Breaking the silence on tax office inquisition of private companies

Veteran businessman John Dahlsen, a former ANZ director and chairman of Woolworths. Picture: Zoe Phillips

One of Australia’s top 500 private companies has had the courage to break silence and reveal that the information the Australian Taxation Office is demanding about its management practices, executives, strategies etc will require a thousand-page answer.

Given that all our top 500 private companies are being asked a similar set of questions that’s a total of 500,000 pages and a huge burden for the sector.

Until now all of Australia’s top 500 private companies had remained mute in the face of this incredible ATO inquisition into the management of their enterprises. I set out the horror story on March 23 under the heading “Tax grilling strikes fear in private companies”.

Our top 500 private companies are a key part of the engine room of Australia’s economy. The company that has broken the silence---Gippsland-based building supplier Dahlsens ---was established in 1877 but is not well known outside its sphere of operation. But its owner, John Dahlsen, certainly is well known, having been chairman of Woolworths, Herald and Weekly Times and the Melbourne Business School. He was a director of the ANZ for 20 years and chairman and co-founder of Southern Cross Broadcasting, which was sold to John Fairfax in. 2007.

John Dahlsen’s full statement is here.

You have all heard me comment about issues like this before so for the rest of this commentary I am going to hand over to John Dahlsen, using edited extracts from his statement:

“The JC Dahlsen Pty Ltd Group which I wholly own has now received 100-plus questions and interrogatories of Olympian proportions to be answered in 27 working days. It is simply not possible. Whilst the ATO has issued other cohorts with similar requests mine is the result of being in the so-called list of 500 largest private companies. I don’t know where we rank on the list, but it would be towards the bottom. We will be probably lodging 1000-plus pages of information which demonstrates the ATO’s insensitivity to the demands being placed on taxpayers.

Why am I making these comments?

My advisers and family tell me not to do it.

Why provoke the ATO? Stay under the radar, comply, grin, and bear it. It will be less costly to give the information now than the cost of two - three annual audits. The ATO is likely to punish you. (But it should be stated there are some outstanding people in the ATO that are not driven by malice, understand your predicament and are highly sensitive to your issues.)

The ATO has massive levers. It can require enormous volumes of data, cross examine and distract your people and make it extraordinarily difficult. Invariably this forces the use for external consultants. But does the ATO care? This inquisition is like a massive due diligence which precedes an IPO or a major acquisition where the accountants have to verify each individual piece of information. With the breadth of questions being asked it will take a long time and be very expensive.

Despite what might turn out to be a huge cost for me, I believe there are extremely important public policy issues that need to be debated. We need an open conversation about the fairness, reasonableness, and sense of proportion of the ATO. Hopefully more will share their experiences and engage in a debate whether they be the taxpayers themselves or their advisers.

I am 86, at the end of my career, when criticism is less important. There are benefits and obligations of being old.

My family of five generations has been passionate about helping small businesses in regional areas.

My intelligence is that the same, or very similar, interrogatories have been given to all companies, so it does not matter whether you are company No 1 or 500. It is a game where one size fits all. This is lazy and unfair. The ATO has massive resources and should have the data or analytical power to refine and make the questions more relevant and important to the ATO statutory obligation to gather tax.

It appears that many of the questions are far more suited to a public company which has much wider reporting obligations than private companies. There will be no value to many smaller private companies in gathering the kind of information the ATO is seeking. The information might enable the ATO to do some matching and so is getting the information from a taxpayer for a collateral purpose and the taxpayer is not compensated for giving the ATO information which is not relevant to calculation of their tax.

To say nevertheless if you give us all the information and it is satisfactory, we will not audit you for three years, is an unfair exercise of its powers. What happens during the three years? Do you have to update the answers to your questions, and will that breather be as valuable as the ATO are saying? The jury is out on this.

The difficulty the taxpayer faces is that it has to prove its innocence and has to pay up the tax irrespective of circumstances. This payment often depletes the ability of the taxpayer to fight the issue, and it can take years to resolve. It is not surprising that taxpayers are distressed. With civil law it is probabilities but with crime you are not guilty until your guilt has been proved beyond reasonable doubt. It is this inherent injustice that gives the ATO the lever to seek all this information - some relevant, some irrelevant – and their ability to tax you in exchange for the proposition that I will not take advantage of you for three years.

Larger companies can afford to have costly information systems which will automate a lot of the ATO requirements. Smaller companies simply cannot afford to operate such systems.

The following questions should be asked:

* Is it a fair and reasonable exercise of power where there is a huge imbalance of power for the ATO to say: you prove your innocence by providing a huge amount of information some relevant, some irrelevant, or we will audit you each year? This implied threat is an abuse of power and process. You have to earn our trust by providing you with a huge amount of information which is untested as to its relevance.

* Does not the ATO have an obligation to make its information gathering simple and user friendly? Is this not unconscionable behaviour? There is a huge tension with the ATO’s enormous power substantially driven by statute and the exercise of that power.

* Is the ATO’s exercise of power proportionate to benefits gained and the cost to the taxpayer? There is no ability of the taxpayer to realistically test whether the ATO is using that power in a reasonable way.

* What is the net benefit to the community?

* The ATO is going close to managing your business. The information required and the implicit processes required to get that information appear to go beyond their need to make fair and appropriate taxing decisions.

* What will this mean for non-executive directors? This is another huge area of compliance which will worry them.

* Will it effect insurance premiums?

* Does this mean we have to go through the whole representation process with sign-offs from management?