Australian Taxation Office Research Articles

Self-Managed Super Funds - the Tax Office Perspective

Ensuring effective management of money invested in self-managed superannuation funds and safeguarding these assets for the future is a critical issue for the community. The Australian Taxation Office (ATO) has a role in ensuring Self Managed Superannuation Funds (SMSFs) comply with the Superannuation Industry Supervision (SIS) Act and regulations. Our focus is on whether fund investments are in accordance with trustees' stated investment strategies and in accordance with the SIS Act, but it is not our role to look at the overall soundness of the investments from a business perspective.

Tax Risk Governance: The Corporate and Personal Dimensions

As the saying goes we live in extraordinary times. The Australian economy is in its sixteenth consecutive year of expansion averaging around 4% GDP growth - a phenomenon quite unprecedented in Australia's post war economic history. Much of the recent growth is directly or indirectly associated with the mining boom and therefore being driven by the large business sector and the global economy. In this environment corporate profits have been rising sharply. Both profits and revenue have been growing faster than the underlying growth in GDP. With growth and a global market place has come increased complexity. For corporates, the challenge is to ensure that this complexity is managed within the company's overall risk management and governance framework. The challenge for the Australian Taxation Office (ATO) is to facilitate easier, cheaper and more responsive tax and superannuation compliance arrangements for large business, allowing companies to get on with business, so to speak.

Delivering for the Community: Making Tax and Superannuation Easier, Cheaper and More Personalised

A common and devilish error is to mistake the Australian Taxation Office (ATO) with consolidated revenue; but apart from that error there is no devil inherent in either.

Supporting Small Business and Tax Agents

I would like to talk to you about three things today. Firstly, ramping up our assistance to small business. Secondly, our other Compliance Program priorities for small business and tax agents, and finally a brief look at the tax industry and the future. Supporting Australia's vibrant small business sector to meet its tax and superannuation obligations is a key focus for the Australian Taxation Office. So too is our continued support for tax agents. Prevention being better than cure is at the core of our approach. The more we help small business, the better the chance they have in getting it right the first time. The more we help tax agents, the more they can help their clients.

Integrity: The Key Stone to Good Tax Administration

This paper argues that corruption has a corrosive impact on the well-being of a nation, and is especially damaging to tax administrations. The paper compares descriptively the contrasting fortunes of countries that are perceived to be afflicted by substantially different levels of corruption, with particular reference to South Africa and Australia. This is done to support efforts in South Africa to reduce perceived levels of corruption. The paper explores the causes of corruption both from the perspective of the design of tax systems and from the perspective of tax administrations. It outlines a range of generic remedies that can be used to minimize the risk of corruption. In giving life to these generic remedies the paper follows the approach taken by the Australian Taxation Office to reinvigorate its integrity framework as a result of the improper conduct of an assistant commissioner (Petroulias) in the late 1990s.

Commissioner Issues Draft Practical Compliance Guideline on Cross-Border Related-Party Financing Arrangements

The authors summarize recent draft guidance issued by the Australian Tax Office for scoring the risk of cross-border related-party financing arrangements.

Behavioural Insights and Business Taxation: Evidence from Two Randomized Controlled Trials

This paper presents the findings of two Randomized Controlled Trials (RCTs) that were conducted in collaboration with the Australian Taxation Office (ATO). The first trial tests the effect of changes to letters (timing, social norms, color, and provision of information about charitable donations) on response rates of businesses, the timing of payments and the amount of tax debt payments. The second trial consists of two parts. The first part aims to raise awareness of the relevance of tax debt payment by changing internal guidelines used by field auditors. The second part focuses on studying the effect of changing the phone script used by desk auditors to offer assistance with payment arrangements and simplifying a follow-up letter. The findings of the first trial indicate that none of the treatments had a significant effect on any of the outcome measures considered. In contrast, the results of the second trial indicate that changing the phone script of desk auditors and simplifying the follow-up letter reduced the proportion of default assessments raised by the ATO significantly, suggesting that businesses are responsive to certain types of nudges.

