Past, Present, Future - The Board of TaxationThe following speech was delivered by the CEO, Karen Payne to the Victorian Tax Institute 4th Annual Tax Forum on 5 October 2016

Thank you for that introduction and thank you for inviting me to speak at The Tax Institute’s Annual Victorian Tax Forum.

I appreciate the opportunity to be part of this forum and look forward to participating in the remainder of the program over the next 2 days.

It is always reassuring to be in a room filled with other tax specialists – lawyers or accountants or both. Although I don’t expect you will agree with everything I say – consensus amongst tax practitioners is rare and unusual – I do take some comfort from the fact that we have a common starting point or a shared lens to inform our perspective. Although Richard Murphy’s title The Joy of Tax – may misrepresent and exaggerate the reality, there are some debates and issues that only a tax specialist can appreciate and get enthusiastic about. I hope that some of the insights I will share with you today allow you to share my enthusiasm for the role and work of the Board of Taxation.

I have had a long association with the Tax Institute - more than 20 years – and have always appreciated forums such as these – for the opportunity to have a professional discourse on matters of taxation that can in other forums – become emotionally charged and at times (I won’t say ill) but lets say less informed.

The Tax Institute is a reliable contributor of well researched and reasoned submissions on tax laws and the need for tax change and reform. In my new role as CEO I have a much greater interest in such submissions and have enjoyed the opportunity to collaborate with the Tax Institute on Board projects – more on this later.

I want to focus on three key themes today.

The Board and its reinvention

The Tax system agenda and how the Board can assist

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The Board’s Agenda and priorities in 2016 and 2017 and how you can assist the Board

1 The Board and its reinventionFirstly a little bit of context and background about the Board. It is a unique institution.

The Board is made up of 8 private sector appointments and 3 ex-officio members. At the start of 2015, the Board was almost entirely reconstituted to include a broader range of governance and business expertise under the Chair of Michael Andrew AO. Cognitive Diversity, business experience, gender and geographic diversity are all very important in formulating the mix for the Board.

Hopefully the members of the Board are well known to you and further details are on the Board’s website. So I won’t spend too much time introducing them individually this morning but just to name them.

Michael Andrew AO – Chair

John Emerson AM – Deputy Chair

Mark Pizzacalla, PhD - Partner, BDO Australia

Karen Payne

Neville Mitchell - CFO and Company Secretary for Cochlear Limited

Peggy Lau Flux, MBA

Craig Yaxley - Tax Partner, KPMG Perth

Ann-Maree Wolff - Asia Pacific Head of Tax, Rio Tinto

Ex Officio Members

John Fraser, Treasury Secretary

Chris Jordan AO - Commissioner of Taxation

Peter Quiggin PSM - First Parliamentary Counsel

In addition to the Board members themselves, the work of the Board is supported by a full-time Secretariat spread across sites in Canberra, Sydney and

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Melbourne. As CEO to the Board I am based in Sydney. I lead the work of the Secretariat and am actively involved in communications with industry, professional, government agency and other stakeholders. It is fair to say that the composition of the Secretariat mirrors the key stakeholders with whom we consult and interact.

It is comprised of secondees from:

Private sector; The ATO and Treasury

I was appointed to the role of CEO in March 2016. This is a new role for the Board of Taxation, recognising the extended Advisory role of the Board and that the Government is keen for the Board to play a more active real time consultation role.

I want to spend a little time exploring how I see the Board fits in to the Tax System to provide you with this context for the rest of the discussion – especially the tax agenda discussion.

The Board of Tax in the Tax Framework - Governance and Stewardship

The Board of Taxation is a non statutory independent advisor to Government but its organisational structure, staffing and operations have close connections to both Treasury and the Australian Taxation Office (ATO). In my view this is not only sensible but intuitive when you consider the necessary overlap and complementary objectives of the functions of the Board and Treasury and the ATO.

The function of the Board according to its Charter is to provide advice to the Minister (Minister for Revenue and Financial Services and Treasurer) on:

the quality and effectiveness of tax legislation and the processes

for its development, including the processes of community

consultation and other aspects of tax design;

improvements to the general integrity and functioning of the

taxation system;

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research and other studies commissioned by the Board on topics

approved or referred by the Treasurer; and

other taxation matters referred to the Board by the Treasurer.

