TaxVibe Podcast

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest’s unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe, recorded live at the 2024 Tax Summit at the ICC in Sydney. 

Today I'm joined by Anthony Marvello, Assistant Commissioner, Client Engagement Group at the ATO. Anthony has significant experience across all markets, including the leadership of assurance, reviews, audits and the provision of rulings and guidance. Anthony, welcome to live and great to do this in person.

Anthony Marvello

Thank you Robyn. Very glad to be here.

Robyn Jacobson

Now you've already presented your session on division 7A.. And this is a great opportunity to look at where we're at with it. So I don't propose that we dive into all the provisions, but it's been part of the landscape for 27 years. And when we look at the significant amendments over that period, there’s been about 25 legislative amendments. And on my reckoning, there are about 25 different pieces of ATO public advice and guidance. And this is separate to any web guidance. I'm just talking proper official guidance. So when I got to background, it is an integrity measure, and it's designed to prevent shareholders of private companies and their associates taking money out of these companies in a tax free form. There has been an increased focus on Div7A, from the ATO, and I'd like to today try to unpack that with you and understand what is the focus. What are you seeing? What is concerning you, and what does this mean for practitioners and their clients moving forward? So in terms of Div7A and its inception, opening comments from you.

Anthony Marvello

You're right. It has been there for 27 years. It is meant to be an amber light, you know, some hazard lights if you work as long as there's always private companies, Div7A will always be an issue. The very nature of private companies, they are closely held, somewhat opaque. The owners may feel that the company is theirs, and it is theirs, but a company is a separate legal entity, and taxpayers and advisers need to make that point very clear. So invariably Div7A it's invariably going to be one of the top issues that we look at anyway is in this sort of market. I suppose the point that, and I probably don't agree with the characterisation of renewed focus, it’s always going to be a focus area. But what we discovered was we were doing a bit of a review of some of the rulings or some of the discretionary requests we were getting, we were also looking at some audit results. And we found that the vast majority, you know, there were fundamental errors or very basic errors being made and that's why it was these ordered adjustments. And that's why, there's been a lot of rulings or requests for Discretions being issued. And it was very much as a part of a consultative process, you know, like The Tax Institute, like the other professional bodies. We said, well, there's a real problem here. We need to up the ante in terms of about education piece and dare I say, we probably had to up the ante in some of our messaging because as I said, Div7A is, you know, targeted at private companies and the shareholders and those associated with them. But the reality of it is because of the nature of the private company and a little bit opaque. Advisors need to really step up because our feelings were that, and we get that being an advisor is tough and we get good advice, costs money, but we also get that Div7A is a fundamental issue, the fundamental set of hazard lights. And we felt that some advisers have been way too passive. Some advisers weren't asking the hard questions. And then that's where Div7A becomes a problem. So it's a little bit of, you know, we all need to up our game. Certainly taxpayers and their advisers can't, you know, have their head stuck in the sand. They've got to realise that we have concerns about it. We're very much taken the approach of this educating phase. It doesn't mean the audits have stopped and it doesn't mean the reviews have stopped. But we very much, you know, have raised the ante, in terms of how we’re approaching Div7A and the general implication across the board and messaging to reflect our level of concern. And that's what we have talked about yesterday.

Robyn Jacobson

Anthony, we'll get into the sorts of areas you're seeing and you talk about them in many cases being basic. Are you seeing any trends across the type of demographics, the geographical location, the type of business, the size?

Anthony Marvello

Yeah. Unfortunately, no. The mistakes are very basic, fundamental errors and even the, you know, the basics of Div7A hasn't really changed, notwithstanding all those, you know, well, there's lots of changes. Does it really matter the size of business, you know, small businesses. Yeah. First companies first. We're starting up or significant profit groups. The mistakes across the board. It doesn't matter what industry, don’t matter about the nature of it. So it's across the board. So there's nothing that would help us and help the profession help advisor to say, okay. We're going to target x y z because it’s not x y z. It's the entire alphabet if you like.

Robyn Jacobson

Do you even get a sense of the type of practitioner. And by that I mean, the rules have been around since December of 97 and the trust rule since February 98. Many practitioners have been around since day one and have seen the evolution and all the debates and all the progress and all the guidance that has been formulated over those years. And of course, there are a new generation of practitioners who may only been in practice for 5 or 10 years and weren't around back then. Is there even a sense that it's some of the more experienced practitioners who may have either forgotten or, as you suggest, maybe becoming too complacent? Or is it more a case of practitioners who maybe never got taught properly in the first place?

Anthony Marvello

Well, I certainly don't have a label. I can't categorise one, to be fair. And as we've heard in the conference over the last or two, it's a lot of those basic issues, you know, 100a, capital gains tax, family trust selections. You know, it's those basic things. They're not new, they're not fancy, they're not shiny. They're existing issues. So our concern is that advisors need to ask those questions of their clients, because if there's a private company involved and there must be a stream of questioning about what's actually happening in the company, you know, how are profits or benefits been taken out of that company. Now, that's a very appropriate question to be asking, because ideally, in a planning phase, to catch up with the client during the year, you need to you had a sense of, okay, well, how are you going to pay yourself? Cause invariably, the private company shareholder is the director as well, probably the employee as well. How are you going to remunerate yourself, so that in a rational sense, conscious sense, you've got a thriving business.

Robyn Jacobson

Because if you're a director or an employee, of course, you've got all of the employment cost for the withholding, and super and so on.

Anthony Marvello

Yet. So no matter what the capacity is and what we like to break down is, you know, there's always different hats that people are wearing. And so you need to be conscious of what those hats are. But there also needs to be some quite hard conversations about, well, what are you actually doing with the company? The company's not your event, notwithstanding the fact that you know, you are in fact, the company. The company is a separate and distinct legal identity. So there's a difference. You can't be raiding the company's piggy bank and not expect there to be tax consequences. And that's the reality.

Robyn Jacobson

I can recall the campaign many years ago for superannuation. Yeah. And the document in particular was titled It's Your Money, But Not Yet. I feel like this one should be this one. It's not your money.

Anthony Marvello

I think we may have discussed this Robyn, but I do want to have the cookie jar and have someone slapping the hand saying it's not yours. And that also if I can just like a liberty for a second. In reality that also applies to pay as you go withholding. Yes, it applies to super and it implies the GST. So I think it's a really important lesson for all those in business and all those that are advising those businesses that it's, dare I say you need to have those separate buckets and you need to be very conscious about those separate buckets, because it is important that we all lodge on time and we pay our debts on time.

Robyn Jacobson

So into the specifics, what is the ATO seeing when it comes to basic errors?

Anthony Marvello

So besides inability to distinguish between the company and the individual or the shareholder, there are some other elements. So we get down to the more basic things. So if you find that you know you have an outstanding loan or an outstanding benefit, you need to do a couple of things. So if there's a recognition that, okay, we're in Div7A territory, how do we avoid that. Yeah. You need to make sure that before the end of the year or before you lodge your tax return, that you have an agreement with the company about the terms. And if it's seven years unsecured with 25 years, how it's going to be repaid, typically there's a minimum yearly repayment, there's an interest rate that varies annually and over the last couple of years, it's almost doubled like it's an 8.77% at the moment. And that needs to be taken into account. So all that mechanical things that needs to be in agreement are what we call a complying loan needs to be put in place before you lodge a return. You've actually got to then satisfy and pay a combination of principal and interest back on that loan. And that needs to be all journaled, actually paid and done before 30th June, or whatever your tax time is, is to ensure that even though the complying one, by not complying with that complying loan, you've run up short on that. That can certainly lead to a deep Div7A deemed dividend. You know, there's a basic elements of it.

Robyn Jacobson

Just to make a particular point. You say before a lodgement day, it's got to be at least the day before lodgement day. So anyone who thinks that as long as I put it in place literally before I lodge could still have an issue, it's got to be done at least the day before, the day of lodgement.

Anthony Marvello

And the other elements, just to unpack it a little bit. And I know, is that the favorite topic of yours is that you can't just journal yourself out of it.  Journal entries reflect the transaction. It's not the transaction. The other thing we see is, well, I'm going to call a round robin where there's the constant repayment of the Div7A loan, but then there's the constant withdrawing of the Div7A loan.

Robyn Jacobson

109r specifically deals with that. And it was built in as an integrity measure to stop people doing that.

Anthony Marvello

Again basic issues. So if we get nerdy for a second 109r does deal with that, basically it would have reasonable person would conceive. But constantly a problem because people think they know better and perhaps their agents, you know, aren't probably holding to the account that they need to be.

Robyn Jacobson

I do want to link back to the journal entries because..

Anthony Marvello

I know you love it.

Robyn Jacobson

...It is a topic that is of interest. There is a mechanism by which, of course, a minimum yearly repayments can be undertaken without cash, and that is by the declaration of a dividend. But to make it work properly, the dividend has to be properly declared by June 30th. And sometimes there may not be an understanding of why this is so important. And I think it's important for our listeners to understand this. So the minimum repayment, of course, is due by June 30th each year. If it is not paid, you have a shortfall and the shortlisting dividend for it. So what we need to do is create that mutual obligation. So a journal entry can be used as a payment. Now we know the shareholder owes the company the repayment. The company needs to pay the shareholder something. So that's therefore the obligation to pay the dividend. So the dividend must be declared by June 30th. That then puts in place a whole series of other obligations. Corporations act. And this is not my space, I work in tax law. But of course we do have obligations with directors minutes or resolutions to be in the corporate register within a month of a decision being made. You then have to issue a distribution statement to the shareholders by 31st October. For profit companies. Then you can get to your journal and record the transaction that's already happened. But it's so important to get that right because the failure to do that means it could have breached as a direct to the Corporations Act. You could have penalties under the Tax Admin Act for not issuing a distribution statement properly, you may have the deemed dividend under Division7A and then I to even go into the Taxation Services Act right now. But if there's been a backdating of documentation to purportedly declare a dividend, it could be an issue.

Anthony Marvello

So yeah, you're bang on attention to detail everything. And that's where the planning part goes to it. And even maybe to add to the mix, even the planning element goes towards what I call is a outstanding line hasn't been put on complying terms. Are we going to bring that to an end. Are we going to repay it or is it going to go in the form of a dividend? Or would it be reflected in salary wages. You know, very important element. Well Div7A is looming large before 30th June if you like. These steps could easily be put into place to mitigate the impact of Div7A.

Robyn Jacobson

And just to let members of The Tax Institute know, we ran a webinar in 2021 that specifically deals with the use of journal entries to make minimum yearly repayments, and that can be found on the member portal for Tax Institute members. Commissioners discretion. Let's move into this area. 109r is the provision that if there's been an honest mistake or an inadvertent omission by the taxpayer, by the company, or by someone else, such as the tax agent, then there can be the opportunity for the commissioner to disregard that deemed dividends. Now, the discretion has been there for many years. Can you talk us through what you're seeing in terms of the applications, and has anything changed? Because this seems to be a bit of anecdotal feedback that this discretion is harder to obtain than it used to be.

Anthony Marvello

It so probably just address that one first. So as a tax ruling said 2010/8 . And there's a practice statement which is an instruction to staff which is 2011/29 So they’ve been around for a while. So that's the ATO view. And that's how the commissioner advises his staff to approach the discretion. So the important thing to note is, first of all, there needs to be either an honest mistake or an inadvertent admission. So that's a tick. And as you said and as you mentioned, it relates to the company, the entity, the benefit from the dividend or the payment and the tax adviser, invariably. Yeah. So it's really a bit of a party. So we need to be conscious of what the various parties are doing. So as I said, this should be an honest mistake on inverted admission and then do the facts and circumstances warrant it. Now we need to consider that any time if there's an audit we make an adjustment. So as soon as we consider making the adjustment and the Div7A a poss. We need to go through that practice because that's what's required. And naturally, if an advisor in their review of going about their business notices that there's a potential Div7A issue or there is a Div7A issue, well, then if it is an honest mistake or an inadvertent admission and the facts and the circumstances warrant it, well, then commissioner can consider the exercise of the discretion. So after that run up, I think over time, advisers have felt that the discretion was almost automatic and it didn't necessarily need to result in there being an honest mistake or an inverted admission. So I thought it was just like a given. So I think the point that we've been making is that, no, that's not the case. That's a bit of a myth and that we have to bust that myth. So it's not a get out of jail free card, and we need to consider it. And taxpayers and shareholders and other associates need to consider that carefully. Now, has there been an honest mistake or an inverted admission? And what are the facts and circumstances. So very much I wouldn't I refocus, but yeah, we're very much conscious of what the TR and the PSOA say.

Robyn Jacobson

So that threshold has to be met first before the commissioners even empowered to be able to exercise that discretion.

Anthony Marvello

And this is where the advisor is fundamentally important because we would expect the advisor who's advising private companies. You would have a pretty good understanding of Div7A and certainly the working parts of Div7A, maybe not all the funky bits, but you know, the basic elements. And again, as I've mentioned before, most of the mistakes we see around the basic elements. So it's really up to the advisor to, dare I say, probe and push a little bit can't be passive. You know, they need to be asking their clients, you know, what are they up to. And there's some examples in the TR this as examples in the PSOA how the Commissioner will approach it. So for example, you know, if the agent is only being provided with a summary of the accounting records. So no detail other than that and they just blithely accept that. And it’s shown that, you know, later down the track, you know, via an audit that, you know, the director or the shareholders more precisely hasn't been doing the right thing and has been stripping money out of the company or being using the holiday house and not doing the right thing. Well, then it's highly unlikely we're going to exercise the discretion because the agent hasn't done enough to satisfy themselves of what's actually happening. Now, there will be cases where, you know, we certainly will. You know, for example, if somebody just maybe got the interest rate wrong. You know, I hope I forgot to adjust it so to the current year rate. And I should, you know, the ATO website, you know, gives that sort of helpful tools. So, you know, that's just a random thing. Well then yes. If you look at all the facts and circumstances where you say, okay, and you do have a discretion, or where a company and the shareholders have been, you know, they've been out and they thought they were buying something for the personal. But they just mistakenly had the company credit card and then down the ways they work it out and they correct it.

Robyn Jacobson

Yes

Anthony Marvello

Well then. Yes, you're going to take that into consideration and it's probably going to be, you know, a positive result.

Robyn Jacobson

Yeah. Anthony, a really common situation is where you take over a new client. And you find a division7A problem I think nearly every accountant could point to that. And that's in that no one's actually creating the problems. The ruling here is from somebody else. So is that an area that is open for the discretion? Well, and I don't tunes on whether there's honest mistake. Again.

Anthony Marvello

Yeah, obviously it depends on the facts and circumstances. But if the previous agent has been wilfully blind or wilfully ignorant and the client hasn't been open and transparent, yeah, that's going to be problematic. And I think there was this element in the past where an agent or an adviser has got a new client and it is a bit of a basket case, and they come to us thinking that we're going to fix it. And again, it's probably going to be a no. But I think people need to be and I suppose that's where expectations needed to manage. You know, the client's expecting the new agent, the fixer of a new adviser to fix it. It may not be fixed or might not be fixable. And that's problem. And I think that's where a lot of the misconceptions around 109rb come and come through. And I think, you know, we've made it pretty clear that, yes, it is available where there's been an honest mistake or inadvertence. However, it's not a get out of jail free card for any other misdemeanor

Robyn Jacobson

And do you think it's possible there are practitioners out there who could be trying to correct these situations without necessarily seeking the discretion?

Anthony Marvello

Well, possibly. And obviously it's a discretion for the commissioner. But again, they need to work with their clients to fix these things and draw these things out. So very much encourage people to sort of try to fix these things, and obviously communicate with the commissioner. But also, dare I say, start with a clean slate. like, yeah, this case, maybe.

Robyn Jacobson

With all that discussion, where to from here, what sort of awareness campaign is the ATO running in and where does this take us for the rest of this year and into next?

Anthony Marvello

And so, We've done a bunch of things already to be very proactive and I know I’ve spent a lot of time doing this. So we've got a couple of events planned, probably at least one other major event. I feel that this is going to be an ongoing thing, and we need to make sure that there are solid roots and solid understanding. And it is a lot of conversation with clients and there's a lot of management of expectations as well. So I think this will be an ongoing thing. I'm hoping over the next couple of years and we'll get some real traction. And then, you know, the the evidence will be, well, okay, less adjustments, less request the discretions and we can all focus on something else. And hopefully, you know, something that actually you can, you know, really help the business. As opposed to trying to deal with , dare I say, missteps.

Robyn Jacobson

So in closing, what are your key bits of advice or tips for practitioners? What's their role in this?

Anthony Marvello

Okay, probably if you are advising private clients, make sure you have a very good understanding of the provisions or advising them. You need to be proactive. You need to be planning with the client about how they are going to extract wealth and benefit out of the company appropriately. If there is a Div7A potential issue, well, then you need to make sure that there's a complying loan agreement. You need to make sure that when you're paying, that you're not trying to be a bit cheeky in terms of round robins or just using journal entries, ensure that the minimum yearly repayment is being met, including the interest, which is the combination of principal and interest. If you don't do that, that's a that's another Div7A issue. So if you can come a bit of a circle and a bit of a cycle initially to make sure that all the timings are right, the journal entries are right, you get the ordering right so that it doesn't become a problem, and then you just move on and actually can get on with your business.

Robyn Jacobson

Okay. Anthony, thank you for your session yesterday. Thank you also for joining us on TaxVibe

Anthony Marvello

Pleasure. Robyn.

Robyn Jacobson

So thanks for listening to this episode of TaxVibe I've been chatting with Anthony Marvello, Assistant Commissioner in the client engagement group at the ATO. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen to your podcast. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the center of the tax conversation, a membership of The Tax Institute could be just what you need. You can learn more at taxinstitute.com.au, will look forward to joining us next time.

Robyn Jacobson, CTA

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson. We love the vibe of Tax and here at The Tax Institute, we do tax differently. In this bonus episode of TaxVibe, you'll get a special insight into our post-Federal Budget reflections. A sneak peek behind the closed doors of our member-only webinar. To see the full webinar and access other member only insights and resources, become a member of The Tax Institute. Head to our website to learn more. We hope you enjoy this episode of TaxVibe.

Welcome to The Tax Institute's webinar addressing the tax measures announced last night in the Federal Budget, 2025-26. I'm Robyn Jacobson, the senior advocate at The Tax Institute. And in this webinar today, I will be the chair and facilitator of the panel session. Thank you for joining us today. This webinar is live and interactive. Joining me on the panel today, we have Tim Sandow, CTA and president of The Tax Institute. We have Julie Abdalla, FTI, head of tax and legal at The Tax Institute, Jonathan Ortner, FTI and partner at Arnold Bloch Leibler. And last but not least, we have Scott Treatt, CTA, who is of course, the CEO of the Tax Institute. So, thank you all for joining me this morning. What I will be doing is drawing on this panel for their reflections, for their insights. It wasn't a what we would call a particularly big budget and certainly will unpack that in a lot more detail. But I first would like to turn to Scott and ask you what your overall reaction to the budget was.

Scott Treatt, CTA

It's an interesting one. The overall reaction, unsurprising. That was probably my comment, because that's got to be one of those. No, not one of it's got to be the lightest budget I've ever seen. I say seen deliberately as opposed to heard, etc., because it wasn't that 90 odd pages of, oh, I don't know how long exactly it was about what was it, about a third or less than a third of the papers that would normally see coming out of a budget, and that I find, that is unsurprising given the timing, like the election's imminent. 

Robyn Jacobson, CTA

But even if it had been a small budget in length, we might have had a lot of tax measures, but we couldn't even have a lot of them.

Scott Treatt, CTA

So, but it was never expected. I don't think we expected anything in relation to major tax aspects. I think I was a bit surprised that we saw tax cuts come out. Now that I see how it's playing through. I'm not surprised, given the political move that sort of happened. As you look at where it's being introduced now, they're introducing it into Parliament. Those tax cuts alongside the Medicare changes, which are due to take effect from the beginning of this financial year. So, there is a you're already seeing a bit of a jostling around some of these key issues before we're coming into an election. Even being called. It's going to be called over the next few weeks. I think it's quite interesting to look at, still the broader economic context in which this sits. I think it's really changed from what we've seen over the past few years as no substantive changes to that. In my opinion, you've still got bucket loads of debt. We still got those underlying core issues within our system that we've got to address, that we've got to deal with. I think some of the front of mind issues that the budget's trying to address, you've still got the cost-of-living issues. You've still got the education issues. It's still got the structural issues within our system around housing and social support, etc. those structural issues haven't moved. I haven't gone away.

Robyn Jacobson, CTA

And Julie will talk about the tax cuts in more detail shortly. But the positioning of this bill, we've got what looks like to be parliamentary sitting days left, 5 to 7 weeks to the election, which is somewhere between the third and the 17th of May. It's going to be one of those three Saturdays. And there's even talk that they may be calling the election as soon as this Friday.

Scott Treatt, CTA

Sure.

Robyn Jacobson, CTA

So, positioning all of this and what's going to get through the current Parliament, what's not.

Scott Treatt, CTA

Yeah. But it's interesting. Before we went live, Julie made an observation around the political posturing of where certain measures are placed, etc. and maybe she kind of had her two cents to that. But it's fascinating that if it is only true, that is what actually happens around the Medicaid stuff, the stuff that's needed for this. She the certainty we need in the system. And that's probably the aspect as an institute, we were keen on what is the certainty we can draw out of this. And I know and when the team worked tirelessly through to pull the report together, we tried something different with our members to try to go, right, what is it that we talk of that certain in this environment, given the election as opposed to all these would be announcements because the announcements of the announcements.

Scott Treatt, CTA

But actually, what does it mean to be able to advise people? And that's the piece that, I guess now when I wake up this morning to see the combination of those matters in that one bill, I go, wow, are we in another difficult position here around certainty coming into year end?

Julie Abdalla, FTI

So, we wrote in the, report that we weren't expecting these Tax cuts to be introduced. For an election. Anyway, but we would have expected that for the Medicare threshold changes. And so we've actually seen this in recent times, where a measure is put in a bill that is completely unrelated for different reasons, and pushing things along in the process can be the objective, but it doesn't always work out that way. And so we had, for example, Division 296 measures that were taken out of a different bill. The instant asset right off was in the buy now, pay later, bill. And then that was taken out at the last minute. So, it makes certainty all the more difficult. And it's concerning when it comes to the Medicare levy changes. We want certainty on that as a priority.

Scott Treatt, CTA

Yeah. It's kind of like Robyn, I think I said to you this morning, it's the budget that we didn't need, but we had to have.

Robyn Jacobson, CTA

Because the optics of having a May election and not having a March budget.

Scott Treatt, CTA

Yeah.

Robyn Jacobson, CTA

The key headline figures, deficits as far as the eye can see. And 2025-26 is the first year forecast we’re going to tip over that gross debt of $1 trillion. Quite eye watering figures. So where was the focus of the budget at a macro level.

Scott Treatt, CTA

Well, I think as I said before it was the cost of living aspects. It's those similar, structural issues that we've had in the system for a while. And, you know, around the housing, around the education, the social support, etcetera. But it's fascinating. You already see in the press, like, how are we going to pay for that?

Robyn Jacobson, CTA

Yes.

Scott Treatt, CTA

That still remains the question. But you've got to look ahead a number of aspects within our system. And we keep harping on around the need for a holistic tax reform, tax reform, tax reform. And I'm happy to keep saying that until we go blue in the face because like I sit there and say we can throw all these measures out there, but how do we create a sustainable system? Is our system sustainable? And there are a number of questions in preparation for this and I was there going, if I had the opportunity again just to sit down with the treasurer, post this budget and say, right, what questions would I ask? And I put them down here, are we taxing income at the right level? Are we taxing capital and consumption at the right level? Is our tax mix right? And I think if you can't answer yes to those questions, then you don't actually have a sustainable system. And I don't know at the moment that any politician could genuinely answer yes to any of those. Which means then we'll we don't have sustainability. A lot of what we're doing within the budgets remain just tinkering as opposed to creating a sustainable future and having meaningful effect. And so what are we doing about it?

Robyn Jacobson, CTA

Before I throw to Jonathan and Tim, for their initial observations of the budget, two things which are always for front of mind when we talk about particularly homeowners and businesses. And I'm referring to interest rates and inflation. So, we have had that first reduction of 25 basis points for the first time since 2020. Given all the rises and the inflation is back within the Reserve Bank's range on paper, but it's still very much having an impact on cost of living for everyone.

Scott Treatt, CTA

Oh, I think that's right. But I don't know that I'd be comfortable being an economist at the moment. Like just so much global uncertainty going on. There's so many things happening in different jurisdictions at different levels and for different reasons, and there's likely to be an impact that flows on to Australia. What that it is exactly. My crystal ball is probably a little dustier than others, so it's going to be interesting to watch how that then plays out and how the overlay of those other issues come through as well.

