Refresh Hockey reforms to revamp Australian Taxation Office

Joe Hockey, former Ambassador of Australia to the United States pictured at his residence in Hunters Hill in Sydney. Picture: Britta Campion / The Australian

Smart shadow ministers embed themselves into their portfolios and learn what is really happening in their area before being swamped by the public service version when they gain power.

There is no better example of this process than Joe Hockey. For four years until 2013, Hockey was shadow treasurer and he rolled up his sleeves and went out into the real business world.

Back then he was horrified to discover that the Australian Taxation Office was simply not functioning correctly. So in his 2013 budget reply, Hockey said “the Coalition stands ready to break up the tax office, so its policeman functions are separate to its responsibility for administering the tax system”.

Hockey had learned about the ATO’s “insular and inward-looking culture”, its “overly aggressive” interpretations of tax laws and the perception that “when dealing with taxpayers, the tax office has everything in its favour”.

In less than two months from that speech, John Howard had been elected Prime Minister and Joe Hockey was Treasurer.

What happened next was a tragedy. The tax commissioner and the public servants in the ATO said they could fix the problems that Hockey had discovered and there was no need to split the ATO. We now know that Joe Hockey was “snowed” but he wasn’t the first and many more will follow.

What happened in the years after 2013 was nothing short of a national disgrace as the ATO concealed its $3 billion gold GST blunder; destroyed much of our research; went on rampages of garnishee activity; destroyed most of the gold refining industry and used its unfettered powers in the most hideous ways.

Given what we now know, Hockey’s remedy did not go far enough.

The magic words of the minister for Small and Family Business plus Employment Stuart Robert: “We are backing small business in over the ATO!” tell us that the Coalition has started to realise that Joe Hockey was right.

As I set out in the commentary headed Finally, some tax justice for small business, Treasurer Josh Frydenberg, Attorney-General Michaelia Cash and Assistant Treasurer Michael Sukkar have combined to announce pending legislation to stop the ATO using its powers to unfairly garnishee small enterprises and their owners.

That’s a good first step, but most in the Coalition now understand that more fundamental change is required and it is likely to be part of the Coalition’s re-election legislative program.

In applying the Hockey formula to 2021, Australia we would start off with a legislated Bill of Rights so that the tax office has a clear set of rules.

Many in the coalition want to adapt the Hockey model so that the business of tax appeals is separated from ATO tax collection and given legislative rules. This means that the ATO would need to justify its tax assessment knowing it might be challenged. It works brilliantly in America where the system is further streamlined with a tax payer advocate.

Under the current system, the ATO pulls out a figure and the taxpayer must prove it wrong.

A fascinating suggestion doing the rounds of the government is that the Inspector General of Taxation role should be transformed into the taxpayer advocate in a legislated revamped appeal process.

The appeal process needs to be speeded up and any penalties or interest not applied until after the appeal process is completed.

We need to remember that it is not just small business that is impacted by the breakdown of ATO procedures and fairness.

When Virgin Blue was hitting the wall, the ATO decided to have some “fun” with the struggling enterprise. The “fun” started with a fairly stupid question in assessing Flight Crew FBT liability.

“Where is the primary place of work of a commercial airline pilot or flight crew including attendants?”

Is it the terminal where they walk in and have a coffee? Is it their home base where they live? Or is it the aircraft where they fly?

The answer would be clear to almost all Australians – it’s the aircraft where they perform their task. Even pilots’ flight planning and attendants service preparation is mostly conducted on the aircraft.

But the ATO was prepared to spend large amounts of taxpayer dollars to prove that was wrong and give a “silly answer” legal status to collect FBT.

As Virgin Blue was heading into administration they lobbed an FBT bill covering past years.

The amount involved was not huge in airline terms but their great credit, Virgin took on the ATO and appealed the assessment before the Federal Court.

ATO went to the Federal Court with all guns firing — respected commercial law firm, HWL Ebsworth and both Senior and Junior Counsel. Maybe the Federal Court would be intimidated by the ATO’s legal firepower?

Cash strapped Virgin could afford only one barrister but the case went into incredible detail covering the movements of flight crew shift by shift. There were large research costs required by Virgin to prove the ATO wrong.

And guess what? The Federal Court found that the flight crew’s place of work was the aircraft! There was no extra FBT bill.

Readers may remember that the ATO tried to use gossip as a way of assessing tax liability and again this idea was thrown out by the Federal Court. For the Federal Court to be required in obvious situations like this shows how poorly structured the appeal process has become not just for small enterprises but for medium and even larger companies.