP (alleviated for the time being by historically low interest rates and a growing economy), and  Our fiscal position is impacted by variables the government cannot control, such as interest rates, commodity prices and global economic growth (although the latter is currently displaying a favourable trend).

Despite the government’s on-going debt reduction efforts, our economy remains at risk should Australia experience a significant negative economic shock. In this context, geo-political factors and the rise of economic nationalism are key concerns.

To be effective in a practical sense, any proposed tax cuts should also be meaningful for the target group. We see little point in a reduction which attracts Senator Amanda Vanstone’s withering description of the 2003 Budget tax cut as barely enough to fund a “sandwich and a milkshake”.

In terms of funding a personal income tax cut, some of the black economy measures under consideration could provide the means, although there will be some delay in the receipt of revenue due to the need to have realistic implementation time frames.

For the longer term however, we remain of the view that fundamental reform of the tax base is needed to achieve more sustainable revenue streams. We reiterate our support for changes to the base and rate of GST. For the personal tax base, a broader ‘tax reform bargain’ is required – particularly if the government intends to make changes to the treatment of work-related deductions.

Chartered Accountants therefore calls on the Government to use the Budget as a platform to “talk straight” to the Australian people about the economic and social risks ahead for our Commonwealth, using Treasury modelling and input from other trusted sources. Research about what a sustainable tax framework looks like should be released not as a policy document, but to encourage informed debate, particularly in view of the looming Federal Election.

We urge the Government not to make piecemeal changes to the tax system in this Budget. Such changes risk portraying the Government as populist and devoid of any big picture, long-term strategy. It gives only the appearance of genuine tax reform, without any grand bargain with the Australian people which shares with them the rewards of a simpler, sustainable tax system.

The tax system plays a role in addressing inequality, but all Australians need to pitch-in

It is clear that equality is an important issue for Australians and politically, will be a central theme in the next Federal election campaign1.

In terms of the role that taxation plays in the debate over income inequality however, our fear is that Australians have been encouraged to believe that extra tax can always be extracted from “someone else”, or piecemeal changes to the tax and superannuation law are acceptable because they only impact a small percentage of Australians.

The reality is that a sustainable revenue base requires everyone to contribute to support community services. That means changing entrenched community attitudes, such as:

 Over-claiming worked related income tax deductions is “all right”

1 Refer Opposition Leader Bill Shorten’s speech to the NSW Labor Conference, 30 July 2017: http://www.billshorten.com.au/address_to_the_new_south_wales_labor_conference_sydney_sunday_30_july_2017

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 Paying cash to receive cheaper goods and services helps “battlers”

The 2018-19 Federal Budget provides a unique opportunity to engage with the community on these important issues as for the first time, the government has at its disposal detailed tax gap research on individual taxpayers, small business, privately owned groups and the black economy. The government also has the Final Report of the Black Economy Taskforce which is yet to be publicly released.

The black economy should be a key Budget focus

The Black Economy Taskforce’s Interim Report notes that: “Operating in the black economy gives an unfair competitive advantage to businesses and workers and distorts economic activity. Those who meet their tax and other regulatory obligations are directly penalised. From an economic perspective, a dual tax and regulatory system (one legitimate, the other ‘black’) takes resources away from their most productive uses.”2

The Interim Report contained a number of valuable ideas that could be announced in the Budget regarding:

 The hardwiring of government (or “joined-up” government) which acknowledges tax compliance as a key eligibility criteria for the “social licence” we enjoy to access government services

 Government leading by example (for example, requiring suppliers to possess a “tax clearance certificate” before gaining contracts to provide goods or services to the government sector)

 Improved tax reporting and collection mechanisms

 Ensuring sharing economy participants contribute equally to those in the traditional economy.

Australia’s tax system is too complex and our approach to tax policy making is poor

In a difficult political climate, it is tempting to make Budget tax announcements which are narrow in their scope and punitive for a particular, typically small or non-voting segment of the taxpayer population.

A plethora of “announceables” rarely addresses broader policy ramifications, creates enforcement problems, raises only modest amounts in the overall scheme of things and goes nowhere near the big picture reforms Australia requires. They confuse taxpayers and add to red tape.

In the meantime, acknowledged problems with Australia’s tax rules continue to appear too hard to fix3. Chartered Accountants notes the growing list of announced but not yet enacted measures and expresses particular concern regarding the proposed changes to Division 7A which were announced in general terms in the 2016-17 Budget but have not been enacted4.

2 https://consult.treasury.gov.au/tax-framework-division/black-economy-taskforce/supporting_documents/BE_IR.pdf 3 Evidenced for example in Board of Taxation reports to which the government has not responded. 4 In the 2016-17 Budget, the Government announced it would make targeted amendments to improve the operation and administration of Division 7A ITAA 1936, with the amendments to apply from 1 July 2018.

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Chartered Accountants therefore calls for a work in progress document to be published by Treasury in association with the Minister for Revenue’s office, along with an overall timetable of consultations.

We also call upon the Government to embrace New Zealand’s Generic Tax Policy Process. This would require all proposed tax measures to pass through the five distinct phases of that policy process, from the conceptual to the implementation phase5, and that there should be greater transparency around the policy setting process, with the public release of Officials’ Papers (as occurs in New Zealand).

Greater transparency of Government budgeting Sound information and a thorough understanding of the long term policy implications should underpin every Budget. The short term impact of a policy on the size of government and the size of the deficit are not sufficient measures.

We should put aside the size of government as a fiscal rule and instead initiate a public debate on the appropriate size of government in the context of the appropriate role of government at both Federal and State level.

Chartered Accountants also calls upon the Government to forecast the fiscal implications of key policy decisions over 10 years. A body independent of Treasury should be tasked with the role of defining the long-term structural budget balance and assessing the impact of proposed policy measures over a 10 year timeframe. It is noted that the Parliamentary Budget Office has recently improved its capability in this and other respects6.

Sustainable retirement incomes policies We have stated in previous pre-Budget submissions that the primary objective of Australia’s superannuation system should be ‘To create a national culture of saving and self-sufficiency in retirement’ instead of the government’s preferred primary objective, ‘to provide income in retirement to substitute or supplement the age pension’ with secondary objectives to be enshrined in regulations.

We believe that a review of these objectives should be held every 5 years. The review would help identify good ideas, such as our proposals to:

 allow couples the option of pooling their superannuation together in joint spousal accounts  replace the annual contribution cap assessment process with a lifetime contribution cap

Participants in the superannuation sector must be confident and engaged in the superannuation system. The scourge of elder financial abuse must be tackled head-on, not after the event. Fees and charges must be made more transparent.

The superannuation sector’s regulatory settings must be efficient and cost effective. Increased digital communications and a review of when actuarial certificates are necessary are two recommendations in our submission.

Looking at the bigger picture, the government must address the income and assets tests for the age pension as it is not fiscally sustainable in the long-term. Age pension expenditure is increasing faster than government tax receipts, not just because of our ageing population and increased life

5 Since 1995, New Zealand’s tax policy has been developed using the Generic Tax Policy Process. See also the HM Treasury and HMRC document: Tax policy making: a new approach (June 2010). 6 Refer PBO media release “PBO establishes panel of expert advisors” dated 21 December 2017: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/media

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expectancies, but also as a result of poor returns on savings. Similar comments can be made about health and care costs for older Australians.

Education, child care and workforce participation – Retraining Australians displaced by technology

It remains unclear where the jobs of the future will arise, but nobody doubts that Australia needs to have an educated, creative and flexible workforce. This is best achieved by ensuring Australians continue to have good access to quality education and child care, with a focus on encouraging workforce participation.

In the context of the corporate rate reduction being promoted by the Government and an activist industrial strategy which seeks to align government and business long-term thinking, the pre- Budget process is also an opportune time to engage with large companies (and peak bodies such as the Business Council of Australia) to seek their commitment to re-training initiatives for Australians displaced by technological advancements7.

*** Our detailed submission accompanies this letter. If you would like to discuss any aspect of this submission, please do not hesitate the following authors of this submission:  For tax matters, contact Michael Croker, Head of Tax (Australia) on (02) 9290 5609, or [email protected] Alternatively, contact Susan Franks on (02) 8078 5450 or [email protected]

 For superannuation matters, contact Tony Negline, Head of Superannuation on (02) 8078 5404, or [email protected]

 For financial advisory matters, contact Sarah Davidson, Head of Advisory Services on (02) 9290 5639, or [email protected]

Yours faithfully

Michael Croker Australian Tax Leader Chartered Accountants Australia and New Zealand

7 Refer the Final Report of the United Kingdom’s Industrial Strategy Commission, published 1 November 2017. This report has a number of other themes of interest in a Budget context, such as: Ensuring adequate investment in infrastructure; De- carbonisation of the energy economy; Developing a sustainable health and social care system; Unlocking long-term investment; Supporting high-value industries and building export capacity; Enabling growth in all parts of the UK.

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About Chartered Accountants Australia and New Zealand

Chartered Accountants Australia and New Zealand is a professional body comprised of over 117,000 diverse, talented and financially astute members who utilise their skills every day to make a difference for businesses the world over.

Members are known for their professional integrity, principled judgment, financial discipline and a forward-looking approach to business which contributes to the prosperity of our nations.

We focus on the education and lifelong learning of our members, and engage in advocacy and thought leadership in areas of public interest that impact the economy and domestic and international markets.

We are a member of the International Federation of Accountants, and are connected globally through the 800,000-strong Global Accounting Alliance and Chartered Accountants Worldwide which brings together leading Institutes in Australia, England and Wales, Ireland, New Zealand, Scotland and South Africa to support and promote over 320,000 Chartered Accountants in more than 180 countries.

We also have a strategic alliance with the Association of Chartered Certified Accountants. The alliance represents 788,000 current and next generation professional accountants across 181 countries and is one of the largest accounting alliances in the world providing the full range of accounting qualifications to students and business.

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Pre-Budget Submission 2018-2019

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Table of Contents Summary of recommendations ...... 4 Detailed submission ...... 11 1. A sustainable tax base ...... 11 1.1 Intergenerational and other factors...... 11 1.2 The corporate income tax rate ...... 12 1.3 The small company income tax rate ...... 13 1.4 Taxing tech companies on revenue streams ...... 14 1.5 The R&D Tax Incentive ...... 15 1.5.1 The quality of R&D Tax Incentive applications ...... 15 1.6 Personal income tax rates and CGT concessions ...... 16 1.6.1 Personal rates ...... 16 1.6.2 The top personal rate ...... 17 1.6.3 CGT concessions ...... 17 1.6.4 Levies and transparency about our personal tax rates ...... 18 2. Indirect taxes ...... 19 2.1 GST ...... 19 2.1.1 An underutilised tax base ...... 20 2.1.2 Modelling ...... 20 2.2 Federal Financial Relations Agreement reform ...... 21 2.2.1 Federal political leadership required ...... 21 2.2.2 Review of the Federal revenue sharing model ...... 21 2.2.3 Taxing the same base or taxpayers differently at Federal and State / Territory level ...... 22 2.3 Environmental Taxes ...... 23 2.3.1 Carbon price ...... 23 2.3.2 Planning for fossil fuel subsidy (FFS) reform ...... 23 3. Black Economy Taskforce recommendations ...... 24 3.1 The black economy ...... 24 3.2 Hard wiring government ...... 25 3.2.1 The Govpass initiative, digital verification of identity and “Tell us once” ...... 26 3.2.2 Phoenix operators ...... 27 3.2.3 The Tax Clearance Certificate ...... 29 3.2.4 AUSTRAC - Anti-money laundering and counter-terrorism financing ...... 30 4. Government online ...... 31 4.1. We need a big picture policy statement for online government ...... 31 4.2 Time for a ATO service standard to show that taxpayers really are clients ...... 32 4.3 Tax penalties and interest – A new way for an online environment ...... 33 4.4 Single Touch Payroll (STP) readiness ...... 34 4.5 The future of STP – Care needed for Stage 2, 3, 4 etc ...... 36 4.6 Digitalisation transformation of government services generally ...... 37 4.6.1 Are Australians really ready? ...... 37 4.6.2 Australians with special needs – Elderly Australians ...... 38 4.6.3 myGov ...... 39 4.6.4 A proper functioning NBN ...... 39 4.6.5 Australian Business Number – A new risk assurance approach ...... 40 5. Small business ...... 41 5.1 Australia Inc ...... 41 5.2 The instant asset write-off ...... 42 5.3 Small business start-up assistance - Cash flow education ...... 42 5.4 eInvoicing ...... 43 5.5 Reporting business unpaid tax debts to the ATO ...... 44 5.6 Time to reform the PAYG instalment system ...... 45 5.7 Small business CGT concessions – Time for a review ...... 45 charteredaccountantsanz.com

5.8 Taxing working holiday makers – Post-implementation review ...... 46 6. Division 7A - Integrity rule for closely held groups ...... 47 7. FBT and work-related deductions ...... 48 7.1 Time to simplify ...... 48 7.2 Reforming the minor, infrequent fringe benefit exemption ...... 50 8. Protecting whistleblowers – More to be done ...... 51 9. Sustainable retirement incomes ...... 51 9.1 Replace annual contribution caps with lifetime caps ...... 51 9.2 Joint spousal accounts ...... 52 9.3 Review binding death benefit nominations ...... 52 9.4 CGT relief for fund mergers and restructures ...... 53 9.5 Ensure full transparency of fees and charges ...... 53 9.6 Appropriate policy settings to prevent elder abuse ...... 54 9.7 Permit electronic delivery of all fund documentation ...... 54 9.8 Actuarial certificates for self-managed superannuation funds ...... 54 9.9 Transition to retirement pensions ...... 55 9.10 Superannuation fund death benefit payments ...... 55 9.11 SMSF defined benefit and other restrictive pensions ...... 56 10. Regulation of the professions providing tax-related services ...... 57 10.1 The new regulatory environment ...... 57 10.1.1The boundary between tax and financial planning ...... 58 10.2 A TPB registration pathway which is unfair, particularly for women ...... 59 11. The regulators ...... 60 11.1 Modernising the regulators ...... 60 11.2 Resourcing the regulators ...... 62 12. Improving budgetary analysis and decision-making ...... 63 12.1 Longer time frames required ...... 63 12.2 Independent body needed ...... 64 12.3 Resourcing Treasury’s Revenue Group ...... 65 13. Alternative economic measures ...... 65 13.1 The size of government ...... 65 13.2 Developing alternative wellbeing measures ...... 65 14. Education and child care – Incentives to join or return to the workforce ...... 67 14.1 Inequality ...... 67 14.2 Participation ...... 67 15. Cyber security ...... 68 16. Anti-corruption and bribery ...... 69 17. Data access and use ...... 70 17.1 When will we see the power of government data unleashed? ...... 70 17.2 Tax data – Is it being used effectively? ...... 71 18. The Australia – New Zealand economic relationship ...... 72 18.1 Progressing the trans-Tasman agenda ...... 72 18.2 Minimising trans-Tasman tax compliance and disputes ...... 72

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Summary of recommendations

1. A sustainable tax base

 “Talk straight” to the Australian people about the economic and social risks ahead for our Commonwealth. Tell us what a sustainable tax framework looks like and don’t skip the role GST should play. [Rec 1.1]

 Publish an easy to understand analysis on what our 30% company tax rate means for future investment and employment prospects in a world where our major trading partners are lowering their rates. [Rec 1.2]

 Legislate the complete company tax rate reduction plan, with the ultimate goal being a unified rate for all companies of 25% as part of a broader tax reform package. Clarify the eligibility criteria for small company access to the lower rate. [Rec 1.3]

 Is it time to consider taxing the revenue streams of tech companies and digital businesses? The United Kingdom has a position paper on this topic, and we think Australia should too. [Rec 1.4]

 Reveal the Government’s response to the Australia 2030 Prosperity through Innovation report. Chartered Accountants supports greater risk assurance in the application process and on-going R&D phase. [Rec 1.5; Rec 1.5.1]

 Sound economic arguments should underpin any personal tax cuts, with clear analysis of how cuts fit with the deficit reduction strategy. [Rec 1.6.1]

 There should be a roadmap for making Australia’s top personal tax rate more internationally competitive. Meanwhile, review the effectiveness of existing safeguards designed to counter erosion of the PAYG withholding base. [Rec 1.6.2]

 The pre-CGT asset rule and level of CGT discount for resident individuals could be considered as part of a broader personal tax reform package. To encourage entrepreneurs, the 50% discount could apply to “active” assets. [Rec 1.6.3]

 Up and down toying with the Medicare levy should stop. Implement the Henry Review recommendation to remove the levy and incorporate it into a simpler, transparent personal income tax rate scale people understand. [Rec 1.6.4]

2. Indirect taxes

 Failing to reform the GST base and rate is to neglect and underutilise one of Australia’s best and most sustainable tax bases. The government should at least commence laying the groundwork for reform, with crucial Federal Financial Relations reform the starting point. [Rec 2.1]

 Vigorously pursue the three macro tax-related recommendations of the Productivity Commission – agreement to a formal joint reform agenda, embedding tax reform as an integral part of that agenda and renewing intergovernmental relations. [Rec 2.2.1]

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 Renegotiate the States and Territories’ ‘power of veto’ under the Intergovernmental Agreement on Federal Financial Relations 2011 so that GST base and rate reform can occur. [Rec 2.2.2]

 COAG should review the interplay between Federal and State taxes and identify areas where duplication of effort can be eliminated and compliance cost reductions achieved. [Rec 2.2.3]

 The Australian government should implement an effective price on carbon as a priority, designed to align with science-based targets in accordance with the Paris Agreement. [Rec 2.3.1]

 Review Fossil Fuel Subsidies in association with industry and develop a long-term strategy to phase-out these subsidies. [Rec 2.3.2]

3. Black Economy Taskforce recommendations

 Announce the recommendations of the Black Economy Taskforce which the government has decided to implement and provide further detail regarding how the Government will use its procurement requirements to drive change in this area8. [Rec 3.1]

 Provide an update and timetable for how Australia will move to a whole of government digital transformation model and unveil the new Australian Business Registry model. [Rec 3.2]

 Ensure the Govpass design adequately factors in verification of an intermediary authorised to transact on behalf of another. [Rec 3.2.1]

 COAG must play a more active role in responding to phoenix operations. More resources should be directed towards prosecutions. [Rec 3.2.2]

 We support the introduction of Tax Clearance Certificate arrangements and urge the government to lead by example with its own procurement procedures, encouraging other tiers of government to follow. [Rec 3.2.3]

 The Phase 2 rollout of anti-money laundering and counter-terrorism financing measures draws near. Announce the ongoing AUSTRAC consultation and collaborative education programs which are key to successful implementation. [Rec 3.2.4]

4. Government online

 Update the community on the Government’s program for introducing online services, and explain the impact. Include details on the national Digital Economy Strategy and findings of the Small Business Digital Taskforce. [Rec 4.1]

 Australians and the business community expect service standards from agencies such as the ATO which require online engagement. Consider a standalone Digital Charter or, for the ATO at least, an enhanced Taxpayers’ Charter. [Rec 4.2]

8 In the last Federal Budget the government announced its support for this idea.

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 A “back to the drawing board” approach is needed to the design and imposition of basic tax penalties. In a pre-fill, data-driven environment, we should be encouraging online and early engagement. [Rec 4.3]

 Consider ways to entice employers into the Single Touch Payroll regime rather than simply mandating that they do so. Our submission includes comments from CAs on the state of readiness for STP. [Rec 4.4]

 We caution the government against a rapid increase in the scope of Single Touch Payroll before Stage 1 is successfully implemented. The UK experience indicates most implementation difficulties were encountered by small business. [Rec 4.5]

 Targeted surveys can help agencies determine readiness for online products and objectively assess achievements under Corporate Plans (Regulator Performance Framework). [Rec 4.6.1]

 The government’s online strategy should outline how personal contact services will remain available for Australians who have difficulty interacting online. Special consideration should be given to the needs of elderly Australians, many of whom feel vulnerable to financial abuse. [Rec 4.6.2]

 myGov participating agencies should report on whether their online products are performing to acceptable standards and made more user-friendly. Agencies providing services to Australians who do not participate in myGov should be challenged and asked for a timeline for implementing their online strategy. [Rec 4.6.3]

 The Budget should include an update from NBN Shareholder Ministers on the efforts of NBN Co to address service quality concerns identified by the Telecommunications Industry Ombudsman and users. [Rec 4.6.4]

 ABN registration and ongoing eligibility must be reviewed as part of the new Australian Business Register design. Consider the use of an accountant’s “ready to start business” declaration as a risk assurance measure. [Rec 4.6.5]

