Inquiry into Australian taxation system is long overdue

When the ATO handles all functions from investigation to sentencing, power corruption is a vital issue to be tackled.

Inspector-General of Taxation Ali Noroozi. Picture: Adam Knott

It’s taken a long time but at last we are to have a proper inquiry into the Australian taxation system.

The head of the inquiry, the Inspector-General of Taxation, Ali Noroozi has pulled no punches in stating; “this review will focus on the future — taking into account technological, social, policy and regulatory changes”

He says these changes will have “lasting impacts on the tax profession, the ATO, the TPB (Tax Practitioners Board) and the wider community”.

The Inspector-General of Taxation will not only “identify the significant changes ahead” but look at those “aspects of the current system that should be retained and/or augmented, those that need to be discarded and the new strategies required to meet future challenges and realise the potential benefits”.

You cannot get any wider inquiry than that. It’s exactly what is required and, to his credit, the Tax Commissioner Chris Jordan requested the inquiry. As I will show later, one of Australia’s boom professions, accounting for tax is set to undergo the sort of revolution that has affected so many other professions.

In my view we are gradually moving to a world where the taxation office collects most data on a day-to-day basis. We may even eventually get to a situation where the Australian Taxation Office will have the ability to send me my tax return to check. At the moment the ATO gets a lot of data (like bank interest and investment income) but has not been able to connect it up.

And currently the ATO’s communications with taxpayers via forms and the correspondence is designed like internal tax memos and you have to be able to understand “ATO speak” to fathom what the correspondence is all about. Not surprisingly, it has become impossible for most people to handle their own taxation matters. Noroozi says that 74.2 per cent of all individuals and over 95 per cent of business taxpayers use tax practitioners — among the highest in the OECD. I am surprised it’s not higher.

If we are going to make the communication system work, then forms have to revert back to normal language but any such change, when combined with the new technologies, will change the role of the tax practitioners.

Similarly the ATO gets into all sorts of bother because it does not always understand that the nature of work is changing. But Noroozi is right onto this issue and points out that “work patterns are also changing as seen in the ‘gig’ economy where workers are engaged on a contractual or project-by-project basis rather than full-time employment”,

In his inquiry scope, Noroozi does not specifically refer to the power corruption that has developed in the ATO because the tax office carries out all functions from investigation to sentencing. In a high technology world where the ATO collects the material, power corruption becomes a vital issue to be tackled and we either find a low cost way to use the court system for appeals or we widen the powers of the Inspector-General of Taxation.

I believe that the power corruption culture led to the Cranston affair and using carefully chosen words Noroozi said at the inquiry launch that his review into the tax profession “in no way suggests that we will not be conducting a review relating to the recent allegations of tax fraud linked to senior ATO officers”.

But he goes much further and the accounting profession needs to be watching carefully. Here are a few extracts from Noroozi’s written comments:

• In coming years, it is likely that the pace of change in business models of tax practitioners will escalate with other professionals, such as software and hardware developers, data analysts and providers of banking and payment services, playing a greater role in the tax system. These changes may be brought about by the application of new developments in artificial intelligence and robotics to perform tasks previously conducted by humans, resulting in a reduction in costs and the need for outsourcing to offshore entities.

• Existing and further use of data management applications, including cloud accounting and blockchain technologies may also have similar effects.

• Products that transfer risk to third parties, such as taxpayer audit insurance and professional indemnity insurance, may be other areas for future development.

• Whilst technology, when appropriately utilised, can deliver significant benefits, there are challenges that need to be addressed such as certain functions becoming redundant or significantly diminished and how the affected parties, such as sole tax practitioners and in-house corporate tax specialists, may need to adapt to the new environment.

• A pressing concern of the tax profession is the level of dependency on ATO digital systems, their reliability and the lack of contingency plans, particularly when unforeseen failures arise such as those in late 2016 and early 2017. Cyber Security needs to be looked at.

The inquiry is long overdue.