Cost of high prevalence mental disorders: Findings from the 2007 Australian National Survey of Mental Health and Wellbeing.

The aim of this project was to detail the costs associated with the high prevalence mental disorders (depression, anxiety-related and substance use) in Australia, using community-based, nationally representative survey data. Respondents diagnosed, within the preceding 12 months, with high prevalence mental disorders using the Confidentialised Unit Record Files of the 2007 National Survey of Mental Health and Wellbeing were analysed. The use of healthcare resources (hospitalisations, consultations and medications), productivity loss, income tax loss and welfare benefits were estimated. Unit costs of healthcare services were obtained from the Independent Hospital Pricing Authority, Medicare and Pharmaceutical Benefits Scheme. Labour participation rates and unemployment rates were determined from the National Survey of Mental Health and Wellbeing. Daily wage rates adjusted by age and sex were obtained from Australian Bureau of Statistics and used to estimate productivity losses. Income tax loss was estimated based on the Australian Taxation Office rates. The average cost of commonly received Government welfare benefits adjusted by age was used to estimate welfare payments. All estimates were expressed in 2013-2014 AUD and presented from multiple perspectives including public sector, individuals, private insurers, health sector and societal. The average annual treatment cost for people seeking treatment was AUD660 (public), AUD195 (individual), AUD1058 (private) and AUD845 from the health sector's perspective. The total annual healthcare cost was estimated at AUD974m, consisting of AUD700m to the public sector, AUD168m to individuals, and AUD107m to the private sector. The total annual productivity loss attributed to the population with high prevalence mental disorders was estimated at AUD11.8b, coupled with the yearly income tax loss at AUD1.23b and welfare payments at AUD12.9b. The population with high prevalence mental disorders not only incurs substantial cost to the Australian healthcare system but also large economic losses to society.

A Snapshot of the Australian Taxpayer

Using the most recent Australian Taxation Office published data, and other sources of data, we provide detailed descriptive evidence on the income, deductions, and other items (including superannuation) of the individual taxpayer in Australia. We provide this detail across tax bracket, occupation, gender and location. In addition, we explore who is accessing negative gearing and by how much, thus contributing to the ongoing debate that surrounds this area of tax law. We show that individuals with a higher taxable income are more likely to access negative gearing, and we provide estimates of how the removal of this deduction would affect Federal tax revenue. We discuss other reported areas such as deductions for gifts and donations, as well as providing a discussion on the use and potential use of the Government provided pre-filled tax information for individuals. Overall, this study is of interest to academics, government and tax practitioners alike.

The Pricing of ULP and Diesel in the Western Australian Retail Fuel Market

This is study of the determinants of ULP and diesel price level and volatility in Western Australia. It draws on Western Australian FuelWatch fuel prices and Australian Tax Office post code level data over the period from 2002 to 2012. As might be expected, crude oil price and distance to the BP Kwinana refinery are important determinants of ULP and diesel retail prices. We find that more heavily populated wealthy post code areas pay higher prices in the Perth region though this is not evident in the regional areas. There is no evidence of prices increasing in search cost or decreasing in price dispersion. Further, cross post code volatility is lower in more populous Perth region post code areas. There is some support for price asymmetry in the diesel market, though this is not apparent in the ULP market. Finally, crude oil price shocks are positively correlated with increased volatility in both the ULP and diesel markets.

Tax Evasion, Tax Avoidance and Tax Planning in Australia: The Participation in Mass-Marketed Tax Avoidance Schemes in the Pilbara Region of Western Australia in the 1990s