These functions have overlap with the functions of both Treasury and the ATO:

Treasury – formulates tax policy and the design of the tax law to achieve that same policy, including the costing and forecasting of the likely revenue impact.

The ATO – also has input into the design of the tax law, particularly through its Legislative Companion Guides, rulings and revenue costing teams.

The Board – advises on the design and implementation of tax laws (complexity, integrity, compliance) – especially reflecting the community views through ongoing consultations.

So we have overlapping functions – which is not to suggest that the Board duplicates either Treasury or the ATO because the Board necessarily brings to the table the perspective of the tax and business community as well as other welfare stakeholders – including charities and unions.

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Tax Policy & Objectives

Law Design & Integrity

Tax System Improvement

Operation and Simplicity

The activities of the Board also complement the functions of both Treasury and the ATO:

Treasury – is responsible for the introduction of the law (but has little interaction with that law once enacted);

The ATO – is responsible for administering tax law and through its guidance material setting out its interpretation of the law, but is not responsible for making or amending the law – even where it is ineffective.

The Board on the other hand considers the operation of the law as implemented and administered to ensure it is functioning effectively including without undue complexity.

I see the function of the Board as fundamentally closing the loop or if you like, making the circle complete.

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Board of TaxationTreasuryATOIndustry & Professional BodiesTax, Business, Other Community

Board’s current approachTraditionally, the Board has given effect to its charter by conducting detailed technical and post-implementation reviews on specified aspects of Australia’s tax system. This would culminate in the provision of a report to Government – sometimes consultations extended over several years. The Government would then consider the Board’s report, and would make a decision to release it to the public along with its response.

The Board’s current approach is to act as a trusted advisor to both Treasury and the Government on tax policy and design. Our focus is to contribute to ‘real-time’ tax policy issues – which means that Board members are contributing their business experience at a much earlier stage in the policy development process.

The Board will nevertheless continue to be involved in technical and post-implementation reviews as opportunities and terms of reference arise.

However, in this new role, the relationship between the Board and Treasury has strengthened and the Board is providing real-time advice across three broad areas:

1. Policy design2. Legislative design3. Administration of Australia’s tax system

For example, the board has led consultations for the purposes of:

• providing advice on the future of ‘announced but un-enacted measures’;

• providing input on major economic initiatives such as the government’s small business package, innovation statement; the Tax Reform Agenda; and

• providing input into the ongoing review of the research and development incentive; and

• resolving ongoing issues in relation to consolidation measures.

• The Board has also provided comments on preliminary Budget measures and initiatives as they are being developed.

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The Board has a successful record acting as an effective interface between the private sector and government on key tax policy and law design issues. Our role is effective because of the ongoing meaningful relationships we have with stakeholders such as the Tax Institute, its membership and yourselves.

It is important to remember however, that we are an advisory board and I wouldn’t want you to have the impression that all of our advice is necessarily acted upon.

This is appropriate because ultimately it is the Government that is elected.

The Australian Constitution, the Westminster system and political theory, recognises three powers of government—the legislative power to make laws; the executive power to carry out and enforce the laws; and the judicial power to interpret laws and to judge whether they apply in individual cases.

This division is based on the principle that the power to govern should be distributed between the Parliament, the Executive and the Judiciary to avoid one group having all the power and so that each keeps a check on the actions of the others.

Although the separation of powers and Rule of Law principles suggest the judiciary and the Courts are the ultimate arbiters of law and have final responsibility for applying the law, as Justice Brennan observed:

"The law which rules - is the law according to the rulings of the courts, but it is applied in the offices and chambers of the legal profession. It is applied in drafting and advising; in consultations more than litigation."

- The Hon Sir Gerard Brennan AC, “Role of the Legal Profession in the Rule of Law”, Supreme Court, Brisbane, 31 August 2007.