Robyn Jacobson, CTA

Thank you. Tim, how are you reading the tea leaves?

Tim Sandow, CTA

Robyn. For me, it feels like it's a bit of a placeholder budget, as in, I had to do something, as Scott said a bit because of the optics, but it sort of feels like I'm wondering if we going to get a second budget later in the year. I mean, we obviously probably will win if there's a change in government, but I think even if there's a, if this government continues, albeit probably with a different mix going forward, are we going to see something later in the year? And as Scott said, there's so much global uncertainty. Maybe the world does look a little bit different in six months’ time. And some of the assumptions that are in it in this budget may change. So, I guess it's a bit of a watch, this space. I think good news out of the budget is, some of the assumptions. Robyn. We're all going to live longer. So, the assumption is that longevity is going up by year for men and women, 86 women and 82 men.

Robyn Jacobson, CTA

So more time for Holidays.

Tim Sandow, CTA

That's right. More time for super, and the birth rate has again increased in the next five years as well.

Robyn Jacobson, CTA

And this is without Peter Costello, who's encouraging everyone to have that third child.

Tim Sandow, CTA

Correct, its gone from 1.44 to 1.54.

Robyn Jacobson, CTA

Oh goodness. Significant. Jonathan, your take on the budget.

Jonathon Ortner, FTI

Well, I think to continue to lighten the mood, Australian brewers and beer drinkers can rejoice. Jim Chalmers has announced a freeze on the indexation for beers for two years. So that's good. Saint George Dragons, unfortunately, over my beloved storm also received funding. Why that was chosen, I don't know, but I think the reality is we haven't seen any major tax announcements in the last three budgets. Probably more. Yeah. So do we expect any announcement of substance in a budget like this was going to be, you know, very low on the probability scale. So I'm unsurprised by what has been announced other than for the fact that the tax cuts have been, you know, presented in a way that perhaps they could have designed it differently. So, we're not outlining $17 billion when we're ready, forecasting deficits over the next however many years.

Scott Treatt, CTA

But wouldn't it say the budgets over the past few years, Jonathon, really like where the compliance dollars were going to go and what the policy position was on integrity within our system was really called out loud and clear. And I don't know that those things were within his budget. Not in that same way.

Jonathon Ortner, FTI

Oh. Certainly. There's still I mean, in terms of compliance within the tax system, the spending going through the Tax Avoidance Task Force. 

Scott Treatt, CTA

Not like the multinationals because of X, Y and Z should, those bigger theme aspects were absent here. And I do wonder if that's again a deliberate move around. Well, we've got time now for,  before the election coming. And we know that those historically in elections it's like every week there's something new. And I do wonder, are we going to see something along those lines over the coming weeks?

Robyn Jacobson, CTA

Jonathan, also interesting to be mindful of where we are on the cycle, because traditionally, if a government wants to go harder or bring in a measure that may not be as popular, they are not going to do it weeks out from a federal election, they are much more likely to do it at the beginning of their term, or perhaps even halfway into. Right? Yeah. So, Julie, your reactions, we've talked briefly about the traditional tax cuts, but, the IBMs, this is our favourite expression, the announcement unelected measures. For those of you who are not familiar with the expression, did we see any movement on the IBMs?

Julie Abdalla, FTI

We saw movement on a few, but less than a handful. There is still a long list that weren't addressed, but one thing that is on, or I thought was interesting on this point in the budget paper. In budget paper number two, if you're interested in the payments and receipts tables, there are line items for decisions taken but not announced. And so these are amounts that are attributed to that are not actually announced measures within the budget. And so I'd be expecting to see post budget potentially pre-election announcements that might shed a bit of light on what those amounts are related to. Hopefully that would deal with some of the announcement on inactive measures. But again, we've mentioned certainty already. People want certainty whether they're proceeding with a or amending it or discarding it, abandoning it altogether. People just want to know where they stand as compared to the law.

Robyn Jacobson, CTA

And make decisions about where they invest and how they run their businesses and understanding where they stand. Scott, we have talked about what the budget means, but in particular, as we head into an election, if we think about the way we brought up our budget reports in non-election news, we always say the government has proposed that it will or the government is intending to do such and such. But given we are weeks out from an election, what does it really mean when the government says it will do this?

Scott Treatt, CTA

That's the hard thing to answer. Like what is going to eventuate in, let's call it seven weeks’ time, right? What? It is a maximum of seven weeks

Robyn Jacobson, CTA

Maximum 7 weeks could be five.

Scott Treatt, CTA

Thought so what is going to actually eventuate at that point? What's going to be the composition of Parliament.

Robyn Jacobson, CTA

Both houses nice houses not just the Senate, yeah.

Scott Treatt, CTA

At that point of time, therefore where do we stand? I think that overlay still sits there. So the difficulty is, yes, there's been some positions put forward. The positive is we've got some view on it which kind of aligns and I know will come to it around the regulation of the profession. That's I sit there and go, well actually there are elements where we can go with some level of certainty because of both sides of Parliament thing aligned on not doing something.

Robyn Jacobson, CTA

Yes.

Scott Treatt, CTA

So I think that's the one positive I'd take up the rest as it can go. Well, actually it's going to depend on what Parliament looks like post-election.

Robyn Jacobson, CTA

And that's really going to be interesting to watch. Listen, I just noting that we are not yet certain when Parliament is going to resume. There are certainly parliamentary sittings scheduled throughout the year, as we know, with sync by July, that have all certainly by a lot. The new senators have to take up their seats, whether we're going to see any sittings in June before they go into their winter recess in July. We really will depend on the counting of the votes and have the sworn in, the minister's internal housekeeping, and I talk about it, putting the new signs on the doors around Parliament House. So there's a little bit of administration that needs to be sorted. Tim, Where does this leave business sentiment? So when they're looking, yes, we're going the election year. Yes. We've got a whole lot of proposed measures. Again, that's as we move into caretaker mode. Would we see a potential slowdown in business decisions, or do you think it will just be business as usual?

Tim Sandow, CTA

Robyn, I think it depends on how much of an influence you think things like tax have on on business decisions. But I'm probably not best to, to speak about sort of that overall business confidence, but certainly I mean from my perspective, I mean I'm thinking in Adelaide, it does feel like there's still plenty happening around the place. And as I'm traveling around as part of the president role, I don't think any of it is just sitting around wondering what we're going to be doing tomorrow. So, because we do have clients that are doing things, whether that's they're investing, they're buying things, they're selling things. So I still have a fairly. Yeah. And I think comes down some of the numbers as well that, yeah, it does feel like the economy is doing reasonably well from what I've read so far, it doesn't feel like any of the Trump tariffs are going to have a big impact on the economy as a whole. They're not having impact on parts of the economy. I guess we're just waiting. Wait and see.

Robyn Jacobson, CTA

Scott, I just wanted your thoughts to. We've often talked about the impact of changes on the profession and compliance costs and regulation. We've still got labor shortages across the profession and that's really being felt by our members.

Scott Treatt, CTA

Absolutely. I think there's a couple of challenges around that one Robyn, them because we are seeing some firms having less graduaate intakes and that's not necessarily driven by demand. I think that's sometimes also driven by supply and quality of supply coming through. You look at the last ten years, student numbers coming through the social sciences and culture avenues and the management type spaces. Those that lead into accounting and law, etc., which drives tax as well. In terms of the student succession coming into the profession, it's dropping year on year. It continues to drop. And I think I've said previously in other webinars like, the impact of the regulation on the profession, right. And the perception that's there is also that impacting students decisions to go into that. And, you know, it's on us to to then try to keep tax sexy and ensure that students maximize the thought processes around coming through, because that supply is limited. That supplies is a key issue to be addressing.

Jonathon Ortner, FTI

I agree with that on. I think, you know, there's been reputational harm to the industry as a result of sort of past events and the regulatory burden that's been imposed is significant.

Robyn Jacobson, CTA

Yeah.

Jonathon Ortner, FTI

But then we've got the complexity of the tax regime. It is so hard at the moment.

Robyn Jacobson, CTA

Yes,

Jonathon Ortner, FTI

it it's acting as a disincentive for younger people to come into the industry. And it's a problem.

Robyn Jacobson, CTA

And Scott, we talk tongue in cheek about it being sexy. We just love tax so much. So we just can’t understand why no one would want to be part of this. But in all seriousness, when we're competing with other sectors where a young person can become an influencer and has that public social media profile, why would they want to come into the tax professionals?

Robyn Jacobson, CTA

All right. So let's now start to do a bit of a deeper dive into some of the tax measures that were announced. So Jonathon, I’ll kick off with you, What's happening in the SME space. What are you hearing on the ground and where is the noise coming from.

Jonathon Ortner, FTI

So I think we still have to correct me if I'm wrong. Over 60 billion in undisputed.

Robyn Jacobson, CTA

Excited it's over 50 billion. Yeah over 50.

Jonathon Ortner, FTI

So obviously that and since the commissioner has come in last year, you know, that's a key part of his agenda, which is to collect that debt. And so I think many in the profession are seeing that starting to happen. Yeah, certainly. Then as a result, you're seeing stronger enforcement of directive penalty notices. Garnishee notices. There's less appetite to, you know, remit GRC or ASIC. In certainly instances where perhaps the ATO would have in the past in light cases. And you know, we're seeing certainly more aggressive a more aggressive ATO in their approach in audits. And objections and, and so that's, you know, obviously becoming difficult for the SME population to manage because the compliance cost for taxpayers is going up considerably.

Robyn Jacobson, CTA

Yeah.

Jonathon Ortner, FTI

Other issues that we're seeing on the ground, and it's no secret it's on the its website as sort of tax issues to, watch out for in the 2025 years family trust elections. I've been presenting on that, recently over the last year at the profit business retreat on the tech summit last year, it's becoming, an ever increasing problem, partly due to the sort of common fact that we've got blended families now, we've got the death of the test individual, we've got really complex private groups, and it's going far beyond, I think, what the rules were set up to deal with and mistakes are happening as a result. So we're seeing that manifest and come out and, you know, reviews as a result. What's on the tip of everyone's tongue I think, is Division 7A and Bendel. And you know, we've got the 2023 UPE’s which need to be dealt with now for, for lodgement day. And, and you know, everyone is asking, what do we do with that now that the ATO sort, you know, special leave to the High Court and, you know, what do we do around tax planning time for, for this current financial year? So happy to open that up as a discussion if we want to.

Robyn Jacobson, CTA

Absolutely. And it is worth reminding our members that yesterday we ran a live webinar with Fiona Dillon, Paul Sokolowski and Tracy Dunn. Fiona, of course, being the chief tax counsel at the ATO called being, the solicitor representing bindle in the full federal court. And Tracy, with a great deal of experience in this space. We unpacked all of this and we talked about, firstly, what does the decision mean? What do you do with the pre 2009 ups? What do you do with those that were managed through that intervening period of 2010 to 2022, and what do you do most importantly with the ups that need to be dealt with by the lodgement day coming up? So we'd certainly encourage our members to access that webinar. You can contact the Tax Institute. We'll look at that through the member webinar series that we've been running. But it's a really interesting situation, and I'm just interested in your thoughts. And yes, I recognize you do work for the firm that represented the case in a different state.

Jonathon Ortner, FTI

Whatever Paul’s thought are, are my thoughts.

Robyn Jacobson, CTA

Very diplomatically put. But it's a really interesting situation where we have a position that was taken by the ATO back in 2009, which they have stuck with all through these years, despite being controversial and many practitioners disagreeing with it. We've now got unanimous two members in the tribunal and three judges now in the full federal court, all finding in favour of the taxpayer. The commissioner. Yes, we know, has sought special leave from the High Court, and we are waiting to see whether that will be granted. But in the meantime, the interim decision impact statement makes it very clear that the ATO will be sticking with its current position. So the main question everyone is asking is legally, how can the ATO do this effectively? It looks like the disregarding full federal court case law while they pursue their appeal. And so people are trying to understand how does that work?

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Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute, where we peel back the layers of the Australian tax world. I'm Robyn Jacobson, your host, and the senior advocate at The Tax Institute. We bring you the sharpest minds in the tax profession, digging deep into their unique insights and sharing nuggets of wisdom you won't find elsewhere, always keeping it real and interesting. So sit back and relax, and let's dive into the world of tax one conversation at a time. We hope you enjoy this episode of TaxVibe.

I am joined by Neil Brydges, CTA, Principal in Sladen Legal's Tax group in Melbourne. Neil primarily practices in direct taxes, and GST with a focus on the taxation of trusts, deceased estates, property corporate tax, M&A and Division 7A. Neil is also advised extensively on cross-border taxation issues. Neil is an accredited specialist in taxation law. A member of the Tax and Revenue Law Committee with the Law Institute of Victoria.A member of the Tax Committee of the Law Council of Australia and a CTA with the Tax Institute, and a member of the Institute's National Dispute Resolution Technical Committee. Neil. Welcome to TaxVibe.

Neil Brydges

Thanks, Robyn, glad to be here.

Robyn Jacobson

So today, we're going to have a chat about the recent Bendel decision. And we will, of course, explain what all this is about ,and why it's so significant. But social media has been abuzz with the long-awaited release of this decision. And we're in particular talking about an appeal relating to the tax treatment of unpaid present entitlements. So, we'll break all this down. But, firstly, why is this such a significant decision? Why is everyone so excited about this, and that's before we even get into what the decision means for everyone.

Neil Brydges

It's a decision that's had quite a long history, not so much in this particular piece of litigation which we'll get to later on, but also what prompted this litigation was the Commissioner's views, which were released in a public form in a draft ruling in December 2009, but also had been expressed publicly a few months before it, and it started in February 2009. When the then Deputy Commissioner Mark Conser, at a talk on basically another topic confirmed his view that a UPE, in certain circumstances could be a 109D loan. and then over the next sort of 10 months. Between February 2009 and December 2009 was discussed at the NTLG meetings, and you can see comments around that in the minutes of those NTLG meetings before releasing a draft ruling in 2009, which became finalised in 2010, as we know, in TR2010/3, and practice statement. 2010/4. Those views. If you read the NTLG minutes and certainly consultation papers that are publicly available. They were controversial views, and that was controversial at time, and they remain controversial for 15 years or so, until ultimately they were tested before the tribunal in 2023 in the Bendel decision, and also the full Federal court more recently. So there's a lot of buzz because the Commissioner's views were controversial back in 2009/10 that probably died down a little bit because people were just like, well, we just have to live with those views until someone challenged them through the courts, and the Bendel decision is basically what has happened with that.

Robyn Jacobson

So let's wind it back. The very essence of the structure for people that may not be familiar with UPEs as we call them, the unpaid present entitlements. What are we fundamentally talking about in terms of a structure, or what the transactions are that's caused this dispute.

Neil Brydges

Fundamentally keeping it to the simplest possible structure. You've got a trust in this case. It's a discretionary trust, that confers a present entitlement to income, in layman's terms makes the distribution of income to a beneficiary, and the beneficiary is a private company. Now that distribution that present entitlement is not paid, it's not paid out in cash or bank transfer. It's just left as an amount owing from the discretionary trust to the private company, the corporate beneficiary. and against this name an unpaid present entitlement. The actual cash that would be used to pay that present entitlement, in the case of Bendel, but also in many cases, retained within the trust. So it's this unpaid amount, owing to a corporate beneficiary that's the unpaid present entitlement.

Robyn Jacobson

Okay. So we need to then put an overlay. We've got some rules called Division 7A. Which in essence talk about loans made by private companies, and if they're not genuine loans, then they can be treated as a deemed dividend, and then they get assessed to effectively the borrower who we're talking about shareholders or associates of those shareholders of the private companies. So again, at its essence, we've got a trust distributing to a company, it's not paid out. The company is therefore owed an amount, so in very simple terms, it's a receivable that the company has on its books. It's waiting to receive the amount of cash. And the whole question is whether that UPE is or is not a loan for Division 7A purposes. So you were saying that the Commissioner's position was controversial. Why was it controversial?

Neil Brydges

So, as you say, Robyn, Division 7A is looking to prevent distributions from private companies of profits to shareholders or associates other than in the form of dividends and Division 7A has a rule around a loan which says, if there's a loan from a private company to a shareholder or associate of that private company, then that loan needs to be paid back before the lodgement date, or put on terms complying with Section 109N, in simple terms, you know, people say complying Division 7A agreement's got to be in writing seven or 25 year term. Now, the definition of loan in Section 109D, includes what we think of as a loan. The Commissioner refers to that as an ordinary loan but also includes an extended definition that deems certain other things which may not be ordinary loans to be loans for the purposes of Division 7A and that extended definition includes the words, a provision of credit or other form of financial accommodation. So in December 2009, when the Commissioner released his then draft views, he said that an unpaid present entitlement with a corporate beneficiary is in effect a form of financial accommodation from that corporate beneficiary to the trust, and if it's not paid back within a certain time, it's going to be treated as a loan for division 7A purposes. So, what the Commissioner was saying was, well, the Trust is getting the benefit of the funds, but it's not a loan. It's an unpaid amount, and because the Section 109D includes this extended definition, including the provision of credit and any other form of financial accommodation. The Commissioner's view was that an unpaid present entitlement fitted within that part of the definition, and so was a loan for Division 7A purposes which, if it wasn't treated in certain ways, would become a deemed dividend under Division. 7A.

Robyn Jacobson

So the Commissioner has taken this view for 15,16 years, that a UPE is indeed a loan. We have got, of course, separate provisions, which were not the subject of this appeal, which we will call subdivision EA. And these deal with loans made by the Trust, where there is an unpaid entitlement with the company. Now that was not what was going on with these circumstances. So it's very important that we distinguish that and say that this case was not about those sorts of arrangements we're just talking about, if you like, the basic UPE between the company and the trust. So the Commission's taken this view. Some in the profession have not agreed with that view. What have you seen all these years? What have most people, therefore, done each year, when the trust has got its income. And it's working out who to distribute to. And we've still had distributions going down to corporate beneficiaries. How have people generally managed these UPE’s

Neil Brydges

So there's a number of ways that people can manage them. So I'll just talk about the ways people can manage them before you know what we've seen. The Commissioner at the same time 2010 released a practice statement which said, There is various ways you could, instead of paying out the UPE’s so that the Trust pays the company the money or putting it on a section 109N loan. Then complying Division 7A loan agreements. The amounts could be held simply on a subtrust investment agreement where there was an interest return paid, and the principal amount was payable after either 7 years or 10 years. Typically there was another option as well. So what people have done in practice when they've tried to comply with the Commissioner's views. Obviously some people haven't complied like Mr. Bendel and his entities in that case, which led to the litigation. But you get a mixture of ways people try to comply with it. Some may pay it out, but certainly sometimes part of the problem is that there is not the cash in the Trust to pay out the present entitlement, because that cash is tied up in working capital stock, etc. Particularly when the Trust carries on a trading business. so in terms of managing it, not falling foul of Division 7A, people have either put it on a complying loan agreement, or one of these subtrust arrangements under the practice statement. Now in 2022 the Commissioner released a taxation Determination withdrew the 2010 guidance, and he provided probably quite a good summary of the various options people have done with in the past, relating to dealing with these UPES putting aside, paying them out in full, or doing nothing but the three where people have tried to deal with them the most and those three are, one, you've made the UPE subject to a ection 109N loan agreement. Two, you've satisfied it, the UPE and replaced it with a 109N loan or three, you've put it under one of the subtrust arrangements. So, certainly those are the main methods in terms of one and two. It's variations on the we're going to make it compliant with 109N. Option one and the TD was, we’re trying to walk the fine line between we're making it subject to 109N but it still maybe is still a UPE and option two is, the UPE  is paid out and replaced by a loan, certainly talking to different practitioners. You know there is a mixture of both of those. Some people are firmly in the second camp, where they're doing the repayment or satisfaction, then replacement and other ones are trying to walk that hybrid line. So it's as important as advisors moving forward to see which of those, if you're in the call it the 109N. Treatment, whether you're in the scenario one or scenario 2 because it may have different implications, and and what you do next.

Robyn Jacobson

All right. So without going back into detail to the tribunal decision, because really the focus is now on this full Federal court decision. Suffice to say that the taxpayer, Bendel, so we had a deemed dividend determined by the Commissioner being this UPE down to the corporate beneficiary that created additional taxable income in the trust that ultimately then was distributed for tax purposes down to an individual and that same company. So an amended assessment was raised. The objection was lodged. Commissioner made his decision on objection, and off we go to the tribunal and in that tribunal decision the tribunal found in favour of the taxpayer, which was very significant at the tbut also we all sat back and thought, well, it is just tribunal. It's an administrative decision. It's not law. So we we need to go to the next stage and thankfully, yes, there was an appeal by the Commissioner up to the full Federal court. It has what we call test case funding. So the ATO is paying, or the government is paying for the cost of this particular appeal. So what did the full Federal Court find, and why?

Neil Brydges

So the Full Federal court found, as I'm sure everyone knows, the Full Federal court found that the UPE in that particular case, the Bendel case was not alone under the extended definition in Section 109D. While they came to the same answer as the tribunal, they took a different approach, and they actually criticised the tribunal's reasoning in the Full Federal Court decision. But what the the full court did was they looked at the the context, and the purpose of section 109D. But also particularly the particular subsection within section 109D. That talks about this extended definition of loan. When they looked at that context, they said, while and call it a surface level, leaving an amount unpaid between a trust and a private company there is a form of financial benefit the trust is receiving because they've got the use of the funds, and they're not paying an interest cost on it. But they say, when you look at section 109D,a loan in that context, both starting with an ordinary loan, which is what we sort of, can envisage as a loan. There is an advance of funds by the private company in this case, and then there's obligation to repay. In some of the other extended part the extended definition in Section 109D. They talk about this advance of funds, or a payment of money by the private company, and then an obligation to repay that advance or that amount was paid first. So they said, what with the UPE, there is not this obligation to repay, because there was no advance, in the first place, by the private company to the trust and the example, what the UPE is an obligation to pay, and they said that the loan in Section 109D talks about an obligation to repay as opposed to an obligation to pay. Therefore the UPE was not alone under that definition, because, while there is an obligation to pay amount. It was not an obligation to repay amount. The taxpayer, and Bendel said, a loan requires a positive act by the private company, the positive act being advancing the funds, whereas what the company does is not a positive act, it just sits there. It doesn't call for the funds. The Full Court didn't say about the positive act, but they basically picked up that sort of approach of saying, well, there needs to be this advance of funds, as payment first by the private company, to enable an obligation to repay, not an obligation to pay.

Robyn Jacobson

So the Full Federal was found in favour of the taxpayer. We'll go through what that means for different arrangements in practice, but just for the moment. Let's stick with this appeal. What happens now?

Neil Brydges

Well, Robyn, that's the $64,000 question, as they say, but certainly the taxpayer was successful in the full court, or putting it the other way. The Commission was unsuccessful in their appeal to the full court. So there's various things that could happen now. Probably the most immediate thing is that the Commissioner, if he wants to apply for special leave to appeal to the High Court, must do so by the 19th of March. So that's in less than two weeks time. So, If that application is lodged well, then, a few months down the track, there would be a hearing to determine whether special leave to appeal is granted or not doesn't have to be a hearing. But typically there is. and if that was deniable, that would be would end with a Full Federal Court. if the application for special leave was accepted. Well, then, the substantive hearing, and once that's heard and decisions handed down, the High Court would either agree with the full Federal court or disagree with the Full Federal Court, but certainly in terms of the appeal process, the 19th of March is a very key date, because either the 19th of March is the end of this piece of litigation because the Commissioner doesn't apply for special leave or if he does there's a couple of sort of subsequent steps, irrespective of the outcome of those those steps from the Commissioner's point of view, but it may go on for a few more months.

Robyn Jacobson

So it's not quite choose your own adventure, but there are certainly different junctures or places that we could go down different pathways in terms of the outcome of this particular appeal.

Neil Brydges

That's right, Robyn, and certainly one of the things with applying for special leave, which is which is maybe not peculiar to this case. But as a feature of this case is that the Commissioner lost at the tribunal, there were two tribunal members in this case. They also lost in the Full Federal Court, and there was a unanimous three nil, three judge decision. So in terms of making an application for special leave, there's not a dissenting judgment somewhere in the journey that you can sort of base your special leave application of, going, you know the tribunal was right, the full court was wrong, or the dissenting judge in the full court was correct, and the other two were incorrect. So I imagine the ATO is very carefully going through the full court judgment and finding, sort of, you know, an avenue as opposed to just picking up on a dissenting judgment. The other thing also is the commission is a model litigant. So so in terms of whether they appeal, they are sort of bound by the model litigant rules in terms of you know they need to have, you know, a reasonable charge, you would think in terms of, applying for special leave due to the model litigant overlay as well.