This paper examines the development of mass-marketed tax avoidance schemes in Australia. It considers changes in approach to tax avoidance from the ‘bottom of the harbour’ schemes of the 1960s and 1970s to the mass-marketed tax avoidance schemes of the 1990s. It also examines the changing structure of tax avoidance from individually crafted tax avoidance structures designed by accountants and lawyers used by high wealth individuals to mass produced structures targeted at highly paid, and therefore highly taxed, blue collar workers in Australia’s mining industry in the 1990s.In the latter half of the twentieth century ‘unacceptable’ tax planning went from highly expensive, individually ‘tailor made’ structures afforded and used only by the very wealthy, to inexpensive replicated structures marketed to skilled and unskilled tradespeople and labourers. By 1998 over 42 000 Australian taxpayers were engaged in tax avoidance schemes with the highest proportion focussed in the mining regions of Western Australia. In the remote and inhospitable mining community of Pannawonica, which has one of the highest paid workforces in Australia, the Australian Taxation Office identified that as many as one in five taxpayers were engaged in a mass-marketed tax avoidance scheme.The paper identifies probable causes of these changes, including the advent of the computerised information technology which permitted ‘mass production’ of business structures designed to exploit business incentives in the Australian taxation system in the 1990s. It also sets these developments within the broader context of the tax compliance culture prevailing in Australia and overseas during this period.

Achieving tax certainty for oil and gas projects

In recent years, oil and gas companies have been exposed to prolonged periods of volatile oil prices, rising costs and productivity challenges, scarcity and affordability of capital, heightened regulation and accountability and the competition of emerging alternative renewable energy sources. As Australian projects weather the current global oil price and demand–supply dynamics, the future prospects of greenfield and brownfield opportunities will depend on how well proponents can achieve certainty over the geological, geophysical, socioeconomic, operational, political and fiscal aspects affecting their projects. Establishing certainty of the tax regime and how it will apply over the lifetime of a project is crucial to its after-tax economics and is therefore a central piece of the puzzle that must be solved to secure project investment sanction. This is particularly prudent in an era of increased scrutiny by communities and tax authorities globally on multinationals contributing their fair share of taxes wherever they operate. So, how is tax certainty attained from the outset, and protracted disputation mitigated, in an environment where the tax law is constantly evolving? Early engagement with the Australian Taxation Office (ATO) is critical to understanding and assuring how the tax law will be interpreted and administered. This paper discusses: (1) best practice ATO engagement avenues for entities seeking to manage the Australian tax profile of oil and gas projects; (2) how to achieve justified trust and be tax-assured; and (3) the types of ATO products best suited to addressing particularly significant tax considerations confronting oil and gas projects.

The Impact of Changing Technology of Motor Vehicles on Road Tax Revenue

This paper considers the impact on tax revenue as a consequence of the changing technology of motor vehicles. As motor vehicles transform their drive trains from internal combustion engines to electric motors their energy source could change from fossil fuel to renewable energy. That may not necessarily be the case. Motor vehicle energy sources may simply move from the on-board, fossil fuelled, internal combustion engines to centralised, fossil fuelled electricity power stations. In that case, fossil fuel consumption, and accompanying greenhouse gas emissions, will continue unabated. Fuel consumption, and its accompanying greenhouse gas emissions, may even increase. Inefficiencies in electricity generation, transmission, storage, as well as losses through storage and use of electricity in the vehicle itself will be added to overall vehicle energy consumption. Regardless of whether the electricity to power the vehicle is sourced from renewable energy, or from fossil fuelled power stations, revenue from motor vehicle fuel excises, currently levied on petroleum products, will fall. In order to continue to build and maintain motor vehicle transport infrastructure governments will be obliged to change their focus on how road tax revenue is raised. This paper seeks to establish how that energy transition might impact the current tax revenue from motor vehicle fuel taxes. It considers the current number of electric vehicles on Australia roads and predicts what is likely to happen to future motor vehicle fuel excises. It looks at the impact of rising self-generated electricity from renewable energy sources, and how that energy might be used to power electric vehicles in the future. The paper examines data published by the Australian Bureau of Statistics and data provided by the Australian Taxation Office statistics. It also refers to sales data provided by motor vehicle manufacturers. Further, it supports the findings of its analysis of statistical data by a case study of a plug-in hybrid electric vehicle (PHEV) owned by the Solex solar farm project in Carnarvon Western Australia. That data has been collated from fuel and electricity consumptions recorded from delivery of the vehicle in June 2016 to the October 2017. It finds that unless motor vehicles are charged from independent electricity sources, such as dispersed, embedded solar pv installations, little is saved in the way of greenhouse gas emissions. However tax revenues from motor vehicle fuel sales may decline considerably. Although, overall tax revenue may remain consistent, as fuel excises become substituted by goods and services taxes on the sale of electricity. It concludes that as a consequence of the introduction of the electric vehicle, revenue from fuel excise may fall. However, as there has been no official link between road tax revenue and road construction and maintenance expenditure since 1959, the reduction in excise revenue will not necessarily affect funding for the construction and maintenance of roadways by the Australian government.

Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office

The obvious commercial benefits of centralising operational functions mean that commercial ‘hubs’ within multinational enterprises will continue to proliferate. More and more so, this will create challenges for the revenue authorities of the high tax jurisdictions such as Australia and the United States, and also the ‘hub-destination’ jurisdictions such as Singapore. For the Australian revenue authority, the challenges are heightened by the fact that the Australian public debate on these issues occurs, it seems, within a framework of suspicion that multinational enterprises set about to avoid paying their ‘fair share’ of tax. As there is ultimately only one value chain spread across more than one tax jurisdiction – whether that be from the hydrocarbons under an Australian sea bed through to a customer sale in North Asia, or the purchase of crude in Singapore through to a point of retail distribution in Australia – it is essential that the tax laws arrive at an international organising principle that fairly allocates taxing rights between the tax jurisdictions affected by a global value chain. Double taxation will arise and economic efficiencies will be destroyed if multiple tax jurisdictions seek to tax the same parts of the single global value chain. That organising principle should be the ‘arm’s length principle’, the fundamental basis upon which Australia enters into double tax treaties with its trading partners. This paper analyses the manner in which the Australian tax laws attempt to deal with the advent of offshore centralised hubs. It argues that the Australian tax laws overreach and, as such, create an environment for double taxation and dispute between competing revenue authorities and between revenue authorities and multinational enterprises. The tax laws are complex, incomplete and, at the time of writing, evolving at a speed not often witnessed in the field of taxation.

Tax Practitioners and Tax Avoidance: Gaming through Authorities, Cultures and Markets

Tax practitioners, otherwise referred to as tax agents, tax preparers, tax accountants and tax lawyers, play multiple roles in our tax and financial planning systems. They are gatekeepers to the tax system for those who know they need to engage but want someone else to take care of it for them. Empirical work collected from taxpayers and practitioners supports the idea that practitioners, like other professionals, are responsive to influences from many sources – clients, tax authorities, professional associations, governments, international bodies, and the organisations and cultures in which they work. Tax practitioners operate with imperatives that are not necessarily compatible: to attract clients, meet taxpayer expectations, meet performance standards set by firm partners, build reputation, abide by professional obligations and any associated regulatory standards, and operate in accordance with the rules set down by the tax authority. Tax practitioners have always been considered important as intermediaries of transactions between taxpayers and tax officials. In recent decades their role has become more complicated with recognition that they, not taxpayers hold the special knowledge required to facilitate tax avoidance, or what Lipatov (2012) calls sophisticated as opposed to simple tax evasion. To understand how to curb the growing acceptance of tax avoidance and the threat it poses to tax systems, the tax practitioner – taxpayer relationship must be understood within a broader social and cultural context. This paper proposes that the tax practitioner – taxpayer relationship is a micro social process to deliver tax compliance. Three models of the tax practitioner and taxpayer experience are reviewed and research on the role of the tax practitioner is discussed within these frameworks. Finally, new data are presented on how tax practitioners operate within the tax preparation market, with full knowledge of oversight by the tax authority. The findings are based on a survey of over 1,000 practitioners preparing and lodging returns for clients with the Australian Taxation Office (Wurth 2013). Drawing on lessons learnt from these three models, an integrated model is provided to broaden the landscape against which we view and study developments in the tax avoidance industry.