Another fundamental principle of the Rule of Law is that the law must be both readily known and available, and certain and clear.So although the separation of powers has important Constitutional significance which reserves power to the Judiciary, the commercial reality is that law and especially tax laws are ‘applied’ and upheld more so in day to day commerce as advised by tax advisers, such as yourself. Accordingly it is not just in your interest but part of your professional responsibility to uphold the rule of law and ensure that laws are:

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clear, predictable and accessible publicly made and the community is able to participate in the law-making

process

This is in part – one of the functions of the Board of Taxation.

Another related priority for the Board is to ensure our tax laws deliver certainty and clarity which is of fundamental importance to facilitate business and commerce. So there is an alignment and co-incidence of purposes here – theory and practice converge. Tax laws that are readily known and available, and certain and clear – are necessary to uphold the Rule of Law and are good for business and ultimately the community.This business and community perspective is an important part of the function of the Board of Taxation.

2 The Tax AgendaThe tax agenda appears destined in the current political and economic environment for incremental reform or change. For example, in Australia - the progressive cut in the corporate tax rate (that is currently before Parliament) is an example of this incremental reform approach. This appears to be a response to both economic and political constraints– namely constrained revenue growth, rapid technological change, uncertainty, unpredictable and challenging global economic conditions.Incremental change or reform is not confined to Australia.Incremental Radicalism

In New Zealand, the Finance Minister - Bill English has proudly labelled the approach of the Keyes Government to political reform as Incremental Radicalism. This was a comment made by the New Zealand Finance Minister when he delivered the Annual John Howard Lecture to Menzies Research Centre in Australia on 25 June 2015. The term, Incremental radicalism was used to distinguish it from the alternative – the ‘crash or crash through’ political approach which he described as creating a burning platform, initiating rapid change, and spending large amounts of political capital which you hope you will recoup when the expected benefits flow through sufficiently strongly for the government to be re-elected.

Uncertainty, unpredictable & challenging global economic conditions are for obvious reasons not conducive to this ‘crash or crash through’ approach.

UK Business Tax Road Map

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The approach in the United Kingdom has been slightly different but still evidences elements of incremental approach to change. The UK in 2010 released their publication the ‘Corporate Tax Road Map’ - to signal the direction for their tax reforms, even if those reforms were not immediately available . The roadmap is intended to set the direction for change and the ultimate ambitions or objectives for their tax system so that each intervening reform can be seen as a step in that same ‘right’ direction. Although these principles were initially developed for reform of corporation tax, they have also guided reforms initiated in other areas of business taxation. The principles which have underpinned their direction for reform were:

Lowering rates while maintaining the tax base

Maintaining stability

Maintaining a level playing field for taxpayers

Being aligned with modern business practice

Avoiding complexity

All very sensible and not so much radical.

The UK roadmap states that the Government’s ambition is to make the UK’s corporation tax regime the most competitive in the G20. Two observations about the UK approach:

First - the UK appears to be regard taxation policy as a strategic opportunity in itself rather than a means to achieve an economic strategy;

Second - it is also worth noting that there are mixed views (even within the UK) about the success of this road map. That is, whether it has helped to progress the tax agenda.

Each of these examples emphasise that incremental change can be a relevant model for tax system improvement and reform.

Incrementalism, has been used successfully for many years by business. It is not necessarily a bad thing.

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Kai = Change Zen = Good

I am sure that most of you will be familiar with the Japanese expression or philosophy Kaizen - Japanese for "improvement" which has long been associated with continuous improvement associated with total quality management.

Japan has been applying Kaizen since the Second World War to successfully rebuild their business and industrial economy, influenced in part by American business and quality management teachers who visited the country.

It has since spread throughout the world[4] and is used outside of business and productivity – including in healthcare,[2] life-coaching, government, banking, and other industries.

During this period of incremental change the key message is continuous improvement and … Patience.

Patience is not the ability to wait but how you act while you wait.

Accordingly even if your tax reform agenda wish list is ambitious - it is not the case that tax reform is ‘dead’ ‘dormant’ or ‘extinct’ – it may simply be progressing at a different pace of change in response to both economic and political constraints.

The opportunity for both tax reform and tax system improvement remains. I want to spend some time exploring this theme.