Robyn Jacobson

But they can't just run a case because they're let's say, adamant that they want to win it. They would actually have to have a good legal argument and a good public interest argument for running the case and then ultimately depending where we land with the High Court, whether they grant special leave if they do, whether they find in favour of the Commissioner or not. Would you still expect that at the end of this we're probably going to have a law change that at some point the government might say, well, that might be what the courts found. But ultimately this is what we want, and we can't speculate at the moment what that policy response might be, but it seems that that's going to be likely at some point.

Neil Brydges

Yes, it certainly, it’s possibility, and I think, with a Federal election being on the horizon, that any legislative change, if there were to be a legislative change. There certainly wouldn't be any announcements of that until post the election and post the appeal process. So if the Commissioner does not apply for special leave. We'll know that on the 19th of March. Well, then, I think even on the legislative change it would be a wait until after the election. If the Commissioner does apply for special leave. Well, I think if there was any announcements of legislative change that would wait until you know until that appeal process is finalised one way or the other. In terms of whether there would be legislative change. There has been announcements by the Government in the past about amending Division 7A. I'm just looking now at the 2019 budget, and they said, the government will ensure that UPE’s come within the scope of Division 7A from one July 2019. This will apply where a related private company is made entitled to a share of trust income as a beneficiary, but has not been paid that amount known as an unpaid present entitlement. So certainly back then, That was the 2019 budget announcement, but it was actually flagged before that the Government had sort of indicated that they're looking to change Division 7A. To bring UPE’s into scope apart from what was already the case with subdivision EA. So there was no draft legislation at that time. They have flagged that. So if the Government did look to legislate any changes down the track. You know they have set the scene in the past. I suppose the things that are important to be considered, When would be the application date? Would it apply just prospectively, or would it be retrospectively? If so, what date? Obviously the budget announcements might give them a bit of a handle for doing a retrospective change because they have announced it in the past. But there are precedents also, as well as governments going back and doing retrospective changes many, many years earlier. Petroleum resource rent tax, not something to do with Division 7A  but there have been long-term retrospective changes. With that, the other thing also, I think, with any legislative changes, is what is the change? One of the things in the Bendel case, the full court acknowledged, and the and the taxpayer actually submitted as well. was that if a UPE is a loan, under the extended definition of section 109D.

There can be certain fact patterns when the trust would be a deemed dividend to the Trust under 109D. But if money has actually left the trust, say a loan to a beneficiary well, then, under subdivision EA, that amount could also be accessible. So there's a potential, for I'll call it double tax. There might be two different taxpayers, but the same basic set of transactions that if the amendment to 109D. Or if there were an amendment to 109D. Bringing a UPE in, you hope that any legislative change will also have an anti-overlap compensating adjustment type rule that if on the facts subdivision, EA could also apply, there's not double tax. Now. I don't say anything about that in the Budget announcement, but certainly the full court acknowledged that there could be double tax in certain circumstances. not the case in Bendel, because the money never left the trust. There wasn't a subdivision EA issue, but in other fact patterns there could be.

Robyn Jacobson

So in terms of what Bendel did not say, or what it doesn't consider. Pre 2009 UPE’s, those created before 16 December 2009, which was the position the Commissioner took from that date that these were loans. So this was not a pre 2009 situation. So we still don't really have any judicial clarity around how they are to be treated. We've simply got the Commissioners assurance at this stage, based on current guidance that they will not go back and apply Division 7A. To those early UPE’s you've already established for this, that it did not cover subdivision, EA. Because the money stayed in the trust. It was not lent out to a shareholder of the company or one of their associates. but it also didn't consider 100A. Now I'm hesitant to even raise 100A, Neil because it's a whole separate conversation, and it there's a lot been said on it over the past few years, but it does seem that there could be some application here where a UPE does not become alone in so far, as the ATO has said. if a UPE becomes a loan we generally won't manage it under Section 100 A. We won't apply 10A to it because you're running it as a commercial loan.that if it doesn't become a loan, and Bendel confirms that a up doesn't become a loan. Could there still be a 100A issue here?

Neil Brydges

Certainly, as you, said Robyn, raising 100A is a thing that everyone in the tax profession knows. The last couple of years is, we're all probably sick to death of section 100A. But we're going to talk about again. But certainly I think there is a risk that in certain fact patterns that there could be a Section 100A risk that was flagged back as long ago as March 2009, when post the speech by Deputy Commissioner Mark Conzer at the time NTLG Meeting, minutes from March 2009, they talked about section 100A might apply. So this was sort of the very, very pre, the draft ruling in December 2009, when they talked about whether a UPE could be a loan by the NTLG process that they also raised the flag of Section 100A. So it's been acknowledged over the time. It wasn't an issue in the Bendel case. But certainly, if you've got fact patterns around where there's present entitlement, and to a corporate beneficiary, and the funds are left in the trust, say the Bendel fact pattern will then section 100A requires a reimbursement agreement. We know from case law that that agreement needs to be before the present entitlement. But the ATO tax ruling on Section 100A relying on the Raftland decision in comment and orbiter, says that you can infer a reimbursement agreement from prior events. So if there is a pattern of behaviour where they're having this present entitlement left unpaid for for many years. Well, there's certainly a risk that there could be a reimbursement agreement looking at the pattern of behaviour, not saying there would be. But there's certainly a possibility if you're looking at the Commissioner's view on reimbursement agreements. then you'd be in the the question around, Is it an ordinary family or commercial dealing? If there's a reimbursement agreement, then would it be ordinary family and commercial dealing? Now I know the way the rules work was. If there's ordinary family commercial dealings. It's not a reimbursement agreement, but sometimes people do it. That two-step process like I described. Have you got this agreement? And then, was it ordinary dealing, certainly around the ordinary dealing point. If you're looking at the once again the Commissioner's view and the taxation ruling on 100A he does talk about. If funds are retained in the trust to lower the overall tax rate of the group. So ie. There's you use a corporate beneficiary. But the funds are retained, so the overall tax rate is less than if it had been accumulated in the trust or paid to beneficiaries in higher rates, and lent back. The Commissioner says that he doesn't think that that's an ordinary family or commercial dealing. Now, that's not necessarily what the courts say, but the Commissioner says it in his 100A ruling. So if you look at the Guardian case, where Justice Logan at 1st instance made comments around a corporate beneficiary is not necessarily not an ordinary commericial dealing, but I think the Commissioner is flagged in this 100A ruling that some of these arrangements could run a risk of 100A buying to it.

Robyn Jacobson

So if we now look at what the decision means for clients arrangements across the country and I think we can broadly look at the old 2009 prior UPE’s, as we've discussed, not affected by this. If we look at those where they've been managed as a UPE and held on subtrust.

Then this decision would seem to suggest that they are not Division 7A loans. So you've always treated them as a UPE, and they don't become a loan, and the court has confirmed that. What about all those that have been managed as a Division 7A lloan all these years?

Neil Brydges

Yes. So that's, I think, just a useful sort of summary of those, call it three types of arrangements. If you look at paragraph, as I mentioned before. Paragraph 101 of TD2211 has the three types of arrangements. Scenario three is the subtrust arrangements, and then scenario one and two are the ones where scenario one is. It's made subject to a 109A loan agreement and scenario. two is when the UPE is satisfied and replaced by a 109N loan. So I think scenario two is probably the easiest one to deal with where there was a UPE, and it was satisfied, and then replaced by a loan. So now you're in the world of you've got a loan, while that satisfaction and replacement may have been driven by a view which the full Court says is incorrect. The UPE you had is no more, and it's been replaced by a loan. And now you actually have an actual loan, an ordinary loan from a private company to a trust. And so that loan is within Divison 7A And if you stop making minimum payments on it, it could be a 109E dividend, and if you forgive it, there could be a 109F Debt Forgiveness.

Now the 1st category, the ones where the UPE is made subject to a 119N loan agreement. So there's been no satisfaction and replacement of the of the UPE replacement with a loan. But you sort of trying to say it's a UPE, but it's on 119 terms. It gets very nuanced talk because the agreement does it say loan agreement at the top? Does it say talk about repayment of the amounts? and things like this. So it does become down. You know, who had drafted the agreement. How it's done. You know also how it's recorded in the financial statements, if it's put into liabilities as opposed to beneficiary amounts owing accounts that may be an influential factor. So the saying that it's still a UPE. But it was subject to a 119 n loan. And so today, you say, well, it's still a UPE, and it's not a loan you need to sort of scratch below the surface. Look at what the the agreement says, you know, if it says, Talk about loan agreement at the top and repayment, etc. You're probably treding dangerous ground, otherwise might be drafted differently, whereas it was a little bit more, saying, Well, we're just making it this, UPE .It's got to be paid back in 7 years, and it's got to be an interest cost on. And there's got to be minimum, minimum, not repayments. Minimum payments of it over 7 years. So there is sort of picking up the flavour of 109 N, and it's under a written agreement that might mean you're okay, whereas ones which have the more the flavor of an actual loan agreement, saying, calling it a loan agreement, and saying it must be repaid.then I think it may actually mean that the conduct of the parties could have resulted in what was a UPE being converted, not used in a technical sense, converted into an actual loan because of the way they went about it. Type thing.

Robyn Jacobson

Practitioners do now. Some of them are dealing with lodgments of the 24 returns. Still, of course, that'll continue for another few months  into May, June this year they could be dealing with even earlier lodgement deadlines. They've got their 2025 distributions coming up for June 30th this year. So there are lots of milestones that need to be considered.

We don't know if we're going to have a resolution of this appeal process before all those particular dates come up. So what should practitioners be doing? And what's the Ata saying to practitioners by way of guidance.

Neil Brydges

So after the tribunal decision in late 2023, the the ATO put out an interim decision impact statement and they haven't updated it post the full court decision. But what that interim statement said was that until the appeal process is complete, we continue with our views. And but we won't apply compliance resources to people, you know, over this period.

I'm paraphrasing that. But basically, it's like until the appeal process is complete, so we will know on the 19th of March whether the appeal process is complete, or whether it has another few months to to run in terms of a high Court application.

So that's in terms of what the ATO is doing. in terms of what taxpayers do, particularly in the next few or advisors do in the next few months in terms of the lodgements of the 24 returns we're really looking at. In many cases the 2023, June 2023 present entitlements, which, on the Commissioner's view, would have become a loan in the 2024 year, under 109 d.

Under the extended definition loan, which means, by the time you get to lodgement date for the 24 year, which is the next few weeks, couple of months, those amounts treated as loans under 109 d. Need to be either paid out or put on 109 N terms.

So the decision, as you sort of said, in terms of what people do in the next few weeks, few months, as a result of the full court decision. As well do they continue to apply the Commissioner's view and say, Well, we'll make it 109 n compliance basis. And then do you, when you do that, do you do the satisfaction and replacement the scenario 2 and paragraph 101 of Td. 2211, or do you do the we're trying to Walk the fine line by saying it's subject to a 109 N. Loan. That's 1 approach. Tthe other extreme is to say, the full court's right, and we'll do nothing, and if  ultimately this was what the law ends up. that will be fine. If the law, the Commissioner wins on appeal or the laws change. Well, then, it may mean that you've got a deemed dividend arising because the Commissioner's view, either through a court process or legislative change, is proven to be correct, assuming it applied retrospectively. What you do there, or your clients would do then would be, you know. Would they? Could they make a 109 rb. Application. And would that be successful? Because that requires an honest mistake or an aversion of mission? If you consciously followed the Federal Court decision? Is that an honest mistake? You know,I don't know. Between those 2 sorts of extremes, that do nothing approach and the follow the Commissioners approach. There's probably a middle ground, which is which is. you do something akin to the practice statement. The withdrawn practice statement. Where you say, well, what we'll do is we'll start. The Trust will start to make payments, effectively. 1/7th of the principal, plus an interest cost to the private company. They may not formally do the 109 N sort of loan agreement across the top, but there is an agreement which says, we will pay you 1 7th of the principle of the up plus an interest charge, so that you're sort of in a position where you're you're complying with, call it the cash flow underlying the How Division 7. A works in terms of 109 d. And 109 E. Payments. But you're not, you're leaving it as a UPE. So so then, in terms of you know, if the ultimately the Hr. Was successful. Well, there's, you know, there's probably an argument. There's been no real mischief, because you've been paying it back on the same basis of this as if you had put the the loan agreement in place. So I think those are the 3 approaches.and what's best for you will really come down a lot of it to one. The client's risk profile are they risk averse, you know, risk risk chases, etc. And also their facts. Because if if you have an Ea situation. we excuse me, money's actually left the trust, and, gone to us to to a shareholder associate. say, for a loan, you may be wanting to avoid an EA deemed dividend. putting it, putting either the the loan, the line between the trust and the company, for example, or the line between the the Trust and the shareholder associate onto complying terms, because, irrespective of Bendel and the 109 d. Position, you may have an Ea deemed dividend as well instead. Importantly, with EA the timeline is different as well, so like in terms of when the deemed dividend arises.

Robyn Jacobson

Really, we don't have certainty yet. We need to look and watch and wait. See whether the Commissioner does apply for special leave. What would you say to practitioners who are looking to lodge amended assessments or think that suddenly Bendel is going to give them access to buckets of cash at the end of the rainbow that suddenly we've got all these refunds that might come through.

Neil Brydges

My views on amended assessments, and also objections, are probably in a similar sort of vein, as well as what are you amending the assessment in relation too, one and and two, is there something else you should be looking at? So in terms of that first point, if the amended assessment is relation to. For example, the private company saying, I put this interest in my tax return, and did I actually derive it if these things weren't a loan under Commissioner's view, can I object to or take second amendment in relation to that interest income which I've paid tax on. The other side of the coin is, there may be an interest deduction in the trust, for example, so it may be a bit of a zeo sum game. But if you're just looking at that interest well, then the first thing was, if there was a legally binding agreement to pay interest, they may well have derived that interest anyway. The fact you entered into that agreement because based on the Commissioner's view, which the full court says was not correct. If there was an agreement to pay for a loan to pay interest well, the interest’s been derived, so that may be not the best thing to object against. If there has been a deemed dividend.

so that, division 7A was not complied with, perhaps a 109 RB submission was not successful, and the deemed dividends you could potentially look to object against that saying, well, that deemed dividend arose because of your view of the law and your view of the law, Full Federal Court said is incorrect. Before you do, I think the thing to look at is whether, if there was a subdivision EA problem or 100A problem before you lodge the objection or the amendment, thinking, well, there's a saying, you know ‘clean hands’. So your saying, well great, I can object against the deemed dividend under 109d but there would be an EA deemed, otherwise, you might find there's no benefit, or if 100a applied that could go back multiple years. So certainly. what are you objecting about, It was the first point, and also 2, making sure there's no sort of secondary sort of consequences which haven't been an issue at this point. But if you go for an amendment or rejection, the ATO reviews the client's affairs, they may say, hey, you've got an EA problem, you've got a 100A problem, and you might find that you know the benefits of the objection are lost, and worse.

Robyn Jacobson

So, whilst on the face of it, it seems Bendel is a win for the taxpayer, and indeed they were successful in respect of the Commissioner's appeal to the Full Federal Court which the Commissioner of course lost. It is rather complicated, and there are so many considerations, aside from whether or not the UPE is itself a division 7A loan.

Neil Brydges

Yes, exactly right, Robyn. I think it's one of the things that while all tax advisors will be, you know, celebrating the decision. There's still more to go in terms of the appeal process, maybe legislative change. But also, even if it stays where it is, it's working out what that means in terms of your arrangements some will be complicated. One thing we have not chatted about was what the full court did say. While it was not a loan, they said, in the particular facts under Bendel that there was a debtor creditor relationship that was created.

So they said, it was not a loan under the extended definition but there was a debt accreditor relationship. There's issues that remained unresolved because they weren't an issue in Bendel about it. If your facts there's a debt accreditor, relationship created. And part of that was the way it was recorded in the financial statements.

Would that mean that if that UPE  which was a debt accreditor, relationship was forgiven, that there could be a deemed dividend under, for example, section 109F. Which is in Division7A, which deals with the forgiveness of debts. Section 109 F does not mention loans. It mentions debts, so there's certainly other things to consider before we sort of get, you know, rushing away and doing things about sort of, you know, forgiving amounts and lodging objections that there's a lot of sort of nuances to work through for us.

Robyn Jacobson

Neil. Thank you so much for your comments and for your insights. It's going to be really interesting to watch in particular, over the next few weeks, and the months ahead where this goes.

Neil Brydges

Thanks, very much.

Robyn Jacobson

I also want to let all of you know that The Tax Institute will be running a webinar on the Bendel decision, and that will be held on Tuesday, the 25th of March. More details will be available very soon, but we will continue to pick up this conversation with a star-studded panel. Thank you again, Neil. Appreciate your insights and thank you to you all for listening to this episode of TaxVibe.

I've been chatting with Neil Bridges, CTA, of Sladen Legal in Melbourne. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute, join us on Linkedin. Thanks again, and till next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. My name is Robyn Jacobson. I'm the senior advocate at the Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's greatest minds, drawing on each guest unique perspective to give you valuable and practical insights. You might hear every day. We hope you enjoyed this episode of TaxVibe, recorded live at the Tax Summit at the ICC in Sydney. Today I'm joined by Paul Bannister, CTA, partner at Grant Thornton in Brisbane. Paul is a chartered accountant and has more than 35 years experience helping clients navigate through complex and potentially risky tax and commercial issues. Paul has presented at many professional and business forums, both in Australia and internationally. Welcome to TaxVibe, Paul

Paul Banister

Thanks, Robyn. Nice to be here.

Robyn Jacobson

Now at the Tax Summit, you have been discussing what happens when you take on a client and you discover a whole host of problems. Now, it's interesting when you're working with clients, of course you want to look after them and service them to the best of your ability, but you don't really want to be opening up a balance sheet or a P&L and discovering a whole host of problems that you really wish weren't there. And probably the client didn't even know about.

Paul Banister

No, indeed, and especially where there are brand new client, you don't want to be the bringer of bad news. And, you know, when you're in particular trying to focus on making sure that you're vindicating their decision to come with you, it might not be ideal for you to be just highlighting what issues that they need to consider that, might ultimately cost the money, or at least some inconvenience.

Robyn Jacobson

A really quick question to kick off with. Have you ever taken on a brand new client, delivered that bad news and they’ve immediately left because they just weren't interested in hearing it.

Paul Banister

Well, the answer is depends on how you define immediately. But if you, define, about 30 days. Yes.

Robyn Jacobson

Soon after, I'll accept, yes.

Paul Banister

Yes, yes, yeah.

Robyn Jacobson

And, do you know, if they went back to the former practitioner or did they go to another.

Paul Banister

One, I I'm unaware. However, I believe it was to another.

Robyn Jacobson

Oh, gosh. And that's something I presume the TPB would also be looking at. Because if people are moving around agents regularly, to me, that would be a bit of a red flag.

Paul Banister

Indeed, in this day and age, that would be, I think we think about maybe some of the issues around that somewhat differently.

Robyn Jacobson

Yes. So you've seen it. You've got that sinking feeling when you open up the book. So you think, oh my goodness, there's something here. And you'll run through some examples of, what are the typical things you might say in practice, what sort of errors you are coming across. And of course, what do you do about it?  So let's kick off with what are the common things you see?

Paul Banister

Yeah. Well, and we're not necessarily looking for problems past. We're looking at what are the things that might impact your current job that are carry forward from prior years. So but the first thing I look at is the balance sheet and the P&L. And I'm sure that if Division 7A has not been mentioned more often than any other term on your podcast, I'd be fairly surprised. So Division 7A is a is a stand out. So we're talking there about loan balances that aren't moving or aren't moving enough. We’re talking about interest income that might not be showing up, at least to the level that you expect. Any other sort of I suppose, enter into the loan account that might look like it has some potential Div 7A obligations.

Robyn Jacobson

So provide another example. Yeah, I many years ago hit about a firm they had taken over the clients of an older practitioner who was retiring. And the first thing I did was look through the balance sheet just to get a sense of what the company owned to where things were at. And there was a property sitting on the balance sheet. So they asked a few questions about always the property. And, you know, what's it worth now? And the response from the client was that property was sold years ago. Now, what had happened was it had been sold. The proceeds had gone to the company, the proceeds had been taken out by the shareholder. And that property on the balance sheet was actually a non-compliant division 7A loan. Completely missed. And to me, that was a great example of asking the right questions of the client.

Paul Banister

And, well, proof of the balance sheet if I use that terminology, which I've used for my career. But when you're finalising your your current year work and if, you're asking questions to the client to validate, then that would show that sort of thing out. And then, that takes you down a sort of a whole pathway, in relation to the past, some other examples. You, you talk about assets on the balance sheet might be the asset that might be, you know, on the bordering a private versus sort of investment, let's just say the Gold Coast apartment that happens to be a valuable, 11 months, a year rather than 12 months a year. So that might be something that you need to, dig down a bit deeper on.

Robyn Jacobson

Or even those situations where a holiday house and I heard about this one, too, on the South coast. And when you go to inquire about its availability, they are the most unreasonable terms. And so, yes, it's available, but, you know, most need to be a redhead. No offense against redheads. You'd need to be left handed. And you must have a dog that's a particular color in order to have that house at that time.

Paul Banister

So that I think that might be a little bit problematic and, might need a at least a serious conversation with your new client as to as what sort of, reasonable guidelines of, for availability might be.

Robyn Jacobson

Now, we could talk about Div 7A all day, but what are the topics? What things pop up? And as you say, it's not that you're looking for them, it's just that they kind of jump off the page with you.

Paul Banister

Yeah. Well, if you think about what do you need to be able to do a good job going forward? It's access to documentation and documentation be one thing. But obviously in the private space there's a lot of trust. So getting access to the the trust documentation, the trust date and all all of their various revisions, getting access to trust resolutions as to application of previous years income, just so that you can help build a profile, is to help you help the client administer each of their entities going forward, that you've got a reasonable amount of information and source documentation to to carry forward. In addition to that, you know, some of the basics. They might be prepayments on the balance sheet. And maybe, you know, I've seen it where the the balance doesn't change, or the trading stock valuation where the balance doesn't change, over a few years. So you might need to dig a bit deeper into those sort of issues to see whether or not they're the right approach in terms of sort of calculating those balance sheet set of items, valid, whether it's, external finance. So you've got interest expense.

Robyn Jacobson

Yes.

Paul Banister

You want to make sure that that's associated with an asset. And sometimes it's very hard to determine that because there might be a lot going on, on the P&L, but other times it might be a very simple P&L and it happens to have interest expense but no assessable income. So that should probably help inform a different conversation that you might have with a client.

Robyn Jacobson

Another example, and I think in both interest and division 7A I in the same sentence, there was a question that came in two years ago from a practitioner who said, if I don't have a desirable surplus at year end, do I have a division 7A problem if there's a loan? And I said no, and that was supposed to be a comma, not a full stop, and they went to their own and said, great, thanks. And I said, hold on a second, but look at why there's no discernible surplus, because if it's simply that losses were made, then that's fine. You might have had a desirable surplus, but by the end of the income year it's no longer there. But equally, it could have been that money has been borrowed on lent. How did they borrow if there is not a suitable surplus and maybe there's an interest tractability question here and date.

Paul Banister

And this is where I suppose the accountant's way of looking at the world is some can be very valuable to help identify and manage risks.

Robyn Jacobson

What do you do when you, a practitioner picks up a new client in, let's say, July or August? September. And you ask the client for the trustee resolution. So you can prepare the trust accounts and the beneficiary through channels, and they can't produce them. Or you have a very strong sense that they were not done by June 30.

Paul Banister

And this is, I suppose, where some of the more risky elements to a new appointment arise. And the first thing, and I suppose from a tax agent's perspective, one of our jobs is to inform clients of their rights and obligations. So if, the rules and they're pretty clear cut from the commissioner's policy about trust distributions, about they need to be in writing by 30 June, if that is not met, it's not necessarily the end of the world, but it might be something that you may decide will client. There's a shortfall of information that you've provided me here. Maybe that's something that we need to get some legal advice on to determine what the true position of that trust is, and whether or not it has provided present entitlement in that year. So that then that can brief you to handle that year's 30th June financials and tax returns, etc. if the client is balking and willing to cooperate in relation to that, then that does become problematic. And for instance, it might be that the client's risks become your risks if you don't handle it properly. And you know that at the sort of pointy end and work, you know, we'll forget about the code of conduct per say at the moment, at the pointy end. That means under our professional standard obligations is, we should consider withdrawing from the engagement.

Robyn Jacobson

I've heard stories over the years about practitioners who've been in the witness box for particular cases, and a question I've asked has had a very, very consistent response. And that is, how did you feel when you were in that witness box? And the same word was used to describe the experience? Daunting. It didn't matter how experienced they were or how strong they were in their own convictions about what they'd done. The experience of being cross-examined, interrogated by the other side was daunting. And my point is that if you're going to do something incorrectly for your client, the client is never going to lie to say to you. You shouldn't be. Similarly lying to cite your client.