5. Small business

 An Australia Inc branded whole of government and private sector strategy should be launched in the Budget by the Minister for Small Business, with particular emphasis on developing export markets. [Rec 5.1]

 The Budget should confirm the future of the $20,000 instant asset write-off. Should the $20,000 incentive be discontinued (as planned), then the revised threshold should be more generous than $1,000, and extended to all businesses. [Rec 5.2]

 The government should review whether small business assistance programs can be more effectively delivered by accountants who advise small business. Allocate funds to turn the ATO’s cash flow education product into an online learning tool. [Rec 5.3]

 The Budget provides an opportunity for the government to convey its support for greater adoption of eInvoicing within the Australian business community, and to formalise the role and work of the Digital Business Council in this area. [Rec 5.4]

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 We support the reporting of aged, unpaid tax debts to credit reporting agencies where the taxpayer fails to engage with the ATO, subject to comments we will make on the draft Bill. [Rec 5.5]

 The level of unpaid tax debt by small businesses is one of several reasons why it is time to revisit the design of the PAYG instalment regime. [Rec 5.6]

 Given the multitude of complex small business tax concessions we think it is time to consider them holistically and reconsider their objectives, outcomes and cost. Chartered Accountants supports the Board of Taxation’s current review of the concessions. [Rec 5.7]

 The government should seek stakeholder input to determine whether (and when) a post- implementation review should be undertaken into the so-called Backpacker Tax. The review should consider both tax compliance and second round effects. [Rec 5.8]

6. Division 7A – Integrity rule for closely-held groups

 By Budget night (hopefully sooner), the government should explain what Division 7A changes will be implemented and by when. The ATO must then quickly respond with draft Practical Compliance Guidelines and conduct fast-tracked consultations. [Rec 6]

7. FBT and work-related deductions

 The Treasurer should commission the Board of Taxation to report on how FBT (particularly expense payment fringe benefits) and work-related deductions could be simplified. [Rec 7.1]

 The FBT law on minor, infrequent benefits should be amended to follow the New Zealand model. Other house-keeping amendments to FBT are overdue in areas such as car parking and taxi travel for employees who fall ill at work. [Rec 7.2]

8. Protecting whistleblowers – More work to be done

 Further consideration of the Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 should be undertaken in Committee stage before it is passed by Parliament. The Expert Panel should have further opportunity to develop the whistleblower legislative model further, and also advise Government on implementation and governance issues. [Rec 8]

9. Sustainable retirement incomes

 The annual contribution cap assessment process should be replaced with lifetime contribution caps, including appropriate transitional arrangements. [Rec 9.1]

 Couples should have the option to pool their superannuation together in joint spousal accounts. The number of superannuation accounts would reduce and couples would have a clearer indication of their progress towards retirement income goals. [Rec 9.2]

 We agree with many of the comments made in Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121 about binding death benefit nominations. The relevant provisions in the Superannuation Industry (Supervision) legislation should be reviewed. [Rec 9.3]

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 Superannuation fund merger tax relief should be extended beyond 2017 to 2020, as promised. Restructuring tax relief should apply where funds transfer investment holdings into a related pooled superannuation trust. [Rec 9.4]

 The government should pursue further regulatory amendments to current product disclosure requirements to ensure all fees and charges incurred both directly and indirectly by fund members are detailed in monetary terms and explained. [Rec 9.5]

 The Attorney-General should update the community on responses to the Australian Law Reform Commission’s report on Elder Abuse, the government’s proposed policies in this important area and implementation timeframes. [Rec 9.6]

 Existing paper-based documentary requirements in the superannuation laws should be reviewed and changed to permit electronic communication if the fund member consents to managing their affairs online. [Rec 9.7]

 SMSF trustees should not be required to obtain an actuarial certificate simply because they wish to claim exempt current pension income in relation to income received by the fund during that part of the income year. Current ATO requirements should be reviewed. [Rec 9.8]

 As a matter of urgency the government should provide regulatory clarity and certainty for Transition to Retirement pensions including those paid to reversionary beneficiaries who have not met a nil Condition of Release. [Rec 9.9]

 The ATO’s Practical Compliance Guide 2017/6 on commutation of a death benefit income stream before 1 July 2017 does not provide certainty for those who provided advice and completed transactions on behalf of clients (as allowed by the PCG). A regulatory safe harbour is needed to protect advisers from third party claims. [Rec 9.10]

 We encourage the government to work with the superannuation industry to provide an opportunity for individuals to cease their defined benefit and other restricted pensions, such as market linked flexi and term allocated pensions, so they can transfer the net proceeds to account based pensions. [Rec 9.11]

10. Regulation of the professions providing tax-related services

 A post implementation review of the Tax Agent Services Act 2009 and the role and powers of the Tax Practitioners Board should consider whether the current regulatory model is adequately adapting to changing industry circumstances. [Rec 10.1]

 Consideration should be given to a broader regulatory model which acknowledges the diverse but complementary skill sets of those engaged in tax, superannuation and financial planning advice. Avoid a narrow focus on “who can do what” in favour of a principles based regulatory approach centred on ethics, education, experience, and the central tenet of acting in the best interests of the client. [Rec 10.1.1]

 To help address the disadvantage suffered by accountants on parental leave who later seek registration as a tax or BAS agent, the Tax Agent Services Regulations should be amended to include a new dedicated pathway for ‘professional accountants’ to register. [Rec 10.2]

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11. The regulators

 Agency heads should regularly outline through their corporate plans how they are transitioning from traditional models to the regulator of 2030. [Rec 11.1]

 In terms of resourcing, Ministers bidding for Budget funds should address whether their agencies have modernised their strategic thinking. Old fashioned resourcing models based on headcount should be questioned. Rationalisation and coalesced regulatory frameworks should be considered. Where necessary, new, technology based regulatory models should be developed. [Rec 11.2]

12. Improving budgetary analysis and decision-making

 The fiscal implications of key policy decisions should be considered beyond the forward estimates period, for a period of 10 years. [Rec 12.1]

 The government should establish a new platform to monitor and report on the long-term pressures on the Budget. Oversight should be by an independent agency. [Rec 12.2]

 Particular attention should be given to the resourcing needs of Treasury’s Revenue Group, taking into account the need to align agency capabilities with the Government's budget strategy and policy priorities. [Rec 12.3]

13. Alternative economic measures

 We recommend that the government put aside the size of government as a fiscal rule. Instead, it should initiate a separate debate on the appropriate size of government in the context of the appropriate role of government. [Rec 13.1]

 GDP is an economic measure only. The Government’s planned 2018 report on Australia’s ongoing progress in achieving UN sustainable development goals should become a basis for reporting more broadly to Australians our nation’s progress. [Rec 13.2]

14. Education and child care – Incentives to join or return to the workforce

 As part of its ongoing efforts to address inequality, the government should prioritise education and child care in its budget planning, with particular attention on how programs address the jobs of the future and encourage workforce participation. [Rec 14]

15. Cyber security

 A Budget update on implementation of Australia’s cyber security strategy would be welcome, particularly the assistance available to small business. Key regulators must play a role in helping stakeholders recover from a cyber security incident, and collaborate with stakeholders to develop credentials for those offering cyber security services to consumers. [Rec 15]

16. Anti-corruption and bribery

 The government should consider further ways to strengthen Australia’s anti-corruption and bribery regime. Relevant agencies should be properly resourced and provided with

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a clear mandate to not only investigate with vigour, but also improve governance and education. [Rec 16]

17. Data access and use

 There should be a progress report from the cross-portfolio taskforce on access to government data by consumers and businesses, together with timelines for implementing Productivity Commission recommendations. [Rec 17.1]

 Regulators should explain how they are making effective use of data and how they can ameliorate the costs of those who supply it. They should also explain their strategy to address the challenges posed by crypto-currencies and block chain technology. [Rec 17.2]

18. The Australia – New Zealand economic relationship

 The Government should outline progress on the trans-Tasman policy agenda agreed with the previous New Zealand government in 2017. The Minister for Trade, Tourism and Investment should outline Australia’s collaborative efforts with New Zealand on developing a post-BREXIT trade agreement strategy with the United Kingdom government. [Rec 18.1]

 The ATO, working with Inland Revenue, should consider ways to reduce red-tape for those businesses which operate solely in the two countries. Other Australian regulators should similarly collaborate with their New Zealand counterparts. [Rec 18.2]

charteredaccountantsanz.com 11

Detailed submission

1. A sustainable tax base Sound fiscal policy rules should ensure that government decisions are considered against the following characteristics:

 Sustainability: that the government’s finances remain on a firm footing over time, able to support counter-cyclical action against any major economic shock  Preparedness: readiness against inter-generational pressure  Discipline: the size of government reflects its role and the scope of government reflects its purpose.

Australia does not currently meet these criteria and the need to reform our tax base has not disappeared.

Whilst some measures have been taken to strengthen the existing base and to increase transparency, fundamental reform has not been achieved. Chartered Accountants supports the government view that the corporate tax rate needs to be reduced. However, this needs to be accompanied by a refocusing of the tax base by widening the GST base and rate and also reducing personal income tax rates so that there is less incentive to incorporate to minimise personal tax.

Another medium-long term measure that Australia needs to consider is the world-wide trend of using environmental taxes as a means of raising new sources of tax revenue in a revenue-neutral way. That is, using environmental taxes as a substitute tax base for traditional tax bases. The idea being to 'tax the bads, not the goods', as the saying goes. The consequences of moving now on climate change and being uncertain about its impacts are significantly less damaging than doing nothing and the opposite being true. In that sense, climate change policies are insurance policies.

1.1 Intergenerational and other factors The 2015 Intergenerational Report tells us about the risks of continuing our heavy reliance on personal income taxes (see discussion below on Indirect Taxes).

The more recent 2016-17 NSW Intergenerational Report also paints a stark picture, even for one of Australia’s more prosperous States:

“If we allow current trends to continue, a widening fiscal gap will emerge between what the state government receives, and what it spends on the services and infrastructure people expect. The fiscal gap is estimated to rise to 3.4 per cent of Gross State Product (GSP) by 2056, which is equivalent to $17 billion if measured against today’s GSP.

If this eventuates, net debt would rise from around one per cent of GSP today to almost 75 per cent in 2056. In that instance, a fifth of revenues would have to go from services to meet interest payments alone.”

Smaller Australian jurisdictions such as Tasmania which rely heavily on GST revenue face increasing fiscal pressure in future decades, largely due to forecast expenditure by the Tasmanian Government on health services9.

9 Tasmanian Government Fiscal Sustainability Report 2016. charteredaccountantsanz.com 12

It is highly likely that future intergenerational reports will also highlight the impact which the so- called “fourth industrial age” will have on productivity, employment and hence personal income tax collections (i.e. robotics, artificial intelligence etc).

Failure to act soon means we will be creating a country for older, asset rich generations, breaking the social contract with younger Australians.

Recommendation 1.1

We are conscious that this is likely to be the last Budget before the next Federal election.

Chartered Accountants therefore calls on the Government to use the Budget as a platform to “talk straight” to the Australian people about the economic and social risks ahead for our Commonwealth, using Treasury modelling and input from other trusted sources such as the Productivity Commission.

Treasury research about what a sustainable tax framework looks like should be released not as a policy document, but to encourage informed debate.

1.2 The corporate income tax rate Chartered Accountants has consistently advocated for a corporate tax rate reduction roadmap so that businesses – particularly those operating in key sectors, such as services, where Australia has advantages10 – can see the tax reform direction in which Australia is headed, and start planning their investments accordingly.

We applaud the Government’s attempts to implement such a roadmap. However, due to lack of fundamental tax reform to assist fund such an initiative, only the first part of the 10 year road map has been enacted for the benefit of small to medium sized companies.

Chartered Accountants remain convinced of the need for Australia to have a more competitive company tax rate as part of a package of fundamental changes to the tax base.

The global trend to lower the headline corporate tax rate also places pressure on Australian anti- avoidance legislation – such as the transfer pricing rules, the Multinational Anti-avoidance law (the MAAL) and Diverted Profits Tax – in their application to accepted methods for compensating others in a multinational group structure for functions performed, assets used, and risks assumed. Compared to Australia, most other countries are now lower-tax jurisdictions.

Recommendation 1.2

To address the difficulties currently associated with the company tax reform debate, Chartered Accountants suggests the Government use the Budget as a platform to launch a paper (with an accompanying communications strategy) highlighting the impact of recent global initiatives – particularly in the USA – on the Australian business tax base and global trade and investment.

10 Deloitte, Positioning for Prosperity, 2014: https://www2.deloitte.com/au/en/pages/building-lucky- country/articles/positioning-for-prosperity.html charteredaccountantsanz.com 13

The paper should identify risks, the various outcomes which may arise and highlight strategies which ensure Australia is prepared.

The theme of the paper should be on what is best for our nation in terms of the jobs and growth that can only come from a prosperous, globally competitive Australia.

Ideally, the paper should be prepared in conjunction with key industry associations to highlight potential investment decisions impacted by current tax policy settings.

1.3 The small company income tax rate Another important issue to address is the bifurcated company tax rate.

Chartered Accountants does not support the continuation of a two rate corporate tax system over a substantial period of time for a number of reasons, including:

 Complexity about which companies are eligible  The difficulty in defining and administering the carve-out for passive investment companies (as distinct from "active" businesses)]  The tax arbitrage effects of the lower company tax rate (e.g. income diversion to lower taxed entities)  Taxpayer behavioural changes (e.g. switch from employee to contractor company status)  Confusion around the interplay between the small company tax rate and the franking of dividends under the imputation system

Although we understand the thinking behind the government’s decision to lower the company tax rate firstly for small companies, the implementation of this policy has been less than ideal and various interpretational issues remain unresolved.

For example, we have been recently working with the ATO to seek clarification on the various technical aspects of the bifurcated company tax rate legislation:

 Draft Taxation Ruling TR 2017/D7: Income Tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?11  Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 201712 (which was not passed before Parliament rose for the summer break), and  Interpretative issues which arise from the Bill (or exacerbate existing issues with the Small Business Entity rules in Division 328 which, because of the company rate cuts which have been enacted, are now of relevance to a greater number of companies).

Recommendation 1.3

We appreciate that the current impasse on the government’s plans to further lower (and eventually unify) the company tax rate reflect political difficulties in the Senate. Nonetheless, we urge the government to continue to seek support for its rate reduction plan, with the ultimate goal being a unified rate for all companies of 25% as part of a broader tax reform package.

11 Refer https://www.ato.gov.au/law/view/document?docid=DTR/TR2017D7/NAT/ATO/00001 12 Refer https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5997 charteredaccountantsanz.com 14

1.4 Taxing tech companies on revenue streams Chartered Accountants notes that several nations have, or are contemplating, new taxes on the revenue streams of tech companies. These approaches reflect frustration with existing taxation models and the extent to which the OECD’s BEPS reforms are being embraced, particularly by the USA.

For example:

 India has imposed a 6% equalization levy (withholding) on business-to-business payments to a non-resident service provider for specified digital services  France, Germany, Italy and Spain have recently called for tax to be paid on revenues (not profits), and their proposal has been backed by Romania, Bulgaria, Slovenia, Greece, Portugal and Austria13.

Less developed nations – already suspicions that BEPs is really a rich nation initiative to carve-up the global income tax pie amongst themselves – are likely to embrace similar taxes on digital revenue streams.

To date, Australia’s approach to the digital economy has been to impose GST on digital services (the so-called “Netflix Tax”).

We do not support further unilateral action by Australia on the international tax front. The Multilateral Anti-avoidance Law (MAAL), the Diverted Profits tax (DPT), enhanced transfer pricing rules based on OECD principles, the multilateral instrument for amending our treaties, and the gradual implementation of other Base Erosion and Profit Shifting (BEPS) measures should be allowed to take their course. The ATO’s Tax Avoidance Taskforce14 should also be allowed to do its work based on the existing legal framework and we understand it has already succeeded in getting some multinational companies to alter their structures.

Nonetheless, it would not surprise us if Treasury officials have not at least briefed the Treasurer on the possibility of a tax on the revenue streams of companies operating in the digital economy.

The United Kingdom (which also has a MAAL / DPT) has recently published a position paper on Corporate tax and the digital economy which says that: “Pending reform of the international framework, the government will explore interim options to raise revenue from digital businesses that generate value from UK users, such as a tax on revenues that these businesses derive from the UK market”.

The elephant in the room in any proposal to tax revenue streams is the USA, where most large companies operating in the digital economy are based.

Globally, tax policies are morphing into trade barriers and economic nationalism is on the rise. Australia should not think itself immune from reprisals.

Recommendation 1.4

If the Government is thinking along similar lines to the UK and other nations and taxing the revenue streams of tech companies, we recommend that (like the UK) it first publish a position paper so that the full ramifications are considered and relevant taxpayers are consulted.

13 Refer https://www.politico.eu/article/ten-eu-nations-back-new-plan-to-tax-digital-giants-google-amazon-facebook/ 14 Refer https://www.ato.gov.au/general/Tax-avoidance-taskforce/ charteredaccountantsanz.com 15

1.5 The R&D Tax Incentive We note the recent publication of the Innovation and Science Australia (ISA) report, Australia 2030 – Prosperity through Innovation. The report identifies as a “Strategic Opportunity”:

Business R&D investment can be increased by better targeting the Research and Development Tax Incentive (R&DTI) program, and increasing support for direct grant programs that target national priorities.

ISA’s Recommendation 6 is to “reverse the current decline in business expenditure on R&D by improved targeting of government support”. To do this, the report recommends implementing the recommendations of the 2016 Review of the R&D TI15 (this report triggered a three phase response plan from the government, meant to be concluded by March 201716).

Recommendation 19 from the ISA is to “introduce a collaboration premium of up to 20% on non- refundable tax offsets to incentivise collaboration”. This recommendation is broadly aligned with earlier recommendations by the Australian Council of Learned Academies (ACOLA).

If endorsed by the government, we expect the premium should be funded out of the savings achieved by better targeting the incentive through applying the $4 million and $40 million caps on refundable offset claims, as well as the recommended 1% intensity threshold17.

However, this uncertainty over the design of the current R&D TI is disruptive.

After so many reviews and numerous submissions, it is time for the government to make decisions.

Recommendation 1.5

Chartered Accountants urges the Government to formally respond to the Review of the R&D TI so that there is certainty about what changes are to be made to the tax incentive (if any), and which broader recommendations in the Review panel’s report will be taken up.

1.5.1 The quality of R&D Tax Incentive applications Regular engagement between Chartered Accountants, the ATO and the Department of Industry, Innovation and Science (Innovation and Science Australia) officials indicates that there are strong concerns about the eligibility and veracity of some R&D claims.

This was evidenced early in 2017 when the ATO published no less than five Taxpayer Alerts on various industries where R&D was a concern18.

These concerns are supported by some R&D practitioners who tell us that the “cash back” nature of the incentive for some eligible companies19 has attracted rogue, unregulated advisers who

15 Refer https://www.industry.gov.au/innovation/InnovationPolicy/Research-and-development-tax-incentive/Pages/R-and- D-Tax-Incentive-Review-report-and-submissions.aspx 16 Refer http://minister.industry.gov.au/ministers/hunt/media-releases/rd-tax-incentive-review-report-released-consultation 17 Refer our November 2016 submission to the R&D Tax Incentive Review Report https://industry.gov.au/innovation/InnovationPolicy/Research-and-development-tax-incentive/Documents/Chartered- Accountants-Australia-and-New-Zealand.pdf 18 Refer https://www.business.gov.au/assistance/research-and-development-tax-incentive/guidance-and- information/taxpayer-alerts 19 Broadly, a 43.5% refundable tax offset is available for eligible companies with an aggregated annual turnover of less than $20 million per year, provided they are not controlled by income tax exempt entities. charteredaccountantsanz.com 16

proffer their services to businesses in return for a percentage of the refund obtained. The actual R&D claim is lodged by the business itself.

But we also hear comments that some officials are adopting aggressive positions and feel that, in “traditional, established” industries such as those referred to in the Taxpayer Alerts, there is little scope for further innovation. Our members also express surprise at reported instances of inadequate risk assessments and background checks by officials when R&D applications are lodged20.

The unsaid issue underlying all of this is the uncapped nature of the R&D tax expenditure and the impact of excessive claims on the Budget bottom-line. In particular, officials have conveyed to us their concerns with the many claims emanating from the financial services sector, relating to financial technology or FinTech.

In addition to the regulatory reforms suggested elsewhere in this submission for those providing tax agent services, we think it is time for the government to “raise the bar” for both claimants and those who advise them.