What’s on the tax agenda for AustraliaThe tax agenda over the next few years is already looking very busy and crowded.Significant tax reforms were announced in the 2016-17 Budget which are yet to be enacted - reforms to reduce the tax burden on business, including: cutting the company tax rate to 25 per cent over time; tax integrity measures including the diverted profits tax; the superannuation reform package; other targeted

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reforms especially for small business; an increase in tobacco taxes and implementation of the OECD hybrid mismatch rules. There is also a world outside Tax and legislation to be enacted to give effect to other Government priorities – such as the Collective Investment Vehicle regime.The Minister for Revenue and Financial Services already has a lot on her plate.There is already a long list of things to get enacted.This is not to mention the implementation of other measures included in previous Board reports Last year (on 4 June 2015), the Government released all of the outstanding Board reports that had been written over many previous years:

Debt equity reports (2 years) Post-implementation review of Div 7A (3 years) Collective investment vehicles (18 months) Thin capitalisation arm’s length debt test (18 months) Permanent establishments (12 months)

So there is a long list (already) of things still to be enacted.So whilst we are all aware of the need to progress tax reform – what should be our expectations and priorities for tax reform and how can the Board assist?

There is no shortage of ideas for tax reform in Australia and the ideas contributed over the last year will not be lost and will continue to be considered in years to come.

Whilst I agree a long term vision or road map for tax reform is a worthy ambition, my wish list for tax reform is perhaps more short term and immediate.

I would firstly like to see the programme of announced measures actually get enacted in an orderly and timely manner. I think the indeterminate state of tax legislation has great potential to undermine business confidence.

So what can we do … if anything?Resourcing

There is clearly a resource and resourcing issue that without commitment of funding (over which the Board of Taxation has little financial influence) we can do little to improve. We do however, to the extent that we can, identify this as a barrier and obstruction that is of material significance with the Minister and Treasury.

Orderly progress for Tax System Improvements and Priorities – Sounding Board

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The Board can assist to identify Legislative and administrative priorities through the Sounding Board - a web-based collaborative platform where users can raise, debate and prioritise business and community sector ideas on how to improve the current tax system.

The Board launched Sounding Board in April 2016 to identify proposals that improve the tax system, that reduce red-tape and result in compliance savings. Sounding Board is not designed to receive substantive policy proposals involving large costs to revenue.

Anyone can register with Sounding Board – either individually or as an organisation - and everything is transparent on Sounding Board – even if you are not registered.

The key feature of Sounding Board is the ability for its users (such as yourselves) to take control of the prioritisation process, thereby assisting in the allocation of limited resources to only those ideas that enjoy the backing of the business and tax community.

The Board will examine the most popular ideas in detail and, where suitable, advocate a pathway for their implementation via legislative or administrative means.

This platform will replace the previous Tax Issues Entry System (TIES) and become the sole point of entry for submissions on how to improve the tax system.

The Board understands that some of these reforms may be included in the Government’s regular Regulatory Reform Bills to be introduced into the Parliament – as announced as part of the 2016-17 Budget.

The top four ideas currently are: A single reporting system for collecting payroll tax information; Additional ATO Guidance material on demerger dividends and dividend

streaming under section 45B of the Income Tax Assessment Act, 1936; Amendments to arm’s length transfer pricing rules when within safe

harbour gearing ratios; and Simplified Superannuation Guarantee Charge Rules.

The Board will also soon post a number of legacy issues from the TIES system to the Sounding Board.The Board encourages you to participate by posting new ideas or by voting or commenting on existing ideas.

Commencement Date

We can also, as part of our recommendations to Government be mindful of the existing pipeline of tax reform ideas to be legislated.

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When the Board reported to the Treasurer in March 2016 on the Implementation of the OECD Hybrid Mismatch Rules – we recognised that this will be a paradigm shift in the way Australia’s domestic tax laws interact with international tax laws. The date of commencement recommendation (Recommendation 2) was cognisant of the fact that access to legislative drafting and other competing Government priorities may result in delay. The Board recommended that the commencement date should be for payments made on or after the later of 1 January 2018 or six months after the hybrid mismatch legislation receives Royal Assent.