Paul Banister

Well, this, comment is applicable across many areas and begin with the end in mind. And if you think about how these situations might play out favorably, unfavorably, points in between. Think about that and in the context that, you explain. Well, it it could play out very badly where, you know, using the vernacular, you're thrown under the bus. And you'll have serious questions to answer for professionally, aside from your responsibility on that particular engagement.

Robyn Jacobson

Absolutely…. Can you explain where the practitioner's responsibilities or obligations start and stop? Yes. You need to tell your client and explain to them their obligations or what will happen as a consequence if they don't take certain action that I, you obliged to report them will go to the regulator side of this.

Paul Banister

So this is where there has been changes with the, recent, changes to Tasso, to the code of conduct, and that is, you are required to dob in the client in relation to material matters. So if you do have concerns that you made to make sure that, they are, informed to the commission.

Robyn Jacobson

And we’re still working through because the government has recently announced that they are going to be, revising the wording. And this is a response to concerns from the official associations and the professional broadly. And we're yet to see that wording released publicly.

Paul Banister

Well some. Yeah. And I certainly a watch this space. And I think even if you just look at the last 2 to 3 months, it's sort of gone from quite a few different steps. So I think everybody needs to make sure that they follow that situation closely because some but initially it might mean that we approach things differently. And I understanding it will change. And then separately, one of the responses that we'll need to make will be to update our standard engagement letters so that it clearly sets out to the client as to what the issues are, so that, for instance, the client should then be under no misunderstanding when I appoint you that this is a consequence of appointing you as a tax.

Robyn Jacobson

Yes. Let's tend to the former agent. Now. The breach reporting rules started 1st July this year for breaches on or after that date. And there may be technically a breach of the code or a suspected breach of the code that took place before that date. So arguably would not fall within the provisions. But is there still a moral or an ethical obligation? If you see quite a courageous behaviour or you see returns that are just so blatantly, incorrectly prepared year after year, and maybe it's not the first time that you've taken over from this agent.

Paul Banister

Yeah, yeah. And that's a difficult one because it's, the obligations that you have, to inform your client of what you suspect is the case. And hopefully you'll get cooperation for the client to, have some expanded scope to explore it further. Or at least encourage them to appoint someone else. It might be a lawyer, for example, to give that, you know, a full consideration. And sometimes that might be addressed or it might be, explained and you can move on, but other times, yeah. If it if it looks like it's a great just behaving particular pattern, then you need to give consideration to what you do while we're still progressing into the new environment, there's no specific obligation upon you to inform, you know, the, regulator, but the legislative framework invites you to bring that to their attention.

Robyn Jacobson

What about the capacity of advisers? So we know that accountants are given the the ability, the power to advise on tax law because of the Taxation Services Act, we then go to state based taxes that are not covered by Tessa. We've got lawyers who are tax agents. We've got accountants who are also lawyers. So there's a lot of cross-pollination across the different disciplines. And so it's really important to understand the capacity in which you're advising. And also I'll just bring kind that as well.

Paul Banister

Yes. Well I suppose one of the things if you start with the proposition that if things might go wrong, they will go wrong, then that's where you need to make sure that you've got, engagement letter, that it well defines your scope of work and in particular what's not in your scope of work. You need to consider, especially that the things that are in your scope of work, you're qualified to do now, aside from the professional standards, you know that you should only take a, an appointment for which you, you know, you have competency and you're you're qualified to provide those services. There might be exceptions in your professional indemnity policy to say that certain things are not covered. Now, the example might be things like payroll tax and stamp duty, which are state based taxes. Yes. As you pointed out in your question, that they're not things that a tax agent is registered under a Tessa to provide services in that area. So the question is whether or not you are otherwise qualified to have the skills and competencies in that area to provide, and if not, then you need to have a colleague or, third party to assist with those obligations. Otherwise if it does go wrong, then you stand to have some compensation claim against you that might not be covered by insurance.

Robyn Jacobson

I'm also thinking through the situations that's more likely to go wrong are the situations where they're more likely to have text. It's for example, if you pick up a client and you see their, historical superannuation guarantee shortfalls, then we don't need to pull apart all the different components. But it turns into quite a hefty bill when all that adds up. And of course you've got your non deductibility. But on top of the text it they then have to arguably pay for your services to unpick it all. Putting the necessary history statements if they're going to be properly complied from here on in I'm thinking of those that have built up substantial text. It's through activity stipends, GST, withholding, whatever. And then we've got issues with director penalty notices and mogadishu's with trying to negotiate payment arrangements. All of this takes time, and your time is costing the client money to the extent you can pass it all. In other words, someone's got to pay for this or what? They drop out of the system altogether by not engaging an agent, and then they're not likely to manage all this on their own.

Paul Banister

Yeah. So this is, I suppose if you start from the practitioner and firstly and then go a bit wider, I think from the practitioner's perspective they need to undertake some proper due diligence, have some take on procedures that does explore what are the issues that are current, that are looking that you might need to deal with in the first year or so of the, relationship that might be sort of pressure points. They might ultimately, you want your clients to be able to afford to pay you for the services they want you to perform. Yes. Do you want the clients to work with you to achieve success generally? Right. So if they're not really positioned to be that because of the state they're in, then maybe you're not the right advisor for them. Yes. Maybe you should introduce them to someone else that, for instance, might be able to walk them through a sort of a, you know, stepping stones from something financial uncertainty to financial certainty. Yes. I look at from that perspective, individually, but then from a broader perspective, and this is, I suppose, a question, profession wide question. It's a little almost like an access to justice. Question is yes. People, they struggle with the tax system because it's so complex. So there needs to be some availability to get some advice to help them, go through that. So things like tax help and whatever it is that you can draw on the ATO to provide some assistance. But depending on the sort of nature of the the business or the client or the entity, it's often unsuitable. So you need to direct them to the right sort of person that might be able to provide help, and it might be multiple people that are required, to just sort of navigate them through a few sort of, you know, choppy series of choppy waters before they, get into some, wide open space.

Robyn Jacobson

So that was my next question at the start. How, in your experience, effective in play been or how helpful have they been or supportive when you go to them with a situation? You know, I've just inherited this situation, it turns out with, you know, I didn't some Pandora's boxes of we've turned some stones over and found a whole lot of miss here, and then you're trying to work through it with the ATO. Do you find that they're generally very open to, them approaching you and trying to resolve those problems?

Paul Banister

I think it depends on the issue. And like, for instance, one example might be problems that relate to family trust, elections and enterprise in the elections. And, and really the hands are largely tied. And it's just a problem that, doesn't go away easily. Yes. There might be some issues a lack of documentation where, you know, I like use the example before about the retired, person that maybe didn't approach things with the same degree of alacrity that you might. So, yeah, that can just help through a few sort of, yeah, uncertainties. But I think you need to look at each issue that's confronting you and determine, well, what's the best approach. And, and not every situation lend itself to just, going across and saying, here you go ATO, here's the whole situation. Help me out here.

Robyn Jacobson

And a week later, it'll look shiny again.

Paul Banister

Yeah, yeah. And especially because you've got a new client. A lot of this is coaching and managing expectations. Because as soon as you identify a problem, it's a bit like in business they will problem fix, move on. And where there is, a solution that needs ATO input, it's a prior issue, so it's only got limited resources. They're not going to prioritise resources urgently to solve this problem. And that might be something that affects 2 or 3 years ago. Yeah. And it just needs to take its time to work through. And that can be quite difficult for, clients that, sort of get anxious about this sort of thing because I might have come from a previous relationship where they, they might not be the same level of proactivity, of maybe dealing with regulators as you might have. And final point, I suppose, on that, is I think that the ATO is open to being approached on these things and, I think they've got a job to do. So you understand that. But, if you identify problems, take to them. We have a self-assessment system. Let's use it, including making voluntary disclosures, which at least helps the level of penalties and potentially interest that might be charged to your client to help them solve a problem rather than leaving it there so that they need to be, you know, it might blow up one day, you know, due to it review. Or maybe they want to sell their business and the entity goes with that and they need to deal with it all at once.

Robyn Jacobson

Problems don't just go away by themselves.

Paul Banister

Correct.

Robyn Jacobson

One of the very interesting issues that was raised in your session was about the amendment period. So if you discover an issue and let's say it is one month short of, let's assume it's a four year amendment period, ethically, do you sit on it and wait for that months to pass, or do you act on that and bring it to the attention? What's the answer?

Paul Banister

Yeah, I strongly think the answer is to make sure that you get it to if if the approach to the ATO is the right solution in that context, absent the question about amendment period, get it to the ATO as soon as you can on that, because if you are seen to be sitting on it and bearing in mind the time that this is examined is 2 to 3 years time when it's first discovered by a regulator, that can really reflect poorly on you and can reflect poorly on your client. If you discovered it at one month out and you've just conveniently missed, informing them, on time.

Robyn Jacobson

We could be running into problems with the honesty and integrity Code item 1.

Paul Banister

Yes. Well, and bearing in mind, of course, part of the answer to this might be your client, taking it in and saying that they're willing to, agree to extending the amendment window anyway in relation to the issue. I'd so. So it depends on how that plays out. But if that's not on the table, then, you know, I think you'd need to encourage that going to the ATO just to, to manage your risk and manage your client risk. Because the other thing as well as you've identified one issue here, there might be another three that you haven't discovered, so that if there is evasion alleged two years later, all issues are on the table.

Robyn Jacobson

And there’s no amendment period for fraud or evasion.

Paul Banister

Correct. So if you focus on that, you take it and try and resolve it. And and it may well be that they don't get to it and, so be it. But I think, you know, you've got to do your part.

Robyn Jacobson

Okay. Paul, thank you for your insights. It's been really interesting both listening to your session and also having a chat with you now.

Paul Banister

Thanks, Robyn. I've enjoyed the conversation.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Paul Banister, CTA, from Grant Thornton in Brisbane. If you've enjoyed this episode, we'd love for you to subscribe, rate and review wherever you listen to your podcasts. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership of The Tax Institute could be just what you need. Stay connected and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. We look forward to you joining us next time.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute, where we peel back the layers of the Australian tax world.

I'm Robyn Jacobson, your host and the Senior Advocate at The Tax Institute. We bring you the sharpest minds in the text profession, digging deep into their unique insights and sharing nuggets of wisdom you won't find elsewhere. Always keeping it real and interesting.

So sit back and relax and let's dive into the world of tax, one conversation at a time. We hope you enjoyed this episode of TaxVibe.

I'm joined by Tim Sandow, tax partner at BDO in Adelaide, and Julie Abdalla. Tim has more than 30 years of experience as a tax professional, including 25 years in the Big four. He provides income tax related advice to a variety of private and large public companies, as well as multinationals. Tim is the partner leading BDO’s national tax risk and ethics group, and was a regular presenter for our TASA related webinars last year. Tim is also the national president of The Tax Institute for 2025, and is the South Australian representative on the National Board of The Tax Institute. Tim is a chartered tax advisor of The Tax Institute and a Chartered Accountant with CA, ANZ.

Julie is the head of Tax and Legal at The Tax Institute and is an FTI. Julie has practiced in the tax teams of the Big four and top tier law firms in Sydney and Melbourne, and in London. She has expertise in law and policy across a broad range of taxes and industry sectors. Julie represents The Tax Institute in several external forums, including the ATO’s National Tax Liaison Group and the Australian Treasury's Tax Treaty Advisory Panel, and has appeared as an expert witness in several Senate committee inquiries. Tim and Julie. Happy New Year and welcome back to both of you to TaxVibe.

Tim Sandow

Thank you Robyn. It's great to be here in 2025.

Julie Abdalla

Thanks for having us, Robyn.

Robyn Jacobson

Pleasure. So look, somehow the year has already come and gone. I'm talking about we're already well into January. There's so much ahead of us. So much to be excited about. Lots of work ahead of us all. So, can I ask you a personal question before we get into any of the tax talk? It's so important for people to relax over that summer break, to relax and recharge and mentally come back with a fresh mind.

How do you both relax over that period? So, Julie.

Julie Abdalla

Well, I spent some time away with my family over the break. We had a good two weeks off and we had great weather in that time, so I spent a lot of time at the beach just relaxing, switched off from my emails and it was really nice. We've had a real change in the weather since then, but it was a beautiful time over the break.

Robyn Jacobson

Yeah, there's something about the sand between the toes. It's good for the soul. And Tim.

Tim Sandow

Robyn, we spent two and a half weeks in Tasmania. We were seemingly we were by the beach, walking along the beach, doing some hiking and camping and relaxing and, I guess just trying to, you know, put 2024 behind us in a good way and sort of mentally getting ready for 2025. And also, we live in the Adelaide Hills and we have chickens. So, I spent part of my time building a mobile chicken coop, that we could, take around our place and, have the chickens do all the hard work in the garden for us.

Robyn Jacobson

Alright, while you're still in frame. You are the president for 2025 of The Tax Institute. So congratulations on your appointment. What are going to be the main drivers for you? What are you focusing on? What would you like to see as a legacy of your presidency?

Tim Sandow

Thanks, Robyn, and thanks for, the congratulations. I was reflecting over the break, and as of, we're walking around Tasmania about how does it feel being a tax advisor in 2025 and it sort of feels like it's a bit of a frustrating time. It sort of feels like over 2023. In 2024, we had a lot of focus on the, conduct of tax practitioners, and we saw a lot of changes. We saw the, mandatory reporting, for breach reports. We saw, changes to the code of conduct, and it did feel like we were under a bit of a attack. But at the same time, we also are dealing with a very complex tax system, and most of us are trying to do our best at navigating our way through the tax system. So just before Christmas in the in tax, Rob, I was talking about, wanting to really focus on The Tax Institute being the voice of tax and constructively advocating on positions to help our members in the tax system more broadly. But I very much for that practical mindset. And I guess over the break, I was thinking about what does that actually mean? And for me, it's about how do we help tax practitioners have more certainty in the advice they're providing to their to their clients? So how do we hope our members in that certainty? And effectively, there was three things that I'm really keen to focus on this year. Three priorities. One was around tax reform.

The second one about dealing with announced but unenacted measures, or ABUMs, as we like to call them, and the last one was around providing more certainty in the way that the tax system is administered. And maybe if I can just touch briefly on each of those Robyn, and then we can sort of draw out a bit more as we go through. If I think about tax reform and, you know, over the break or not in Tasmania, but I did reread the parts of case the change, and it is interesting that it's as relevant now as it was when it was written back in 2021. And I guess while achieving holistic tax reform might be something that goes beyond my presidency in 2025, particularly if that involves changes to the GST, it does feel like there's a lot of areas that we can focus on where they can be more certainty, you know, and I'm thinking here about and particularly about measures that deal with small businesses, the number of different thresholds. And, you know, when you're applying the small business concessions, it's really hard to navigate your way through and really easy to make a mistake inadvertently. So you look at that every time I think about those rules is at a $2 million threshold. 5 million, 10 million, 20 million, 50 million. It would be wonderful to have one simple definition of what are small businesses? So that we can, apply them. I think this is lots of opportunities for looking at those sort of thresholds, rewriting Division seven. I probably even rewriting Division six, the, the trust provisions. You know, now that we've had some experience with 199 billion, if there's parts of that legislation that was written a long time ago that no longer works. I'm a big believer in simplicity. And if we look at those sort of rules and think these rules should be applied by small businesses in a really straightforward context, they shouldn't need to get very complex legal opinions about how those rules apply. So should little be rewritten. So it actually does what it says it's going to do. And I think there's just this real opportunity. Maybe if we can't tackle wholesale tax reform, we can at least tackle simplicity. And actually doing the law, doing what it says it should do.

Robyn Jacobson

Tim. You’ll remember the simplified tax system, as many of our listeners will. And that was a regime that was around from 2001 to about 2007, and most formed the view that it actually wasn't a simplified tax system. It was a rather complicated tax system for simpler businesses. So what you're saying has so much resonance for me, because you look at all the different definitions, and that's before you start bringing in ASIC definitions and fair work definitions outside the tax system.

Tim Sandow

I think it's such a complex area for what should be, you know, small businesses should be able to focus on running their businesses. They shouldn't have to spend huge amounts of money complying with the system. I mean, maybe I'm talking against some of our members interests here. But, you know, I think there is a great need for simplifying thresholds, simplifying rules so that the rules do what they say we're going to do. As I said, some of these, provisions 199 and so on. I've been around for many, many, many years. And the question I'd have is in 2025, are they still fit for purpose and are they still doing the things that they should be doing? The second thing that I was going to talk about was just around dealing with the announcement on the measures. So again, around, you know, it's really frustrating as a tax practitioner when a client says to you, and I'll use the instant asset write off as an example, a client says if I purchase this piece of plant equipment, it's going to cost me $10,000. Do I get a tax deduction for it? And I have to say it depends. Again, it's a frustration that some of the things when they get announced take months to get enacted. But I really see the point in having an instant asset write off threshold legislated on the 28th of June. Because if the purpose of the threshold is so, the rule is to encourage businesses to purchase equipment, then they've got no time to do it. So what you're doing is rewarding behaviour that's already happened.

Robyn Jacobson

Particularly when it's announced on budget night. It's designed to provide that incentive. It wasn't just months. I mean, that was turning into every year before it was enacted.

Tim Sandow

Yeah. And the one that came up really raised its head again at the end of last year for us was around, corporate tax residency. And particularly it got light again because of the changes overnight to the reporting for yeah, for financial reporting for some of the major companies and these rules, they announced the change in the 2020-21 budget. So in October 2020, that's four and a bit years ago, they, set to apply from 2017. Well, that's almost eight years ago and we're still waiting. And so as a practitioner, when I'm talking to my clients and I say, well, we've got a company overseas, why are you telling me that that's it's how you operates business overseas. Why are you telling me that's an Australian resident. You know, it's very difficult to provide advice with certainty and sometimes it doesn't even change amount of tax payable. But when you get into the, the detail of lots of the other rules about bringing dividends back, maybe even some of the integrity measures like the anti-terror new measures and tax consolidations and other things, they don't apply particularly well when they should. And it's this extra layer of complexity that just shouldn't exist. And it's been announced, but it just hasn't ever been enacted. And it's a really frustrating thing when you're a practitioner wanting to do the right thing, wanting to provide your advice with certainty to clients, but you just feel like you can't quite get there. And then the last thing is, I'd love to say I think the tax office does a great job, but there's a couple of things that I'd really like to see around having some more certainty in the way that, the law is administered. One is around consistency, and I understand that, when you've got so many employees in an organisation that different people can make different decisions. But, you know, we've seen instances where companies within a wholly owned group can ask for a lodgment extension. Same facts, even the same case officer. One company gets denied and the other one gets granted.

And there's no logical sense that it's so difficult to explain that to a client. And then lastly, I just, rather it was about getting access to the right people in the tax office and particularly in the private ruling system. I think there is still some improvements that can happen. There. Usually you requesting a private bonding ruling because you want certainty of the outcome. So a client sold their business, where administering a deceased estate. People want to know how much tax to pay. They have to pay so they can get on with life and reinvest or spend or whatever they want to do with that money. Sometimes those ruling requests take a very long time, and it's very difficult to get access to the right technical people to have the discussion, to keep the the ruling moving. So that's a very long answer. But if I just sort of break that down, the priorities for me this year are around what can we achieve in tax reform? How do we deal with the ABUMs? And then how do we get more certainty in the way the law is administered.

Robyn Jacobson

Yeah, thank you, Tim. And the issues you raised about getting responses to private rulings, getting objection decisions, getting deferral, certainty, GST, remission, these are all very common things at the moment.

Tim Sandow

Yeah.

Robyn Jacobson

Julie I know a lot of that will resonate with you too. We've talked often about the ABUMs and we've talked about challenges and with policy, with administration. What are your key priorities this year.

Julie Abdalla

Thanks, Robyn. So I think, you know, last year was such a big year. And if I'm, you know, gazing into my crystal ball, my prediction is that this year will be another big year for us. One of the key themes that was coming through, a lot of what Tim was saying is the uncertainty that people are dealing with, both as advisors and as taxpayers, and some of these things are really easy fixes. I think one of the key priorities for us is listening to and supporting our members. So we are trying to do this on very different levels. We are delivering content that is useful for them in their day to day practices, and that helps them to support their clients and navigate some of this uncertainty in what is seemingly a constantly changing legal and regulatory landscape. So we're trying to provide resources that assist them in what they do on a day to day basis, and so they can also understand and meet their own obligations as a practitioner. And then on a higher level, we're also advocating for them to the government. So that includes the government that we, when we're speaking on behalf of our members and the system in Parliament, when we're dealing with the ATO and other stakeholders in the system. And over time, we've built really strong relationships with stakeholders in the system. And we often say that positive changes result from our advocacy efforts, whether it's through our submissions or our role in consultations or otherwise. And that goes to our voices. Tim mentioned before. That goes to our role as the voice of tax in Australia. We're advocating for our members, and we're advocating for improvements to the system that will benefit the society as a whole. So I think that's our priorities in a nutshell.

Robyn Jacobson

Tim, let's return to 2024 for the next little while. We had some major changes to the regulation of the tax profession. And by that I mean registered tax agents and registered agents. Of course, lawyers will generally be sitting outside. What we know is the tax agent services Act, but there are certainly some lawyers who are registered as tax agents. And we have some new rules begin mid-year to do with break reporting and then some further changes, which, look, I've got to say from Julia, my perspective pretty much dominated that a year. I feel like I lived and breathed the last year with all the advocacy work that was done and engaging with government. Can you briefly talk us through where did we land? What does this mean for practitioners? What's the way forward for all these thousands of practitioners that are dealing with new rules?

Tim Sandow

Yeah. Thanks Robyn, look, I, I think there's two aspects to it. One of them is the breach reporting rules. And it's, with all these different dates, it's easy to forget what's applying and when. So the mandatory breach reporting rules applying from 1st July 2024. We probably haven't seen too many examples yet of when breaches have been reported. I'm aware that the Tax Practitioners Board has had some, but I think that given that the breach must relate to something that's happened after 1st July 2024, we'll probably see more of those sort of, issues that where we may need to make a decision about whether they're being reported or not. As 2025 progresses. So, the likelihood of us picking up a new client or doing something with a 30th June tax return, 30th June 2024 tax return has been lodged and we see an error in it. And then we have to make a decision about, well, does that make the test for is it a one off material era? Is it a systematic area. Do I need to be reporting. You know, and the unfortunate thing here is that it is a mandatory reporting hour for the yourself or of another practitioner. You don't have a choice to sit back and say, I don't feel like reporting that person. It is mandatory. So I think as we're coming to 2024, we're going to see more and more of our members having to turn their minds to whether or not they need to be undertaking a report. Of course, the other changes, to the code, you know, particularly around making false, misleading statements and, keeping clients informed. Some of those are some practices for the larger practices of more than 100 people. They're applying from 1st January. So they're already applying or other practices that apply from 1st July 2025. So I guess over the next five and a half months, there'll be, a number of our members who are looking at how they do comply with those new measures.

Robyn Jacobson

And more information and guidance to come on all of that.

Tim Sandow

Well, that's right. And of course, the TPP finalised their guidance, virtually on the on Christmas Eve, I think it was Julie or thereabouts. So, it'll be a little bit of a Christmas present when people come back to it. Yeah.

Robyn Jacobson

Julie, we also saw some new reporting requirements come in last year for the reporting of self assessing. So in other words, if you're a non charitable not for profit organisation you now need to work through a new process to basically establish that you are able to self-assess and that you are tax exempt. So what does this mean. We're still seeing this roll out in practice.

Julie Abdalla

Yeah. That's right. So for non charitable not for profits with an active ABN. Where they're seeking to be income tax exempt, they now need to self-assess against eligibility criteria in one of eight categories. And they need to do this by lodging an annual not for profit self review return. So an SRR, another acronym to add. Now the new annual reporting obligations came into effect from the 1st of July 2023. And since then, about more than 14,000 not for profits have lodged their first, self review return. The due dates were on the 31st of October for 2024 for the 2023-24 returns, but the ATO have provided extra time for not for profits to lodge their self from year returns until the 31st of March this year. Now, you don't need to do anything if you're, within the scope of these rules, the time extension is already there. But if a not for profit is taxable, it doesn't need to lodge a self review return. It must instead lodge a normal income tax return or notify the ATO if a return is not necessary. And it might need to consider applying the principle of mutuality. To their income. And that's a legal concept that an organisation can't derive income from itself.

Robyn Jacobson

One of the biggest issues Julie is that the ability to lodge this return, it's primarily done electronically or digitally, which means these organisations need to access online services for business. To do that, you need a myID, which is the brand new name for what was mygovID, finally removing hopefully that confusion that, emanated for years. But to do that, you need up to date data in the Australian Business Register and you might even need to engage the tech items, and only about something like 8% of not for profits that are not charitable previously had used a tax agent. So this could be a whole new line of work for tax agents. But more to the point, we’re going to see these not for profits engaging, having to engage in the tax system, perhaps in a way that they haven't previously.