Recommendation 1.5.1

Chartered Accountants recommends that the R&D TI application process be changed to incorporate greater levels of risk assurance for government and relevant regulatory agencies.

A trusted R&D Tax Adviser system should be considered so that a minimum level of professional acumen is involved in developing the applications, with the adviser providing a level of risk assurance on key aspects of the application. Thereafter, the adviser could annually attest to the on-going eligibility of the taxpayer to receive the incentive.

Chartered Accountants is willing to work with the regulators and the Tax Practitioners Board to develop a suitable model.

1.6 Personal income tax rates and CGT concessions 1.6.1 Personal rates The Prime Minister recently announced that he is “actively working” with the Treasurer to ease the burden on middle-income Australians, while also meeting the return to surplus commitment.

Chartered Accountants is lukewarm in its support of personal tax cuts in the absence of substantial tax reform.

As noted elsewhere in this submission, if personal tax cuts are forthcoming:

 funding should come from realistic revenue growth forecasts and from those operating outside the tax system (e.g. black economy measures), and  in the absence of a tax reform bargain with taxpayers, existing deduction entitlements should not be eroded.

20 Refer http://www.smh.com.au/national/investigations/millions-rorted-from-government-rd-scheme-20170703- gx3b79.html?mkt_tok=eyJpIjoiT0RnMVlXTmpPRFl4TlRCaCIsInQiOiJqSk1HM29oUjFCREszbHhiZjNKZWlsekdBSkRJM WtwNHA5UjE4SEFEbHY1QWR3Uk43S1JPVktpc25uK3hEU0d4TVVPVDdhT0FCUTdoK21maEl3ZnptTEZHYnRLdXB5 RElHcUZGVU1IMksyeVhobzVqN1NuMmx6dTczNERZMFNSciJ9 charteredaccountantsanz.com 17

Recommendation 1.6.1

Sound economic arguments should underpin any personal tax cuts proposed in the Budget, together with a clear analysis of how such cuts align with the deficit reduction strategy.

1.6.2 The top personal rate In an ideal world, the top personal tax rate should match or be close to the general corporate tax rate to remove complexity and counter structuring designed solely to take advantage of the tax arbitrage structuring. Given the global trend to reduce corporate tax rates however, this will be impossible to achieve.

If the political climate was different and the government committed to tax reform on a grand scale, Australia could re-weight its tax base away from personal taxes and towards GST.

Nonetheless, and just as it has attempted to do with the company tax rate, we think the government should craft a long-term plan to keep our personal tax rates globally competitive.

Not all small businesses are incorporated, and individual entrepreneurs these days can easily take their talents and private equity funding elsewhere. Australia’s top personal tax rate is high both in terms of the rate and the income level at which it applies21.

In the meantime, existing integrity safeguards (such as the personal services income rules) and the PAYG withholding and PAYG instalment collection mechanisms should be reviewed to determine whether they remain fit for purpose in an environment where tax planning is driven by arbitrage opportunities (e.g. the gap between the top personal tax rate and the “small” company tax rate).

Recommendation 1.6.2

Just as the Government has sought to address the need for a globally competitive company tax rate, it should also seek to maintain competitive personal tax rates. The government should also review whether the PAYG tax collection mechanisms and integrity measures which underpin the personal tax base remain fit for purpose.

1.6.3 CGT concessions The discrepancy in the tax treatment between individuals who derive capital gains (particularly pre- CGT gains) and those who derive ordinary income is significant.

In our view, and in the context of a comprehensive personal tax reform process, it is worth reconsidering the policy rationale for a number of CGT measures. Greater alignment of the treatment of capital gains and ordinary income could improve both equity and simplicity.

21 Refer https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/individual-income-tax- rates-table.html charteredaccountantsanz.com 18

In particular, consideration could be given to:

 The treatment of pre-CGT assets

It is now over 32 years since CGT was introduced. As a tax simplification measure, any remaining “pre” CGT assets held by individuals could be brought within the CGT net, with a cost base equal to the current market valuation.

 The size of the 50% CGT discount

We support a review of the current discount factor. Should the government consider that a 50% discount be retained to encourage entrepreneurship, then an “active” business test could be developed, with a reduced discount applicable to CGT events impacting “passive” assets.

In this context, Chartered Accountants has recently contributed to an ATO effort to clarify the administrative guidance around property development and the capital v’s revenue distinction. Other countries such as New Zealand have developed “bright line” tests for individuals to make the distinction.

Recommendation 1.6.3

The pre-CGT asset rule and the level of CGT discount for resident individuals could be considered as part of a broader personal tax reform package. To encourage entrepreneurship and risk taking, the 50% discount could be confined to “active” assets.

1.6.4 Levies and transparency about our personal tax rates We acknowledge the Government’s intention to pass the Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017 which, once enacted, will amend the Medicare Levy Act 1986 to increase the Medicare levy from 2% to 2.5% of a person’s taxable income for the 2019-20 income year and later income years. Other tax laws, such as the FBT rate, will be impacted.

This measure was announced by the Treasurer as part of the 2017-18 Budget on 9 May 2017 to fund the Commonwealth’s contribution to the National Disability Insurance Scheme (NDIS).

Whilst the NDIS is without doubt a noble cause, we believe that Australians should pay income tax at rates which are clearly understood. They should not be bamboozled into thinking that tax levies are always earmarked for a particular cause, or even if so earmarked, will always provide sufficient funding for a particular cause22. As we understand it, the NDIS is an uncapped outlay.

In a tax policy design sense, levies increase compliance costs and make the tax system less transparent.

In terms of fiscal policy, levies – particularly when they are constantly being imposed and later withdrawn according to the political cycle – give the distinct impression that our nation’s finances are poorly managed, unable to cope with important national projects such as the NDIS or occasional unexpected events.

22 The Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017 amends the Medicare Levy Act 1986 and nine other Acts) to reflect an increase the Medicare levy rate from 2% to 2.5% of taxable income for the 2019-20 income year and later income years. charteredaccountantsanz.com 19

Amongst the individual clients of CAs, the credibility of levies has plummeted especially in the current political climate where the major parties are at odds over the amount of the Medicare levy and which individual taxpayer segments should bear the impost.

Levies have also become an unpredictable factor in determining after tax spending power, adding further complexity to personal decision-making around important topics such as whether to borrow for a house, take a career break to start a family, or when to retire.

Unlike the company tax rate debate, Australian governments rarely inform citizens where our personal tax rates rank in international terms. For the record, Australia’s current top personal rate of 49% (for 2017-18) is ranked 16th highest in the OECD’s comparative chart.

For those who opine about what it means to be “rich” in Australia, the OECD figures also indicate that our top tax threshold of $180,000 is reached at just 2.2 times average earnings, which is substantially sooner than most OECD countries.

As both ATO and OECD figures attest, Australia’s tax system rides on the back of personal taxpayers, particularly those in the higher tax brackets. On and off again levies only exacerbate the burden.

Recommendation 1.6.4

It’s time to implement the Henry Review recommendation that the Medicare levy should be removed as separate components of the system and incorporated into a simpler, transparent personal income tax rate scale which everyone can understand.

2. Indirect taxes 2.1 GST Each year, the imperative for GST reform becomes greater as States and Territories squabble over how the existing GST revenue should be distributed23. There can be no holistic reform of the Australian tax system without GST rate and base reform being on the agenda. In turn, there can be no GST reform without getting the Federal financial relationship settings right.

History has proven, under consecutive governments at both Federal and State level, that there will be no GST reform until the Federal Financial Relations Agreement is re-negotiated to remove or dilute the States and Territories’ ‘power of veto’ over changes to the GST rate and base. As a Federal tax collected by the ATO, we consider that the Federal government must have an appropriately weighted vote in the reform process regarding the GST. This is discussed in further detail below.

Once the Federal government is in a position to effect GST reform, Australia can move towards a more sustainable tax base mix for the future.

23 By the time the Budget is delivered, the Government will hopefully have made clear how it intends to provide “GST floor” funding for Western Australia and other States and Territories. Refer Prime Minister’s speech to the annual WA Liberal Party State Conference, 3 September 2017. We also await with interest the report of the Productivity Commission’s Inquiry into Horizontal Fiscal Equalisation, due January 2018. charteredaccountantsanz.com 20

2.1.1 An underutilised tax base Australia’s 10% GST rate is relatively low compared with other nations such as New Zealand at 15% and the United Kingdom at 20%. In Australia, our GST currently taxes less than 50% of our potential GST consumption base. By contrast, New Zealand taxes roughly 96% of its potential GST base and is considered to have the most comprehensive, simple and efficient GST in the world24.

We need to make much better use of the GST, not only for its benefits but because of the potential risks if we don’t. These risks include:

 Revenue sources which Australia has historically relied upon will no longer be fit for purpose and able to meet future needs. Top of this list is continuing our heavy reliance on personal income taxes. Australia’s aging population means there will be fewer people paying income tax to support a higher proportion of retired people. According to the 2015 Intergenerational Report, there are 4.5 people of standard ‘working age’ for every person aged 65 and over in Australia today. By 2055, that number will only be 2.7 people.

 The corporate tax base is coming under downward pressure due to international competitive trends.

 Traditional revenue generators, such as coal exports, are also likely to decline in a carbon- constrained world and will need complementing from growth sectors of the economy such as food, health, education, digital services and financial services.

On a more positive note, the many benefits of the GST should not be overlooked:

 GST is widely acknowledged as our most efficient tax.

 It taxes consumption rather than income or profits, so it is more difficult to avoid and encourages saving.

 It has low volatility, so is readily forecastable and reliable for government budgets.

 It is a relatively proportional tax. The more people earn, the more they typically spend, and the more GST they pay overall.

We commend the government for introducing the recent cross-border GST integrity measures to impose GST on sales of goods and digital services imported by Australian consumers. Assuming reasonable levels of compliance by offshore taxpayers, these reforms will continue to reap dividends for Australian revenue collections for many years to come.

2.1.2 Modelling Chartered Accountants undertook tax reform modelling in July 2015 which demonstrated how a tax mix switch to a fully expanded GST base, covering education, health, financial services, and fresh food, could be done fairly and affordably, with appropriate compensation.

The Chartered Accountants tax formula shows that if GST is increased to 15% across a fully broadened base, it could generate revenue of $265 billion over four years, in a way that is both fair and affordable.

24 Refer Australia – New Zealand GST comparison at http://www.ird.govt.nz/yoursituation-bus/bus-aust-nz/tax- basics/comp-gst/comp-gst.html charteredaccountantsanz.com 21

Recommendation 2.1

Failing to reform the GST base is to neglect and underutilise one of Australia’s best and most sustainable tax bases that is key to our nation’s future prosperity.

We urge the Federal government to at least commence laying the groundwork for GST rate and base reform as a matter of priority, with crucial Federal Financial Relations reform as a starting point.

2.2 Federal Financial Relations Agreement reform As discussed above, we consider that there will be no GST reform until the Federal Financial Relations (FFR) Agreement is renegotiated to remove or dilute the right of the States and Territories to ‘veto’ changes to the GST rate and base. In this sense, FFR reform is an essential pre-requisite, which must be embarked upon by the Federal government as a pre-cursor to any notions of tax reform.

2.2.1 Federal political leadership required In our view, the Federal government, as the central government responsible under the Constitution for the peace, order and good government of the nation as a whole, must take the lead on this reform in order to keep the Federation united, funded equitably, and playing to our strengths as a nation.

Recommendation 2.2.1

We strongly support the three macro tax-related recommendations of the Productivity Commission, which were to:

 Seek Commonwealth-State/Territory agreement to a formal joint reform agenda (Recommendation 6.1).  Make tax reform as an integral part of the joint reform agenda (Recommendation 6.2).  Renew intergovernmental relations (Recommendation 6.4)

These recommendations should be vigorously pursued by government.

2.2.2 Review of the Federal revenue sharing model The current situation whereby the Federal government has no ability to influence or effect GST reform is unworkable and cannot be maintained in the national interest.

Specifically, the States and Territories’ ‘power of veto’ under the Intergovernmental Agreement on Federal Financial Relations 2011 (Schedule A) needs to be renegotiated so that GST base and rate reform can occur in the national interest, as part of the broader national tax reform agenda.

charteredaccountantsanz.com 22

We envisage that FFR reform could be achieved by renegotiating the various rights, obligations and, importantly, tax mix shares under the Intergovernmental Agreement on Federal Financial Relations 201125.

This could empower the Federal government by breaking the standoff and key constraint that currently exists – the need to obtain the unanimous support of States and Territories in order to make substantive GST changes to the rate or base.

Recommendation 2.2.2

Australia can wait for a “burning bridge” moment to address current problems with Federal Financial Relations, or the Federal Government can take the lead now to advance the cause of reforms which are ultimately in the national interest.

The States and Territories’ ‘power of veto’ under the Intergovernmental Agreement on Federal Financial Relations 2011 (Schedule A) needs to be renegotiated so that GST base and rate reform can occur in the national interest, as part of the broader national tax reform agenda.

2.2.3 Taxing the same base or taxpayers differently at Federal and State / Territory level In the absence of comprehensive reform, the never-ending search for new revenue sources is leading to some unfortunate outcomes in terms of FFR.

For example, there is now a “vacancy tax” on unlet residential real property levied at Federal level26 and (as a land tax surcharge) in Victoria27 and Queensland28.

A number of States have imposed higher stamp duty (and in the case of NSW, also land tax) on non-residents whilst federally, there is a new CGT withholding tax on non-residents disposing of real estate investments.

For online gambling taxes, a destination principle of taxation has been adopted in some States and Territories in addition to GST on gambling activities. The Federal Treasurer has reportedly agreed to see if a streamlined approach can be adopted to address tax collection, compliance and gambling addiction policy goals29.

There is also no consistent understanding of what a “luxury car” means for Federal Luxury Car Tax and State / Territory duty purposes.

Recommendation 2.2.3

The Council of Australian Governments (COAG) should review the interplay between Federal and State taxes and identify areas where duplication of effort can be eliminated and compliance cost reductions achieved (e.g. through the alignment of definitions).

25 Refer http://www.federalfinancialrelations.gov.au/content/intergovernmental_agreements/IGA_federal_financial_relations_aug1 1.pdf 26 Refer https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5963 27 Refer https://www.sro.vic.gov.au/vacant-residential-land-tax 28 Refer https://www.qld.gov.au/environment/land/tax/calculation/absentees 29 Refer http://www.afr.com/news/politics/tax-shakeup-for-online-betting-floated-20170324-gv5wjw charteredaccountantsanz.com 23

2.3 Environmental Taxes 2.3.1 Carbon price Chartered Accountants have been advocating the need for a carbon price in the Australian economy for many years.

In our view, the Australian government should implement an effective price on carbon as a priority. Australia has pledged to reduce emissions by 26% to 28% below 2005 levels by 203030. We must also be in a position to meet the increasingly stronger targets that will be required for the world to meet the goal of staying within a 2˚C average global temperate increase.

Tax policy can play a central role in an environmental policy, as many countries around the world are demonstrating31. Sweden, for example, is aiming to become one of the first fossil fuel-free welfare countries putting a price on carbon and redirecting investment flows.

Germany’s Director General for Energy Policy, Ministry for Economic Affairs and Energy, Thorsten Herdan has argued during G20 meetings in 2017 that putting a price on carbon is essential and the only way to implement the Paris Agreement, noting that carbon pricing can create a market “where the price tells the truth” in order to redirect investment flows.

The Nation Energy Guarantee (NEG)32 proposal that is being explored by the Federal Government with the States may provide an adequate ‘effective carbon price’ for Australia, provided it is designed in a way that is sufficiently flexible to incorporate science-based emissions reduction targets, in line with the Paris Agreement trajectories.

We note that the OECD has commented that the current Emissions Reduction Fund (ERF)33 involves a net fiscal cost to the public purse34. This cost to the Budget will continue to grow and become unsustainable as reduction targets become more ambitious towards full decarbonisation of the economy.

Recommendation 2.3.1

The Australian government should implement an effective price on carbon as a priority, designed to align with science-based targets in accordance with the Paris Agreement.

2.3.2 Planning for fossil fuel subsidy (FFS) reform As Australia's transport emissions escalate35 and the Paris Agreement requires progressively more ambitious commitments every five years, it makes sense to introduce domestic policy “review and refine” cycles36.

In our view, this means attention will inevitably turn to the significant fossil fuel subsidies that encourage fuel consumption and combustion-engine vehicles.

30 Refer https://www.pmc.gov.au/sites/default/files/publications/Summary%20Report%20Australias%202030%20Emission%20Re duction%20Target.pdf 31 Refer http://fffsr.org/2017/12/part-of-the-policy-solution-fossil-fuel-subsidy-reform-and-taxation-at-the-unfccc/ 32 Refer https://www.energy.gov.au/government-priorities/better-energy-future-australia 33 Refer http://www.environment.gov.au/climate-change/government/emissions-reduction-fund 34 Refer http://www.oecd.org/eco/surveys/Overview_Australia_2014_Eng.pdf 35 Refer http://ndevr.com.au/environmental/tracking-2-degrees-fy18-q1 36 Refer 2017 Review of Climate Change Policies, http://www.environment.gov.au/climate-change/publications/final- report-review-of-climate-change-policies-2017 charteredaccountantsanz.com 24

According to the Tax Expenditure Statement 201637 published in January 2017, the concessional rate of excise levied on aviation gasoline and aviation turbine fuel costs $1,250 million in revenue forgone.

Apart from the budget impact, there are a number of other factors which support an FFS review:

 Failure to reform fossil fuel subsidies is working against the Government’s innovation agenda, and exposes Australia’s economy to increasing carbon risk (financial loss and stranded assets) through businesses and citizens being relegated to carbon-intensive fuel and assets for transport and electricity generation.

 Like any subsidy, FFS has an opportunity cost, directing funds away from initiatives which promote clean energy and energy efficiency.

 There is an increasing global focus on FFS. During the 2017 UN Climate Conference in Bonn from 6-18 November 201738, a side event titled ‘Implementing Paris and the Sustainable Development Goals through Fuel Subsidy Reform and Taxation: Country Best Practices’ discussed international efforts to remove fossil fuel subsidies and invest in renewables, public transport and energy efficiency39. Other major economies have already committed to the rationalization of their FFS programs and implemented peer review processes to monitor the phasing-out of subsidies40.

But any policy changes on the horizon also need to acknowledge the important role such subsidies play in key sectors of our economy. There are also political sensitivities associated with FFS and this is a policy area where stakeholder expectations need to be managed carefully.

It is very important therefore that long-term policy thinking be applied to the future of FFS.

Recommendation 2.3.2

As part of a long-term “review and refine” policy approach, Australia should review its Fossil Fuel Subsidies and develop a strategy for a long term plan to phase-out these subsidies, with corresponding re-allocation of resources to assist those impacted and develop socially responsible, low or zero- carbon initiatives.

3. Black Economy Taskforce recommendations 3.1 The black economy “Black economy activities: undermine the community’s trust in the tax system; create an unfair commercial environment which penalises businesses and individuals doing the right thing; enable and entrench the exploitation of vulnerable workers; undermine tax revenue; and enable abuse of the welfare system. If unchecked, increasing black economy participation can lead to a dangerous dynamic. It can foster a culture which legitimises and

37 Refer https://static.treasury.gov.au/uploads/sites/1/2017/06/Tax-Expenditure-Statement-2016.pdf 38 Refer http://www.un.org/sustainabledevelopment/cop23/ 39 Refer http://sdg.iisd.org/news/cop-23-side-events-address-removal-of-fossil-fuel-subsidies-subnational-climate-action- in-the-us-13-november-highlights/ 40 A Guidebook to Reviews of Fossil Fuel Subsidies, published by the Global Subsidies Initiative, sets out how other countries including Australia can join almost a third of G20 members and nearly half of APEC members who are in the process of undertaking their FFS reviews. charteredaccountantsanz.com 25

supports this participation, spurring its further growth. As revenues fall, those remaining in the formal economy may ultimately be faced with higher tax burdens, giving them a greater incentive to move into the shadow.”41

In last year’s Budget the Government announced that it was adopting a small number of initial recommendations of the Black Economy Taskforce. We have since seen a draft Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2017 to ban sales suppression equipment and extend the taxable payment reporting system (TPRS) to couriers and cleaners. The ATO was also granted some additional funding to target the Black Economy.

Chartered Accountants supports these initiatives. The Interim Report of the Taskforce contains a number of other initiatives which Chartered Accountants also supports.