By ensuring the commencement date is after enactment, the business community has an appropriate opportunity to respond to the law in a way that the OECD intended – restructure out of hybrid mismatch arrangements.

Consider if Administrative Solutions are viable options

Although legislative certainty may be ideal – consider if an administrative solution may also be an acceptable solution. The Sounding Board certainty encourages the Board to consider administrative solutions to improve the system and progress issues through the system.

Some Other Ideas

Short term consulting arrangements to manage the back-load.

I’m sure there are many other ideas out there on ways to tackle these problems and if you have some constructive thoughts then we are always wanting to hear from you. Don’t wait for us to contact you – please contact us.

3 The Board’s Agenda and priorities in 2016 and 2017 and how you can assist the BoardBefore I move onto the Board’s current priorities let me recap on some of our recent achievements.

These achievements were assisted by our relationships with industry and other stakeholders.

The list of recent key activities include:

• voluntary tax transparency code

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• report to Government on the implementation of anti-hybrid rules

• considering and commenting on measures for inclusion in the Federal budget

• Advice on Consolidation – deductible liabilities

• Targeted consultation on reform options as part of the Tax Reform Taskforce

• Advice on improving tax policy development processes

The Board’s priorities for the coming year

In addition to our current Projects, the Board’s priorities for the coming year are:

Improving and contributing to policy development processes

Reducing tax red tape

Continuing our focus on tax transparency

Stakeholder engagement

Voluntary Tax Transparency Code

I want to say a few words about the Voluntary Tax Transparency Code.

The Code is a set of principles and ‘minimum standards’ to guide disclosure of tax information by businesses. It was developed by the Board of Taxation at the Treasurer’s request and in response to Government and community expectations that large businesses be more publicly transparent about their tax affairs. Australia’s actions mirror the increasing international concern about multinational tax avoidance but the Code is not just about avoidance – it is also about public education and understanding Australia’s tax framework and contribution.

The Voluntary Code was endorsed or recommended by the Government as part of the 2016/17 Budget. It is a Voluntary Code so there is no legislation to make is operative – it is up and running now.

To date, there are 33 organisations indicating their intention to adopt the Code. A register of these organisations can be found at: http://taxboard.gov.au/current-activities/transparency-code-register/

You should note that the number of registered entities is likely to differ from the ATO published data (which is based on taxpayer entities rather than taxpayer groups). This makes direct comparisons less meaningful.

According to a recent evaluation by the Corporate Tax Association, the 32 (of a potential 1,200) signatories registered with the Board represent more than 50

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percent of taxable income and tax payable by corporate taxpayers. This illustrates the concentration of corporate tax collections in Australia.

The Board strongly believes that a voluntary (rather than mandatory) Code will deliver the best tax transparency outcomes in Australia. This is because:

• A voluntary Code will lead to the disclosure of more and higher quality information;

• A voluntary Code will encourage senior management to be actively involved in the decision to adopt the Code, which will in turn drive cultural change within the corporate sector towards greater tax transparency.

In contrast, a mandatory Code (would involve templates, forms, box checking) would be seen as a compliance exercise and would be delegated to lower levels within the organisation. Such a measure would have less impact on the disclosure culture of the organisation.

There has been a much slower take-up of the Code by private companies.

I suspect this is because private companies unlike listed and public companies are less used to ‘disclosing’ social responsibility reports and related information for stakeholders, beyond shareholders and creditors and tax transparency and has been framed in the media as predominantly as a multinational tax issue.

If you do advise in this sector then this is a great opportunity or excuse to have a conversation with your client about what tax information they should or could be disclosing under the Voluntary Code – especially because the Code provides flexibility for groups around the format , presentation and content. If you are looking for inspiration about what might be included there are lots of existing examples in the market – have a look at some of the Taxes Paid, Social Responsibility and Economic contribution and payments to governments Report 2016.

October 2016 will be a critical period during which it is expected that further ATO data will be released and the report of the Senate Economics Committee’s enquiry into Corporate Tax Avoidance will be tabled.

