Blood letting at Tax Office takes hold

• Assistant Treasurer Josh Frydenberg hammers the party line on GST but hints at company tax cuts
• Tax cheats to win from ATO cuts, insiders say

The nation's two most senior tax men have spent much of the past year trying to sell the idea that the Tax Office can sustain some of the deepest cuts to staff in its more than 100-year history.

But Tax Commissioner Chris Jordan and second commissioner Andrew Mills have had a tough sell.

Tax Commissioner Chris Jordan spent last year trying to convince ATO employees the cuts would not have an adverse effect on the organisation.Credit: Andrew Meares

The pair spent 2014 separately touring the nation, pushing their vision for a more modern and efficient Tax Office to its remaining 23,000 employees and the public. Using face-to-face town-hall style meetings with staff, they argued that a new "cultural revolution" at the agency would mean the impact of the cuts – the bulk of which, according to the Tax Office's own testimonies at parliamentary hearings, have come from the audit area – would be minimal.

But there are others who dispute this official government line that losing thousands of staff will have no real impact.

Experience lost: 3000 job cuts have already hit the Tax Office, and there will be another 1700 by 2018.Credit: Louie Douvis

The issue, they argue, is not necessarily about the numbers of cuts, but about the quality of people leaving.

It is depriving the agency of seasoned tax professionals and leaving nearly untouched the layer of middle management – who either don't have skilled knowledge or whose expertise is arguably more centred on human resources than taxation.

And the real impact of the 3000 job cuts that have already hit the Tax Office, and another 1700 that will come by 2018, may not be fully clear until mid-year when the agency is as its busiest.

The Tax Office was one of the agencies hardest hit by the Abbott government's debut budget in May. The main union representing the bulk of Tax Office staff, the Community and Public Sector Union, recently surveyed 100 ATO staff mostly working in the compliance area. Its results were depressing. It found that 75 per cent felt the Tax Office budget cuts had affected the agency's capacity to monitor and audit companies at risk of tax avoidance.

Staff comments from the survey included that the "drain of skills" had impacted morale and left staff questioning their future at the organisation. Staff feel "debilitated" over the knowledge bank the agency has lost and that some staff remaining are "inexperienced and fatigued".

An ATO spokesman told Fairfax Media that despite the massive staff reduction, the Tax Office was exceeding its targets for revenue collection.

In its most recent annual report, the Tax Office said net tax collections (total tax collections less refunds to taxpayers) in 2013–14 were $321.7 billion, up $9.8 billion (3.2 per cent) on the same period last year, but $14.7 billion (4.4 per cent) below the 2013–14 Budget forecast.

"The ATO is committed to maintaining revenue collection with a focus on identifying and following up on those activities and taxpayers that represent the highest risk to the system," the spokesman told Fairfax Media.

The people who are leaving the office, the vast majority of them have been there a long long time and that depth of experience, the impact of that loss, it's irreplaceable.

anonymous former ATO staffer

"While we have lost some good experience, our remaining workforce is flexible, skilled and responsive."

But Fairfax Media spoke to several senior and mid-ranking Tax Office officials who left the agency last year, who say there's greater pressure to work harder.

Most people Fairfax Media spoke to were unwilling to be named as departing staff are forbidden, with threats of up to two years in jail, to go public on the inner workings of the department.

One former middle manager, speaking on condition of anonymity, said many ATO staffers were realistic about the need to trim the office's workforce but there was "enormous frustration" that technical expertise was being lost.

"The people who are leaving the office, the vast majority of them have been there a long long time and that depth of experience, the impact of that loss, it's irreplaceable," he said.

"How do you pick the right 4000 that you can lose and which are the right 4000 that we can't afford to lose? It's a very delicate balancing act."

At a senate estimates hearing in October assistant ATO Commissioner Geoff Leeper said the audit team was a "standout area" for the job losses.

Nearly one quarter of 2200 cuts that had been dished out at that date had come from the audit team, which investigates and enforces tax compliance by individuals and multinational companies. Leeper told Senate estimates that he did not expect the proportion to change as the ATO pursued the remaining redundancies.

That means the ATO could expect to lose more than 1000 employees in total from its audit team in coming years.

Asked how a loss of such a significant number of auditors would not have an impact, the Tax Office responded: "More than 5000 auditors remain at the ATO. As a result of the ATO redundancy program about 500 staff have left our audit area, including staff in management and support roles. As we rebalance our remaining workforce over the next few months, we expect the net reduction to be much lower."

It also adds that in the first two rounds of redundancies, they tried to select staff not directly involved in revenue collection activities.

Another key challenge to the ATO's cultural change agenda, is the clash between the "externals" – new blood brought in from the private sector – and long-term ATO staffers.