We see the Budget as an ideal opportunity to reveal the Government’s stance on these other recommendations and explain why new policies are necessary.

The 2018-19 Federal Budget poses special challenges for the government in communicating to small business if (as expected) the Budget contains measures to address the black economy. Some of these measures may be portrayed as “bad” for small business when in fact addressing the black economy actually helps honest small business operators to compete on a level playing field. The communications strategy for any Black Economy announcements needs to be carefully crafted.

Recommendation 3.1

The Federal Budget provides an opportunity to announce those recommendations of the Black Economy Taskforce which it has decided to implement, together with background information on why such measures are necessary and how they help honest taxpayers.

3.2 Hard wiring government The Black Economy Taskforce Interim Report noted that the complexity of the regulatory environment can lead to increased black economy activity as it becomes easier to opt out than to navigate multiple, overlapping, duplicative and cross jurisdictional regulatory regimes. 42 This regulatory spaghetti also imposes compliance costs on the economy due to government inefficiency, fragmentation and lack of focus43.

As a consequence, the Interim Report recommended that Australia develop “a robust, real-time business identification and verification system in order to reduce red tape, generate valuable data for government and businesses (for example simple verification of their counterparts) and improve delivery of relevant services.”44

41 Refer Black Economy Taskforce Interim Report, March 2017, Page 1. 42 Page 18 https://consult.treasury.gov.au/tax-framework-division/black-economy- taskforce/supporting_documents/BE_IR.pdf 43 Page 18 https://consult.treasury.gov.au/tax-framework-division/black-economy- taskforce/supporting_documents/BE_IR.pdf 44 Recommendation 6, page 4 https://consult.treasury.gov.au/tax-framework-division/black-economy- taskforce/supporting_documents/BE_IR.pdf charteredaccountantsanz.com 26

Chartered Accountants strongly agrees, and urges the government to progress as an integrated package, the following initiatives already announced:

 Digital identity verification  Director identification numbers  A modernised Australian Business Register, and  The National Business Simplification Initiative.

Combined, these initiatives have the potential to reap significant administrative savings for business, consumers and government at all levels. They can also level the playing field for businesses who are doing the right thing by making it easier and more efficient to enforce laws regarding phoenix operators, money laundering and terrorism funding, and existing Federal and State or Territory taxation and other laws.

From a social policy perspective, these measures can help clarify who owns key Australian assets (e.g. infrastructure, agricultural land, mining rights and water) and associate relationships. Even something as simple as nominating which home is a person’s main residence can be relevant at both a Federal (CGT main residence exemption) and State / Territory level (land tax exemption).

More broadly, such information could help inform many important research tasks, such as who is ultimately making political donations and who is benefiting from obtaining government procurement contracts.

It seems to us that the Government has come to a significant cross-road in deciding the direction of whole of government online initiatives.

We think the Budget provides an excellent platform to explaining the digital transformation of the regulation of entities, new identity authentication procedures, enhanced cyber security safeguards and data collection functions which incorporate new policies such as the beneficial ownership register45. The key agencies with responsibility for leading implementation should also be identified. Importantly, the Budget must convey why this modernisation is good for Australia generally, and particularly the business community.

Recommendation 3.2

Chartered Accountants recommends that the Government update the community, as part of the Federal Budget, on how Australia will move to a whole of government digital transformation model which modernises and streamlines the way Australians and businesses deal with government.

Particular attention should be given to unveiling the Australian Business Registry initiative.

3.2.1 The Govpass initiative, digital verification of identity and “Tell us once” On 17 October 2017, Angus Taylor MP, at that time the Assistant Minister for Cities and Digital Transformation, announced that the Government had delivered a beta of its digital identity platform called Govpass.

45 Refer Treasury consultation paper: https://treasury.gov.au/consultation/increasing-transparency-of-the-beneficial- ownership-of-companies/ See also the UK’s Digital Strategy 2017: https://www.gov.uk/government/publications/uk- digital-strategy/uk-digital-strategy charteredaccountantsanz.com 27

We understand that Govpass aims to reduce the number of Federal government logins from more than 30 to 1 by allowing a ‘verifier’ to vouch for the citizen. The great hope is that compliance costs will be substantially reduced by a “tell us once” approach which would automatically prepopulate information across a range of government agency functions so that only additional, specific information is required to be provided to a particular agency with specific information needs.

The Government is to be praised for progressing an issue which has frustrated our members and their clients for years.

We note also that Govpass has the potential to lower compliance costs for the businesses conducted by our members (e.g. in obtaining statutory licences to operate, registrations etc from a range of government agencies and regulators).

Verification of individuals, businesses and their (advisers) – intermediaries – is vitally important. Intermediaries also have a role to play as trusted, ethical professionals in keeping Govpass information up to date.

Recommendation 3.2.1

Given the heavy reliance that Australians and businesses place on intermediaries, particularly their accountant, the Govpass design and build must adequately factor in verification of an intermediary authorised to transact on behalf of another.

There can be a tendency for intermediaries to be overlooked in the design phase of such projects, ignoring the key role that accountants play in the tax and business affairs of their clients.

3.2.2 Phoenix operators A very conservative estimate of the cost of phoenix operators to the Australian economy in 2012 indicates that it is approximately $1.8 to $3.2 billion per annum46. The study noted that this estimate underestimates the impact of phoenix operations by:

 taking capped compensation rather than actual compensation into account, and  excluding the:  cost of unpaid superannuation benefits  impact of unemployment  costs to government of regulation and enforcement action, and  impact on business of unfair competition. Since 2012, there has been a surge in phoenix activity.47

Collaboration

There are already a number of ‘hotlines’ regarding phoenix operators and/or bad business practices. But as noted in our submission to Treasury’s consultation paper regarding “Reforms to

46 Fair Work Ombudsman, “Phoenix activity: sizing the problem and matching solutions” by PwC, June 2012. 47 Treasury consultation paper “Reforms to address the misuse of the Fair Entitlements Guarantee Scheme”, May 2017.

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address illegal phoenix activity”48, it is understood that not all State based hotlines are linked to the central ATO hotline.

It would be beneficial if COAG co-ordinated their response to phoenix operations by linking their web sites that have a phoenix reporting functionality to that of the ATO so that one standard set of scripted questions can be used and acted upon. The ATO would also share insights with relevant State and Territory agencies.

This could be included as part of the National Business Simplification Initiative which has already used a similar methodology in relation to business registrations.

Warnings to those who may be impacted – a name and shame approach

It seems clear that regulators such as ASIC, the ATO and consumer affairs agencies have a reasonable idea of who is likely to be a potential phoenix operator49. However, members of the public are not generally aware of them.

In our view, warnings need to be embedded in the proposed Australian business register system. This could be achieved, for example, by users being able to conduct free searches of people/entities who have been found to have engaged in phoenix activity and associated entities.

There is also the Tax Clearance Certificate proposal to consider (see next paragraph in this submission).

We understand that there are concerns about a “name and shame” approach, but such a policy is akin to the government’s other initiative of naming of those with aged unpaid tax debts who have not engaged with the ATO.

Prosecutions

The paucity of prosecutions of phoenix operators under the existing law is concerning, particularly given that the identity of some phoenix operators appears to be well known.

If there is a resourcing issue here, we would support a Budget allocation to support a Phoenix Taskforce charged to bring more wrongdoers before the courts.

48 Refer https://treasury.gov.au/consultation/c2017- t221952/?mkt_tok=eyJpIjoiWTJWak9UTXpaV0ZqTnpGayIsInQiOiJsd25uaTBYc1dNWkI5MDQxSUowTllaYnhiZ203TEE3 YXBWYm9Lb0NQY2dWNGN4STlPWXZKTzFWamNVUGp5elFDaWxUTjZXd3JcLytXVG5GZmF2dU4rSUVucWZOeXZi SVIzY0FMKzZsZ3VDZmNUY3pXWHlTejJNWUNDRWNERnBBSFYifQ%3D%3D 49 Treasury’s consultation paper noted that: “Of the more than 1,300 directors involved in multiple FEG [Fair Entitlement Guarantee] cases, more than 950 were involved with one or more companies where FEG or GEERS [General Employee Entitlements and Redundancy Scheme] was advanced and no return was obtained through the insolvency process. Further of the 950 directors, more than 600 of those directors were involved in two or more cases where FEG or GEERS was advanced and no return was realised in the insolvency process.” charteredaccountantsanz.com 29

Recommendation 3.2.2

Chartered Accountants would strongly encourage the Government to liaise with the Council of Australian Governments (COAG) to co-ordinate their response to phoenix operations.

Chartered Accountants recommends that one of the design features of the modernised business register be to enable the identification of persons previously proven to be phoenix operators.

Chartered Accountants supports extra funding to support the prosecution of phoenix operators.

3.2.3 The Tax Clearance Certificate On Budget night last year, the Government announced that it had “agreed to the Black Economy Taskforce’s recommendation that Government procurement processes encourage good tax behaviour50. The Taskforce was to develop a proposal in conjunction with the Department of Finance and other Commonwealth agencies for the 2017-18 Mid-year Economic and Fiscal Outlook.”

This initiative has the potential to drive enormous behavioural change through the government’s expenditure programme if it is enforced throughout the supply chain (some of the worst black economy industries51 are beneficiaries of significant government expenditure). “Government” in this context would ideally mean all tiers of government, right down to local and shire councils, and all forms of government funded agencies. Ultimately, we would hope that the private sector would also come on board.

The concept of a “good” taxpayer with a “Tax Clearance Certificate” eligible to apply for government contracts is used in countries such as South Africa and Ireland. Broadly, these regimes require that the taxpayer has a good compliance record, with all tax payments (other than those relating to legitimate disputes) up to date. Taxpayers can see their tax clearance certificates online and, working with their accountant, correct errors or bring their lodgements or tax payments up to date.

Procurement conditions could also be extended to other areas of concern to the government. Ideas raised in the Black Economy Taskforce’s Interim Report include:

 requiring contractors to provide information about their ultimate beneficial owners (Issue 18)  committing to pay sub-contractors in a timely manner52 (Issue 20)

50 The Black Economy Taskforce interim report recommended that “Australian Government procurement opportunities should be limited to firms which have a good tax record and do not engage in bribery or corruption. By taking a lead on this, the Government will send a clear signal to private sector supply chain managers. Responsible supply chain management must become the new norm and should be consistent with parallel initiatives across different levels of government.” 51 Building and construction, IT consulting, building maintenance (cleaners and security), and catering. 52 This is consistent with Recommendation 2 of the ASBFEO Report on Payment Times which states that “the Australian Government to require its head contractors to adopt the payment times and practices of the procurement through its supply chain. All levels of government to consider adopting.” And Recommendation 3, that “the Australian Government to extend its payment policies to all its agencies and entities. All levels of government to consider adopting.” charteredaccountantsanz.com 30

 good supply chain management (Issue 21)53 and,  potentially, participate in e-invoicing.

To align these contractual terms at all levels of government and to have common inspection / auditing procedures (Issue 28) would be incredibly powerful.

Recommendation 3.2.3

Chartered Accountants supports the introduction of Tax Clearance Certificate arrangements in Australia and urges the Federal government to lead by example with its own procurement procedures, encouraging other tiers of government to follow.

3.2.4 AUSTRAC - Anti-money laundering and counter-terrorism financing Chartered Accountants welcomes the recent announcement by the then Minister for Justice, Michael Keenan, of an additional $43.3 million in funding for the Australian Transaction Reports and Analysis Centre (AUSTRAC)54.

Although the funding will be used to recruit more staff to ensure financial institutions comply with the law, the extra staff will also be expected to educate 14,000 businesses across Australia on how to improve their anti-money laundering and counter-terrorism financing (AML/CTF) measures following the enactment of the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017.

The fact that some major, well-resourced public companies have recently been found not to have met their AUSTRAC reporting obligations – and have been hit with litigation and substantial fines – has raised deep concerns within the broader business community and in particular, amongst our members. How many others are getting this wrong?

Our members are particularly mindful of the Phase 2 rollout of the AML/CTF to lawyers, conveyancers, accountants, high-value dealers, real estate agents and trust and company service providers.

We appreciate the thorough way in which the Attorney-General’s Department is proceeding with consultation on the Phase 2 implementation of the AML/CTF and we support the Government’s initiative to combat money laundering and financing of terrorism. It is important that Australia meet its obligations as a member of the Financial Action Task Force.

As a professional accounting body we are committed to acting in the public interest and contributing to a robust system to prevent criminals from using Australia for illegal activities. We see accountants listed amongst the professions identified as “professional facilitators” by the Australian Criminal Intelligence Commission 55and know that those in our community who enable criminal activity to occur must be held accountable.

53 The Fair Work Ombudsman recently released material regarding how small businesses can manage contracting through their supply chains. The paper notes that monitoring the initial contractor is not enough. There needs to be monitoring of sub-contractors as well. The work in relation to reducing slavery could also be linked. 54 Refer https://www.ministerjustice.gov.au/Media/Pages/Multimillion-dollar-boost-for-money-laundering-and-terrorism- financing-fight-18-December- 2017.aspx?_cldee=bWljaGFlbC5jcm9rZXJAY2hhcnRlcmVkYWNjb3VudGFudHNhbnouY29t&recipientid=contact- 91e25a8f9c2fe61180e8c4346bc52700- dcc06ec102ef419f9cfea4e813fe6825&utm_source=ClickDimensions&utm_medium=email&utm_campaign=Daily%20Tax %20News%20-%20Dec%202017&esid=fb8c83d0-74e4-e711-813a-e0071b67aca1 55 Refer https://www.acic.gov.au/sites/g/files/net1491/f/oca_2017_key_enablers.pdf?v=1503462931 charteredaccountantsanz.com 31

However, our support for AUSTRAC and the AML/CTF regime is conditional on the regulators’ approach being pragmatic and proportional. This balance is best achieved through ongoing consultation with – and education of – stakeholders, and for AML/CTF, appropriate and reasonable transitional timetables being agreed on.

As the Minister’s latest announcement acknowledges, it will take businesses time to develop and put in place the required AML/CTF measures. There will need to be an appropriate implementation period, which in our view is two to three years.

Recommendation 3.2.4

Recent action by AUSTRAC against major Australian companies indicates that even well-resourced businesses make mistakes and fail to comply. The Phase 2 rollout of the anti-money laundering and counter-terrorism financing measures to various professional groups, including accountants, also draws near.

Ongoing consultation and collaborative education programs are key to the successful implementation of these regulatory requirements, as is a pragmatic and proportional administrative approach from the regulators.

The Budget allocation of agency funding should allow for adequate education funding and on-going consultation arrangements with relevant professional associations such as ours.

4. Government online 4.1. We need a big picture policy statement for online government Chartered Accountants have consistently supported the move to government online services. A modern economy should be underpinned by a modern administrative framework.

However, we remain concerned at the lack of Ministerial ownership of the various transformation projects. We see different agendas being pursued by different agencies, and disagreement about who should do what, and how.

A current example is the uncertainty surrounding the development of an Australian Business Register. Single Touch Payroll could be another.

The Government seems reluctant to paint a picture of what is in store for Australians and the business community, although the Digital Economy Consultation Paper launched in September 2017 was a step in the right direction56. The paper foreshadows the launch of a national Digital Economy Strategy in 201857.

In particular, there seems little desire to explain that, eventually, it will be mandatory for most Australians to use government online services.

56 Refer https://industry.gov.au/innovation/Digital-Economy/Pages/default.aspx 57 Refer http://minister.industry.gov.au/ministers/sinodinos/media-releases/deciding-our-digital-future charteredaccountantsanz.com 32

Silence about the “big picture” policy goals of modernisation means any opprobrium generated by projects such as Single Touch Payroll is borne by those government agencies leading the way, with the perception in some quarters being that these agencies are inflicting unnecessary additional compliance costs for no apparent public benefit.

Failure to reveal the long-term goals also lulls citizens and businesses into thinking they need not modernise the way they go about their daily lives. For example, we should be encouraging business operators now to think about using modern software and keeping digital records.

We appreciate that the small business sector is an area of particular concern for the government and note that the Terms of Reference of the Small Business Digital Taskforce58 include several fact-finding aspects about how small business currently use technology, and “regulatory or other impediments”. “Interactions with government at the Commonwealth, State and local levels” are specifically mentioned.

We are not sure how this Taskforce will carry out its work but we commend the UK’s qualitative research approach (published 31 January 2017) which explored attitudes, behaviours and digital capability of small businesses and intermediaries.

Hopefully, the national Digital Economy Strategy and the information gleaned from the Taskforce when it reports by 28 February 2018 will inform the Budget process and highlight the need for greater transparency around the government’s plans.

Recommendation 4.1

The Budget papers should include a summary of the government’s program for the introduction of online services, and the impact this will have on Australians and the business community. The document should include indicative implementation timelines which allow for adequate consultation with community and business representatives.

More detail should be made available in the proposed national Digital Economy Strategy, which should ideally be published on or before Budget night. The Strategy document should link to the findings of the Small Business Digital Taskforce.

4.2 Time for an ATO service standard to show that taxpayers really are clients Efforts by the ATO and other agencies to encourage Australians to interact with it online continue at a rapid pace.

The switch to the ATO’s Practitioner Lodgment Service seems to be proceeding well, with more and more tax return types gradually being migrated to the new platform.

The major ATO outages in December 2016 and February 2017 appear to have been addressed although occasional, unscheduled down time remains a concern for CAs in public practice. Confidence is gradually re-building.

Tax and BAS agents are looking forward to the ATO roll-out of promised enhanced online facilities which will give them access to much more detailed information about their clients. These facilities are currently being piloted with a small number of tax agents.

58 Refer http://sjm.ministers.treasury.gov.au/media-release/122-2017/ charteredaccountantsanz.com 33

Recommendation 4.2

We reiterate our suggestion that the ATO and other online agencies embrace the concept of a service standard.

Breach of the standard should trigger automatic entitlements for users, such as extended time to lodge forms online. Compensation procedures should be streamlined – as distinct from the current application and Act of Grace payment procedures.

This service standard could be part of a broader product (e.g. a Digital Charter using the UK model59 as a starting point), or form part of each agency’s standard (e.g. an enhanced Taxpayers’ Charter60 in the case of the ATO).

4.3 Tax penalties and interest – a new way for an online environment Given the shift to ATO online, we think now is a good time for both the Government and the ATO to review existing frameworks for the imposition of penalties and interest on taxpayers, particularly in the individual and small business segments.

There are a number of reasons for this suggestion:

 There is a growing realisation amongst tax regulators around the world that onerous tax penalty and interest models should be revisited.

o Particularly where the taxpayer is trying to do the right thing in a complex tax system, harsh penalties and interest regimes have the potential to jeopardise what should otherwise be a good working relationship with the ATO. Worse, they actually encourage taxpayers to avoid future contact with the regulator. Clients may also be discouraged from confiding in their tax adviser.

 The move to online services means that taxpayers in these segments are being actively encouraged (and will eventually be required) to deal with government agencies online. There should be some quid pro quo outcomes to entice, rather than push, taxpayers into the modern way of doing things.

 Compliance is being made to seem easier using online tools, yet the penalty and interest regimes remain draconian.

 In an online world, individual taxpayers in particular are being encouraged to think that they need not deal with the ATO through an intermediary (i.e. a tax agent), yet those that deal directly with the ATO are denied the “safe harbour” that currently applies when lodging via an agent61.

 The Government is collecting more and more information on taxpayers and, through data analysis, is aware of errors a taxpayer makes (indeed, the ATO technology is already such

59 Refer https://www.gov.uk/government/publications/digital-charter 60 The ATO is currently following up on the Inspector General of Taxation’s Review of the Taxpayer’s Charter and Taxpayer Protections in December 2016. 61 Refer https://www.ato.gov.au/tax-professionals/prepare-and-lodge/tax-agent-lodgment-program/safe-harbour/ charteredaccountantsanz.com 34

that it prompts online taxpayers to correct errors or suspiciously high deductions claimed). Such data should be used to help and educate taxpayers, not punish them.

 The ATO mantra is now all about “early engagement” and “talk to us if you have a problem”. The current penalty and interest regime was designed for different times, when taxpayers were “caught” and had to be “punished”.