Our projects

All of the Board’s Projects have been approved by the Treasurer and Minister for Revenue and Financial Services and we regularly check in with the Minister to update her on our progress.

Here is a list of the projects we currently have underway:

• Asset merger roll-over relief

• The consistency of definitions applied under State and Federal tax laws

• Alignment of tax and accounting concepts

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• Targeted trust simplification

• Residency tests for High Wealth Individuals

• Review of international experience and best practice in managing shadow economy

• Tax and the sharing economy

I won’t speak about all the projects in the same level of detail because I suspect there will be some of greater interest to this audience than others.

Asset merger roll-over reliefThe Treasurer1 asked the Board to work with Treasury to develop a measure which removes the existing tax barriers to non-cash business asset merger restructures, by providing income tax roll-over relief – not just capital gains tax relief.

The tax system currently includes a range of roll-over relief treatments to assist with business restructures (most notably, the scrip-for-scrip roll-over regime). However, these roll-overs are targeted primarily at restructures triggered by takeovers or mergers of companies and only apply in relation to capital gains tax. No relief is currently provided for business restructures realised by the ‘merging’ of business’ direct asset interests.

The adverse capital gains tax and State stamp duty consequences associated with these restructures create a barrier to the progression of business combinations.

Broadening the scope of available roll-over relief to encompass non-cash mergers would boost investment by enabling affected entities to access the economic efficiencies associated with the scrip-for-scrip roll-over regime, without the impediment of income tax transaction costs.

Definitions applied under State and Federal tax lawsThe Board is wanting to understand what inconsistencies in some core definitions within Federal and state taxes are presenting an ongoing challenge for business through high compliance costs and complexity. Numerous studies suggest the compliance cost of regulation and red tape fall disproportionally on smaller businesses as a result of these inconsistencies, because they have fewer resources available to them.

1 This proposal was advanced by the Board of Taxation on 15 February 2016 as part of a number of recommendations to the Treasurer to consider as part of the 2016-17 Budget process. On 8 April 2016 the Treasurer wrote to the Chair noting the potential economic gains and asked Treasury to work with the Board on furthering this proposal.

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So as an initial step the Board will undertake a stocktake of inconsistencies within relevant Federal and state laws around concepts of employee, employer and contractor for the purpose of administering tax systems. The aim is to identify if the inconsistencies create impediments or barriers for businesses and to test the relative impact with stakeholders with a view to prioritising key definitions for harmonisation.

Addressing these issues will enhance the efficiency of tax arrangements and support competitiveness, investment and higher rates of participation and economic growth.

Alignment of tax and accountingThe Board is investigating whether there are ways in which an increased alignment between the tax and accounting systems can reduce compliance costs without compromising other tax policy objectives.

In particular, the Board is investigating:

• Ways to broaden the consideration of accounting treatment as a tax law design option when implementing new tax policy initiatives in the corporate tax space; and

• Making recommendations in relation to law or administrative changes in relation to specific circumstances where greater alignment between accounting and tax would be a net positive for the tax system.

Targeted Trust simplificationThe Board in conjunction with the ATO and Treasury is looking at 2 very targeted trust measures that will produce simplification.

• Custodial arrangements or Bare Trusts – Legislate the current industry practice of looking through bare trusts so that the relevant tax amounts fall for consideration at the beneficiary level (that is, ignoring the trust for Division 6 purposes). This is a perennial issue which should not give rise to integrity issues as it is intended to resolve the problem of the law not being applied as it is currently written. Additionally as it merely confirms existing practice it will have a negligible impact on revenue.

• Repeal of Division 6D reporting provisions – Remove the trustee beneficiary reporting requirements for closely held trusts which are duplicated in the TFN withholding rules that were extended to closely held trusts in 2010. It is also proposed that the exclusion for trusts within a family group from the non-disclosure tax anti-avoidance rule be removed, imposing a new integrity requirement.

High Wealth Individuals and residency

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The Board will review the current residency rules for individuals and make recommendations on how to improve the integrity of the system.

• Reports indicate that tax residency rules are being used by some high wealth individuals to avoid tax obligations.