Julie Abdalla

Yeah. That's right. So some of this will be quite foreign to a lot of these not for profits. And there will be an additional compliance burden, especially in the initial stages when they're first getting set up and making sure they have the right information to be able to complete these on an ongoing basis.

Robyn Jacobson

And why is that happening? Because the ATO found, through its work that too many of these, not for profits, were getting their status wrong. They were deeming themselves to be tax exempt when maybe they perhaps weren't. So we need to see where all this lands.

Tim, you've already spoken about the instant asset write off and you mentioned, the 28th of June being the date that the 20,000 threshold was finally enacted. And we got that certainty for the 23-24 year. But it seems that no sooner have we finally got certainty on one year that we've then got uncertainty for the next year. Can you talk us through where we're at with the 24-25 measure, which is proposed to, again maintain this 20,000 threshold till June 30th this year?

Tim Sandow

So, Robyn, my understanding is that the day we're talking that hasn't been legislated yet, I don't really understand why, it hasn't been legislated. I don’t understand what's so hard about it? It would be great to see a permanent threshold in the legislation. And I know that's something we've been advocating for for a while as The Tax Institute. Just the removal of uncertainty? Because, as I said, otherwise, it's just very difficult as a tax advisor, to be able to tell people whether they get tax deductions for things and it doesn't feel like this is a particularly complex or even contentious area of the law. So I don't really understand why it keeps getting deferred.

Robyn Jacobson

We are seeing the political football being kicked around a bit. So we know that the coalition are pushing for a permanent threshold of 30,000, and we've suggested 30,000 as a permanent threshold for many years now. So it's consistent with that. But we've also seen the government maintaining up to 20,000 for just one year. But this one year extension has been going on since 2015. So this would now be the seventh time we've seen a one year extension. So agree this uncertainty has to come to an end. But at the moment, was the relevant schedule removed entirely from the relevant bill? It seems that this will be perhaps not certain until after the election, which is not great either, because we're looking very much into May or June before we might find out what's happening this year.

Tim Sandow

And that's exactly right, Robyn. You know, particularly this year is an election year. It could be June again before we know. I mean, it could even be after June. And then as I said before, you know, if the policy is to encourage businesses to invest in new equipment, then all you're really doing is rewarding past behaviour. So which is not a bad thing. I certainly like getting tax deductions for our clients, but you don't have this alignment with policy and the tax law.

Robyn Jacobson

And it seems to me that squabbling over a $10,000 difference in thresholds, when all of this is a timing difference anyway, can't we just move on and debate the really big issues in tax rather?

Tim Sandow

Oh, I was going to say, it feels like there's bigger issues in the economy than 20 or $30,000 difference in the instant asset write off.

Robyn Jacobson

Julie, we've seen some very recent changes that kicked in 1st January this year to do with the foreign resident capital gains withholding regime, and that name's always been particularly confusing because it's not confined to capital gains and nor is it confined to foreign residents.

Julie Abdalla

No it's not. It is a bit misleading. So you're right. We had some legislative changes from the 1st of January this year. And what they've done is to increase the foreign resident capital gains withholding rate. There's you mouthful from 12.5% to 15%. And they've also removed the $750,000 threshold below which the withholding would not normally apply for transactions involving taxable Australian real property and certain indirect Australian bill property interests. So now the key change there is that Australian residents selling real property for less than 750,000, they'll be affected as well. And so they'll need to obtain a clearance certificate from the start of this year to avoid withholding on the sale of their homes or investment properties. So something to be really mindful of that it's not just about foreign residents.

Robyn Jacobson

And since the rules have been around since 2016, anyone with high value property should be reasonably accustomed with these rules by now. But as a vendor, you've got to provide the certificate so you don't have withholding taken out of your transaction proceeds. But similarly, the purchasers generally know now that they need to acquire one from, from the vendor so as they don't have a payment obligation, that if people have been dealing in property below that threshold, they may not have ever encountered these rules.So I feel like there's a whole new cohort of people that this will be unfamiliar, and they really need to be getting advice. I will be relying on conveyancers and real estate agents just to increase awareness that they can give advice, of course, but just to increase awareness.

Julie Abdalla

And it is something that the tax advisers will need to be aware of as well, to be giving advice to their clients on what needs to be done.

Robyn Jacobson

And Tim this is where advisors can be proactive, because there's no point saying to your client when they come in after year end. And so we sold a property during the year, whether their home or whether an investment property and the purchaser simply might come in and say, oh, we bought a property. Well, did you get a clearance certificate from the vendor or to the vendor if you wanted the purchaser? Oh, we didn't know about that. It's all too late to do something about it then.

Tim Sandow

Yeah. And I would hope, Robyn, that Conveyancers would, would be across it as well. So, hoping the risk of that happening is, is small, but, but you never know.

Robyn Jacobson

Yeah. This next one. I don't know who I should, direct it to you, because I know you both got, great interest in this space, corporate taxation. And maybe you can divvy it up between you. But we might start with you, Tim, because you've already mentioned the corporate tax residency rules. We're still in limbo, as you say. So any clarity on the horizon here.

Tim Sandow

Robyn, who knows. I mean, I guess that was, I said that I reread, some of the Case for Change, over the Christmas break, and I read it with mixed emotions because it was in one way it was, good to see that all that hard work that went in in 2021 is as relevant today as it was back then. But on the other hand, it's sort of disappointing that we haven't really made much progress. And there was a comment in the case for change to say it's really encouraging to see that, the government has accepted their Board of Tax’s recommendation, and, we'll be making the change to the corporate tax residency definition. And so to be sitting here three and a half years later and still waiting, it's quite frustrating. And as I said, it's it's just the the uncertainty and the extra work that it creates on something that shouldn't be complex. So in other words, you know, if, for example, you have an overseas company and you saw this, an Australian resident, you know, there's even a question, where is that company now? Join the tax and solidarity group. And if it does, then I have to go through the process of registering that company for an IPA. And it's just a lot of work, but no extra tax and no extra VAT for the client. So I really do hope that that change does get legislated quickly, because it's one of many things that are in there which just creates a lot of work for no value for anybody.

Julie Abdalla

And it's got a bigger picture implication to it as well in terms of foreign investment into Australia. I mean, I think the amendments themselves would provide a lot more certainty to foreign residents, looking to invest in Australia and that that has a bigger picture implication than in terms of supporting investment here. And so I think we have very much advocated for consultation to proceed with this. There's no real need for delays.

Tim Sandow

That's right. Well, I mean, a lot of the heavy thinking was done in the Board of Tax, paper, and none of that's changed. So it shouldn't be that difficult.

Robyn Jacobson

Julie, another aspect of the corporate taxation rules – we’ve seen some pretty big changes in what's called pillar two. And many may be familiar with that. Many may not be. Thin capitalisation, something called the deduction creation rules. And I think I am talking English there, and country by country reporting rules. That's all a big mouthful.

Julie Abdalla

There has been certainly a lot going on in the large corporate end of town. So you've got you mentioned pillar two first and that we've recently had this legislative package that has established a framework around the OECD's global anti base erosion rules. The globe rules. And so this is aimed at ensuring that multinationals are subject to a minimum level of tax on the income that arises in the jurisdictions in which they operate. And then from an Australian perspective, an Australian domestic minimum tax for certain very large multinationals. And they're the ones with an annual global revenue of at least €750 million. So it's not actually affecting quite so many Australian taxpayers. But where it does, the rules are very complicated. There's a lot of compliance to it. You also mentioned think cap. So we did have almost a complete overhaul of Division 820. And that has basically attempted to bring Australia more in line with the OECD's best practice approach in BEPs action item four. And so the reforms now limit the way that amounts of debt can be deducted by multinationals in an income year in a few different ways. You've had the safe harbor test replaced by a new fixed ratio test. The arm's length test has now been replaced by a third party debt test. And there's a worldwide gearing test that has replaced the group ratio test. Those amendments became law last year, but they actually apply retrospectively from the 1st of July of 2023. And then you mentioned the debt deduction creation rules, which is English. And that's a new measure that has applied from the 1st of July last year. Now the last one, I'll tick off before we continue on is the country by country reporting. And those changes have simply required certain multinationals to now publish selected tax information on a country by country basis. And there are some exceptions to that. But again, it's only affecting those very large multinationals.

Robyn Jacobson

It seems that there's not too much lemon juice left in that lemon, but they’ve squeeze just about everything they can out of this sector. Is that a fair statement?

Julie Abdalla

On the one hand, if you look at the tax gaps, for example, the large business tax gap is actually quite small in terms of percentage, and the dollar value is enormous, but it is actually quite small. So they have a very high compliance rate from an Australian tax perspective. And you actually do have much larger gaps in the smaller business space. But on the other hand, I mean, it is politically and socially a bit more palatable to pursue the multinationals. That is something that we say it's very common in the media to say, you know, multinationals are not paying any tax, and it doesn't really get into the reasons behind that. So part of the work that needs to be done is educating the public about why that might not be the case, why they might not be paying tax for perfectly legitimate reasons. And what goes on behind.

Robyn Jacobson

So very quickly, some other changes we've seen come in recently. We've got an increase in the penalty unit. So this underpins almost every penalty we've got in the federal system where if there's been some sort of misdemeanour or breach of something or a failure to do something, that's come from $313 to $330 per penalty unit from the 7th of November, we are seeing some proposed changes from 1st July this year to deny deductions for the general interest charge and shortfall interest charge, and that's going to make the cost of essentially borrowing from the ATO or not paying your debts on time, if more expensive. We've got some changes coming through for luxury car tax. I won't go through the detail of those. And then administratively we've got new ART. So the new Administrative Review Tribunal has now replaced the Administrative Appeals Tribunal. 14 October was that change. In a sense, I’ll ask you Julie, does this actually change anything or is it just a cosmetic name change?

Julie Abdalla

It's certainly not meant to be a cosmetic name change. So it's a new federal body. It is still conducting merit reviews of administrative decisions in the same way that the Administrative Appeals Tribunal did. And that includes tax matters. It has assumed all of the existing rate cases. And so it's dealing with a backlog. Now, since the October transition, there had been quite a lot of challenges with the A8 in, not just in the tax division, but in others and the way that it was managed. And so there is a lot of work was done. A lot of consultation took place. We were very much involved in that to create a new entity, a new tribunal that will be able to achieve some of the challenges or overcome the challenges that the AAT struggled with.

Robyn Jacobson

So Julie, turning to what we're now waiting on and what's ahead and what's on our radar for this year, let's kick off where we could go all day on these matters. But the first one is the Bendel appeal, which is all about unpaid and entitlements and trusts and corporate beneficiaries. Where are we at with this?

Julie Abdalla

So we are now awaiting the full federal court's decision on the commissioner's appeal from the earlier appeal case. Now, in that case, the tribunal found that the up arising from the entitlement to income or capital of a trust is not a loan for Division seven purposes. Now, this is in total contrast to the administrative position that the ATO has taken in its public guidance over the past 14 years or so. The ATO is issued an interim decision impact statement in. I think it was about November of 2023. So the commissioner's appeal has test case funding and the court's decision has been reserved. A decision either way is going to affect both, whether it's in favour of the commissioner or in favour of the taxpayer, is going to affect small businesses that commonly distribute from trusts to private companies. Special leave application, we might say that with the case potentially going to the High Court, but we'll have to wait and see the sitting time.

Robyn Jacobson

Got to look likely, doesn't it? Regardless of the outcome and the appeal.

Julie Abdalla

I would think so. Either way, it's going to have huge implications.

Robyn Jacobson

Absolutely. The next one is Division 296, otherwise known as the $3 million tax, on the proportionate earnings of super balances above $3 million, proposed to kick off for middle of this year. Yet the legislation's been very much stalled before the parliament.

Julie Abdalla

Yes. So the bill's been divided into two to enable the passage of the measures that aren't related to Division 296. But now it sort of hangs in the balance and we don't know whether we're going to see something moving forward. It's unlikely that it will be debated again before the election. But we don't know. We've got, you know, huge concerns about the taxation of unrealized gains and some of the other key issues in there, like the lack of indexation, for example, that will lead to a kind of creep with more and more taxpayers being within the scope of the measure. There are quite a lot of problems with that over time that we would hope would be resolved before it would progress further. But again, we wait and see.

Robyn Jacobson

And we're also seeing a political separation of positions on this, because we know the government clearly wants to progress that. And they've indicated that while they don't seem to have the numbers ahead of the election to pass it with the current Senate, that they would, still commit to doing this if reelected, whereas the coalition have said, we will not do this, we do not support taxing unrealized gains. So it is a point of differentiation between the parties. And again, it's almost like the election is going to help determine, where we land with this.

Julie Abdalla

Yeah, absolutely. I mean, it's very much a different approach to the policy. I mean, the measure we support generally, we would support clawing back some of the concessions in the superannuation system. You know, we do have a very concessional system in terms of super. But taxation of unrealised gains is not quite the best way to go about it, in our view.

Robyn Jacobson

And payday super, it was first announced in 2023. It was or is due to start. I shouldn't use past tense 1st July 2026 and three years lead time seemed appropriate and reasonable, but we're now sitting less than 18 months out. We still haven't even seen draft legislation yet. So what are your thoughts on where we're going with this over the next 12 months?

Julie Abdalla

I think the biggest development we had was the fact sheet that Treasury released in, I think, September last year, and that set out some of their further policy details. And while it was very good to see in that, a lot of our recommendations have been taken on board, and especially when we're looking at the reforms of the penalties regime. But this again, there hasn't been a lot of movement since then. Well, there hasn't been any movement since then and the start date is around the corner. The time will fly in for, you know, here and there's so much work that needs to be done to actually get this rolling. And this will affect every, you know, every employer, obviously every super anyone will be affected. But you also have the role of the DSPs.

Robyn Jacobson

So the digital service providers who have to build the systems to make it all work.

Julie Abdalla

Yeah. That's right. And they can't really get started without a bit of certainty from the legislation. So there's a quite a long road ahead. And it would be good to see things picking up again this year.

Robyn Jacobson

And then you've got the debate about the cash flow impost on employers who are not paying it more regularly than quarterly at the moment. But then we've got more than $3 billion a year of super. That is not being paid on behalf of employees, which is also a disgrace. So it's interesting going to look at how this is going to work in practice. Thousands upon thousands, if not millions, are going to be affected because we've got the employers, we've got the practitioners, we've got employees, all the intermediaries, payroll providers, clearinghouses. There's a lot of stakeholders involved.

Julie Abdalla

Absolutely. So many people are affected by this. And the best way to figure out how it's going to look in practice is through consultation.

Robyn Jacobson

Absolutely. Tim. Julie and I have been chatting a lot about budget and the election and all these things coming up on the horizon. Comment on the budget, because this is traditionally, of course, the second Tuesday in May, but we know that the federal election must be held no later than 17 May. So that kind of knocks out a May budget. Are we going to have presumably a March budget based on what the parliamentary sitting dates are telling us, or are we not even going to have the budget before the election?

Tim Sandow

Robyn, I think at the moment, if you are betting you, I don't know which way you'd go, it sort of feels like both leaders are certainly, ramping up their, discussions. They're traveling the country. I don't know where the. You sort of get the sense that it might be an election sooner rather than later. Whether it might be before May, maybe we won't have that much budget. I guess if we do have the March budget, it's very unlikely that anything that gets announced would actually be enacted. So really becomes, you know, an election platform for both the prime minister or treasurer, about what they're intending to do if they are reelected. And, and I guess for the opposition in his response to, to talk about, well, what would he do if he was elected in listening to numerous podcasts about, from different commentators about the political landscape? It's going to be a really interesting election. And, and there's certainly a lot of discussion about whether we end up with a minority government and, and what that looks like and who that could be and who would work with who. And it's, I think it's going to be quite an interesting election, this one.

Robyn Jacobson

And an observation because the election campaign has not formally begun whilst both leaders are traversing the country at the moment, they are doing that on taxpayer dollars. Whereas once the election campaign is fully underway, each party must fund its own electoral expenses. So at the moment it's all on us.

Tim Sandow

I won’t make any comments.

Robyn Jacobson

So Parliament is scheduled to resume in early February. We presume that will still be the case. So we're looking about roughly two, three weeks away from now. But it remains to be seen, as you say, Tim, whether anything that is potentially debated in Parliament or if we do have a budget, whether it is, you know, actually be enacted this side of the election. So lots to watch out for there. Now, of course, very briefly, Julie, once the election is called, we move into caretaker mode. What does that mean for any bills that might be sitting before Parliament there?

Julie Abdalla

So once they issue the election writs, the government assumes caretaker. And at that stage, all the bills, any legislation in the House of reps will lapse and the bills before the Senate will lapse immediately before the commencement of the new parliament. So it might be some time, some of these measures that we've been talking about, it might be quite some time before we know their budget and where they're going to land. But as Tim said, that list of announced but unconnected measures will continue to grow. And that's something that we really need to see being dealt with as a matter of system maintenance as well. We've already got a long list, and we need to know the government needs to clearly indicate whether it's proceeding or not.

Robyn Jacobson

Another observation there are 52 weeks in the year, and typically Parliament sits for about 19 of those. In an election year, you lose chunks of months out of that because the caretaker mode kicks in. The elections held, you then got to count all the votes. So the time between when Parliament last sits to when Parliament does sit again isn't just a matter of weeks we could be looking 3-4 months.

Julie Abdalla

That's right. And they're not just dealing with tax bills in there. That's the other thing. There are so many other bills that are going through the houses, and a lot of time is being spent on certain measures going like the instant asset write off, going back and forth between the houses that could be better spent elsewhere.

Robyn Jacobson

Tim, let's go back to tax reform. It seems every year we have another budget. Every three years we have another election. Hopes are raised, and then it seems that hopes are dashed as we move in and out of this cycle of will they or won't they progress with holistic tax reform? Is this going to be another missed opportunity this year, or do you think there's actually some hope?

Tim Sandow

Robyn, I think that both parties are probably a bit gun shy about tax. When it comes to making big promises in elections. I know that when the Labor Party was talking about, changes to franking credits and so on, a few years ago, that didn't go well. So I don't think. Are we going to see any brave, announcements around tax reform as part of the election? But even if there is not, I mean, you still the underlying reasons why you would, regularly review the system, look at the policy, look at fairness. That's not changing. The cost of living is not changing. The, young people being able to afford houses is not changing the issues we've got with them. You know, people, having children coming back to work and, you know, extraordinarily high effective tax rates when you take into account loss of rebates and so on. None of that stuff has changed the underlying reasons why tax reform should be considered is not going away. At some point. It has to be addressed. And so I, I'm really interested in exploring just what that trigger point is, because it does feel like we're getting closer and closer. And, we have a lot of good discussions there. We have the Ken Henry report from 2010, but from memory. Yeah, there's a lot of good stuff in there. We've got Case for Change. We've got the Board of Tax that does regular reviews. There's a lot of really great thinking that happens, but not a lot of action. And at some point I just feel like it's just going to come to a head.

Robyn Jacobson

And it's becoming very obvious that more and more people are engaging in the conversation. And that's a really good place for momentum to progress.

Tim Sandow

Yes, that's exactly right, Robyn. I think it's going to be really difficult. I don't think we're going to see whole scale tax reform, unless we can put GST into the agenda and have a really serious discussion about what that looks like and what that could achieve in a very educated discussion. But you really have to take the politics out of that, because any side that is going to to start talking about that in an environment where we're still dealing with inflation and cost of living and housing and so on, they become a very big target for the other side. So it needs to be a very mature discussion about what, can be achieved for the broader good of the economy.

Robyn Jacobson

So, Julie, to wrap up, what do you expect to see in the year ahead? So whether in a policy level or a business confidence level, what's the ATO going to be doing? How do you see things?

Julie Abdalla

What the ATO's doing? I think we'll see firmer action on the outstanding tax it, that's for sure. The ATO has made its position very clear that it will be pursuing. It's much more proactive, I think, than it had been, especially during the pandemic period. That is putting pressure we're already seeing on businesses and vulnerable taxpayers. I think in terms of business confidence, some of these measures and some of these kind of debt recovery activity, this will impact business confidence, for sure. People feeling the challenges. And if we think about our own practitioners, their own businesses and the pressure that they're under, not only to keep up to date with all of these changes, but to support their clients and in managing their own businesses. So there's a lot of pressure out there. The economic climate is challenging, to say the least, and I don't think that will necessarily ease in a way that will be significant enough to provide relief on its own any time soon, which is all the more reason why our tax system is not sustainable and work needs to be done to alleviate those sort of constraints and get businesses going and support Australian taxpayers. I think there's going to be a focus on some of these regulatory changes. I think will continue to be a focus in policy areas, clawing back some of the concessions available in the system. You'll also see, I mean, at a state tax level, there will be, I think, further work around payroll tax and payroll tax exemptions, changes in the property tax base. We've seen so much going on in Victoria alone for the past year or so, and that the implications of those we will see more and more over the years to come.

Robyn Jacobson

Be interesting to see whether any other state governments, start adopting some of the measures that we've seen down here in Victoria. Tim, to wrap up, what do you see for the year ahead, apart from a very busy year for you personally?

Tim Sandow

It is going to be a busy year. Robyn. I think it's going to be a really interesting year, as it often is. I think that from a tax practitioner's perspective, I'd like to hope that, the bulk of the changes, the bulk of the spotlight that's been put on to the profession over the last few years, rests for a little while, and we can't get on with that with our day jobs of providing great advice to our clients. I do hope that, we do get some more certainty in the way that we can provide that advice, whether it's through tax reforms, dealing with ABUMs, dealing with the way the law is being administered. But of course, there's also it's going to be things to look at the impact of, what's happening in the world. It's the 16th of January. Today. We're four days away from, Donald Trump, becoming president again. We've got an election happening soon. It it's going to be a really interesting year for world politics.

Robyn Jacobson

It sure will. And, just a reminder to all of our members, welcome to the year. We are here to support you, and we encourage you to reach out to us throughout the year as you need to, whether in person events or, drop us a line. And for the non-members out there, always time to take another look at us and see whether membership might be right for you.

Tim Sandow

Robyn, if I could just add one more thing. I think if I look at 2025 and everything that's happening in our own world, as practitioners, that there's never been a more important time to have a really strong network around you. And so that's something which, you know, that's what's so special about The Tax Institute. It's why I've been volunteering for 27 years. And while I was really keen to, to take on the presidency role because it is really special about the collegiality that we have, and people share their thoughts and ideas and insight willingly and it's just such an important time as we try and navigate where we are in the tax system that we have that kind of support around us. So The Tax Institute has never been more relevant than it is in 2025.

Robyn Jacobson

Well said and thank you for your time, Tim, and all the best for the year.

Tim Sandow

Thanks, Robyn.

Robyn Jacobson

And Julie. Thank you to you. We will continue to work away at, all the, challenges and particular issues that come our way. But I look forward to working with you throughout the year.

Julie Abdalla

Likewise. Thank you for having me on the podcast.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Tim Sandow, CTA and Julia Abdalla, FTI.

If you enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership at The Tax Institute could be just what you need. Stay current and connected with tangible real world benefits. Learn more at taxinstitute.com.au. Thanks again. Until next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and you're host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by David Montani, CTA, who is the national tax director. Admitted firm. David provides tax, technical, strategic and training support and has more than 30 years experience in specialist taxation advisory. He's also a lifelong observer of politics, having lived and breathed the political battles over tax reform across more than three decades. Now, David has combined his two great passions, a tax and politics, into a book called Tax Wars, which looks at the gridlock in reforming our tax system over many decades and where a solution might be found. David, welcome to TaxVibes.

David Montani

Thanks, Robyn. Thanks for having me.

Robyn Jacobson

So the title Tax Wars is intriguing. So how did you come up with the title? Why are you writing this book?

David Montani

I came up with the title because the gridlock on reforming our tax system feels like a bit of a, a stalemate in war. And I use the comparison in the book. It's a bit like the old mutually assured destruction concept in the Cold War era, where we have a situation where both sides of politics, have, over time, you know, developed their arsenals of essentially dishonest scare campaigns, and they're just ready to launch, at a moment's notice. And as a result, looking the side will really propose anything, meaningful. And that's, that's built up over, you know, more than 30 years. So, you know, writing this book, hopefully what you will get from it is that people will sort of see the wood for the trees and what's been happening over this time. And that's really what we need to look to, to figuring out a way to break the gridlock.

Robyn Jacobson

What is the book about? Is someone going to sit down and read this and it's going to be wall to wall text concepts?