Chartered Accountants favour new approaches, such as:

 A “points” system (similar to the road rules) to provide second, third chances to taxpayers

 Better recognition of taxpayer early engagement

 A “stop the clock” approach to penalties and interest where a taxpayer has engaged the services of a tax agent to bring a taxpayer’s affairs up to date and lodge outstanding tax returns

 Lower general interest charge and shortfall interest charge rates (current settings are overly punitive)

 Guaranteed “start-up” penalty and interest concessions as new online technology and “products” are implemented by the regulator

 No penalties or interest exposure at all after a specified, short amendment period of time has elapsed (assuming no fraud or evasion)

 ATO guidance which alludes to old investigation strategies (audits) etc should be updated for the modern way in which taxpayer engagement occurs

 ATO guidance which alludes to old record-keeping and verification processes should be updated for storage of substantiating documents on apps, in the cloud etc

 There should be some acknowledgement that taxpayer errors could potentially be attributable to flaws in the burgeoning range of software and apps, in which case full remission of penalties and interest occurs (i.e. a tax software warranty of sorts)

Recommendation 4.3

Chartered Accountants supports a “back to the drawing board” approach to the design and imposition of tax penalties on individuals and small businesses.

Some of our suggested approaches could form part of a revamped Taxpayers’ Charter, as distinct from amendments to the existing law.

4.4 Single Touch Payroll (STP) readiness Australian businesses are edging closer to the first phase implementation date for Single Touch Payroll (1 July 2018 for employers with 20 or more employees). Smaller businesses will be implementing STP from 1 July 2019.

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The ATO Project Team working on STP is deservedly confident that its implementation strategy is on track. Employer awareness is gradually growing and the ATO has embraced a pragmatic approach to implementation, with sensible procedures for:

 a “grace” period for late initial STP reporting  “overs and unders” in PAYG reporting and the ability to make true-up calculations in subsequent reporting periods

However, CAs continue to raise with us the feedback they are receiving from their clients, such as:

 For some clients, there are preliminary and in some cases substantial workloads in getting existing payroll data and systems STP ready (time and money needs to be invested).

 The difficulties being encountered in engaging some employers on STP (“What’s in it for me?” or “More compliance costs!” is a common response). Few see the ‘big picture’ benefits for their businesses arising out of STP.

 Selecting the appropriate software solution is an issue for some employers. “Can the ATO tell me what software is STP compliant?”

 STP is generally seen as a Government / ATO “Push” strategy. Chartered Accountants feel that employers would be more responsive if some “Pull” factors were implemented, either administratively by the ATO or via legislation. Examples include: lower penalties and interest for late reporting62, extended time to report, and reduced compliance in areas such as FBT63.

 Employers with variable reporting, payment periods will require extra attention (i.e. the ATO will need to work particularly closely with these employers / industries).

 Some employers may seek a 1st (and possibly a 2nd) year STP exemption, citing implementation costs, delays in the availability of software, lack of internet connectivity, and the need to change established payroll practices. The ATO needs to have a consistent, transparent approach in dealing with such requests.

 Cyber security is a big issue for many reasons, including STP. New software sometimes involves data storage in the cloud, or new payroll outsourcing arrangements are entered into. Who owns the data, and who would report and be responsible for any breach? More should be done by the ATO to promulgate awareness that software developers must meet information security standards to participate in the STP system. At the end of the day, quality software actually enhances protection against cyber incidents.

 Payroll / HR staff training ramp-up seminars are being conducted by the ATO, software developers, accounting firms and professional associations, but there is still a lead time in educating employees about STP and this training need will need to be on-going (payroll functions tend to experience high staff turnover).

 STP may encourage more employers to embrace payroll outsourcing (or labour hire outsourcing), due to cost, risk, lack of expertise and technology factors. This trend raises important issues for regulators such as the ATO and Tax Practitioners Board (e.g.

62 For example, the United Kingdom plans a “points” system for determining what tax penalties should apply for late electronic lodgers under its Making Tax Digital regime: refer: https://www.gov.uk/government/consultations/making-tax- digital-sanctions-for-late-submission-and-late-payment 63 For example, a small business could simply make a biennial declaration that no taxable fringe benefits are provided and that all minor, infrequent benefits are kept below $300 per employee. charteredaccountantsanz.com 36

Operation Elbrus\Plutus Payroll)64. Both New South Wales and Western Australia have also recently expressed concerns about scammers operating in the outsourced payroll industry65. We think current regulatory arrangements for payroll outsourcing and labour hire companies need closer examination and COAG has a role to play here.

 Finally, employers often ask Chartered Accountants: “Why isn’t the government also making FBT and reportable payments (contractor) compliance easier?” Some indication in the Budget that “Stage 2” of STP will address these topics would be welcome.

Nor can STP disguise long-standing problems and complexity in the tax and superannuation law which underpins PAYG withholding and employer superannuation.

Recommendation 4.4

Treasury (policy) and the ATO (administration) could do more to entice employers into the Single Touch Payroll regime rather than simply mandating that they do so.

4.5 The future of STP – Care needed for Stage 2, 3, 4 etc To date, the ATO team’s focus has rightly been on STP Stage 1 implementation.

But there is growing awareness that other Government agencies are keen to utilise STP in the future – agencies such as Fair Work, the Department of Human Services, and the Australian Bureau of Statistics. For example, further enhancements to STP have great potential in helping to reduce fraud, errors and debt in the transfer payment system.

Whilst we understand the enormous appetite for employee data and the assistance this would give regulators in other contexts, high compliance costs should not be foisted onto the employer community.

Stage 2, 3, 4 obligations must be designed with the same care as Stage 1, using a “tell us once” approach. Software producers need time to add extra reporting features into their products. Employers need time to adjust.

Care is also warranted because (in our view) few Australians are aware of the link between STP and their transfer payment entitlements. Community education and thoughtful implementation is required.

64 The Tax Practitioners Board has advised Chartered Accountants that it is currently in the process of developing a new course and registration pathway for payroll service providers. 65 For NSW, refer: http://revenuensw.cmail19.com/t/ViewEmail/i/85712C9FCBABAB5C2540EF23F30FEDED/163965F331240E8E62AF25A CF5E3F0AC?mkt_tok=eyJpIjoiWWpSaU5EZzFNekE1WXpRMSIsInQiOiJcLzhiYUU3aXFIakxnaGRZS040UGRkYXhxVX hvbHR3OU42dTZTK1NmNGUyWDE3Mks1ZHVtVlpGSlBwU3QwamR2RWErNU9YVWwzMWkzWjI5aDliakJteFVEQW51 bVZ5MzA0d29HUVBCXC9XVThXeEx1dWQwTzM2UGRXbDZzbWRXM1RMIn0%3D For Western Australia, refer: https://www.mediastatements.wa.gov.au/Pages/McGowan/2018/01/Employer-warning- labour-hire-scam-operating-in-Western- Australia.aspx?mkt_tok=eyJpIjoiWWpSaU5EZzFNekE1WXpRMSIsInQiOiJcLzhiYUU3aXFIakxnaGRZS040UGRkYXhxV XhvbHR3OU42dTZTK1NmNGUyWDE3Mks1ZHVtVlpGSlBwU3QwamR2RWErNU9YVWwzMWkzWjI5aDliakJteFVEQW 51bVZ5MzA0d29HUVBCXC9XVThXeEx1dWQwTzM2UGRXbDZzbWRXM1RMIn0%3D charteredaccountantsanz.com 37

Recommendation 4.5

We caution the Government against a rapid increase in the scope of STP before Stage 1 has been successfully implemented.

The experience in the United Kingdom with the roll-out of the STP equivalent system was that most of the implementation difficulties encountered involved the small business sector.

This suggests to us that 1 July 2019 – the STP implementation date for small business with less than 20 employees – will be the key milestone, and the ATO’s efforts should focus on this sector before additional regulators and government data gatherers are allowed to utilise STP.

4.6 Digitalisation transformation of government services generally 4.6.1 Are Australians really ready? Many Chartered Accountants would concur with recent remarks in a speech by Dr Martin Parkinson to a public sector audience66:

We are yet to really grapple with the opportunity to genuinely engage people online – rather than simply using online platforms as a way of pushing out information.

We raise this because 2018 is expected to be the year in which the digital transformation of government services really picks up pace.

After a rather shakey start, the Digital Transformation Agency (DTA) is beginning to find its place and role amongst public sector agencies but lacks visibility elsewhere, particularly with stakeholder groups like ours whose members are impacted by the DTA’s work.

Government should be particularly mindful of any “we know what’s good for you” thinking amongst the various agencies involved in modernisation projects. In the United Kingdom, poorly planned and executed strategies led to the government announcing a one year deferral of its ambitious “Making Tax Digital for Business” plans for small businesses67.

Two way engagement between the government and citizens is vital, and in this regard we think there is merit in conducting (and publishing) readiness surveys of samples from the community impacted by the government’s digital transformation plans.

To illustrate, the DTA’s work on a Trusted Digital Identity Framework68 is not well-known within the general community. Few would know about plans for two-factor authentication, and some could ask what is my data being used for and how is my privacy being protected?

There has been very little dialogue between the DTA and those historically trusted by the community to act as intermediaries – accountants, tax or BAS agents, and solicitors for example.

66 Refer https://www.pmc.gov.au/news-centre/pmc/ipaa-apsc-end-year-event-11-december-2017-secretarys-address 67 Refer https://www.gov.uk/government/publications/making-tax-digital-for- business?mkt_tok=eyJpIjoiT0dVNFlXWTJOVEZqTnpsbSIsInQiOiJNQnlDb1FueWFBdWNiOXZ0NWlRRE5iOFNtMEQ2c EFpTEFpbjNPUExcLzVvd1pjT1l5TTdYZ1ozbXJqeEM0TmRKN1BSZFYwV0tGYlFhUUQ2THhNUUllSlhBNUZDOEtMV29 qanZsdk9mR04yR09scUd5MmYxbUpnc1wvdVwvWnYrRWxiNCJ9 68 Refer https://www.dta.gov.au/news/have-your-say-tdif/ charteredaccountantsanz.com 38

Yet at the same time a new breed of online intermediaries are emerging. Key government agencies such as the ATO tell us that they are being bombarded with application programming interface requests from FinTech outfits seeking access to ATO data for use in new apps providing tax, superannuation, financial and wealth management services. Their demands resulted in the ATO calling a pause whilst an operational framework was developed setting out how the ATO would provide access to (and monitor) the digital transfer of data through software and applications69.

Surveys to a sample of the population served by a government agency also add welcome balance to the self-assessed nature of the current Regulator Performance Framework70, and challenge what might otherwise be seen as self-serving commentary from regulators. In a tax context for example, we note that the ATO’s latest Corporate Plan lists as “Under development” the need to set targets for “Empowerment – Partner perceptions of how the ATO empowers and includes them”71.

Recommendation 4.6.1

It is time to educate the Australian public about where government online services are heading and provide assurances about data.

Regular readiness surveys should be conducted (using sampling techniques) and published of those parts of the Australian community impacted by the government’s online plans.

Bespoke surveys by particular agencies such as the ATO would also help them objectively gauge whether they are achieving targets set out in their respective Corporate Plans, published as part of the Regulator Performance Framework.

4.6.2 Australians with special needs – Elderly Australians Whilst automating government services and encouraging digital interactions may be driven by the need for efficiency, the human element should not be overlooked.

This comment can be contextualised with many examples, but let’s look at Australia’s aging population.

As part of the ATO digitalisation process, careful consideration needs to be given to how elderly citizens will be able to interact with the ATO. It is generally acknowledged that as people grow older there is a decline in cognitive, physical and sensory functions. This combined with the pace of technological change can make digital communication difficult.

ATO research in 2011 also highlighted other issues amongst the elderly: computer illiteracy, “technophobia”, concern over the security of their information, and the perceived greater risk of making a mistake online.

69 Refer https://softwaredevelopers.ato.gov.au/operational_framework 70 Refer https://www.pmc.gov.au/regulation/commonwealth-regulators/regulation-performance-framework 71 Refer https://www.ato.gov.au/about-ato/about-us/in-detail/strategic-direction/ato-corporate-plan-2017-18/ In New Zealand, Chartered Accountants co-author an annual survey of the Inland Revenue’s performance – refer https://www.charteredaccountantsanz.com/news-and-analysis/news/discussing-new-zealands-new-tax-system-with- inland-revenue

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Aged persons may also be forced to rely on others and here we note growing concerns about elder financial abuse, as evidenced by the recent enquiry by the Australian Law Reform Commission. We are strongly of the view that there is a need for improved safeguards and consideration of the role that trusted intermediaries can play in helping the aged manage their financial affairs.

Recommendation 4.6.2

The government’s online strategy should make clear the personal contact services which will continue to be made available for Australians with special needs, or who find it difficult to interact in an online environment. Special consideration should be given to the needs of elderly Australians, many of whom feel vulnerable to elder financial abuse.

4.6.3 myGov Feedback from our members indicates that Australians have ongoing difficulties with myGov. We also note the June 2017 Australian National Audit Office report on myGov.

Whilst the number of citizens subscribing to myGov is growing (and will grow further because of the STP employee on-boarding platform), it is not mandatory to participate in myGov on an on- going basis. The ANAO found that “the effectiveness of myGov as a whole-of-government capability has been hampered by government services not joining myGov and not fully adopting the myGov functionalities”.

Two-way communication via myGov is problematic, particularly for those who have established intermediary relationships (e.g. tax agent and BAS agent arrangements).

Also, identity authentication remains frustratingly difficult for many myGov users, particularly those seeking online access to Medicare. Govpass will hopefully ease the frustration.

As the ANAO report noted however (and we agree), it is vital that the DTA establish a performance framework, including key performance indicators focusing on outcomes, so that the Government can gauge the extent to which it is delivering expected outcomes for users and member services.

Recommendation 4.6.3

Chartered Accountants recommends a review of myGov participating agencies to determine whether their online products are performing to acceptable standards and are user-friendly. Those agencies providing services to Australians who do not participate in myGov should be challenged and asked for a timeline for implementing their online strategy.

4.6.4 A proper functioning NBN A prerequisite for successful digitalisation of government services is reliable internet coverage.

Our members continue to express on-going concerns about this issue, particularly in parts of rural and regional Australia. Their concerns are backed up by increased complaints lodged with the Telecommunications Industry Ombudsman.

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We note also the recently announced temporary pause by NBN Co for all new orders over its HFC access network72. This pause has been prompted by the need to raise the quality of the NBN service for existing end users, reinforcing the view that all is not well with the current user experience.

Recommendation 4.6.4

A reliable, effective NBN is vital to the nation’s economic interests and the future of online services. The Budget should include an update from NBN Shareholder Ministers on the efforts of NBN Co to address service quality concerns identified by the Telecommunications Industry Ombudsman and users.

4.6.5 Australian Business Number – A new risk assurance approach For several years now, there have been a substantial number of people who have obtained an Australian Business Number (ABN) when they were not entitled to one73. On the other hand, recent media reports suggest there are some eligible applicants struggling to obtain an ABN.

To some, the ABN has become an entitlement, not a licence granted by the community with rights and obligations.

Chartered Accountants have long been concerned that the ABN is being deliberately gamed. The integrity of each ABN is integral to the success of the ATO’s digital transformation initiatives, protecting the PAYG withholding base from those who present as contractors but are really employees, and helping to detect phoenix operators.

We believe that those who assert they are in business should act like they are in business from Day 1. They should come within ATO data and tax collection systems sooner than is currently the case for PAYG instalments.

The proposed new Australian Business Register hopefully provides an opportunity to embed new, rigorous integrity controls into the ABN application and registration process74.

Consideration should be given to the quality of the ABN application and whether an accountant or suitably qualified person has provided some assurance to the regulator that the applicant has met clear criteria indicating that a business is in fact intended to be conducted (e.g. a business plan exists, cash flow calculations done, financing in place etc). Similar post-registration assurance could also be provided after an ABN has been obtained, to check that a start-up has in fact embarked upon genuine business activity.

72 Refer https://www.nbnco.com.au/corporate-information/media-centre/media-releases/improved-customer- experience.html 73 This is an issue because an ABN is essentially a licence to ‘do business’. It enables: exemption from ‘no-TFN’ and ‘no ABN’ withholding; listing on the ABR as an ‘active’ business; access to a ‘business name’; opening of a business bank account; establishment of ‘.com.au’ website; collection of GST; claiming of GST Input Tax Credits; collection of PAYGW from employee wages; access to government licensing; access to government grants, rebates and contracts; and business discounts on purchases.” Page 32 https://consult.treasury.gov.au/tax-framework-division/black-economy- taskforce/supporting_documents/BE_IR.pdf 74 ABN applications have become a “product” offered by online, unregulated service providers who care not whether the applicant meets the legislative tests for ABN eligibility. charteredaccountantsanz.com 41

Recommendation 4.6.5

The system of granting ABNs and monitoring ongoing eligibility for an ABN needs to be reviewed as part of the new Australian Business Register design and implementation process.

An ABN application accompanied by an accountant’s declaration that the applicant has met specified “ready to start a business” criteria should be accorded a lower risk rating than a “do-it-yourself” ABN applications. Trusted intermediaries could also provide on-going assurance that a business continues to be carried on.

5. Small business 5.1 Australia Inc Most businesses in New Zealand are by definition small to medium sized businesses (SMEs). Yet in almost every New Zealand forum Chartered Accountants participate in there is a common goal, a shared desire to promote the New Zealand business community at home and abroad in a strategy which is generally summed up in the term “New Zealand Inc”. This common purpose can be found in the public sector as well as the private sector.

As discussed previously with the former Minister for Small Business, Michael McCormack, the Federal Budget provides an opportunity to package together and effectively communicate a range of disparate initiatives which support small business across a range of ministerial portfolios and help improve our nation’s global competitiveness75.

The government’s 2017 booklet – Backing Small Business: Creating jobs, opportunity and growth – is a great example of what we mean. A continuously updated version of this publication online would be even better.

The Budget night small business information document could be further enhanced by promoting the various programs which help Australian SMEs expand beyond our limited domestic market and into the emerging markets of China, India and the South-East Asian region76.

Recommendation 5.1

An Australia Inc branded whole of government and private sector strategy should be developed by the Minister for Small Business and launched in the Budget as part of an on-going effort to clearly indicate to the small business sector that the nation’s goals include promoting the establishment and growth of small businesses.

75 The World Economic Forum’s Global Competitiveness Report 2017-2018 ranks Australia 21st. Our strengths are financial market development (driven mostly by a stable and well-regulated banking sector) and higher education and training (which reflects a capacity to produce a large pool of qualified workers). The top 5 most problematic factors for doing business in Australia are: restrictive labour regulations; tax rates; inefficient government bureaucracy; policy instability; and a poor work ethic in the national labour force. 76 For example, refer the New Zealand Inc theme reflected in that country’s trade strategy: https://www.mfat.govt.nz/en/trade/nz-inc-strategies/ charteredaccountantsanz.com 42

5.2 The instant asset write-off By all accounts, the $20,000 instant asset write-off for depreciating assets purchased by small business with a turnover less than $10 million has been very well received in the business community. Many Chartered Accountants say their small to medium sized business clients would like to see the concession continued. This concession is due to expire on 30 June 2018, so the question for those framing the Budget is whether it should continue.

The government is likely to have received from the ATO some analysis of the tax expenditure, the types of assets commonly purchased, and the extent to which incorrect claims have been made. In terms of incorrect claims, some Chartered Accountants report that small businesses occasionally fail to adequately differentiate between private and business use of equipment.

From a tax compliance perspective, the $20,000 threshold has provided a welcome simplification of the capital allowance rules. It has helped address the disproportionate administrative burden (relative to the value of the capital allowance deduction claimed) in classifying assets and calculating the write-off for what are relatively small asset acquisitions.

We note comments by Ms Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman that the $20,000 threshold is too low for some industries, like farming77. Whilst we agree with her observation, adoption of Ms Carnell’s suggestion would nonetheless still require an overall monetary cap on what could be claimed to protect the revenue base.

Recommendation 5.2

If supported by analysis of its effectiveness and if Budget circumstances permit, continuation of the $20,000 instant asset write-off would be well- received by Australia’s small business community.

Should the government discontinue the $20,000 threshold, then we would hope that:  the new threshold would be something more generous than $1,000 (the previous threshold)78, and  the lower threshold would be made available to all who carry on a business.

5.3 Small business start-up assistance - Cash flow education There are many well-intentioned government sponsored small business advisory programs across Australia designed to support small business, especially those in start-up mode. Many of these receive funding through the Australian Small Business Advisory Services program administered by Treasury79.