• The ATO are also currently analysing a number of cases in which high wealth individuals are believed to be avoiding tax through residency schemes.

The ATO has identified $1 billion of potential tax receipts from unresolved audits of high wealth individuals who the ATO believes may be avoiding tax by temporarily changing residency.

Tax and the sharing economyServices like Uber and AirBnB have gone from emerging services to major market players, while new Australian companies like AirTasker and ParkHound have grown from start-ups into fully-fledged firms.

There are two features of the sharing economy:

They frequently involve payment outside Australia;

they increasingly involve the potential ‘commercial or business’ use of what are otherwise fundamentally private assets – the principal residence or the family car.

As these services have expanded, there is a case to review the taxation treatment of these services ensuring companies/individual providers doing business in Australia are paying an appropriate amount of tax without stifling their growth. The divide between private and business assets is also to be reviewed to determine if this divide is appropriate in light of the dynamics of sharing economy activities.

A report to Treasury will be developed which outlines the current tax treatment of these entities, analyses of any problems with the current system and outline possible solutions to address these problems in the future.

Shadow economy• The community continues to raise concerns over the prevalence of a

‘shadow economy’ where businesses operate outside the tax system, including failing to disclose income, undertaking additional activities without reporting them and/or using primarily cash or crypto-currencies which is not declared or can be channelled in such a way that it is not detected (or is difficult to do so).2

2 Unless specified otherwise, the phrase “Shadow Economy”, when used throughout this paper, refers collectively to these activities.

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• In addition to concerns of illegality, the shadow economy:

– places honest businesses meeting their tax requirements at a significant competitive disadvantage;

– undermines the integrity of the tax system;

– has potential to undermine the objectives and integrity of the welfare system; and

– deprives the community of much needed tax revenue.

• The Australian Bureau of Statistics estimated the size of the underground component of the non-observed economy as worth up to 1.5% of Australia’s gross domestic product (approximately $21 billion).3 Whilst the true size of the problem is necessarily difficult to measure accurately, of increasing concern is the influence of community perceptions in relation to the size of the problem and the resulting impact of such views on future tax compliance.

• Given the particular concerns over tax avoidance expressed by the community, the Board will undertake a joint project with the ATO and Treasury to research possible alternative approaches, including those implemented by other jurisdictions addressing tax avoidance through the shadow economy, cultural drivers in other jurisdictions differences, and report our findings and recommendations to Government.

It is still early days on this project but the Board considers the following areas are worthy of further investigation:

1. Identify ways to improve Data capture and Matching opportunities for ATOWe need reporting systems, devices and software that can capture streamlined data for record keeping, and shared data that are acceptable by ATO and are easy to use by end users.

Consider lessons and opportunities from the reportable payment system Identify opportunities for improved sharing of data among government

agencies (including the AFP). This may mean legislative change.

2. Improve systems and technology for verification of ABN and other tax system Identifiers

3 Per ABS Information Paper, “The Non-Observed Economy and Australia's GDP, 2012”, released 12 September 2013 and regarding the 2012-2013 financial year.

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We need a higher level identifier, a number or ID that can capture and consolidate key information and entitlement data but that can be verified at the time of entry.

Transaction made in the banking sector are readily traceable – so are there some lessons from KYC and 100 point verification that applies in the banking sector

Review the present design and intent of the ABN, and whether it is still fit for purpose. Need to have an ABN system that “collects” and “verifies” at various touch points in the supply chain and consider withholding requirements if this is not met

3. Limit opportunities to use cash or increase requirements to report cash transactions

Consider opportunities to restrict the use cash – based on overseas lessons and experiences – including the Hong Kong Octopus Card

Identify opportunities to extend the AUSTRAC reporting (transaction over $10,000) [Financial Transaction Reports Act 1988 (FTR Act) and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act)] beyond financial industry transactions.

The FTR Act was introduced in 1988 to assist in administering and enforcing taxation laws as well as other Commonwealth, state and territory legislation. The FTR Act applies to 'cash dealers', which are defined under section 3 of the FTR Act and include the following:

o financial institutionso financial corporationso insurer or insurance intermediarieso securities dealers and futures brokerso cash carrierso trustees or a manager of a unit trusto persons that deal in travellers cheques and money orderso persons who collect, hold, exchange or remit currency on behalf of

other personso currency and bullion dealerso casinos and gambling houseso totalisator agency boards.