David Montani

It's not, I mean, for a book about tax, it's surprisingly not technical. It's more storytelling. It's telling the stories of events over the last 30 plus years. And that, I think, will give the insight that's necessary. It'll allow people to see the wood for the trees on what's been going on for 30 years, and how that has led to the the gridlock of where we are today. So yeah, it's silly. It's my my interpretation. It's my take on those events. But, a large part of it is, you see, it's telling stories of those events over those years.

Robyn Jacobson

Why now? because you've been in practice for many years now, you've seen this come and go, all set back and watched elections and reviews and budgets and changes of governments and lots of promises and lots of tinkering. And we'll talk about that shortly. Why now?

David Montani

You know, this book could have been written any time in the last ten years, but it was about two years ago that the idea popped into my head. But certainly, in the lead up to the next federal election, which could be any time in the next five months. Certainly we want people be having these conversations in the lead up to an election. People will certainly, I think, focus their attention more on these issues. And so we want to get this out there while people, you know, will be turning their minds to these sorts of policy issues.

Robyn Jacobson

Does it strikes me that either the government or the community or base doesn't want to have those conversations, or is there, in fact, someone who does want to have these conversations, but it's a particular cohort that might be holding things back. In other words, what's the stalemate been caused by?

David Montani

We certainly want to have these conversations, and yeah, amongst ourselves and in the, in the text community, of course, we have these conversations, a lot I find. Why are the the kinds of conversations in this book, you know, you don't really see so much out there. And I think it's because a lot of the discourse out there is off the mark. People and the media go to politicians and essentially tell them what to change. And you might have noticed that that's not achieving anything or all that alone is not, I mean, like The Tax Institute does good advocacy work, and that's very important. We need something more. And there's something more. I think is rather than tell politicians what to change. It's also about understanding why they refuse to make any meaningful change. That is where I think the solution is to be found.

Robyn Jacobson

Is there potentially also a how, how should go about changing it?

David Montani

Yes, it is very much a how. So in terms of who can do what to actually achieve ultimately reforms and obviously changes of laws to our tax system. At looking at the books, not just telling those stories, it gives those perspective because that's then a basis to then say, right, well, let's put some meat on the skeleton here. I'll actually suggest like a starting package of changes. That's the the what to charge. But then what comes after that is okay. Well how how could we go about actually making this a reality? And what that comes down to is getting politicians to change laws. And I do set out a plan for how we might actually get that to happen.

Robyn Jacobson

Now, throughout the book, you refer to quite a number of pop culture references. If I can call them those. And this is being used, to my mind, to explain some of the very, very complex fold of texts trying to break down those concepts. What was the thinking behind using that approach of referring to pop culture?

David Montani

Well, I had a lot of fun with that. I find that it does make it easier to understand the concept for people. If you can relate it to something that they can identify with, and then it's easier to, to understand. And I'll give one example. In the book, I talk about the changing attitudes towards the GST from the 1980s to today. Look back in the 1980s, or consumption tax as it was referred to then. It was an unknown and it was quite scary. Whereas today, you know, we're used to it and it's not quite the same thing. So I do use a comparison. With those changing attitudes to, I used the movie A Nightmare on Elm Street. Now, Nightmare on Elm Street was a 1980s horror film introduced us to the slasher killer Freddy Krueger. I watched The Nightmare on Elm Street in the 80s when I was a teenager, and it was scary. It was scary. And so then, you know, years later when, kids were old enough for life and I thought, let's have some fun. Let's perhaps terrorize our kids a bit. Let's watch A Nightmare on Elm Street. But you know what? It wasn't scary. Things are change. Times are past. We watched it and. Oh, you know. What this is actually This is not scary anymore. And so that's the parallel with the GST. Gary, in the 1980s, but not today.

Robyn Jacobson

So the idea of perhaps the seed being planted, the idea being accepted and even getting used to what it would look like.

David Montani

Yes. And experiencing it, I believe.

Robyn Jacobson

Now, in terms of the book, what do you hope that its release will achieve, and is it a coincidence? If you look at the timing of when the book is looking to be published and this is going to be, early next year, we know we have got a federal pulp now to get really technical for a moment, the Senate has to go to the polls by late May. The House of reps itself can go through to September, but I'm not familiar with governments that like to go to the polls twice in one year. And the cost of running to election site. We seen there is a normal general election no later than the 24th of May, but there are murmurings that could even be earlier about a march election. So the timing of this book in relation to what would likely be, right in the middle of a federal election campaign, pure coincidence.

David Montani

Not so much a coincidence in that, I, I just wish I had the idea had popped into my head six months earlier than than when it did. But look, certainly we looking to have the book out before an election is called. And again, the election could be called, for example, in late January, you know, for an early March, poll. So that's entirely possible. So, look, we do want to get this out there. So to give people time to, to absorb it. And in terms of like, you know, what are we trying to achieve? Certainly lead up to an election. There's probably been a focus on these sorts of issues. But, you know, my hope is that what the book will do is a few things. One, you know, change conversations. As I mentioned before, I think a lot of the public discourse is is off the mark as to what the issues are that we are dealing with. So I'd like to change those conversations. I would like to give, journalists ideas for asking different questions of politicians. I find when politicians get interviewed and say they're asked question and they give an answer, and I think, you know, that answer is not actually really what needs to be explored here. And then you want the journalist to ask this question. So hopefully I can, inspire that. And look, and ultimately, the goal of the book is to enlighten a pathway that will end the tax wars and actually result in those changing through Parliament, for a better tax system. That's the ultimate goal.

Robyn Jacobson

Do you challenge long term thinking about tax reform and everyone? It's interesting. Perhaps it's like falling in love, but everyone has a different definition of what, tax reform should look like or what form it should take. So whatever perspective people have taken on tax reform, are you challenging the way people are thinking about it or how it should be approached?

David Montani

I think I am for the reason that, is another one of those pop culture references. I draw upon, the movie Raiders of the Lost Ark, where the villain, although we're not villains, is digging in the wrong place. So I like to think that I've come across I've conveyed information that, helps us. Now. Now we're digging in the right place, to find a solution. And the thing is that the our unreformed tax system, it's leaving us less productive, less competitive. It pushes all the wrong incentive buttons, leads us less incentivize, and it undermines the funding for a decent social safety net that makes us a less wealthy country. And again, it's getting worse. In terms of the inter-generational theme that runs right through the book, the intergenerational theme in terms of, well, why do we need reform? But like, like most parents, I think ahead to the years ahead and ponder the kind of world we are leaving for our children. And in terms of our tax system, we are leaving a very lopsided system that will place a greater and really quite objectively unfair tax imposed on, on younger people. And so in terms of challenging your long term reform, often with any kind of reform, you know, the notion of winners and losers comes about. And the thing is that any reform endeavor has short term winners and losers. Now, the emphasis there is on short term because people do adjust their behavior. But with a lack of reform. And by reform I mean genuine reform. The lack of reform is what produces long term losers. And for the most part, I'm sorry to say, people on the 40, that's who one of the interviews I did for the book was with Ken Henry, former Treasury secretary and chair of the Henry Tax Review, released in 2010. Now, he has some very fascinating observations and comments about, you know, his experiences through that review and even back working for Treasury in the 80s. And, of course, you know, he's very big on that intergenerational thing that Treasury told government off the government over many years. Look, this is coming. You have to deal with this. But they haven't yet.

Robyn Jacobson

If we start to pursue layers over this. So we've got a tax system that is often described as creaking under its own weight. And if we look at the three pillars of what a good tax system should be simplicity, equity and efficiency. Now, it could be argued that you can never in nirvana achieve all three of those. Because if it's really, really simple, it's probably not going to be as equitable and certain amount of equity needs to be built in. And that in itself will create a little bit more complexity. But I think everyone would agree that we haven't got the balance right. So if we've got a tax system that's not as efficient as it could be, and we start putting in aging population housing process, and I'm talking the long term issues, not just the next year or two. Then we start to have a much greater dependency on the government and pensions and, and how those people are going to be supported in all age, particularly if they don't have, say, equity in their homes that they can draw on in the future. And then we've got potential lack of superannuation. With the growing gig economy. There are just so many dynamics to this.

David Montani

There are and I, one thing I, I talk about in the book is what's called, you know, get your big rock sorted first. It's a essentially a parable about prioritizing issues where, big rocks, you know, the very important things might have second order issues, and then you've got, what you call grains of, of of sand and, if you put big rocks in a jar, this is the analogy. Get them sorted first, then you can put in smaller rocks, they'll fumble and bumble bad into the gaps, and then you can tip sand in the, you know, the lower priority issues. They'll fill in all the gaps. Then you go to full jar. Whereas if you start by just dealing with the the lower priorities, if you just tip grains of sand into a jar, you deal with those first, okay? And then you try and deal with the big rocks. The spice in the jar is going to be used inefficiently. Yeah. And you're going to have big and small rocks left on the table. You cannot get into the jar. So what I find is that for many years now, across both sides of the political spectrum, we're not dealing with the big rocks and more. So we're just scraping grains of sand into a jar. And then that's not dealing with those long term serious implications.

Robyn Jacobson

This is, I think, more a rhetorical question, but do we need more than tinkering? It's us and my answer itself. We often talk at The Tax Institute about addressing the very lengthy list of bumps. And for those who are not familiar with this acronym, it's the announced bit on enacted measures. And throughout the year, we've got our reviews and budgets. As I mentioned before. And these will add to the list of measures that they're announcing, which they're going to legislate. And yet the number they actually do legislate, or the time it takes to legislate is resulting in this list either remaining very, very long or it just stays there for a long time. And again, it seems to be tinkering. We're not fundamentally dealing with what you describe as genuine reform.

David Montani

Those who are old enough who remember sort of 20 plus years ago, which that includes May, of course. There were many times when again, from both sides of politics, a government would announce a policy change. The, you know, the legislation would be within Parliament. Obviously, it was all prepared beforehand. It would be debated, legislated and implemented really over a matter of months. And that that was the norm for a long time. And then this changed. We had these announcements. The clearly the the work behind that to actually legislate those announcements hadn't been done. And as you said, you've got the week with this increasing list of, you know, announcement, unconnected measures. And I do comment on that in the book, in that I get the sense that others would be more qualified to comment on this than me, but I get the sense that the professional advice from the public service has been hollowed out over the years, and I referred to a report by the Grattan Institute that talks about not just tax reform, but but gridlock on reform in general, and the comment about how nowadays the, you know, the expertise used to reside in the public service. And in our case, we're talking particularly Treasury data and so forth, whereas nowadays that's also been shifted to, you know, what we call, ministerial advisers. And they seem to have taken the place or largely displaced that those ranks of expertise in the public service. So I can only speculate that, you know, the minister's going to the spin master in the next office rather than going to the public sector expertise in the next building. More and more of that nowadays, I get a sense is contributing to this inability to, announce something, have the legislation in Parliament because you've already had that prepared and, and it's debated and, and, and the arguments prosecuted and implemented so that this is clearly, something has changed in the last 20 plus years. I think that is a part of it. It might not be the only thing. But, you know, I do think that, ministers have perhaps a more nowadays, a shallower pool of expertise to rely on, because of the way they've changed who they go to for advice.

Robyn Jacobson

In July 2021, The Tax Institute published its own report into tax reform. And we called it case for change. And this wasn't the silver bullet. Was it going to solve all the problems overnight? It's a bit like a blueprint, and it set out lots of challenges and issues and pathways and options for reform. Does advancing tax reform need political courage, and have we got that across anyone in the spectrum of government? You're looking right or left or in the middle. Is that what we need and have we got the ability to progress this one day?

David Montani

I find that, pyrite is not the word that comes to mind because that implies, like defeating an adversary. That's not so much what I think is going to win the day. And I make that point in the book, I think, what we need of this is not a word I use in the book, but, I think what we need is statesmanship and look, and that involves a number of attributes. In a politician, you know, the ability to, to have a chance of successfully prosecuting reform being what it is. Still looking at a minister who has a personal store of knowledge on the subject himself. The the minister needs to be able to test a that they are receiving and where that's lacking. I think you are less likely to have reform because I minister either is less able to prosecute the case for reform, the perhaps less able or less likely to take up a very worthwhile suggestion from the departmental advisers, because if they themselves not that they would admit it, that I feel that they really couldn't carry the day prosecuting the argument, and I'll possibly shy away from it. And I do comment about the the, you know, the increasing professionalization of politics. You know, we have more and more politicians today who basically have no experience outside of politics. Look, and I think that has an impact on the the ability to articulate, prosecute and implement, reform.

Robyn Jacobson

As a reader, what insights could someone gain by reading the book?

David Montani

I'm looking for readers to gain insights, in terms of, you know, oh, no, I'm it's it's like, oh, that's why so-and-so opposes this tax. Oh, that's why the government back then did that or didn't do that. Oh, I understand now why and why why and wherefore. So that's the kind of insight I'm hoping readers will get. It's those oh, moments about these, these unexplainable reasons, public why governments and politicians have done things, not done things. What are they? Take certain decisions. Oh, that's why now I understand. So that's the kind of insight I'm hoping readers will get.

Robyn Jacobson

Maybe no one's explained it to them before. Maybe they haven't had access to the right people who understood this to be able to explain it. So it's a great perspective.

David Montani

Yes. And I think part of that is that, you know, this is not so much a technical issue. You get a group of tax experts and economists in a room. What should we change in our tax system? They'll come to a fairly broad consensus on what we should change. It's not the technical issue. It's the political gridlock. And and that's what the that's what the tax laws reflects. It's a political gridlock. And so when, again, when you have that insight as to how it is that we have come to this gridlock, you understand that. But it's not about what we should change. It's about why the politicians won't change anything. And so that means that the solution is not going to be found in a technical discussion of what we should change. The solution is to be found in how can we get politicians to act when presently and for a long time they refuse to act. That's where the solution lies.

Robyn Jacobson

What is one thing that you learned while writing the book?

David Montani

I learned that, I think, you know, the deep cognitive process of writing a book. It helps you figure out what you think on a subject, having to explore a subject. I mean, I, I had some fairly well formed opinions, but the point of that is that is that if you write with an open mind, then, I mean, you're open to changing your mind. And again, that's the thing I talk about in the book where, you know, there are views I've held in the past on certain subjects, but I don't close my mind to those subjects. And this book has helped with a number of things where you we're having to write about it. You have to think about it and you actually discover some things about what it is you actually think, of a subject. So that's, you know, it's it's a very I mean, I like that intellectual process.

Robyn Jacobson

And finally, no spoilers regarding the last chapter, but its title is the one person who could end the text falls. What can you tell us about that?

David Montani

Well, it's all good. Well, to talk about the political gridlock and how we got here and so forth. But then it's a case of, well, now what? So I do put forward a, a starting package of reforms to give an anchor point. Here's a package of things I think would be we would do well to do. But then I go on from that and say, right, how could we actually make this happen again? It's about resolving a political impasse, not a technical impasse. And so it's about what incentivizes politicians to act. And through that, yes, I have brought it down to one lone individual whom I believe is the one who could end the tax wars.

Robyn Jacobson

So out of this entire population of Australia, readers will have to make their way to the last chapter to find out who that is. David, we look forward to this hitting the bookshelves or the e-books. Congratulations on writing it. It's a very necessary conversation to have and we wish you well with it.

David Montani

Thank you very much, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with David Montani, CTA and author of the upcoming book Tax Wars. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn if you're interested in being at the centre of the tax conversation. A membership with The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at taxinstitue.com.au. Thanks again. Until next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest unique perspective to give you valuable and practical insights you may not hear every day. We hope you enjoyed this episode of TaxVibe. Recorded live at The Tax Summit at the ICC in Sydney. Today I'm joined by Andy Milidoni, CTA, partner at Johnson Winter Slattery, and he specialises in all aspects of taxation, revenue law and trust law, and some aspects of superannuation law. He advises both public and private corporate groups, SMEs, high wealth individuals across industry sectors and he also works closely with a range of intermediaries such as accountants, business and corporate advisors, liquidators, financial planners and court appointed trustees and guardians. Thank you for joining us at The Tax Summit, Andy.

Andy Milidoni

Thanks, Robyn. Thanks for having me.

Robyn Jacobson

And your session was talking about the changed position, the firmer action that the ATO is taking in relation to texts and what sort of support that practitioners can provide their clients. So I wanted to unpack that a bit more with you. It is a changed environment and when we look at historically, the ATO’s has of course had very wide ranging powers and there are actions they can take when it comes to debt. But we know during the pandemic, the was a directive to say take it easy. We don't want businesses going under, we want to keep them afloat. So we did see very generous remissions of penalties, general interest charge, shortfall interest charge, generous payment arrangements and the firm direction of things like direct penalty notices. And we'll talk about all the different types of things they can do. Also, the foot came off the accelerator. Whether that went too far, people can, talk about that and make their own surmises as to whether that was appropriate or not. But it does seem that some businesses have perhaps taken that and expected that some new normal, which it's not. You know, and I want to talk through the levels of text it that we're now seeing. We are hearing anecdotally through our membership that the ATO is taking stronger action. And they've effectively said this themselves in their public statements. So can you talk us through what does the current landscape look like? What is the amount of debt that is now owing? Who owns it, and is this ATO action appropriate?

Andy Milidoni

Well, I think that's right. I think since Covid and probably since, early 2022, we've seen enormous increases in it collection activity. I think just recently in a speech made by various ATO officials, I think the approach of the ATO moving forward from this point on is to go back to being an old school tax collector. The point I think to make here is, is that, you know, Uncollectible debt stands at 50 bill. And the has taken the view of, well, there's a risk management aspect here in that, this historical debt which is very high and in fact much, I think doubled since before Covid. And there'll be more debt to collect. So they're buying the bullet and, they're putting their foot down on collection. And we've seen that through, the legal recovery actions. We've seen so many thousands of DPNs being issued, garnishee orders, lot more, engagement in it or at least enforcement. But, ATO officers chasing debts, chasing agreements is a big thing as well. A lot of what I'm sort of saying is there's a bit of an attitude which, I know that accountants and other advisors are trying to get on top of, and that is some taxpayers are saying, look, I won't lodge because that means I won't have the debt. But that's only really compounding, their own, their own personal circumstances when it comes to debt. But the reality is, is that the ATO are being told to collect the debt, and that, I think the, sort of the generous approach is, I think, well and truly over.

Robyn Jacobson

Well, they couldn't keep handing up money forever. So the role of handing out all that support, which, again, people have their own views as to whether that was or wasn't appropriate, but it still did its job. They're now at a point where they've got to go back to being a revenue collector. And the figures are quite astounding. If you look at the representation by the SME sector in that collectible debt. It's about two thirds of it. It's disproportionate.

Andy Milidoni

Yes, it is a lot.

Robyn Jacobson

Yeah. So why is that? Because there's always this focus on big end of town and whether they're doing the right thing. But in fact the problem seems to be more at the SME end.

Andy Milidoni

I think that's right. And a lot of that debt is carried over from the pandemic. I think we're in a pretty tough economic climate at the moment as well. And in some sectors of the economy, there's a sort of the double whammy of costs going up and revenues dropping, and they're being squeezed and that's hitting cash flow.

Robyn Jacobson

Yes.

Andy Milidoni

And unfortunately, sometimes the first things that aren't being paid are the, the tax, the tax collections and where it's pay out withholding, for example, it's opening up directors to personal liability through the issue of DPNs. And so unfortunately, it's mainly in the SMB sector, private groups. And they're saying most of that debt is as a result of the nonpayment of activity statements, which broken down is pay withholding and GST liabilities.

Robyn Jacobson

Yes. Both of which are now part of the DPA regime. So historically, of course, it was just withholding. And then SGC came into it and then we added more recently GST and perhaps less of an issue, but luxury car tax and one equalization.

Andy Milidoni

Do the other, you know, the other indirect taxes.

Robyn Jacobson

So could you explain this three month rule that exists because people are often a bit confused about this having to do with the reporting and the nonpayment of when directive penalty notices can actually kick in?

Andy Milidoni

Yes. The important thing about, responding to a DPN is that what you should be doing even before a DPN is issued is getting your lodgment seen. So in relation to pay a wage, withholding and GST and the others, except for superannuation guarantee, you must lodge within three months of the due date of the lodgment. If you don't do that, then any DPN that you get is what we refer to as a lockdown. And what that means is that, in the event you haven't paid, you haven't lodged within a three month period when you get your DPN. The only options you have, to pay it because with the, an option under DPN includes putting the company into some form of external administration, and you don't get that option if you haven't lodged within the within the, the three month period. So that's what the three month means. And unfortunately, a lot of people I think when things are going southwards, they sort of going back to what I'd said earlier, we won't lodge because the debt's not there and we'll deal with that later. But the take home message is, is that even if you don't have the funds to make the payment, make sure that your lodgment are up to date. So if things don't turn around in a reasonable period of time, and you can address the debt through payment arrangements and other engagements with the ATO, if it gets to the point that the ATO issued you the DPN, you have the option of putting the company into liquidation and removing the personal liability. DPNs are used as sort of the first step towards, if it gets to it, putting the putting the company into liquidation. It's one of the first steps that the ATO, takes in the in, in the journey towards, putting the company into liquidation.

Robyn Jacobson

So leaving aside for a moment the three month rule and direct penalty notices, is an an unrealistic and perhaps foolish move. To think the ATO is not going to find you are not going to be interested that if I don't lodge and don't pay, they'll somehow forget about me.

Andy Milidoni

I think it's look, in some cases, you may be able to fly under the radar, but only for a period of time. It really all comes to a head. And what we've found, we've had experiences where there's sometimes, Look, the systems are so more, so much more sophisticated. There's a lot more talking between systems, etc.. But what we've found is that, taxpayers might be on the tax officer's radar for something else, and then they pull a thread and then they, they see what else is going on in terms of non lodgment, debt that's piling up. And as I said, often times it might be something else that they're looking at. And then it opens up to everything else. And then that's where I think taxpayers really are in a world of pain.

Robyn Jacobson

Andy, can you run us through the powers the commissioner has to collect it? What is this firmer action that we're referring to?

Andy Milidoni

Yeah, Look, powers include, issuing garnishee notices, issuing DPNs, freezing orders. There's the offsetting. Obviously, which is where, a credits owed in relation to one part of, a lodgment, but is then withheld where there's another debt. There's the general insolvency regime and bankruptcy regime that's available to the commissioner. And the starting point there would be, the issue of statutory demands and other things. So they're all the more formal legal recovery, actions that the commissioner can take. Now, whether he takes those or not, is really as a result of everything else failing.

Robyn Jacobson

Yes.

Andy Milidoni

And we've, we've seen examples where and it's not with or not with everyone, but through examples where you've got the taxpayer that literally puts their head in the sand and pretends that this is not happening and then let a year go by another year the notices are coming in all the other.

Robyn Jacobson

And then when engage with advice.

Andy Milidoni

Just won't engage because I think, there's a it's like a slippery slope. There's sort of so far to falling off the edge of a cliff. There's obviously other things going on with the business, and maybe in the personal life it is a world of pain, but people get to the point where they put their heads in the sand. I don't want to, deal with it. And then you say the much more formal recovery action. We had a client that, got to the point of a statutory demand. It wasn't a huge amount of money. A lot of other things were going on. There were other debts within the group, but they let it get that far down where, they actually could have paid it, but they were the head they had so far in the sand that they just were. We're not getting on top of these things. They actually end up paying the statutory amount because that really that was the first point before the ATO was going to apply for a winding up order. So, we're very much in these formal legal, legal recovery powers really come about where the ATO has, has really at the end of their tether as well.

Robyn Jacobson

Yes.

Andy Milidoni

And, and oftentimes they'll resort to those powers, sure, for outstanding debt. But they say other risks.

Robyn Jacobson

Would you also throw a departure prohibition order into this?

Andy Milidoni

Oh, if there's a risk of the, taxpayer leaving the country. So there's the DPOs. So, yes. Certainly.

Robyn Jacobson

Yes.

Andy Milidoni

And, yeah. So that those all make up, legal recovery, actions that, that, that the ATO can take.

Robyn Jacobson

Is it fair to say that when a matter hits your desk, it's already escalated to a pretty serious point? In other words, you're the lawyer, not the accountant. And are they the ways or approaches that accounting practitioners can take to try and deal with these well before everything elevates or escalates to such a point that if they go to bring the lawyers in to fix everything..because I would have thought the cases you see are going to be the much more heightened ones.

Andy Milidoni

Yeah. And that's, that's right. Robyn, as a tax lawyer, we get involved towards the very end when, when all the alarms are going off and the red flags are being, should I look at that? I have enormous respect for the accounting profession that I do wonderful work there. They're the trusted advisors to to to their clients and taxpayers. I work a lot with accountants, and I see the very good work that they do. I think, the good practices I'm saying with accountants is that, they encourage their clients to keep lodgment up to date. Even despite this idea, we won't lodge because the date won't be. They don't know lodge because they understand that it gives options when it comes to DPNs. Closely, I saw them with the tax office and negotiating payment plans as soon as possible, but also keeping in touch with the tax office when circumstances change. So there's an ongoing liaison with the tax office. And I think, look, we all have our sort of views about, tax office behaviour. But overall, I think if you continue that engagement, keep them informed. Then I think together the debts can be managed. Now, if it gets to the point that the company is going looking at going to some form of external administration, that might be that that might be the case. But by keeping the tax office informed and, keeping that engagement going, I think stays the tax office away from a lot of the more formal like recovery action. So take, for example, Garnishee notices we often call because a client might have been have received a Garnishee knows always in the most, unexpected circumstances. It creates a lot of turmoil.