77 Refer http://www.asbfeo.gov.au/news/news-articles/small-businesses-encouraged-claim-instant-asset- write?utm_source=TaxVine&utm_campaign=00265891b1-Taxvine130417&utm_medium=email&utm_term=0_df128cff6f- 00265891b1- 97619205&mkt_tok=eyJpIjoiTkRobE1UYzBNV05sTldKaCIsInQiOiJLeU5XbXhIeVNWUWdcL2xORVdDK1lOODBwUnpn TkR3WFNzcDNZZXhPYTBPaEJUbFIrWVdITFwvSFZzZ01yS1RMRVJcL2tnRzM5cVdDeWZzTnFvVDdqcjZ0NmxydjZGO TZNaFgydTRaZXVwSjRNSlVpQm5senBEMk5kbWZCYmVTMnpCSCJ9 78 Refer https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-detail/depreciating- assets/simplified-depreciation---rules-and-calculations/?anchor=Instantassetwriteoff 79 Refer https://www.business.gov.au/assistance/australian-small-business-advisory-services-asbas charteredaccountantsanz.com 43

However, recent ATO research indicates that most small businesses particularly rely on their accountant for help.

We point this out because, in our view, the public sector could and should make much greater use of the highly trained, business-connected workforce of accountants in public practice.

Funds currently spent on government-delivered small business advisory programs could perhaps be better spent on incentives for start-ups to seek bespoke advice from an accountant keen to develop an on-going relationship with new small business clients (e.g. through a voucher arrangement or refundable tax offset).

We understand some research has been commissioned on this topic.

Our organisation has also been working closely with the ATO on small business cash flow education. Some of our members have participated in an ATO pilot programme which assists accountants educate small business operators on cash flow issues.

Cash flow education is vital not only in helping to prevent business failure, but also in reducing high levels of unpaid taxes from the small business segment of the taxpayer population.

Feedback on the pilot has been overwhelmingly positive and we endorse the ATO’s efforts to involve accountants in this important project.

To date however, the ATO’s cash flow education product has been published only in hard copy form (educational kits) suitable for one on one or small group presentations. Digital, on-line learning is our preferred way to progress this initiative.

Recommendation 5.3

The Government should review whether more effective small business assistance programs can be delivered by accountants who specialise in advising small business.

The success of the ATO small business cash flow training materials during the pilot phase suggests that funding should now be allocated to enable the materials to become an online, self teach product. In this fashion, more entrepreneurs would be able to benefit from the training materials and learn about cash flow issues before they commence business.

5.4 eInvoicing eInvoicing has already been embraced by some government agencies and large companies. It brings many cost-savings and efficiency benefits to those who embrace this technology.

It is time to expand awareness of eInvoicing to more small to medium businesses so that they can embrace the technology and enjoy the cost savings it brings.

Chartered Accountants is promoting eInvoicing through its involvement on the Digital Business Council, which enjoys the support of the ATO in providing proof of concept and pilot facilities.

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Recommendation 5.4

The Budget provides an opportunity for the government to convey its support for greater adoption of eInvoicing within the Australian business community, and to formalise the role and work of the Digital Business Council in this area.

5.5 Reporting business unpaid tax debts to the ATO The latest ATO Annual Report notes that whilst most taxpayers pay their tax on time, as at 30 June 2017 small businesses owed nearly $13.9 billion in collectable tax debt, an increase of 7% from last year (accounting for around 67% of total collectable debt).

Other taxpayer segments also show an increased debt profile:

 individuals owed $2.3 billion in collectable tax debt, up around 2% from last year (individuals account for 11% of total collectable debt)  not for profit organisations owed $96.8 million in collectable tax debt, up almost 3% from last year (0.5% of total collectable debt).

Overall collectable debt was $20.9 billion, up from $19.2 billion in 2015-16.

Growing levels of unpaid tax debt are being addressed by the ATO’s Debt team in many novel ways, some of which involve behavioural science.

But the key government policy response in the 2016-17 MYEFO statement – the Tax Integrity project to improve the transparency of taxation debts by allowing them to be reported to credit reporting bureaus – has progressed slowly. Draft legislation has only just been released for public comment80. The ATO is very conscious of the sensitivities involved and the need for fair processes to be put in place.

As yet, no aged tax debt from a “non-engaged” business taxpayer had been reported to a credit reporting bureau and this cannot occur until the relevant enabling legislation receives Royal Assent.

Recommendation 5.5

We support the tax integrity measure on unpaid tax debts, subject to comments we will make on the draft Bill, subject to comments which we will make as part of the consultation process. Apart from the unfairness arising where most taxpayers pay up but others don’t, businesses which don’t pay their tax often inflict similar damage on other creditors.

Chartered Accountants calls upon the Government to finalise the unpaid tax debt legislation.

80 Refer: https://treasury.gov.au/consultation/c2017- t246047/?mkt_tok=eyJpIjoiWWpSaU5EZzFNekE1WXpRMSIsInQiOiJcLzhiYUU3aXFIakxnaGRZS040UGRkYXhxVXhvb HR3OU42dTZTK1NmNGUyWDE3Mks1ZHVtVlpGSlBwU3QwamR2RWErNU9YVWwzMWkzWjI5aDliakJteFVEQW51bV Z5MzA0d29HUVBCXC9XVThXeEx1dWQwTzM2UGRXbDZzbWRXM1RMIn0%3D

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5.6 Time to reform the PAYG instalment system The lag in issuing and paying PAYG instalments can give start-up business and contractors a significant cash flow timing advantage.

PAYG instalments only commence after the first income tax return (e.g. for income year 1) is lodged and processed. This lodgement can occur as much as 18 months after business operations commenced. Upon initial assessment of this Year 1 tax return however, the taxpayer is then confronted with two tax debt obligations:

 The assessment of tax for all the income tax owing for income year 1; and  (Typically) One quarter of the total PAYG instalment owing for year 2.

Significant hardship can arise if the taxpayer has not set aside sufficient tax funds according to ATO research81. In some industries (especially building and construction), it is questionable whether some taxpayers ever intend to pay the tax: instead they engage in phoenix activity and re-establish themselves under new business names.

Technology advances since PAYG instalments were first introduced indicate that improved tax collection models could be developed. For example, business software is now capable of tax- adjusted PAYG instalment calculations in real-time and is used in New Zealand under the so- called Accounting Income Method.

Recommendation 5.6

Chartered Accountants feels that it is time to revisit the design of the PAYG instalment regime. That is, when a PAYG instalment rate is issued, how PAYG instalments are calculated, and the timing of PAYG instalment remittance.

The aim of the policy review should be to ensure that:  Businesses start putting aside income tax from the commencement of business, and  Compliance burdens, particularly from a cash flow perspective, are minimised, allowing businesses, the self-employed and other PAYG instalment taxpayers to adopt a greater range of PAYG arrangements with a choice of payment patterns that suit them. In this regard, consideration could be given to the Accounting Income Method recently introduced for New Zealand small business taxpayers82.

5.7 Small business CGT concessions – Time for a review An alternative (and perhaps unpopular) way of looking at small business tax policy is to consider what role the tax system should play in helping businesses grow, as distinct from focusing on tax breaks for those businesses that start small and intend to remain that way.

81 Refer https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/General-research/PAYG-instalments-- exploratory-research-2011/ 82 Refer http://www.ird.govt.nz/technical-tax/determinations/aim/determinations-aim-index.html charteredaccountantsanz.com 46

If that approach is taken then factors other than ‘smallness’ should have a greater influence over Australia’s tax policy thinking – i.e. factors that encourage innovation, investment and the hiring of employees would become more important.

The OECD recommends83 that countries must first decide what problems are faced by small businesses and then, if they consider the problems are sufficient to warrant government action, consider the relative merits of preserving a neutral tax system and using direct expenditure to pursue small business policy objectives, since non-tax measure will often be better targeted than tax measures.

Given the multitude of small business tax concessions we think it is time to consider them holistically and reconsider their objectives, outcomes and cost. We are pleased that the Board of Taxation thinks so too, and we have accepted an offer for a member of the Chartered Accountants Tax Team to join the Board’s Reference Group for a comprehensive review of the concessions.

We think particular attention should be given to the small business CGT restructure concessions which clearly fail the tax criteria of simplicity. A quick comparison between Division 152 ITAA 1997 and the relatively recent Subdivision 328-G (effective 1 July 2016) in the Income Tax Assessment Act 1997 highlights what we mean.

Recommendation 5.7

Chartered Accountants supports the Board of Taxation review of small business concessions, and has accepted the Board’s invitation to join the Reference Group.

5.8 Taxing working holiday makers – Post-implementation review Most would agree the introduction of the 15% tax on working holiday makers from 1 January 2017, and the related departing Australia superannuation payments rules, were poorly handled.

We hear from some Chartered Accountants in rural and regional Australia that the new arrangements have not been embraced uniformly. The ATO is no doubt following up on whether the implementation has gone as well as it hoped.

In terms of second round effects, ABC News has reported the “Backpacker Tax” is a contributing factor to a shortage of fruit picking labour in southern States in Australia84.

Data for the year to 30 June 2017 shows a 1% reduction in first Working Holiday visas were granted, compared to 2015-1685, with the largest decline being British backpackers. It is unclear whether this had anything to do with the new tax arrangements, or is part of an overall declining trend in recent years86.

83 Refer http://www.oecd.org/ctp/tax-policy/38007088.pdf 84 Refer http://www.abc.net.au/news/rural/2018-01-12/fruit-pickers-in-short- supply/9320256?pfmredir=ms&user_id=a5775fdef74b290b87cce267f4cac65750581e6a6d339e178121d29a448f2cf4&ut m_source=sfmc&utm_medium=email&utm_campaign=%3a8935&WT.tsrc=email&WT.mc_id=Email%7c%7c8935&utm_c ontent=ABCNewsmail_topstories_articlelink 85 Refer https://www.homeaffairs.gov.au/ReportsandPublications/Documents/statistics/working-holiday-report-jun17.pdf 86 See more detailed datasets on https://data.gov.au/dataset/visa-working-holiday-maker charteredaccountantsanz.com 47

Recommendation 5.8

Chartered Accountants recommends the government seek input from the ATO, other relevant regulators, and the National Farmers’ Federation to determine whether (and when) a post-implementation review should be undertaken into the so-called Backpacker Tax. The review should consider any second round effects on the main industries which rely on working holiday makers.

The Senate Economics Legislation Committee is well-placed to consider this topic, given its previous work on the Bills which implemented the new tax and departing Australia superannuation payments tax arrangements87.

6. Division 7A - Integrity rule for closely held groups The different outcomes where income is received by a company and an individual give rise to tax planning opportunities. The main policy reason for the existence of Division 7A ITAA 1936 is to limit the ability of private company shareholders to exploit these tax arbitrage opportunities. But Division 7A also acknowledges that a private company’s funds can be put to legitimate business use.

Division 7A is notorious in tax circles both for its complexity and the tax problems surrounding the use of tandem structures involving a private company and a related discretionary trust (i.e. the unpaid present entitlement issue).

There have been many reviews of Division 7A, the latest of which has been the Board of Taxation’s “Post Implementation Review of Division 7A of Part III of the Income Tax Assessment Act 1936”88. Chartered Accountants contributed to the Board’s review.

The complexity of the issues associated with Division 7A is reflected in the protracted process in releasing this latest report. On 18 May 2012, the then Assistant Treasurer announced that the Board would undertake a post-implementation review of Division 7A to be completed by 30 June 2013. On 8 November 2013, the Assistant Treasurer announced an extension to these terms of reference and extended the reporting date to 31 October 2014. It was only on 4 June 2015 that the Board of Taxation’s report into Division 7A was finally released. The Board’s report contains a number of recommendations which have merit.

The 2016-17 Federal Budget indicated that at least some of the Board’s recommendations would be implemented89 (“targeted amendments”) but to date nothing has happened. The changes were to come into effect from 1 July 2018 and impact both pre-existing and new loans.

Chartered Accountants are increasingly concerned about the 1 July 2018 implementation date announced in last year’s Budget. Many of their affected clients will need time to unwind existing arrangements and adjust to any new regime.

87 Refer https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/BackpackerTaxBill2016/Report?mkt_to k=eyJpIjoiTTJZM05HUTVZemszWldJeCIsInQiOiJaRnhoY2xKSldcL3RJT1ZKeXhia2U3aHdWQzBNdjdzd3YzOTRYbzBO c2NtYmtVYWtLNDVaZzJ1ZmRaeDBLNEN0Uk9nTlU4V09ubkJtUzF3NGUyRlJrSmNzSVwvbVg3TG9aOEVHOXk2ZFdcL 0xsbWFPenlcLzk2UFlZNTZVUmdHdHFzd0UifQ%3D%3D 88 Refer http://taxboard.gov.au/consultation/post-implementation-review-of-division-7a-of-part-iii-of-the-income-tax- assessment-act-1936/ 89 Refer http://budget.gov.au/2016-17/content/bp2/html/bp2_revenue-10.htm charteredaccountantsanz.com 48

In the meantime, Division 7A remains a topic area which “attracts the ATO’s attention”, although the ATO has provided a stop-gap measure for existing unpaid present entitlement arrangements (ATO guidance was originally published in 201090 and updated in 201791). Eventually, the ATO timeframe for rectification of UPE arrangements will expire.

All of this uncertainty is giving tax practitioners the distinct impression that Division 7A is too hard to fix.

Recommendation 6

Chartered Accountants urges the Government to explain by Budget night what Division 7A changes will be implemented and by when.

The ATO must then quickly respond with revisions to its current Division 7A guidance and engage subject matter experts in a consultative process.

Detailed, fast-tracked consultations must accompany changes in policy and administrative approaches.

7. FBT and work-related deductions 7.1 Time to simplify Ever since 1986, FBT has been an unnecessarily complex area of the tax law – especially for small business employers.

Recent attempts by the ATO to develop FBT “safe harbours” (e.g. for the minor, infrequent fringe benefit exemption) have largely proved unsuccessful because of FBT’s “black-letter law” drafting style.

Chartered Accountants have long considered FBT to be an area of the tax law where there should be bi-partisan political support for a joint government - private sector working party to radically simplify the law.

For benefit categories which contain the “otherwise deductible rule”, this exercise should be undertaken as part of a broader review of work-related deductions because of the connection between FBT and income tax.

We note that in 2016, the Standing Committee on Economics was tasked to examine: “the personal tax system as it applies to individual non-business income, with particular reference to the deductibility of expenditure of individuals in earning assessable income, including but not limited to an examination of comparable jurisdictions such as the United Kingdom and New Zealand”92.

90 Refer https://www.ato.gov.au/business/private-company-benefits---division-7a-dividends/in-detail/division-7a---unpaid- present-entitlement/ 91 Refer https://www.ato.gov.au/law/view/document?DocID=COG/PCG201713/NAT/ATO/00001 92 Refer http://www.aph.gov.au/TaxDeductibility We note that the Committee also looked at business interest deductions but understand that this aspect of the Terms of Reference will be considered as part of the government’s response to the OECD’s BEPS Action Plan. charteredaccountantsanz.com 49

Chartered Accountants made a submission to this inquiry93, but the subsequent report did not make any “courageous” recommendations of a policy nature94.

Our submission made clear the inter-connections between FBT and income tax deductions, as well as other factors such as negotiated workplace agreements, and occupational health and safety (e.g. the overall tax treatment of employees receiving benefits such as work boots from their employer, vis-a-vis employees who pay for such items themselves).

On the deductions front, some policy options for individuals not carrying on a business would be to:

 Abolish work-related deductions altogether in return for a taxpayer allowance which would be reflected in PAYG withholding calculations.

 In Stage 2 of Single Touch Payroll, require employers to insert a code on the electronic data communicated to the ATO indicating whether or not the employer has a policy of reimbursing legitimate business expenditure incurred by employees (i.e. to prevent employees from claiming expenses already reimbursed).

 Amend the income tax law so that mixed purpose expenditure is disallowed (e.g. laundry, home office expenses). This could be done by legislatively specifying the type of expenditure disallowed, or changing s8-1 ITAA 1997 to remove apportionment for individual taxpayers earning salary or wage income (e.g. by requiring that the expense must wholly or principally relate to the production of assessable income), and / or

 Review the current substantiation legislative rules and ATO guidance to address those areas which are contributing to non-compliant behaviour (e.g. requiring full substantiation for expenses exceeding a specified amount in order for a deduction entitlement to arise).

We acknowledge the practical difficulties in reforming work-related deductions. Not all workers have employers who provide them with tools of trade and uniforms for example.

There is also the trade-off employees will expect in terms of wage increases or tax cuts if work- related deduction entitlements are taken away or modified.

Reform in this area also requires consideration of potential behavioural implications, such as the incentive any changes may give employees to become contractors (i.e. to gain access to greater deductions, small business tax concessions and deferred tax collection arrangements).

Once a new model for income tax deductions is developed, consideration then needs to be given on how the model flows through to the FBT law. This requires consideration of the “otherwise deductible rule”.

As a cut-through measure, we favour a simple FBT procedure for an employer to declare to the Commissioner that:

 No salary sacrifice arrangements are entered into for employee expenses, and

 Only those expenses which the employer considers to be 100% work related expenses are paid or reimbursed, allowing for:

93 Refer https://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Tax_deductibility/Submissions 94 Refer https://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Taxdeductibility/Media_Releases

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o some minor, infrequent benefits to a specified dollar value (these are currently treated as exempt benefits) o entertainment to which current FBT rules apply.

Recommendation 7.1

Chartered Accountants recommend that the Treasurer seek from the Board of Taxation a report on how FBT (particularly expense payment fringe benefits) and work-related deductions could be simplified.

7.2 Reforming the minor, infrequent fringe benefit exemption We note that the Inspector-General of Taxation recommended in December 2016 that the Government review FBT “with a view to delivering a reduction in compliance costs in the short to medium term as well as longer term fundamental reform”95. This has yet to receive a government response.

If no major FBT review is forthcoming, the ATO’s recent unsuccessful attempt at a safe harbour rule for minor, infrequent fringe benefits96 indicates that this provision of the FBT law should at least be amended to:

 assist businesses who generally find it difficult to apply the existing legislation;  adjust for modern work practices (e.g. hot desking and working from home arrangements mean more genuine business meetings are held in coffee shops etc).

We favour the New Zealand approach to minor, infrequent fringe benefits. There, employers can provide up to $300 of free, subsidised or discounted goods and services per employee per quarter without having to pay FBT. As soon as the value of the benefits goes over $300 per employee per quarter, the full value of the benefit is subject to FBT.

There are also a number of other FBT “fixes” required in areas such as car parking and the definition of “taxi”. These have been the subject of on-going representations to the Treasury and ATO.

Recommendation 7.2

The Australian FBT law on minor, infrequent benefits should be amended, with an overall cap for employers, to follow the New Zealand model97.

Other house-keeping amendments to FBT should also be undertaken, in areas such as car parking and taxi travel for employees who fall ill at work.

95 Refer http://igt.gov.au/publications/reports-of-reviews/atos-approach-to-employer-obligations-compliance- activities/?mkt_tok=eyJpIjoiWldJM09EVTVZamt3WlRkbCIsInQiOiJhWFNaSHpIMGxuWkR1Z2ZPZHdVS2tLU2RjemFIMn BaMW5rTExxMnplMnh4QkZWSkFoRE05dnlsR3lWb2twNlJtcUI3c3RPTUY0djF6NlF6OTFJQVI0OTNHXC9nakJRQndOT E41XC94dXFKZzFUXC9vZTlaT3FcL2c5KzhkKzdqVGlmT3QifQ%3D%3D 96 Refer https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/FBT-exemptions-and-concessions/Minor-benefits- exemption/ 97 Refer http://www.ird.govt.nz/fringe-benefit-tax/fbt-types/fbt-goods-and-services/ charteredaccountantsanz.com 51

8. Protecting whistleblowers – More to be done The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 was introduced into Parliament on 7 December 2017. It is a welcome first step.

Chartered Accountants supports enhanced whistleblower protections and we were pleased that our Australian Tax Leader, Michael Croker, was appointed to an Expert Panel to work on a voluntary basis and assist with this measure.

Whistleblowers not only draw the attention of regulators to behaviours which may be unlawful, they can change cultures within organisations and improve management practices. Individuals who report misconduct deserve to be supported and protected.

That said, the Bill appeared hastily prepared and additional time would have been appreciated to consider submissions received on an earlier Consultation Draft. Nor does the Bill address all of the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services Report on Whistleblower Protections. Finally, there are a number of implementation and governance aspects yet to be considered.

Recommendation 8

Chartered Accountants submit that further consideration of the Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 be undertaken in Committee stage before it is passed by Parliament.

We hope and expect that the Expert Panel will have further opportunity to help develop the whistleblower legislative model further, and also advise Government on implementation and governance issues.