Partner-Scale Economies, Service Bundling, and Auditor Independence in the Australian Self-Managed Superannuation (Pension) Fund Industry

SUMMARYUsing proprietary Australian Taxation Office (ATO) data, this study examines audit pricing, service bundling, and independence issues in the self-managed superannuation fund (SMSF) sector, the fastest growing and largest segment of the Australian $2 trillion retirement savings industry. We consider the impact of partner-level scale effects for a large sample of SMSF audits for the three years to June 2010. After controlling for factors known to determine audit fees, we find evidence of fee discounting by partners with large client portfolios. However, when the dependent variable is redefined to the total “bundle” of services (including audit and non-audit fees), the firms of partners with larger client portfolios are shown to earn bundling fee premiums. This finding suggests industry specialists price strategically using audits as a conduit to supply higher margin non-audit services (NAS) to clients with more resources. Last, we find no evidence the supply of NAS impairs auditor independence, alleviating joint supply concerns raised in the Cooper Review.

Taxpayer Alert on Thin Capitalization and Internally Generated Intangibles

The Australian Taxation Office has issued Taxpayer Alert TA 2016/1 concerning entities inappropriately recognizing and revaluing intangible assets for thin capitalization purposes.

Top Incomes and Inequality in Australia: Reconciling Recent Estimates from Household Survey and Tax Return Data

We systematically compare differences in recent Australian income inequality estimates derived from tax records and survey data. We use customised tax tables provided by the Australian Taxation Office (ATO) to more precisely measure Australian top incomes as conceptualised in the international top incomes literature. We then document the inability of Household, Income and Labour Dynamics in Australia (HILDA) survey data, as well as the ATO 1% sample tax files, to replicate our top income share values. In contrast, accuracy is substantially improved using the ATO 2% sample introduced in 2011-12. Using HILDA data with enhanced income values from the 2% sample we better track top incomes. More importantly, we are able to use alternative income concepts and income-sharing units to provide more consistent cross-national comparisons than are currently found in the top incomes literature. Furthermore, we improve standard summary measure estimates of inequality found in the traditional survey-based Australian literature. Our findings show great potential value in linking tax records and survey data, but also show that this value is severely limited when using the 1% tax sample available for 2003-04 to 2010-11. Whereas the 2% sample substantially improves top incomes estimates, data without censored and perturbed income variables are needed and could be provided without unduly threatening tax filer confidentiality.

Reinventing Administrative Leadership in Australian Taxation: Beware the Fine Balance of Social Psychological and Rule of Law Principles

The Australian Taxation Office’s goal of “reinventing” the way it goes about administering the Australian federal tax system raises fundamental questions about the role and implications of administrative “leadership”. This article considers administrative leadership from the general perspectives of rule of law principles and leadership theory, with a focus on the social psychology and public administration literature. The article questions whether a greater focus on administrative leadership might conceal potential problems when viewed through the lens of the interaction between the rule of law and leadership theory in building trust in tax administration. It is the second of two articles to do so. The first focused on China. This article uses Australia as an exemplar, so that the two articles allow for an examination of administrative leadership in a jurisdiction with weak rule of law and with strong rule of law. Ultimately, it is suggested that before pursuing administrative leadership to achieve change or influence regulatees, the Commissioner of Taxation must be careful to define precisely what that leadership will entail, to what context it is proposed to be employed and how it might interact with upholding the rule of law. Simply advocating leadership as a positive is too simplistic an approach.

Foreign Employment Income and Double Tax Avoidance Agreement: Australia's Possible Governance Failure

The paper illustrates a discrepancy between the Act of Parliament and the narrative offered by the Australian Tax Office on the changes introduced since July 2009 with reference to Income Tax Assessment Act 1936 – S23AG. This pertains to the Double Tax Avoidance Agreements (DTAA) of which Australia is a signatory. The DTAA with Singapore is taken as an illustrative case. Further, as illustrated in the paper the changes have introduced both social and economic losses to Australia.