Robyn Jacobson

And when they can least afford it.

Andy Milidoni

When they can least afford it, one minute they think there's money in the account, next minute it's not there.

Robyn Jacobson

Yes.

Andy Milidoni

So and that's an example where, I see that often happens where there's been very minimal engagement. Or if there has been, there hasn't been compliance or there hasn't been follow up. So I think the take home message is keep your lodgment all up to date. Talk to the tax office. Have the, accountants are talking to their clients. The clients are open with the accountants. Really try and keep engagement to the highest possible level as possible. And also where money does become available, make payments and, encourage, additional payments on the repayment plan or to chip away at the date to demonstrate to the ATO so that, there is a history in relation that particular payments being made, I think, with a debt collector, whether it be the ATO or someone else, if they see that there is a willingness to get on top of the debt and to make payments, it's really not in their interest to push the more formal buttons, because that costs money as well.

Robyn Jacobson

Of course it does.

Andy Milidoni

It cost money and time, But the opposite is no engagement. Gone. I will head in the sand.

Robyn Jacobson

They don't like it when you go silent.

Andy Milidoni

You're pushing the the collector to to stop pushing other buttons to get the reaction. So yeah. So I think the short of it is liaison and engagement.

Robyn Jacobson

An anecdote I heard many years ago. I remember the program Wheel of Fortune.

Andy Milidoni

Oh yeah.

Robyn Jacobson

Now, apparently there was a taxpayer who owed some money. I don't know how much. Obviously the ATO had been trying for some period of time to try and collect this debt, and I think you spelt it for 30 the afternoon or something. And this particular ATO officer was home that day. Was this a well before Covid? I was watching the show when this taxpayer appeared on the show.

Andy Milidoni

Yeah.

Robyn Jacobson

And he immediately rang the station's producers and said, you know, I want to issue a notice that fellow who's on your show because he owes us some money.

Andy Milidoni

Yeah.

Robyn Jacobson

And the station said, don't you know that we pre-record this.

Andy Milidoni

Was already on the money to go out the door, so I could see the taxpayer……..

Robyn Jacobson

So what are you seeing and hearing out there with the the escalated action? Do you see that the ATO is cooperating because we are hearing increased feedback, and I don't know whether anything has changed as such at the ATO said about payment arrangements not being quite as forthcoming as they might have been. Now, we do know that there's firmer action in back in Covid days, but is it getting more difficult to get a payment arrangement?

Andy Milidoni

I'll say it is. I think there's a number of, if you've got a taxpayer that's just fallen on some hard times, has a very good compliance history. My experience is that you could get a payment arrangement between 6 and 12 months with that too much fanfare and without too much grief. I think with this sort of the repetitive, the taxpayer that's gone through the ups and downs over the last few years has put a few payment arrangements, and there's been a few, some noncompliance around that, but eventually got through it. It's it is for though for those taxpayers, it has become much harder. Anything beyond 12 months is much more difficult. More information, more submissions, more trying to demonstrate that, the taxpayer can go to third parties to get funds before the ATO, entertain much longer arrangements. I've seen, some taxpayers having to give security over the date. It is certainly much tougher. What I'm hearing from accountants is, is that, it's, the it's certainly is much harder to negotiate and the ATO are taking, a little bit more of a, a tougher position on how generous payment arrangements will be.

Robyn Jacobson

What advice you've got for practitioners, particularly the accounting practitioners, who might be perhaps a little closer to the coalface than you are in terms of the the direct dealing with the client and that taxpayer.

Andy Milidoni

Look, I think the advice is, it's sometimes it's the difference between is the business going to survive or if it's not, if there's a genuine belief that a longer arrangement is needed and that that's going to help the business, because really the differences, we either, step on the business and have the ATO sort of take more formal action, and it basically is wound up or trying to put forward a pathway where, the business can survive, but the ATO can get their money back, perhaps in a much, a much longer time frame, I think for accountants, I think they know a lot of those issues. But to work on pathways with the tax office, but also with the clients to demonstrate that it is worth entering into that longer payment arrangement, that everyone's risks are being sorted in that the ATO obviously want to collect the data, but they want to be able to say that the money is going to be can't be forthcoming. So I think we just need to get a little bit more creative in the way we approach payment plans with being able to juggle a number of these things. So, I think the advice is to probably, provide more comprehensive submissions, actually demonstrate to the idea that there is that pathway, that there is some and unusual circumstances affecting the business that can be traded through. And to really go in and advocate for the tax taxpayer, but also to understand the position as well.

Robyn Jacobson

It is such a tough question to ask though, you've got a business owner. They might have set up the business 40 years ago, five years ago. Whatever their heart, their soul has gone into this to confront the idea that they may need to shut down the business, give up the business, that it's not been financially, economically successful. It's not just about the financial aspect. There's all that pride and all that sentiment caught up in it and trying to get the client to acknowledge that and face it and deal with it. Very difficult.

Andy Milidoni

It is. And I mean huge financial and personal investment. The other thing that we find, Robyn, is sometimes you've got, you know, it's a it's quite a great it's a great business. And then what happens is an audit comes along and I go back five years and, it's not because there's been some sort of, deliberate attempt to avoid the payment of tax or the assessment of liabilities or whatever, but something's gone wrong. They've gone back and now they're confronted with, the payment of back taxes.

Robyn Jacobson

Yes.

Andy Milidoni

So you're in a tough economic environment looking forward. You're barely paying your, meeting your liabilities. And then you have this audit and then you've got taxes going back for years with interest and penalty. That can be quite a shock. And, having to negotiate payment plans around that historical date can be, very challenging. And this is where I think, you know, I'd like to think the state would step up and recognize that he's a situation where no one sort of saw this liability. Or maybe. Yeah, sure, they maybe should have sort of seen it, but for whatever reasons and I've seen it, in some circumstances where it was just very unfortunate that the businesses got themselves into that position. And he comes in audit. And you'd like to think that in that scenario, there would be, more understanding in their negotiating of those payment plans because not only do you have your debts moving forward and those liabilities, you also have to then find the money to try to, to fill those back taxes.

Robyn Jacobson

I've said for years that things can go undetected for a long, long time until and unless you get an audit or this death Or this divorce.

Andy Milidoni

Yeah.

Robyn Jacobson

And if you're unlucky, you have all three happen at the same time.

Andy Milidoni

As I say, when it rains, it pours.

Robyn Jacobson

Yeah. And it can unravel things that you did not expect. So, Andy, as we close off our discussion, any final tips or ideas or suggestions as to how you can help you navigate through this?

Andy Milidoni

So we're in a, I guess, a bit of an economically volatile environment, particularly for some sectors. There's a lot of new tax law coming through. We've heard the ATO is focusing on the the collection of that $50 billion of outstanding liabilities. I think a tip I would give is, if there is, if a business can find the time to engage with their accountant and tax lawyer to undertake just to review. So everything's going well, maybe submit to a, have a review of the business, look at what the the risks are from a tax, perspective. Try to, get ahead of any particular liabilities that might be on the horizon. That might not be sort of expected. Now, do it in a time where there's no distress, because if changes, need to be made, they should be made at a time when there's no date on the horizon, no one's chasing anything. And if there can be some changes to, put the business into a better structure or something that's more fit for purpose. I would encourage that because there could be some really good stuff that comes out of the review, and it at least gives, business owners, a bit of a snapshot as to what the next two, three, 4 or 5 years looks like. And as much as possible mean. If we had the benefit of a crystal ball, and we could look into that and see what's on the horizon, obviously we don't have that. But if we can just get ahead of ourselves and, see what things might look like and what changes that can be made, because oftentimes when we do hit distress, there's an appetite there. So let's change this. Let's change that. But often times it's just too late.

Robyn Jacobson

Yes. So this is the equivalent really of going to your dentist for a health check, going to the doctor once a year for a health check, or taking a card and salute the mechanic to get it checked out.

Andy Milidoni

Yeah. And, we do we've worked with accountants to do these reviews. And often times when we can sit back and go through these things, business owners, it's a very good opportunity for them to sort of do a bit of navel gazing. Yes. And to oftentimes the process identifies other issues that no one really expected. And people are very grateful for. Yes. Because, when we're all busy trying to sort of make money and run the business and do everything else, we're not these things aren't on our radar. And it's a really good opportunity to do that.

Robyn Jacobson

Andy, thank you for your insights. Thank you for your session. And, there's a lot for people to think about that. I think the key message is if you've got to text it, engage, seek advice, talk to your accountant, talk to your lawyer. Yeah, talk to the ATO.

Andy Milidoni

Absolutely. And thank you. And thank you, Robyn. And thank you to The Tax Institute.

Robyn Jacobson

You're very welcome. Thank you. Thanks for listening to this episode of TaxVibe. I've been chatting with Andy Milidoni, CTA, partner at Johnson Winter Slattery. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen to your podcasts. We welcome any suggestions and feedback to catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership with The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. Thanks again and we look forward to joining you next time.

Robyn Jacobson

Hello and welcome to TaxVibe, a Podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax professionals, brightest minds, drawing on each guest unique perspective to give you valuable and practical insights, you may not hear every day. We hope you enjoyed this episode of TaxVibe, recorded live at The Tax Summit at the ICC in Sydney.

Today I'm joined by Adrian Cartland, principal solicitor of Cartland Law, based in Adelaide. Adrian is practice for nearly 20 years in a number of tax roles in top tier firms, as well as boutique tax practices. About ten years ago, he founded his own on Cartland law and thinking about the future of law, developed an interest in artificial intelligence. Adrian specialises in and only accepts instruction in tax, trusts and technology. He's also created Ailira, the Artificially Intelligent Legal Information Research Assistant, which beat a paralegal on ABC's I race past the Adelaide University tax law exam and powered the world's first law firm without lawyers. Adrian is the chair of the Society of Trust and Estate Practitioners, South Australia, and also is a member of The Tax Institute's State Taxes committee. So Adrian, welcome to TaxVibe

Adrian Cartland

Thank you very much. That was very good. The polite and sanitised version of my intro. So and so, You speak much too highly of me. And you say that you have many clever people on here. Hopefully I can live up to that.

Robyn Jacobson

 I'm sure you will.

Adrian Cartland

So, we're going to talk about some AI today.

Robyn Jacobson

Yeah. Let's unpack this because it's, it’s an emerging technology. And our listeners will be on a spectrum. Some will be very regular users of some of the products, such as ChatGPT, and others will have very little understanding of what it involves.

Adrian Cartland

So first of all, the thing we need to deal with is the conceptualization of AI. So the largest part of the human brain works towards understanding other humans. So when we look at the moon, we see a face in there. When we think of a robot, we think of it in a human way. We anthropomorphise it. So that's why we are scared of the Terminator. What? Hal 9000. We think of C-3PO. However, those are not accurate descriptions of what AI is. AI is should actually be, called alien intelligence. It's entirely unlike human. A better example of what AI is like is like Tony Stark's Iron Man suit, which takes Tony Stark from being a human to being like Superman but still requires Tony Stark. So we are symbiotic with machines. If you put a human in the jungle naked and alone, they will die a terrible death. Without technology, 99.99% of the human race will die. And this scares us. And because we don't like the idea that we are not the masters, but we actually symbiotic, technology without humans is useless in a junk. And we can't do anything without technology. Even our stomachs have evolved over hundreds of thousands of years to require cooked food. We can't just eat grass. So, we require technology. And every time we are reminded that we are symbiotic with some new technology, that's scares us. But once we become used to it, just like we've become used to podcasts we're comfortable with.

Robyn Jacobson

Well, let's go back 20/30 years when email or internet was all born. It was unfamiliar technology to everyone at that point, and yet we all accept it as day to day technology now.

Adrian Cartland

That's correct. So it's absolutely terrifying when we are confronted with something new. But once we get familiar with it, then we become comfortable with it and it no longer scares us. So if you were thinking of AI as something scary, it just means you need to familiarise yourself with. Now, I've done something fun at The Tax Summit, and I wanted to show this as an example of how AI can work. And at The Tax Summit, I have produced the first paper for The Tax Institute that openly at least, is entirely written by a large language Model, by AI

Robyn Jacobson

What I now what is a large language model for those of you have never heard the expression?

Adrian Cartland

Sure. So if we go back 50 years or 20 years, and when we see the things that a computer forecast, we familiar with, they will often be built on a bunch of if this then that statements. And I'm back from the 80s. In the 90s there was expert systems where we plug in specific pieces of questions and answers, and we can therefore write out knowledge that way. That's not the type of AI that it was commonly used now or rather, is in the public consciousness. Instead, what happens is a bunch of fancy Maths. And I'm going to try and explain this in a simple way. You take all the words that there are and we convert them into tokens. And so there was a token for the and and and and so on. And then what happens is these tokens is we create relationships between those tokens mathematical relationships. And those relationships are called vectors. And what happens then is they, a company like OpenAI or Google or many others will feed large amounts of text or other data into those. And and those vectors will be trained to create a relationship between them. And then based on that statistical relationship, based on that fancy maths, it will generate. We're talking about generative AI. It will generate answers. So they're not stored in there. You can't open up the hood and and see them. There's not a bunch of rules.

Robyn Jacobson

And it's not insisting content.

Adrian Cartland

No. So some potentially do save it in there. But the the general way of doing this, there is something that is created a fresh which is also interesting from a copyright perspective. So just just don't make the copyright law. One thing that is really problematic, particularly in Australia, is people say there's been copyright theft. Now that's more of actually an Americanism. Theft requires taking something. I take something from someone else with, with the intention to deprive them of it. You can't steal intellectual property in Australia. Now you can breach copyright. Totally different thing. But, there is a question of whether reading over something is a breach of copyright. I don't think so. If you generate something that looks like something else, again, if it's generated fresh, it's not a breach of copyright. So what I've got is I got copilots, which is one of which is Microsoft's, large language model to generate a paper. Now, I've written a number of papers. They take a lot of time. They're very difficult. And what I did is I said, I'd like you to explain the relationship between, you know, the tax profession and artificial intelligence. And I forgot to spit it out. Paper.

Robyn Jacobson

Do you specify the premises? Do you say I want a page or I want a 20 page paper?

Adrian Cartland

So if I wanted to make a better paper, yes, I would. And in fact, at the end of the process, I asked copilot for some feedback and what I could have done better. I knew things that I could've done better, but I asked for some feedback, and the feedback it said is you should have specified these parameters more. Now I just said, write me a paper on this and, and off you go. And so the one thing that I did include that is my text in this paper was I said, this is a paper written by copilot, not me. And then I said, and here are the exact prompts. Now if you copied and pasted those prompts, you would get a similar paper to mine. You would not get the exact same paper because it's generated afresh. Now, something that's interesting about this is because it's it's generator fresh. It can create things wrong when it creates something that is wrong. We call that a hallucination. So for example, if I asked, copilot to explain some tax laws, it might generate them correctly. It might make some up. Now I can't actually control that. So that is something that's problematic. And in fact this is something that's been that there have been a number of tax cases in the UK. There have been, where people have, have done this. There's been some solicitors who have got, in big trouble in the US, and our courts here have, regularly saidt submissions, particularly by unrepresented litigants, that they have just gone into ChatGPT and written and said, yeah, explain this case for me or write, write out some submissions for me. I will make up some cases.

Robyn Jacobson

So the person in question at this point is AI that to replace the profession, or is it simply not going to be the case because you're saying it can generate all this report and files, article, whatever content it is we want to write for us? But you're saying it might be correct or it might not be correct. So therefore isn't there, of course, a professional obligation to check what is there before it is used for professional service or a commercial purpose, or for a device purpose or for publishing purposes?

Adrian Cartland

So that's that's an excellent question. So technology doesn't replace humans and no technology ever makes another technology obsolete. So if I go into the Sears Robot catalogue of 100 years ago, I can buy every item in the new today.  I own an edaphon because I love vintage, office accessories. I've got some typewriters and old telephones and, and an edaphon and an edaphon is a wax dictating machine. The one I've got from is from 1912. This is. And there's a wax cylinder on there, and I can buy new wax cylinders for that today. So technology doesn't get rid of old technology. So I have a pen, I have I sometimes send written letters sometimes, you know, I've sent handwritten notes just to people from time to time. I send emails, still send faxes to the tax office. Yeah, I know, I send text messages and in whatsapps and so on, and each of them becomes more niche. So first of all, generative AI is not going to replace some of the other technologies though, like the more niche. The other thing is just professions don't get replaced, say in law. The biggest change we've seen over the last 40 years has been the invention of copy and paste and Microsoft Word, and so and going from people who have typewriters and having to, to text out any, any changes and send things to the typing pool. And instead now what happens is they if they want to change, they go to copy paste or delete. And if I want to take a precedent, instead of having to stick it through a Xerox machine or some kind of ink copying, I just go to copy paste. Now that hasn't replaced lawyers, and in fact it creates more work because then people work longer and longer contracts. People make more and more legislation. Again, looking back a hundred years ago, every profession that was 100 years ago, it still exists today. There are blacksmiths. There's not that many, but they still exist. So they never replaced. The only professions that I've totally replaced are ones that have a Specific technology they work with, for example, elevator operators.

Robyn Jacobson

Yes.

Adrian Cartland

100 years ago, an elevator was terrifying. Death defying adventure to go up in an elevator. And, you know, maybe you go up, maybe you career down to your death that you need to. Someone needs to operate this correctly. Another one is computers. A computer originally, just like in the 1950s, was a lady who sits and almost all women who sits there and turns on various switches and punch cards and and connects wires in a machine in the overall, mainframe computer.

Robyn Jacobson

They used to take up entire rooms.

Adrian Cartland

Correct. And there'd be a team of 20, 20 computers, like, ladies who are programming those in. Now we have disk drives, and, and solid state memory and so on. To those very technology specific things have been replaced. Maybe in the future, TikTok influencer will be replaced. I really hope for the good of humanity that they are, but those things, will be replaced. But otherwise, no, what might happen is that parts of the job can be automated. Now, the things that can be automated is, so robots do things at, at scale. They do things they can they can do boring, laborious tasks. They do them much better. And, and so I, I just want to go, does it back. Even if robots are better than humans at something, it doesn't mean they are replaced. Since Gary Kasparov was beaten by, Deep Blue in 1997. People still play chess. And in fact, people play central chess. Central chess, are the best chess players. The human plus machine, beats a pure machine or a pure human. Now, in fact, the best centers pilots of chess programs are actually not the best chess players. Because the best, solo chess players will, overthink what the machine does and second guess it. And so you actually, again, coming back to Tony Stark's Iron Man suit, you know, like, if Tony Stark was Superman. Superman wearing alignment suit. Probably not a great idea, but maybe Tony Stark, who's a clever you know, human. Great idea. So another thing is, so humans have been bested by machines at a number of tasks for hundreds of years. The best hand-to-hand fighter has been a machine for, I know, at least Leonardo da Vinci's time. Maybe it maybe a year earlier we could create, machines that will beat a human. Yet people still have boxing and cage fighting, and they get in their underwear and into a cage and slug each other out. If you put a robot on there, 100% of the time will win. If you have a a good robot. So people still want humans with things, and humans have a purpose even if they are not the best. But there are things that humans will always be better at. One, contextual reasoning. This is two creativity. Three charisma four. Empathy five. Judgment six lateral thinking. So these these things humans will always do better. If you want to stand up in court and convince somebody of your case, a robot is not going to be convincing. They're not going to get that empathy. If I want to make a judgment as to what is the best thing to do, what is the best law to to use a human will always be better than a machine, but will be augmented by machines. And just as we are augmented by machines now, so will we be replaced by generative AI? Now the level of generative AI at the moment it's actually pretty good. I would say a reasonable approximation of what the level of general AI’s ability is is probably a university student or a university graduate who has gone to all of the lectures, but who hasn't done the reading. So now they're sitting in their exam and you're asking them questions. Now they might make some of them up. But they're pretty good. Now what could you get a graduate to do? You get them to do a lot. And especially if you have an unlimited amount of them. Now anyone who has worked with, with junior professionals before immediately knows the things that you're going to need to put in place to work with generative AI. So you don't just get a junior to write something for you and then send it off to the clients.

Robyn Jacobson

Yes.

Adrian Cartland

You read things, you might get them to write something for you and then use it as inspiration. They might write many, many words, but they just sort of a word salad.

Robyn Jacobson

Are there some examples of where professionals have used AI, and perhaps not been sufficiently looking over the contents, and therefore have passed it off as being correct, and it's turned out to be incorrect?

Adrian Cartland

Well, there was a great example in the US, Mata, Mata, V avianca and a solicitor or attorney had to prepare as case submissions and, didn't have access to a research tool. And so instead went onto ChatGPT and said, I want you to generate me some cases that say this. And it did exactly as it was told to, which is, yeah, which is fantastic, except that it hallucinated the cases it made up, a case about Southwest Airlines that answered and helped his case exactly like he told it to. And again, think of this like a university graduate. And he said, go and do this thing you haven't said. Don't make it up. If you do say don't make it up. Yeah. It that improves it. Now then what happened is he submitted to the other side and they did. The first thing that they would do is looked up the reference and go, well, this seems to be a case that would win you the case when you you matter. Why can't we find it? Now I just want to stop and say I don't understand how someone could have relied on a case without actually reading it. Like. I mean, who does that?

Robyn Jacobson

Did he think it to be a valid case?

Adrian Cartland

Yes. He said, you know, I want a case that supports the thing that I'm doing and it's and it listed off and it looks like a properly cited case. And I gave a summary of the case. Okay. Yeah. I mean I would have thought that you would have checked it like that was that was what I understood. Everyone was taught in in legal research and writing when I was at university. But anyway, so the other side then comes back to him and says, we can't find this case. And then he continues to, to cause a problem. So instead of going, you know, maybe they're right, maybe I should, you know, get someone else's help on this, lookup a proper research service. But then he went back to ChatGPT and says, is this case real? And then ChatGPT says, yes.

Robyn Jacobson

Is it like saying to someone, are you lying?

Adrian Cartland

Are you lying?

Robyn Jacobson

 And they say, no

Adrian Cartland

No, Is that a lie? No. It’s just, It's ridiculous. But then he said, okay, show me the case. And then it generated the case, which is totally a made up text. And if you look at it carefully, you will not even carefully, you know, if you half decently look at it, you can see that it looks like legal text, but it isn't particularly coherent. Again, like there's a uni student who's sitting in their exam and they've written many words and they've used lots of legal words, and you go, but you just made this up. So he got in trouble, he got fined. And I think he got struck off and, and rightfully so.

Robyn Jacobson

So do we look at that as an isolated case. And yes, we can have a laugh about it or doesn't represent or present a serious risk in terms of what professionals are passing off as work to their clients.

Adrian Cartland

Well, let's again, consider the alternative is what if he had given this to a junior? And he gives this to this junior who goes off and finds a case who, you know, doesn't read it. And maybe the junior is not going to expressly make it up. But if you've gone, if the junior finds a case for you you don't read it.

Robyn Jacobson

It could be the wrong.

Adrian Cartland

It could be the wrong case. That's it. And then then his. It still would have made the same problems with the processes that he had. Whether he used ChatGPT or a junior, he would have run into problems. So, you know, the problem is not generative AI. The problem is the processes that he had. So if you were following good professional practices, you shouldn't have a problem with this. Although although of course, another part of this is that he didn't quite understand what it was doing. He genuinely thought that this was an accurate research service. And so you you need to understand the tools that you're, that you're using. So it's like if you get in your car when you come to the wharf and you go, well, I just got to drive off of this wharf because I expect that it's also a boat. No, it's not a boat. You need to get out of the car. Get on the boat. So here he thought that this was an accurate research service, and it wasn't. So you need to understand the technology that you're using. And again, that's a fundamental problem, not a generative AI problem.

Robyn Jacobson

If you're AI practitioners using it and there are now, are they going to be streets ahead from those who don't. And I think of this a comparison cloud accounting and cloud computing. We know that there are many advantages. There are efficiencies. They've got the ability to share a file directly with your client. You can work from anywhere on it. There are lots of commercial advantages and efficiencies that come from that. And to some extent, they've moved ahead. And they might still be those using, say, desktop programs. Is this an example where those that adopt us engage, that are going to have commercial advantages and those who don't are going to have disadvantages, or is it just a different way of working?