9. Sustainable retirement incomes 9.1 Replace annual contribution caps with lifetime caps The government must review the current process of assessing the annual concessional contributions made for each superannuant, and imposing severe tax penalties on those who exceed this various contribution caps.

This annual assessment process is complicated, costly to administer and does not work. It is based on the false assumption that every superannuation investor will make contributions at a constant rate throughout their working life. It has a particularly negative impact for those with broken work patterns, such as women who take a break from paid work to raise their family, although the proposed catch-up contribution cap mechanism will ameliorate this problem to some extent.

The reality remains however that most people’s ability to make significant super contributions only occurs later in their working lives. The concessional contribution cap needs to be set at a level that acknowledges this typical experience.

The patch-work solutions introduced by previous governments to fix annual concessional contribution tests are complicated and costly to administer. It is unfair that these costs are borne by superannuation investors who may never pay excess contribution taxes.

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Recommendation 9.1

Chartered Accountants recommends that the government remove the annual contribution cap assessment process and replace it with lifetime contribution caps, including appropriate transitional arrangements.

9.2 Joint spousal accounts We believe it is time for the government to consider the suitability of joint spousal accounts within superannuation funds, including for pensions. The advantages of this approach have been put forward by a number of stakeholders98.

For example, joint spousal accounts could dramatically reduce the number of superannuation accounts held by a couple and thereby further reduce costs for fund members.

Recommendation 9.2

Couples should have the option to pool their superannuation together in joint spousal accounts. Benefits include a substantial reduction in the number of superannuation accounts and couples would receive a much clearer indication of how they are tracking towards retirement income goals.

9.3 Review binding death benefit nominations The August 2016 South Australian Supreme Court decision Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121 was critical of a number of aspects of the superannuation regulatory environment but binding death benefit nominations in particular.

The court said that sections 58 and 59 of the Superannuation Industry (Supervision) Act 1993 and regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) give rise to "ambiguities, uncertainties and potentially unintended consequences", and that it is "highly desirable" that those provisions be reviewed by the government.

The court also said that regulation 13.16 of the SIS Regulations gives rise to "issues of construction and application", and that it is "desirable" that the regulation also be reviewed.

Recommendation 9.3

We agree with many of the comments made in Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121 about binding death benefit nominations and recommend the government review the relevant provisions in the Superannuation Industry (Supervision) legislation so that in the future the law delivers better outcomes for consumers and superannuation funds.

98 Refer for example this (undated) Rice Warner newsletter: http://ricewarner.com/wp-content/uploads/2015/10/Joint- Superannuation-Accounts_April-2014.pdf charteredaccountantsanz.com 53

9.4 CGT relief for fund mergers and restructures Chartered Accountants welcomes last year’s Federal Budget decision to provide tax relief for superannuation fund mergers until July 2020 to enable: “super funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets”.

This was a welcome initiative because the previous concession was scheduled to cease on 30 June 2017.

We note however that the extension to 2020 has not been legislated, and encourage the government to complete its legislative passage as soon as possible. We hope the government remains open to the idea of permanent fund merger relief in view of the Productivity Commission’s ongoing three-stage review into the efficiency and competitiveness of the superannuation industry99.

In addition, we request that the government expand this concession to provide the same relief when superannuation funds wish to restructure so as to transfer some or all of their investment holdings into one of more related pooled superannuation trusts.

Allowing this type of restructure would give two or more APRA regulated super funds the opportunity to merge their investment holdings, and gain the benefits of scale that this might allow, while also allowing the funds to remain separate entities.

We believe this concession would provide many of the cost savings that fund mergers often allow without the burden of fully completing fund mergers.

Recommendation 9.4

The government should move to legislate the extension of superannuation fund merger tax relief beyond 2017 to the promised extended date in 2020.

Tax relief should also apply where superannuation funds wish to restructure by transferring some or all of their investment holdings into a related pooled superannuation trust.

9.5 Ensure full transparency of fees and charges

Recommendation 9.5

The government should ensure that all fees and charges incurred both directly and indirectly by superannuation fund members are detailed in dollars and cents and the long-term impact of those fees are also explained in dollars and cents. We believe that this will involve further regulatory amendments to current product disclosure requirements.

99 Refer http://www.pc.gov.au/inquiries/current/superannuation charteredaccountantsanz.com 54

9.6 Appropriate policy settings to prevent elder abuse The Australian Law Reform Commission report “Elder Abuse - A National Legal Response”100 (Chapter 7) made a number of recommendations about preventing elder abuse in the superannuation sector, including to the BDBN rules mentioned above. We note that developing the government’s response to this report is part of the Attorney-General’s Department’s 2017 – 2021 Corporate Plan101.

Chartered Accountants in public practice are increasingly expressing concern about the welfare of some of their elderly clients. Their concerns are typically in the context of:

 intra-family positioning on issues relating to the potential transfer of wealth from the baby boomer generation to a younger generation which has found it difficult to save and address higher living costs, particularly housing affordability

 decisions relating to medical treatment for the elderly, given the impact of advances in medical science on improved life expectancy.

Recommendation 9.6

We encourage the Attorney-General to update the community on feed-back received from interested parties on the Australian Law Reform Commission’s report on Elder Abuse, and the government’s planned policy responses.

We hope that a range of worthy recommendations in the Commission’s report can be implemented as soon as possible.

9.7 Permit electronic delivery of all fund documentation There are a range of superannuation fund documents where relevant regulations still require written documents.

Recommendation 9.7

The existing paper-based documentary requirements in the superannuation laws should be reviewed and, where possible, the law changed to permit electronic preparation and delivery if the fund member consent to managing their affairs online, with cost savings passed onto fund members.

9.8 Actuarial certificates for self-managed superannuation funds If any portion of a self-managed superannuation fund’s (SMSF’s) income that is not in 100% pension phase (typically because there is a mix of pension and accumulation phase monies) for part of an income year, and the assets are not segregated, the ATO believes that the SMSF trustee is required to use the proportionate method to determine the exempt current pension income and consequentially is required to obtain an actuarial certificate for that part of the year if it does not wish to pay income tax on fund earnings during that period102.

100 Refer https://www.alrc.gov.au/publications/elder-abuse-report 101 Refer https://www.ag.gov.au/About/Documents/Attorney-Generals-Department-Corporate-Plan-2017-21.PDF 102 Refer https://www.ato.gov.au/printfriendly.aspx?url=/Super/Self-managed-super-funds/In-detail/SMSF- resources/SMSF-technical/Self-managed-super-funds-and-tax-exemptions-on-pension-assets/ charteredaccountantsanz.com 55

It has been industry practice for funds in this situation to obtain an actuarial certificate for the whole of the income year. The ATO has allowed this policy to be used for the 2016-17 financial year but not for future financial years.

The requirement to obtain an actuarial certificate for part of an income year is onerous and expensive for a SMSF. We do not believe industry practice leads to revenue leakage given the method that actuaries typically employ to determine the exempt current pension income percentage.

Consequently we ask the government to provide a regulatory amendment to permit industry practise to continue indefinitely.

We do not believe this issue is likely to arise in APRA regulated funds.

Recommendation 9.8

As a red tape reduction measure, we ask the government to review the circumstances in which the ATO currently requires actuarial certificates for SMSFs, particularly in the post 2016-17 scenario where, for any portion of an income year, an SMSF is not in 100% pension phase and the SMSF's assets are not segregated.

In our view, SMSF trustees should not be required to obtain an actuarial certificate simply because they wish to claim exempt current pension income in relation to income received by the fund during that part of the income year.

9.9 Transition to retirement pensions We request that the regulatory uncertainty surrounding Transition to Retirement (TtR) pensions – for example, TtR pensions paid to a reversionary beneficiary on the death of the principal pensioner – be sorted out as quickly as possible.

In particular we refer to the maximum income requirements if the reversionary beneficiary has not satisfied a nil Condition of Release and the inclusion of such pensions in a recipient’s Transfer Balance Cap.

Recommendation 9.9

As a matter of urgency the Government should provide regulatory clarity and certainty for Transition to Retirement pensions including those paid to reversionary beneficiaries who have not met a nil Condition of Release.

9.10 Superannuation fund death benefit payments The ATO’s Practical Compliance Guide 2017/6103 says:

 The ATO “has become aware that industry participants have inferred that s307-5(3) ITAA 1997 provides a mechanism for the spouse of a deceased member to roll over a death benefit income stream and retain the amounts as their own superannuation interest without the need to immediately cash-out that benefit.

103 Refer https://www.ato.gov.au/law/view/document?DocID=COG/PCG20176/NAT/ATO/00001 charteredaccountantsanz.com 56

 “The Commissioner's view is that the roll-over by a spouse of a deceased member's death benefit income stream does not change a superannuation provider's regulatory requirement to cash the deceased member's superannuation interest as soon as practicable. This means that the superannuation provider that has received the rolled over death benefit must immediately cash the deceased member's superannuation interest.

 “However, the Commissioner acknowledges that the industry practice that has developed means that a number of death benefit income streams have been commuted, rolled over and treated as the spouse's own superannuation interest.

 “The Commissioner will not apply compliance resources to review whether a SMSF has complied with the compulsory cashing requirements relating to a death benefit as set out in regulation 6.21 of the SISR provided that:

o The member of the SMSF was the spouse of the deceased on the deceased's date of death; and o The commutation and roll-over of the death benefit income stream is made before 1 July 2017; and· o The superannuation lump sum paid from the commutation is a member benefit for income tax purposes because it meets the requirement of subsection 307-5(3).”

We are concerned about the lack of regulatory certainty for those who provided advice and completed transactions on behalf of clients as allowed by this PCG.

While the PCG gives someone in this situation protection from complying with the superannuation laws from regulator action when dealing with SMSFs, it does not necessarily protect them from action commenced by other parties (such as aggrieved relatives who did not benefit from applying PCG 2017/6).

We believe a safe harbour – via a regulatory amendment to permit the ATO’s administrative concession – is essential not only for super fund trustees but also their advisers such as accountants and financial advisers.

Recommendation 9.10

The government needs to provide regulatory certainty to formally allow the ATO’s superannuation regulation administration concession.

9.11 SMSF defined benefit and other restrictive pensions

Recommendation 9.11 We encourage the government to work with the superannuation industry to provide an opportunity for individuals to cease their defined benefit and other restricted pensions, such as market linked flexi and term allocated pensions so they can transfer the net proceeds to account based pensions. There are a complex and inter-related range of superannuation, tax and social security law considerations that the government will need to consider in this area hence the need to the government to work with interested parties in the superannuation industry and related disciplines.

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10. Regulation of the professions providing tax-related services 10.1 The new regulatory environment The Tax Practitioner’s Board (TPB) has an important role to play in a self-assessment system to help ensure taxpayers receive quality tax related services.

From a practitioner perspective, they also help weed-out unethical and incompetent practitioners who create an uneven playing field and reputational damage for our profession. On this point, we have become increasingly concerned about ATO data suggesting that some agents actively assist their clients claim false work-related deductions.

Recently, the ATO has hinted that it may act independently of the TPB and move against tax intermediaries who are of concern. For example, it is within the Commissioner’s power to deny an agent access to ATO systems.

The TPB has now been established for over 7 years.

During that time, advancements in technological innovation have resulted in the traditional sources of tax advice being digitally disrupted. Robo advice, tax apps and artificial intelligence products are examples.

The TPB has also recognised new service providers who do not fall into the “traditional” tax and BAS agent categories for which the Tax Agents Services Act 2009 was initially designed. Because tax is relevant to a wide variety of transactions and service offerings, the TPB has grappled with the recognition which should be accorded to a range of professional groups operating on peripheral areas of the tax law (e.g. conveyancers, who may play a role in determining a vendor’s tax residency status under the CGT withholding rules for non-residents).

Then there are those who simply operate outside the regulated environment. Some of these players are located offshore and provide their services remotely. But our members also report that there are domestic service providers (e.g. pre-insolvency advisers, rogue R&D advisers) who undermine the business models of regulated tax advisers.

An example was exposed in Operation Elbrus104, which revealed an alleged PAYG-skimming operation conducted by an unregulated payroll outsourcing provider.

Diagram 1 attempts to convey how these and other developments are chipping away at the traditional (highly regulated) tax and BAS agent sector. The cross-over points in Diagram 1 highlight the main areas of difficulty encountered by the TPB in drawing boundaries for what is, or is not a tax related service.

104 Refer https://www.afp.gov.au/news-media/media-releases/afp-smashes-165-million-tax-fraud-syndicate charteredaccountantsanz.com 58

Diagram 1: Other service providers who may be providing tax-related services

Software Developers Unregulated Tax Apps offshore tax advisers R&D Fin Tech Payroll provider Banks Labour hire Tax Financial Quantity surveyors Services planners TPB regulated Conveyancers SMSF Insolvency specialists Valuers

Unregulated onshore tax advisers Source: Chartered Accountants Australia and New Zealand

There are also concerns about whether the TPB has the resources to investigate and prosecute those operating outside the law. Indeed, the TPB’s Annual Report 2016-17 and Corporate Plan 2017-18105 highlight that the TPB’s primary challenge in delivering on its objectives in this dynamic environment has been budgetary constraints.

Finally, in the current environment, many members increasingly see the label “tax agent” as anachronistic, suggesting that Australia should embrace a broader concept of what it means to be an “intermediary” acting for individuals and businesses.

Recommendation 10.1

We believe it is time for a post implementation review of the Tax Agent Services Act 2009 and the role and powers of the Tax Practitioners Board.

This review would need to be undertaken in co-operation with the ATO and other relevant regulators such as ASIC.

We stress that this is not a comment on the TPB’s performance. We are simply saying that regulatory models must adapt to changing industry circumstances and remain fit for purpose.

10.1.1 The boundary between tax and financial planning A particularly troublesome area for the TPB is the interplay between the tax and financial planning professions in Australia.

105 Refer https://www.tpb.gov.au/sites/default/files/2017-18_tpb_corporate_plan.pdf?v=1504491315 charteredaccountantsanz.com 59

We say professions (plural) with some caution because, although some practitioners see themselves in one camp or the other, most acknowledge that there are many cross-over areas which are notoriously difficult to define.

The vast majority of tax practitioners participate in the tax and superannuation system (for the latter, especially SMSFs). And the majority of accountants who provide financial advice are registered tax agents.

For our members in public practice, the vagueness of the delineation and the regulatory environment which has emerged since removal of the “accountants exemption” in 2016, together with technological advances already mentioned, has resulted in unwanted complexity and additional compliance costs in the form of various levies and licence fees.

The 1 July 2017 superannuation changes have also increased the demand for financial advice and created uncertainty amongst many accountants as to where the line is drawn between a tax agent service, accounting compliance advice and financial advice that requires holding or operating under an Australian Financial Services Licence.

Clients typically find it difficult to understand the boundaries also.

All this at a time when consumers have witnessed scandals in the financial planning sector, even within major financial institutions.

Regulators, industry and professional associations and professionals themselves have spent too much time on turf wars and forgotten the key objective – How do we collaborate and bring all our talents to bear for the benefit of those who matter most, our clients?

Recommendation 10.1.1

As part of the suggested post-implementation review (see above), and in conjunction with ASIC and the Financial Adviser Standards and Ethics Authority106, consideration should be given to a broader regulatory model which acknowledges the diverse but complementary skill sets of those engaged in tax, superannuation and financial planning advice.. The objective should be to avoid a narrow focus on “who can do what” in favour of a principles based regulatory approach which focuses on ethics, professional standards, education and the central tenet of acting in the best interests of the client.

10.2 A TPB registration pathway which is unfair, particularly for women An ongoing flaw in the Tax Agent Services Act 2009 regime is a barrier to registration that exists for professional accountants, such as Chartered Accountants.

Some Chartered Accountants who seek to register as tax agents with the TPB under the ‘work experience’ pathway (Item 205) are finding that they are rejected because they cannot satisfy the so-called ‘eight out of ten year rule (i.e. eight years of full-time relevant experience in the past 10 years). The fall-back pathway (Item 206 - Membership of a professional association) requires the applicant to be a voting member of a recognised tax agent association (such as Chartered

106 Established under the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017, the Financial Adviser Standards and Ethics Authority will mandate higher professional, educational and ethical standards for all financial advisers. charteredaccountantsanz.com 60

Accountants) and also have the equivalent of eight years of full-time relevant experience in the past 10 years.

The 8 out of 10 year rule is having a disproportionate, adverse impact on female accountants who have taken time out of the workplace to start a family. Increasingly, we are also receiving complaints from male accountants who have taken extended paternal leave.

The TPB was asked to review this issue in 2013 but has been unable to provide a resolution. The barrier is causing considerable ongoing issues for our members and is inhibiting their ability to duly register and provide tax services to the public in accordance with their Certificate of Public Practice (CPP) issued to them by our professional association and others.

Professional accountants don’t “switch-off” whilst temporarily away from the workplace. With so much technology available, there are now many ways to stay up to date with professional reading and participate in the many online webinars available.

It seems to us that the TPB is being too rigid in its interpretation of the 8 out of 10 year experience rule where such evidence of continuous professional development is available. Not only is the Board’s interpretation contrary to current social norms and work practices, it is annoying for employers who generally are most keen for employees on maternal or paternal leave to renew their careers as soon as possible. Commercially and from a legal liability perspective, employers have a vested interest in only supporting competent individuals to become tax agents.

We have put these views to the TPB.

However, it seems the only way forward is for the Tax Agent Services Act 2009 to be amended so that a separate new registration pathway is made available for ‘professional accountants’ to become a tax agent or BAS agent.

This new pathway should be inserted into the Tax Agent Services Regulations, and perform a similar role to the dedicated pathway available for professional lawyers (legal practitioners). Essentially, if a practitioner is a member of a professional accounting body and holds the academic qualifications required for the accounting body to issue a Certificate of Public Practice to them, the practitioner should meet the academic requirements to register as an agent.

In TPB parlance, we seek the equivalent of item 204, for accountants.

Recommendation 10.2

To help address the disadvantage suffered by accountants on parental leave who later seek registration as a tax or BAS agent, the government should amend the Tax Agent Services Regulations to include a new dedicated pathway for ‘professional accountants’ to register as a tax agent or BAS agent if they meet the academic requirements of their professional accounting body for a Certificate of Public Practice.

11. The regulators 11.1 Modernising the regulators In June 2017, Chartered Accountants published The Regulator of 2030: Regulating our digital future.

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Our research identified and discussed seven essential characteristics of any future regulator wishing to retain consumer confidence and remain effective as we approach 2030. These are summarised in Diagram 2:

Diagram 2: Seven essential characteristics of any future regulator

This research also highlighted how complexity and compliance costs can be reduced through greater digitalisation, improved data usage and streamlining the regulatory approach taken by agencies such as ASIC, ATO, TPB and others. To put these themes into the context of a pre- Budget submission for example:

 As regulated entities increasingly embrace technology solutions (increasingly referred to as “Regtech”) to meet regulatory requirements, the regulators should seek real-time insights by applying analytics (e.g. data could show that a tax agent’s clients routinely claim higher than average deductions, or that a financial planner weights elderly clients into high risk investments).

 Blockchain technology should be a particular focus of the key regulators, both in terms of the opportunities and threats107.

 The many existing levy collection points for advisers should be streamlined, along with integrating the registration and licencing requirements (e.g. using a simplified registration process through a single portal).

 Existing confidentiality rules and procedures should be reviewed to determine whether they prevent the effective sharing of relevant data between agencies.

107 ASIC has already proactively signalled its approach in a FinTech context. Refer http://www.asic.gov.au/regulatory- resources/digital-transformation/evaluating-distributed-ledger-technology/

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There is, in our view, a need for the agency heads of key regulators to ensure their Corporate Plans outline how they will transition from the traditional regulator to the regulator of 2030. Some of the themes for this suggested communications strategy are outlined in Diagram 3: Diagram 3: The regulator of 2030

Recommendation 11.1

Many challenges lie ahead for our key regulators as they seek to learn from and understand the entities they oversee, embrace innovation, create a flexible and agile culture, and harness the power of technology.

Within those key agencies most relevant to Chartered Accountants and their clients (typically found in the Treasury portfolio), we urge the relevant agency heads to ensure their Corporate Plans outline how they will transition from the traditional regulator to the regulator of 2030.

11.2 Resourcing the regulators Regulators can only carry out their roles if they are adequately resourced, especially now that new technologies and their associated risks are placing increased demands on already limited budgets. Globally, regulators are struggling to make static or declining budgets cover growing and increasingly complex mandates.