As part of his plan to modernise the Tax Office, Mr Jordan has made several changes from the way young female staff are expected to dress, to more high-level decisions such as poaching some of the consultants he previously worked with at major accounting firm KPMG.

Former accountants from the "big four" multinational firms – KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young – have also replaced the heads of the government's advisory board on tax law design, former Board of Tax chairwoman Teresa Dyson and deputy chair Keith James.

At the Tax Office, old hands complain that the externals lack the "servants of the public" ethos and have a poor understanding of administrative law, deficiencies that all too often mark heated disputes between the ATO and small business or individual taxpayers.

"It is a nightmare trying to say to people who do not have a genuine background in audits or tax, that problems cannot be glossed over," the former middle manager says.

"You can get an external coming in with 20 years' experience but if they don't have those public service values we speak about, they don't understand the role that you have, not only as a tax administrator but as someone who serves the public for the greater good. People can be so focused on the dollars of a settlement that you would have to explain to them, 'you're a public servant mate, you're not a bandit'."

There are others who say, because the middle layer of management has not changed, not much has changed at all.

One ex-Tax Office auditor, who spent most of his 20-year career looking into the tax affairs of highly wealthy individuals, said while Jordan and top level commissioners were singing from a new song sheet, the middle layer of management were still doing their own thing.

"They have lot of power and have a delegation of the commissioner because they are public servants."

He says many of the senior skilled people who had left were "independent free thinkers", who, while a valuable resource, were seen as resisting change.

Even so, he says "there's still too much bureaucratic red tape in terms of how things are run".

Another former ATO auditor, Martin Lock, is one of the few people who have been willing to speak on the record. He took a redundancy in mid-2014, and is at pains to point out that he is simply commenting on matters that have already been publicly aired.

Lock says the ATO's top brass has not yet come clean on the impact of the massive cuts on the agency's ability to do its job and that the "business as usual" rhetoric does not stand up to scrutiny.

"The Commissioner has an obligation as an independent statutory administrator, to speak out and say what the impact will be of these cuts," Lock says.

"From what I've seen in the public domain, he's merely waited for the Treasurer [Joe Hockey] to explain what the impact is and simply parroted that."

Lock says the agency needs to inform federal parliament if there are aspects of its job, including scrutinising multinationals, that it can no longer do.

"The impression that is being created is that notwithstanding having lost one in eight staff, soon to be one-in six staff, it will be business is usual," Mr Lock says. "That stretches credibility beyond reason."

There are also questions about whether the Tax Office is pursuing big companies as vigorously as it used to. The number of taxpayers The Tax Office views as high risk has diminished, although the Tax Office refuses to tell Fairfax Media how many large corporates are now in the highest-risk category, claiming the numbers have not been finalised.

The CPSU survey found just under half of those surveyed think budget cuts have affected decisions on whether to litigate. Comments included that "more settlements are occurring", and "current ATO policy is for staff to look at alternative dispute resolution and settlements rather than litigate".

There's also much criticism of Jordan's plan to get the big four accounting firms to conduct audits instead of the Tax Office. The agency has already started a pilot program, internally known as the External Compliance Assurance Process (ECAP), that uses a small number of companies earning over $100 million. If deemed successful, it would become a permanent feature.

But staff surveyed say it's like "Caesar investigating Caesar", or "giving the keys to the vault to the thieves".

One staff member pointed out how, in light of PWC's role as the architect of Luxembourg schemes, it seems "incredulous that the ATO would, a) continue to hire them as consultants and b) continue to consider ECAP an ethically sound proposition".

CPSU spokeswoman Emma Groube says with one in eight staff gone, there is now too much work for the people left to cover.

"While many members are saying we won't see the full impact until around June next year as it gets busier, already there is real pressure and problems for the Tax Office whether that is following through on leads, assisting businesses trying to do the right thing, and investigating tax evasion from the big end of town," she says.

Shadow assistant treasurer Andrew Leigh has, not surprisingly, also been a vocal critic of Abbott government public service job cuts. He claims the agency could be losing up to $1 billion in annual revenue.

"You cant rip thousands of staff out of an agency without morale plummeting and expertise going out the door," he says. "But in addition to that, what we've seen is the government trash-talking the work of public servants. We've had government members [MP Don Randall] referring to them as those 'who feed on others'."

Mr Leigh says while he welcomes Jordan's moves to bring in outside corporate expertise, the fact is, "there's been more blood letting than fresh blood".

But the new Assistant Treasurer Josh Frydenberg says he is confident in Mr Jordan's ability to steer the Tax Office through cultural change, although it would take some time for the transformation to take shape.

"I'm very confident that the Tax Office can do the job both the government and the Australian people expect of it," he says.

"There is ongoing cultural change but it's pointing in the right direction."