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Consider the function of receipts - evidence of proof of purchase, warranty & insurance, tax deductions,

We need sound IT architecture that cannot be manipulated (point of sale) – eg taxis, local stores, food courts, etc

4. Consider social contract style penalties and consequences for participation in the shadow economy The CA ANZ suggested that Landlords that don’t declare income don’t

have standing in rental tribunals The theory follows something like this – if you want the protections and

benefits that society provides then you need to play by society’s rules There will be social contract style consequences for participation in the

shadow economy – your licence to carry on business is suspended or revoked, no standing before a tribunal, no tax deduction, no insurance, no consumer protection, etc.

The Overseas or international Experience on the use of cash is especially interesting.

The Board and ATO have a stocktake of approaches in many overseas jurisdictions that simply prohibit cash transactions over a certain value.

The following outlines a selection of methods that have been implemented (or are planned to be implemented) by tax administrators and law-makers overseas in response to the threat posed by the shadow economy:

JURISDICTION METHODS

France - Cash payments of over 1000 Euros have been banned for French citizens, as well as cash payments of over 10,000 Euros for foreign citizens

Denmark - a goal of eradicating cash by 2030. Likely to be followed in other Nordic countries (entirely cashless societies).

Hong Kong - Increasing the types of vendors and service providers who accept the electronic “Octopus” contactless smart card (now includes transport, retail, parking, online-payments, self-service kiosks and public services), thereby further reducing the need for cash transactions

Portugal - The Government organised a lottery in 2014 for people who demanded receipts for goods and services they purchased, with prizes including Audi motor vehicles

United - Her Majesty’s Revenue and Customs (HMRC) has used a variety of publicity

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Kingdom campaigns to encourage people to report undeclared income

- HMRC also recently gained greater powers to obtain data from payment providers and businesses intermediaries to identify hidden economic activity

- HMRC is currently consulting on making access to licenses or services for businesses conditional on being registered for tax and for new sanctions to be applied to those who repeatedly and deliberately participate in the hidden economy, including penalties and monitoring of repeat offenders

New Zealand - New Zealand Inland Revenue (NZIR) investing in a specific “Hidden Economy” programme, complete with national marketing campaigns (“e.g. Declare it all or risk everything” and “Crackdown on Cashies”) targeting specific industries and raising awareness of the consequences of businesses avoiding tax obligations

- NZIR developing and enhancing relationships with local and national participants and stakeholders in specific industries on the importance of paying taxes, recording transactions, providing receipts and requesting invoices

- NZIR also encouraging anonymous whistleblowing on shadow economy activity

So there are lots of ideas to be thought through.

ConclusionI said upfront that I hope you will share my enthusiasm for the role and work of the Board of Taxation.

Our vision is that the Board will:

play a significant role in contributing (and contributing earlier) in the policy development process;

work closely with the government to improve the tax system and build the path to improved tax processes and reform ;

ensure that laws are fit for purpose and that policy measures are better targeted and achieve their intended aims.

The Board is an effective avenue for The Tax Institute to contribute to tax policy design, tax system and improvement and tax reform more broadly.

The success of the Board’s work relies on your participation and input.

The Board encourages you to get involved. So just to recap here is how you can get involved:

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How you can contribute to the Board’s activities

• Register on our website to receive regular updates – and when you see a project that you want to be involved with – contact us directly

• Register on our Sounding Board and contribute your ideas for tax system improvement to the Board’s Sounding Board platform

• Review and Comment on Tax Ideas that others have made on Sounding Board

• Participate in formal Board consultations;• Attendance at monthly Board stakeholder events – usually informal

breakfasts and lunches;• Make submissions to Board discussion and working papers;• Volunteer to be a member of Board working groups or consultation

groups

Thank you for listening. I hope you enjoy the remainder of the conference. You know where to find us. We definitely look forward to working with you.

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