We suspect many regulators feel, understandably, that no amount of funding will ever be enough given the size, complexity and number of entities they oversee. Like many of the entities they regulate, the need to do more with less means they too must recognise the need to change their cultures, processes and structures.

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Some regulators have already acknowledged the need to harness new and emerging technologies to gain efficiencies and reduce costs108. They are using and sharing datasets, and exploring the benefits (and risks) of emerging technologies, such as blockchain, artificial intelligence and machine learning.

In a world where megatrends are forcing businesses to reinvent themselves to ensure survival, regulators must do the same.

Recommendation 11.2

In terms of resourcing, Ministers bidding for funds should address whether their agencies have modernised their strategic thinking. Old fashioned resourcing models based on headcount should be questioned.

Rationalisation and coalesced regulatory frameworks should be considered.

New, technology based regulatory models need to be developed.

12. Improving budgetary analysis and decision-making 12.1 Longer time frames required Australia’s limited revenues need to be used in the most appropriate manner. To do this, better budgetary procedures and information are required.

A recent Parliamentary report recommended that longer term estimates of tax expenditures be provided109. This can be seen as a reaction against a number of decisions, made by both major political parties, to implement policies whose real impact occurs outside of the forward estimates.

In our view, the Government should introduce a mechanism to ensure that the fiscal implications of key policy decisions are considered beyond the forward estimates. This is especially important in instances where the biggest fiscal impacts occur beyond the four-year forward estimate horizon.

Consideration should be given to:

 Implementing a requirement that the fiscal impact of key new policy decisions are forecast over a 10 year period and compared to a scenario without the policy; and/or  Mandating a role for the Parliamentary Budget Office (PBO) to develop independent estimates of the fiscal impact of key new policy decisions over a 10 year period, compared to a scenario without the policy.

Recommendation 12.1 Chartered Accountants recommends that the fiscal implications of key policy decisions are considered beyond the forward estimate period, for a period of 10 years.

108 For example, the ATO Corporate plan 2017–18, covering the period 2017–18 to 2020–21. Refer https://www.ato.gov.au/about-ato/about-us/in-detail/strategic-direction/ato-corporate-plan-2017-18/ 109 For example, see response to recommendation 11 of http://www.aph.gov.au/Parliamentary_Business/Committees/House/Tax_and_Revenue/Tax_Expenditures/Government_ Response charteredaccountantsanz.com 64

12.2 Independent body needed Some of the assumptions included in the long term forecasts undertaken in relation to the Australian economy have used assumptions that may need updating. For example, the 2015 Intergenerational Report110 suggested that bracket-creep would largely drive the recovery of tax receipts, but Australia’s recent low wage growth experience makes it unclear whether this still holds true. Given the sensitivity of the structural budget balance to the assumptions and parameters used to construct it, if the structural balance budget were to play a larger role in public discourse, there is value in ensuring that they are as credible as possible. Accordingly, there may be a role for an independent reviewer to report on the veracity of the adjustments. The Parliamentary Budget Office (PBO) has already published research on the structural budget balance111 and this looks to be emerging as an important part of the nation’s governance on budget related matters.

While Treasury will necessarily continue to estimate the structural budget balance as part of its core role in the budget process, expanding the remit of the PBO and providing it with additional resources to develop parallel estimates of the structural budget balance will allow the PBO to play the role of an ‘honest broker’ in the debate around the veracity of numbers in the budget papers.

In practical terms there may be little difference in the modelling outputs but if there is more confidence in the process there is likely to be greater engagement and it would help to focus attention on the policy issues at hand rather than their political context.

At the very least, a better explanation of the budget process would be welcome112.

Recommendation 12.2

Chartered Accountants recommends the Government establish a new platform to monitor and report on the long-term pressures on the Budget.

This platform should be independent of executive government and the central agencies. Consideration should be given to a role for the PBO or an independent institution (along the lines of the Institute for Fiscal Studies in the United Kingdom) or an expert panel (along the lines of Germany’s Council of Economic Experts).

As part of its mandate, this body would be tasked with:

 Reviewing periodically the assumptions and parameters used by Treasury to estimate the structural budget balance  Promoting a greater understanding of the structural budget balance in the national debate, and  Undertaking ongoing research to refine the measure of the structural budget balance.

110 Refer http://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/2015-Intergenerational-Report 111 Refer http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Reports/Research_r eports/Estimates_of_the_structural_budget_balance_of_the_Australian_Government_2001-02_to_2016-17 112 Refer for example to the New Zealand government’s explanatory document: http://www.treasury.govt.nz/budget/process charteredaccountantsanz.com 65

12.3 Resourcing Treasury’s Revenue Group The commitment to the Black Economy Taskforce, implementation of OECD BEPS initiatives, a backlog of Board of Taxation reports which have yet to receive a response, and a list of announced but not yet enacted measures – these have all added to the Treasury Revenue Group’s already sizeable workload.

Recommendation 12.3

We recommend that the Treasurer and Treasury Secretary pay particular attention to the staffing needs of the Revenue Group in planning Average Staffing Levels for 2018-19, taking into account the need to align agency capabilities with the Government's budget strategy and policy priorities.

13. Alternative economic measures The Federal Budget provides an opportunity to present alternative economic measures to the Australian people. 13.1 The size of government In our view, the government should reduce the emphasis on the size of government as a fiscal rule.

In the short term, the size of government rule may provide policy makers with some fiscal discipline by making them more aware of the fiscal impacts of decisions. However, the optimal size will change over time.

We feel the government should initiate a separate public debate on the appropriate size of government in the context of the appropriate role for government.

This in turn would lead to a discussion of how those roles should be funded. The government’s self-imposed “tax speed limit” of 23.9% of GDP113 would then come under consideration in what would hopefully be a more informed context.

Recommendation 13.1

Chartered Accountants recommends that the government should put aside the size of government as a fiscal rule.

Instead the government should initiate a separate debate on the appropriate size of government in the context of the appropriate role of government.

13.2 Developing alternative wellbeing measures In the quest for measuring progress and being able to compare this progress against other nations, welfare has become synonymous with Gross Domestic Product (GDP). Yet GDP is not a welfare measure – rather it is a measure of economic activity. Interest is growing in communities, governments and internationally as to how a more complete picture of progress can be shown, one

113 Refer http://sjm.ministers.treasury.gov.au/speech/022-2017/ charteredaccountantsanz.com 66

which recognises environmental and social outcomes (inequality, intergenerational equity) as well as economic aspects.

In our publication “Is policy making measuring up? Rethinking how we measure the success of a nation”, we compared GDP per capita against various alternative measures of national progress (see Diagram 4).

Our analysis indicated that alternative measures of progress are now poorly correlated with changes in GDP for Australia. Yet these alternative measures of progress are a closer reflection of the aspects that society values most.

Diagram 4: Comparison between GDP per capita and several alternate indices

These results are consistent with international findings that the correlation between an increasing GDP per capita and other measures of national progress tends to be strongest at lower GDP levels, with the rate of change in welfare tending to decrease at higher GDP per capita levels.

In Australia, recognition of the importance of a more holistic view of national progress led to the development and revision of Measure of Australia’s Progress (MAP) by the Australian Bureau of Statistics (ABS). In 2013, ABS published “Is Life Getting Better in Australia, Measures of Australia’s Progress” to explore precisely this question. The multiple indicators of MAP were published in addition to GDP data, allowing a deeper understanding of the successes, and areas of improvement. However, due to funding cuts this was discontinued. The loss of MAP raises an important question: how can the evolution of long term national progress measurement be best supported in an environment focussed on short term economic change?

In September 2015, Australia (one of 193 nations), adopted the UN sustainable development goals (SDGs)114. The 17 goals were finalised after significant international consultation, including from Australia and will run from 2016 to 2030. They represent the broad global perspective of what our

114 Refer: http://dfat.gov.au/aid/topics/development-issues/2030-agenda/pages/sustainable-development-goals.aspx charteredaccountantsanz.com 67

future looks like and cover all aspects of sustainable development from poverty and climate change to innovation and economic growth. The SDGs explicitly call on all nations and businesses to help solve these sustainable development challenges.

Australia will deliver its first Voluntary National Review on the 2030 Agenda at the High Level Political Forum (HLPF) in New York in July 2018.

In the absence of MAP, we recommend the government publicise the SDG reporting to facilitate a deeper understanding of Australia’s progress in a broader, more holistic way and the areas of development.

Recommendation 13.2

The Government’s planned 2018 report on Australia’s ongoing progress in achieving UN sustainable development goals should become the basis for reporting more broadly to Australians our nation’s progress.

14. Education and child care – Incentives to join or return to the workforce Investment in education and child care is important in terms of:

 addressing inequality; and  developing a flexible, diverse and creative workforce.

14.1 Inequality As the December 2014 Senate Community Affairs References Committee Report Bridging our growing divide: inequality in Australia noted, inequality is increasing in Australia. An October 2017 report from the IMF indicates the trend is continuing115.

Our November 2014 publication, Risk-wise and a fair go - A plan for Australia's continued prosperity, noted that high levels of inequality can reduce growth through its impact on education and labour mobility, particularly in periods of rapid change, and that social cohesion can be eroded.

There will always be some inequality in a market economy but addressing the gap is not only desirable on social policy grounds. It also leads to more economic growth and higher government revenues.

As the government plans for Australia’s future, we encourage further investment in education, particularly early childhood education for lower income families, to not only meet the needs of Australia’s growing population but also as one way to address the increasing inequality in society.

Education is a key area where public investment can result in both social and economic dividends. Digital skills and skills relating to science, technology, engineering and mathematics (STEM) should be a special focus for investment.

14.2 Participation Furthermore, the education of our future workforce will be critical to Australia’s future economic success. Access to affordable, flexible and safe child care plays a critical role in enabling parents to return to and stay in work. This access is not just needed before children begin school, but also

115 Refer http://www.imf.org/en/publications/fm/issues/2017/10/05/fiscal-monitor-october-2017 charteredaccountantsanz.com 68

access to out of school hours care for those whose occupations are not aligned to school hours. As the 2015 Productivity Commission’s report into child care and early childhood learning recommended116, “State and territory governments should proactively encourage the provision of outside school hours care on school sites”.

Marginal tax rates also impact decisions whether to return to work, particularly for the second income earner in a family. Consideration of how taxation and the design of family income support and transfer payments impact on effective marginal tax rates should be an on-going project.

Recommendation 14

As part of its ongoing efforts to address inequality in our society, the government should prioritise education and child care in its budget planning, with particular attention on how programs address the jobs of the future and encourage greater workforce participation.

15. Cyber security In April 2016 the government released Australia’s updated cyber security strategy. Chartered Accountants encourages the government to rapidly implement this updated strategy. With the cost of cyber-attacks to businesses and individuals estimated to be around USD $133 billion globally, cyber security is an escalating risk and a top national priority.

Aside from the April 2016 updated strategy, aspects of the Report of the 2017 Independent Intelligence Review117 impacting cyber security are also relevant.

Overall, a Budget update on the government’s response and implementation strategy for the various cyber security recommendations in these reports would be welcome.

Our members tell us that many small to medium sized businesses have yet to develop a cyber security defence strategy and need help to do so (e.g. through cyber security governance ‘health checks’ and testing of their cyber security).

We also urge key regulators to engage with stakeholders about their cyber security strategies, cyber preparedness, and their willingness to assist stakeholders impacted by cyber incidents. The mandatory reporting of data breaches is important, but so is the speed and effectiveness of the response.

Finally, it would be useful if key regulators and relevant industry and professional associations collaborated on developing public guidance on the qualifications consumers should look for before hiring cyber security consultants. We are hearing reports of service offerings from persons with questionable skillsets.

116 Refer http://www.pc.gov.au/inquiries/completed/childcare#report 117 Refer https://www.pmc.gov.au/resource-centre/national-security/report-2017-independent-intelligence-review charteredaccountantsanz.com 69

Recommendation 15

The Budget should include an update on Australia’s cyber security strategy, and progress to date on implementing key recommendations from past reviews. Assistance for small business should be a key focus.

Key regulators must play a key role in helping stakeholders recover from a cyber security incident. Regulators should also collaborate with industry and professional associations to develop credentials for those offering cyber security services to consumers.

16. Anti-corruption and bribery We understand the Prime Minister is open to the idea of a Federal anti-corruption body. In light of recent events and to address community concerns, we would support such a move.

The overall government response should form part of a comprehensive and sustainable plan to strengthen Australia’s anti-corruption and bribery regime in order to address the growing threat of corruption and cybercrime in the region, to enhance our international reputation and rankings for anti-corruption measures, and to send a clear message that we do not tolerate bribery and corruption.

Australia currently ranks 13th in Transparency International’s annual Corruption Perceptions Index118 which measures world-wide perceptions of corruption, and we have slipped in the rankings over recent years.

We support Transparency International (TI) Australia’s call to the government to enact the OECD’s reforms to address overdue foreign bribery law reforms. We also support TI recommendations to establish a strong, broad-based federal anti-corruption agency; reform anti- corruption and political finance regimes at state and federal levels; and strengthen our nation’s anti-money laundering regime to ensure that public regulators, and key industries like finance and real estate, are not compromised by the flow of dirty money from overseas.

According to our 2015 publication Are Australia and New Zealand Corrupt? corruption is on the rise, with both nations increasingly trading with countries considered to be corrupt. Research suggests that bribery and corruption has increased by upwards of 80% and both Australia and New Zealand have fallen in global rankings for transparency and corruption.

Our report provides a ten point plan which could be adopted to combat corruption and bribery in Australia and New Zealand. Major recommendations for the public sector include increased transparency in awarding public sector contracts; regulation to prohibit the awarding of public sector contracts to those with past convictions; and a prohibition on public sector contracts for companies without corruption policies.

Other key recommendations in our report include compulsory anti-bribery and corruption policies in NZX and ASX listing rulings; better cross border cooperation on bribery, particularly on foreign bribery; harsher sanctions applied more broadly; and reviewing the income tax deduction rules for “facilitation” payments.

118 Refer https://www.transparency.org/news/feature/corruption_perceptions_index_2016 charteredaccountantsanz.com 70

The government should also properly resource our nation’s anti-corruption and bribery regulators. Discussions with the Australian Federal Police for example indicate that pursuing such actions through the courts is an enormously costly and time consuming exercise and that earlier interventions and good governance should be the key strategies.

We also note the current lack of clarity as to several implementation aspects of the new whistleblower regime (refer Whistleblower Expert panel report to government).

Recommendation 16

Chartered Accountants recommends that the government further strengthen Australia’s anti-corruption and bribery regime in order to help to address the growing threat of corruption and cybercrime in the region, to repair the damage to our international reputation and rankings for corruption, and to send a clear message that we do not such behaviour.

To support this the government should properly resource and provide a clear mandate to agencies which enforce our nation’s anti-corruption and bribery regime. Their emphasis should be on governance and education.

There are several implementation aspects of the whistleblower regime which need to be addressed.

17. Data access and use 17.1 When will we see the power of government data unleashed? A number of major Government-commissioned reports have highlighted the benefits of increasing the availability and improving the use of data, including the:

 2014 Financial System Inquiry (the Murray Inquiry)  2015 Harper Review of Competition Policy.

In March 2017, the Productivity Commission published its landmark report into Data Availability and Use119. The Government responded by establishing a cross-portfolio taskforce120 but the taskforce has yet to report any progress from a government agency perspective towards implementing the Productivity Commission’s recommendations.

Instead, the Government has acted on a part of the Productivity Commission report impacting the private sector by announcing it will legislate a national Consumer Data Right, allowing customers open access to their banking, energy, phone and internet transactions121.

We can only reiterate the Productivity Commission’s key points:

Extraordinary growth in data generation and usability has enabled a kaleidoscope of new business models, products and insights. Data frameworks and protections developed prior to sweeping digitisation need reform. This is a global phenomenon and Australia, to its detriment, is not yet participating.

119 Refer http://www.pc.gov.au/inquiries/completed/data-access/report/data-access.pdf 120 Refer https://www.pmc.gov.au/public-data/data-availability-and-use-taskforce 121 Refer https://ministers.pmc.gov.au/taylor/2017/australians-own-their-own-banking-energy-phone-and-internet-data charteredaccountantsanz.com 71

Improved data access and use can enable new products and services that transform everyday life, drive efficiency and safety, create productivity gains and allow better decision making.

Recommendation 17.1

Chartered Accountants urges the Government to provide a progress report in the Budget on the work and progress to date of the cross-portfolio taskforce on government data access and use, together with timelines for implementation of the Productivity Commission’s key recommendations.

17.2 Tax data – Is it being used effectively? Government agencies collect massive amounts of data at great cost to those required to provide it freely.

In a tax context, there is growing skepticism amongst our members as to whether the ATO and other tax regulators around the world will make effective use of the substantial increase in data being shared under the Common Reporting Standard (CRS) and Country-by-Country Reporting. There are also suggestions that tax regulators are receiving data already obtained by other means.

On the other hand, there appear to be gaps in the international data collection and sharing framework (e.g. in areas such as crypto-currencies)122.

Chartered Accountants has also offered to work with the ATO to reduce the risk that CRS data is misinterpreted, and ensure any errors in the information gathered or in the way it is used will be fixed with minimal cost to taxpayers (in terms of time and money). Offshore trusts, superannuation funds and collective investment vehicles are likely to be the main problem areas.

Recommendation 17.2

We urge regulators such as the ATO to enhance their annual reports by explaining in general terms how they make effective use of the data compulsorily reported.

Data identified as having little or no use, or which is collected inefficiently, should be identified and the compliance costs on those supplying such data ameliorated.

The initial implementation phase of the Common Reporting Standard should be accompanied by strong efforts on the part of the ATO to reduce compliance costs associated with rectifying incorrect information provided by other jurisdictions.

The regulators should explain their joint efforts to collect data on crypto- currency transactions and ensure participants are within the tax net and not engaging in illegal activity.

122 Domestically, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 has been expanded to include regulation of digital currency exchange providers. Refer: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5952 charteredaccountantsanz.com 72

18. The Australia – New Zealand economic relationship 18.1 Progressing the trans-Tasman agenda The major trans-Tasman initiatives for 2017 were contained in the Joint Prime Ministers’ Statement on 17 February 2017 following their annual leaders’ meeting in Queenstown123. Key topics included:

 the signing of the Australian New Zealand Science, Research and Innovation Cooperation Agreement  Trans-Tasman economic integration and strengthening Australia and New Zealand’s partnership in the Asia-Pacific region  working together closely on tax issues, especially in relation to the Organisation for Economic Co-operation and Development (OECD) BEPS project  exploring collaboration on Fintech, including through the existing close links between New Zealand’s Financial Markets Authority and the Australian Securities and Investments Commission (ASIC)  progress towards the mutual recognition of business identifies (ABNs and NZBNs) which would benefit large businesses wishing to establish trans-Tasman operations.

Earlier in 2016, the Australian Prime Minister had indicated that Australia and New Zealand should collaborate in developing a strategic response to BREXIT124. Both countries have a keen interest in a post-BREXIT trade agreement with the United Kingdom.

Recommendation 18.1

Chartered Accountants urges the Government to progress the trans-Tasman policy agenda agreed with the previous New Zealand government and establish a sound working relationship with the new government led by Prime Minister Jacinda Ardern.

Collaboration on a post-BREXIT trade agreement strategy is particularly important for our two nations.

18.2 Minimising trans-Tasman tax compliance and disputes The two Prime Ministers have already discussed the mutual recognition of business identifiers (see above).

Chartered Accountants feels there is also scope for a marked reduction in the tax compliance for businesses which operate solely on a trans-Tasman basis.

This could mean, for example, less attachments to the income tax return, fewer country-by-country reporting requirements, and fast-tracked cross-border tax dispute resolution.

Such collaboration would reflect not only the importance of the economic relationship between the two countries, but also the high levels of trust and collaboration which already exist between the two tax regulators, the ATO and Inland Revenue.

Other regulators should be similarly challenged to liaise with their New Zealand counterparts and explore ways to promote the trans-Tasman economic relationship.

123 Refer https://www.pm.gov.au/media/joint-statement-prime-ministers-rt-hon-bill-english-and-hon-malcolm-turnbull-mp 124 Refer http://www.abc.net.au/news/2016-06-27/turnbull-orders-orders-urgent-review-of-brexit-implications/7546890 charteredaccountantsanz.com 73

Recommendation 18.2

The Budget provides an opportunity for the government to report on progress made in forging closer economic ties with New Zealand.

The ATO and Inland Revenue (as well as other regulators) should consider ways to reduce red-tape for those businesses which operate solely in the two countries.

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