Adrian Cartland

So if I was trying to sell a book or an article or a consultancy report, I would say yes. If I was trying to sell some software, I would. I would say yes, but I'm going to say it kind of depends on what you're doing. So let me give you some simple examples. If you're trying to do a first draft or something or like generative AI is fantastic. Now we joke about lawyers not being good with maths. And then the the flip side of that is that we joked about accountants not being good at writing. I know a number of accountants who use generative AI all the time to write emails and so on, because they write them in, let's say, accountant words.

Robyn Jacobson

Yes.

Adrian Cartland

And then I turn this into polished words, and you can tell that it's from the generative AI, but it's a much, much nicer email. So again you're stepping up and it's another thing is are you trying to generate lots of words. So let's just say if you did a job that you did was generating consultancy reports that talked about the future of artificial intelligence. Now at the moment, there are some consulting firms that get 22 year olds to generate a lot of text. And then charge six figures for that to large corporations who say, great, you know, we're learning about new technologies. Can that be replaced by I'll call could. Could someone be much more efficient in doing that? Absolutely. As you can see from my paper, I've written something like that. The the futurist, Richard Sass guide. He's written lots of papers and books and articles and so on. I look at what copilot, drafted for my paper, and I. You know what? I think it's better than a fair amount of his writing. So certainly, if that was what you're doing, then. Yes, if your job is to think, you know, have contextual reasoning with your client, you sit down there and go, I understand this one thing that you're saying, but I also need to understand all the problems that you that you're dealing with, that you need to empathize with the client. If you're understanding, if you're trying to make judgment for the client, that doesn't help. Now, I might do some of the back office work. You know, like, again, watching your emails, writing some nice blog posts, said ten things about FBT. Do do a listicle. It will absolutely smash that. I use generative AI on all of my, website blog post images because they're much better than, much better than stock images. And I write a lot about artificial intelligence in the law. There's only like five stock images for AI and ML, and they're all used by every news outlet. And so I'll look at my blog post and I'll see it on 50 other websites. But now I've got a whole bunch of really specific intricate pictures on there, and they're fantastic. Now so that stuff is replaced again. Has that made my core business better? Not really, but it has improved things.

Robyn Jacobson

It makes it less generic.

Adrian Cartland

Yeah, it makes it less generic. The other thing is the biggest change that we've had in, say, more is the ability to copy and paste.

Robyn Jacobson

Yes.

Adrian Cartland

And 40 years ago there were typing tools. And since we had WordPerfect, the ability to delete and copy and paste, that's changed all the typing tools of God. Now, has that impacted the core part of wall? Not really. Obviously the people who could copy and paste and they've become a more efficient. So yes, there is absolutely competitive advantage there. And it really just depends on particularly what you're doing. So I don't like making broad statements. And so that's why I've got a really long answer to that. And and so the answer is it kind of depends for some things you can for some things you think that you can't, you know, when you see someone who says 49% of, you know, more jobs or your professional jobs are going to be replaced by artificial intelligence? Yeah, well, that's not it's not true. Can things become much more efficient? Yes. But also the job of the positional is not actually about cutting down work. See, our incentive structure as a professional, the most overriding thing that we have is not to screw up that. So over a career of, say, 40 years could be 60 years for many people, but say 40 years if you make one large critical mistake that could end it. So the like the most important thing in your job is not to ever be negligent, not to ever screw up. So you don't have unlimited time. You have a constraints on this. You can't look at every piece of legislation, every every law. And so you need to do some triage on that. Now if suddenly you can do that triage faster, your incentive is not to do more work, but is to go deeper and remove mistakes. If you're, say, a, returning to law and with the ability to copy and paste, legal contracts have doubled, tripled in size because lawyer will go now I can add in this clause. This goes, this goes. I don't have to dictate it out. I can just go copy and paste. And so the more research we can do, the faster the research we can do, the more we will do. And so it will just expand the nature of work. And it works the other way around. The ability of AI to automate things will mean that the government says, let's find new things to review. Like, you can easily set a generative AI to review a whole bunch of text. You don't need to specifically data match. You can say reveal this text, okay. That means now there's a whole bunch of other things that can be audited. There is more work. This comes back to basic economics, to bond and supply curve. We have shifted the supply curve. When you shift the supply curve out, what that means is that you will produce more things for lower price. So there will be a greater quantity of goods. You move along the demand curve. And so now you might say does that mean we're all going to charge less. No. Maybe you can do this one job cheaper but you charge by the hour like you. You just do more jobs and there will be more jobs created. So I think that what will happen over the next ten years and again, I hate making these big predictions, but over the next ten years, there will be a massive explosion in the amount of tax work.

Robyn Jacobson

Adrian. Thank you. You've taken us on quite a journey, and it's really interesting to see where this is now and where this is going to take us in the future. So I'm sure you'll keep us informed of the period ahead.

Adrian Cartland

Fantastic. Thank you very much. Thanks. Excited.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Adrian Cartland, principal solicitor at Cartland Law. If you've enjoyed this episode, we'd love for you to subscribe, rate and review. Wherever you listen, we'd welcome any feedback and suggestions to catch all from TaxVibe and The Tax Institute. You can join us on LinkedIn if you're interested in being at the center of the tax conversation. Membership of The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at Taxinstitute.com.au. Thanks again and we look forward to joining you next time.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest's unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by Dr Ann Kayis-Kumar, Associate Professor of Taxation Law at the University of New South Wales Business School. Ann specialises in tax law and policy at a domestic and an international level. She's the founding director of the UNSW Tax and Business Advisory Clinic, an international award-winning platform for experimental work integrating learning, innovative grassroots research and catalysing social impact across Australia. Her research has appeared in the media, including Channel Ten's The Project, ABC Radio National, and The Guardian. Ann also serves on the Tax Institute's National SME Technical Committee, the ATO's Small Business and National Tax Clinic Stewardship groups and the Law Council of Australia's Taxation Committee. Ann, welcome to TaxVibe.

Dr Ann Kayis-Kumar

Thank you so much for having me, Robyn.

Robyn Jacobson

Look, this is a really important conversation that we're going to be having today. And I just wanted to firstly, thank you for the time and your commitment to this space. As we talk about economic and financial abuse in relation to, in particular, intimate partnerships. You wrote an article for us in our TaxVine, our member newsletter, that was titled Domestic Violence – What's tax got to do with it? Now, leaving aside the really catchy title, I think this is such an important social conversation to have, and I thought as we take a more serious path away from more regular tax conversations, and we delve into how the tax profession can take a role in identifying and disrupting financial and economic abuse. Can you just set the scene for us as to on the national landscape – where's this sitting? How's the conversation going? What's the narrative like? Because we've seen a lot of increased media coverage in this space.

Dr Ann Kayis-Kumar

Yes, absolutely. Robyn. So we know that domestic violence is a national problem. We've had people as senior as the prime minister talk about it as a crisis. We also know that most cases of domestic violence also have an element of financial and economic abuse. And we know the numbers are really staggering. So the ABS most recently estimates that 16% of Australian women and around 8% of Australian men have experienced intimate partner financial abuse. So we're talking 2.4 million Australians. And that's likely an underestimate because tax so far hasn't really been as deeply understood.

Robyn Jacobson

Yes, staggering figures and we'll get more into the stats and the data and the trends. But for our listeners can you explain or define what is economic abuse or financial abuse. Perhaps those terms are interchangeable, and does it relate to domestic violence?

Dr Ann Kayis-Kumar

Yes. Yes, absolutely. So what is financial and economic abuse? There's a lot of literature around defining it and unpacking it, but at its broadest, it's about a perpetrator in an intimate partner relationship using money as one of the tools at their disposal to control the victim survivor. So that just adds to the pain and the dynamics of power and control and coercion. And money is a really powerful one. You wouldn't think that it would be so profound, but it actually, is one of the most problematic and insidious elements because, for starters, it continues after the victim survivor has escaped the abusive relationship. And also it can be used in ways that are less visible. And so there might be less help seeking behavior by victim survivors because they might not even realize that what they're experiencing is financial abuse. So coupled with that plus relatively low awareness of what it even is as a community, it makes it really important that we have programs like yours to raise awareness and lift the lid on it so that we can have more of a conversation about what it is, what the red flags are, and more optimistically, what we can do about it.

Robyn Jacobson

One of the key points I take from what you just said was that even after any immediate physical threat has passed, there is still, if not an ongoing or potentially even an increased risk of this financial or economic abuse.

Dr Ann Kayis-Kumar

Yes, yes. And to add to that as well, often, and this is what we know from the domestic violence literature, often it's financial instability and economic instability that can lead someone back into an abusive relationship, even after they've left. So that really highlights the importance of the systems supporting victim survivors.

Robyn Jacobson

And whether that's returning to that initial abusive relationship or whether it's seeking some sort of alleged refuge, or apparent refuge in a new relationship which might turn out to be equally as damaging.

Dr Ann Kayis-Kumar

That's such a good point.

Robyn Jacobson

Yeah. So we know that financial abuse almost always occurs alongside other forms of domestic violence. And this could be physical threats sexual, psychological and emotional abuse, threats, intimidation, controlling behaviors, duress. The list is endless. What sort of trends are we seeing? What's the prevalence of this in our community? And I might even suggest your community, your population that you particularly look after might be a little more exaggerated than perhaps the general population.

Dr Ann Kayis-Kumar

We definitely see the people that we help are in the most extreme of crises. So the clinic that I'm the director of, we partner with community organizations to identify people who are in serious hardship. And since we've started, we've always seen an overt representation of particularly women who are experiencing domestic violence and financial abuse that manifests in really unexpected ways. When you layer on the tax taxpayers. That goes back to your question, what's tax got to do with it? And ultimately, it boils down to business structures and joint and civil liability. Once you have any sort of mechanism and this applies beyond tax as well to other facets and other areas of law. Once you have some sort of joint liability at play, it is vulnerable to abuse by a perpetrator who can, as a tactic of control and revenge, allocate, sometimes without the victim survivors knowing, even allocate tax debts into that person's name. And that might not even come to light until, for example, that person receives a direct penalty notice. So, for example, one of our clients had that happen to her. She came to us in tears with the direct penalty notice for a company that she didn't even know existed, let alone that she was the director of.

Robyn Jacobson

And that's where my mind was going. You've got obviously, the case of multiple directors. So let's assume that we've got, two people in a relationship who are both directors of the same company. In the ideal world, they are, of course, appointed formally. And they know when they signing off that they have been appointed. But we've heard of store directors where unscrupulous directors might deliberately approach homeless people or people who are down and out and very desperate for some money, and they'll take it on in order to become a director of the company. But that understanding the implications, that's slightly different. This is where perhaps that director doesn't even know they've been appointed. But the other place that my mind went was cross partnerships. And there are a lot of small business partnerships which are in a domestic relations sense, set up. And so you could immediately have that joint and civil liability where one of them just walks away from all the commitments and obligations and leaves the other partner to carry the mess?

Dr Ann Kayis-Kumar

Precisely, yes. And we have had situations just like what you're describing, Robyn.

Robyn Jacobson

Yeah. What do you think is driving this? So we've seen a lot of increased discussion. Is it because there's greater awareness of the issue and the communities talking about this more a little bit like other things that years ago were taboo and now we are talking about it, or is it a case of an increased rate of incidents of this happening, or is it, in fact both?

Dr Ann Kayis-Kumar

That's a really good question. And while I don't have the the concrete numbers because it's something that is still relatively new as an area, I imagine, I suspect it is a bit of both. So on one hand, there is this increased awareness really catapulted to, a national conscience since the royal banking Commission led to the big banks doing work on financial abuse and identifying things like $1 transactions being a marker of financial abuse, that's then really shifted the national conversation around financial abuse specifically. So there's heightened awareness of it, but also, we do know that from the literature, increased levels of financial distress are significantly associated with financial abuse. Unfortunate. In a post-pandemic environment, we've seen a cost of living crisis that is not easing up and people are really struggling. We know that there are millions of Australians who are living below the poverty line. We know that of people who are homeowners, around half of them are experiencing some sort of financial distress. So there is a lot of pressure financially across the community more broadly, and that can manifest in these issues being triggered and exacerbated.

Robyn Jacobson

Do you have any numbers around the the people who are going through this financial distress, either in what we call official severe financial hardship or those that are feeling pressure but may not actually be seeking assistance?

Dr Ann Kayis-Kumar

Yeah, that's such a good question. We know from the Financial Counseling Australia data that it's roughly only 300,000 people per year who approach a financial counselor. So that's people who are in such deep money problems, and they really need someone to help them navigate those many problems. And we know from research that my team and I did, this is pre-pandemic, so the numbers are probably higher. We know that over a third of people who approach a financial counselor have an unmet tax need. And of that third, roughly 90% need a registered tax agent because they are unable to manage the long term overdue tax returns and best returns, and also tax debt discussions with the ATO. And really, like you say, once you layer in a small business angle, you really need a professional to help you navigate it. It's pretty much otherwise impossible.

Robyn Jacobson

And yet, ironically, in most cases, there's a cost associated with seeking that professional tax advice unless they're going to something like a tax clinic.

Dr Ann Kayis-Kumar

Exactly. Yeah.

Robyn Jacobson

Do you think also we've got a bit of a cocktail going on where we are some years out of the pandemic, and yet it feels that some people are still coping with that or dealing with that. There seem to be a lot of short tempers. We know their mental health issues across the community, and it just seems a lot of this is fusing together with that cost of living pressure as well. And there may be people who have never experienced this before, who haven't been in mortgage stress, who haven't had the familiarity of being around financial distress and are now facing it. So this is not to exclude in any way, but it helps to understand why, some of this perhaps does occur.

Dr Ann Kayis-Kumar

Yeah, I absolutely agree with you, Robyn. I think one of the things that we were really, surprised to find when we started collecting client data six years ago is that severe mental health issues were one of the most striking trend. About 80% of our clients self-report severe mental health issues. That was no surprise to colleagues in the mental health space, though, because they've established for decades that financial distress and mental health illness go hand in hand. They are significantly associated. So for us and then in the tax literature, it was new but not new from a mental health literature perspective, which is informative for us because it adds an extra dimension, like you're saying of these are all interrelated issues.

Robyn Jacobson

I understand that ASIC has published some figures around the people who are reporting distress. In other words, they're trying to keep up with their loan repayments but actually struggling. Have you got to figure around that?

Dr Ann Kayis-Kumar

Yeah, I think the last time I checked, it was about 5.8 million Australians have some sort of financial distress, which is really troubling. Absolutely. And those are people who, I guess the literature is, is silent when it comes to people in poverty. For the most part. And so that there's a bit of a policy blind spot at that level, too. And that's the focus of what we're doing with the clinic and finding really surprisingly, that, for example, most about clients have a tax debt that is quite significant. And that's up to, in some cases, $300,000 of tax debt. But they're on Centrelink. So it gets to a point where we really need to unpick what's happening. The difference between, once you overlay the financial abuse angle, what the solution should be, because it's not right that if someone is not even responsible for creating a tax debt, that they are deemed responsible for paying it off. So our clients will be in, transitional housing, reliant on Centrelink. So they've got income of the significantly less than the national average. But on average the tax debt that they hold is about $90,000. It's simply impossible for them to pay that off with a payment plan. And what I worry about and what my team is concerned about, is the next steps that can then lead to bankruptcy. And that then fades into what you're saying before about the mental health piece. Because if someone is made bankrupt, then what are the consequences of flow from their.

Robyn Jacobson

And we'll chat about that in a moment. So does any of this get into the sphere of elder abuse or is that a different conversation?

Dr Ann Kayis-Kumar

That is a whole other conversation and one that we really need more work being done. In my research, focus has been on intimate partner financial abuse, but there is absolutely a whole other unexplored unknown when it comes to that and its interaction with the tax.

Robyn Jacobson

Okay. What about whether this is getting into what can be described as gendered violence?

Dr Ann Kayis-Kumar

Yeah. So unfortunately there is an overrepresentation of women when we talk about financial abuse. The statistics, it's you know, it's 16% versus 8% women to men experiencing financial abuse. So statistically, much more likely to be women experiencing financial abuse.

Robyn Jacobson

And that's a national average. You're referring to the 16% of women.

Dr Ann Kayis-Kumar

Of all Australian women, according to the ABS data.

Robyn Jacobson

On what would be the proportion that you're seeing in your clinic.

Dr Ann Kayis-Kumar

We've got much, much higher rates of financial abuse. Unfortunately, when I first started the clinic six years ago, it was about 60%. And that then prompted collaboration with the Gender Violence Research Network. And they've just been invaluable because they've already been working in this space and have significant strides in the financial services industry. However, what's even more troubling is in the last year and a half, that number has skyrocketed to over 80% of our female clients. So reporting financial abuse.

Robyn Jacobson

Recently, there was a report delivered from the Independent Rapid Review of Prevention Approaches to help stop gender based violence. A lot of words in that. There were some recommendations made across six key areas. My question is, is this just another report? Another review with more recommendations. Does this report progress the conversation or more importantly, progress action and solutions to actually make a difference to those who are in these very, very difficult circumstances?

Dr Ann Kayis-Kumar

Thank you, Robyn. I think what's really special about the Rapid Review is it's we already knew from the national plan that tax was part of the landscape, but the national plan didn't have any concrete policy solutions. And what's really promising about the rapid Review is that the expert panel has identified tax as one of the significant systems that can cause harm. And so that in and of itself is breakthrough. That is the first time that a federal government level report has recognized the interaction of tax and financial abuse. And so I'm really optimistic that with the report coming out and then in October next month, the Parliamentary Joint Committee on Financial Abuse will deliver its recommendations to government. I am an optimist, and I'm hopeful that we will see some real policy recommendations being made, that the government will be able to act on the things that are practical and meaningful, because that is really what we need in this space. We need law reform so that the regulatory environment and the administrative levers are modernised and appropriate to deal with this.

Robyn Jacobson

So let's unpack the tax side of it a bit more. With your background as founding director of the UNSW Tax and Business Advisory Clinic, what do you see and how does tax play a role in all of this? And I'll add to that, you have in your previous research and papers and, and other publications referred to sexually transmitted tax debts. So can you also explain what that means?

Dr Ann Kayis-Kumar

Absolutely. So sexually transmitted debts are a term that financial counsellors coined a little while back to highlight how a victim survivor can be saddled with debt. What we're seeing is that playing out via business structures in the tax system, and that's really problematic, because then it means that the ATO is pursuing victim survivors, sometimes without the victim survivor even knowing about the debt to begin with. And it's, unfair on the ATO as well, because they don't have the legal mechanisms that make it really clear that, for example, with that DPN affected clients. That that is a defence. If we were to legislate for those sorts of defences or to have a mechanism, an exit valve, it would be beneficial for the ATO and beneficial for the community.

Robyn Jacobson

So you've talked about Director Penalty Notices being issued to people who are directors but didn't even know they were. And of course, the DPN makes you liable for unpaid PAYG withholding superannuation guarantee charge, but also GST, luxury car tax and wine equalisation tax. You've also talked about bankruptcy. So let's delve into that further. What are the implications if someone is declared a bankruptcy, what sort of impact does that have on the victim survivor.

Dr Ann Kayis-Kumar

Absolutely. And particularly keeping in mind, the piece around the lack of social justice that is achieved by bankrupting someone for a debt that they weren't even responsible for creating and oftentimes didn't even know existed. So in addition to that, then it is part of the broader tactic of control and revenge and abuse. So what we then see is the system effect kicks in, and the system is often deliberately used by perpetrators as a further tactic of control and abuse. So the system effects of things like once someone is made bankrupt, it impacts their ability across short, medium and long term to attain economic security. It can affect housing, it can affect employment. It can affect ability to get finance. So it can affect ability to travel overseas. But more profoundly when it's done in really sinister ways. And we have seen clients who have told us that their former partner has said to them, I am going to financially ruin you, and that is a deliberate thing that they're doing. It's loading up with revenge tax debts as a result. Once you overlay and family law and bankruptcy, things can get really problematic in ways that are really unexpected. For example, being made bankrupt can affect someone's standing in a family court matter, which can in turn affect their ability to secure child custody. So there are very profound ripple effects.

Robyn Jacobson

These words, and I'm going to reel off a bunch of them for you, are these apt descriptions of what you see with your clients: power imbalance. You've talked about someone deliberately setting out to ruin the victim, intentional behaviour, revenge, calculated behaviour, vendettas, and energy put into destroying the victim.

Dr Ann Kayis-Kumar

Yes, yes to all of the above. Unfortunately, it's chilling.

Robyn Jacobson

Yeah, it really is. What role does the tax system and maybe this is a paradox. Does it actually enable or facilitate this inappropriate behaviour? Or can it be used to harness good out of it? It there a way of using the tax system to identify and prevent financial abuse.

Dr Ann Kayis-Kumar

Yes.

Robyn Jacobson

And I feel that you’re more likely going to be leading on the bad list rather than the good list. But let's see how we go.

Dr Ann Kayis-Kumar

I think the present state is bad just because we've had such poor awareness and understanding of it. And often when I talk to people, they are surprised at how the tax system is weaponised. It's something that we don't expect to see. But unfortunately at frontline level it is commonplace. What we could do is turn this whole ship around and empower the ATO to identify and support victim survivors by bringing in legal solutions that give them the discretion to release victim survivors from tax debts created by the perpetrator. Also other administrative solutions, too. And that's often things that we can see international examples of in the way that debt is managed, for example, in the United States, which really is the shining light when it comes to serious hardship in the context of innocent spouse relief is that they have the legislation that means the IRS is poised to be able to grant these sorts of discretions, but they also have administrative mechanisms, like a victim of domestic violence indicator that while not perfect, we could learn the lessons from and cherry pick elements of to design something that's really going to make the ATO positioned in a way that it can disrupt perpetrators rather than the situation that we have today.

Robyn Jacobson

How does the indicator in the US work?

Dr Ann Kayis-Kumar

That one's a little bit complicated, but it goes to previous behaviour in screening, and then the IRS is able to keep a record of that. Another thing that we could be doing here, which I understand is forming part of the broader conversation around the national response, is sharing data across agencies. So for example, ASIO, Centrelink and the ATO, we know from previous work in this space being led by academics like Kay Cook, that there is also the weaponisation of the child support system. So by not lodging a tax return or by lodging a tax return, but understating income that has a knock on effect, the child support payment amounts. And we've also seen situations where perpetrators have deliberately understated and subsequently amended their tax returns, which then creates Centrelink debts, which then the ATO needs to pursue. And it gets to a really messy state because you can't get relief from your tax debts on grounds of serious hardship if you have other tax debts, and Centrelink debts are one of those other tax debts.

Robyn Jacobson

Is it the case that if you don't lodge a tax return for two years, then you don't need to pay child support?

Dr Ann Kayis-Kumar

Yes, that is something that has been uncovered as well. And I absolutely agree with you in the way that you're saying it. It is absurd even just saying it. And that's one of the deficiencies in the system that I'm hopeful that we see corrected as a result of the government work in this space.

Robyn Jacobson

What other red flags do you see, or, I guess more importantly, for our members who are practitioners and they're sitting there with their clients, what sort of things should they be looking out for? And I want to emphasise, this is not about an expectation that the tax profession should be running to the rescue and solving all the problems, intervening, because they're not trained to do so. They're not trained psychologists, they're not trained in domestic violence issues, but there must be signs or red flags that would make a practitioner sit back and think, gee, I wonder if there's an issue here, and if there is, what could and should they do about it? So perhaps we break it down and look at what are some of the red flags you're seeing.

Dr Ann Kayis-Kumar

Absolutely. So in situations where decisions are being made, transactions are being made, organisations being set up. And that's happening as a couple, but without the written or, evidence consent of the client's spouse. That is a red flag. Identification checks. So we've seen again, really chilling ways that perpetrators can, you know, through charisma and other tactics, put accountants in positions that are compromising. For example, one client came to us and their abusive former partner had masqueraded as them by setting up a fake email account, pretending to be them, and telling the accountant that she couldn't attend meetings. She was too busy at work and everything just needed to be done via email. There was no client verification. Now, that's not to say that solving that would solve all the problems, because you still could have situations where there is coercion. And so the client's spouse may be physically, there may be giving consent that may actually be in a situation of coercive control. And we know that a couple of states, including New South Wales, have enacted legislation against that. But going to your point about what can we do as a profession? I absolutely agree with you. We are not trained mental health practitioners or domestic violence support services. It's more about where it is safe for both the client's spouse and for the individual who's identified a potential red flag, where it is safe to pull them aside and say this might be a red flag. Are you getting support? Do you need support? Something as simple as raising an awareness of it could have, a trajectory changing effect, but any further action? I think it's imperative that that individual, that particular person, is empowered to do the next steps of reaching out. It's certainly an area where I wouldn't recommend any further action from a professional's perspective, but things like raising awareness around the need to get consent, the need to make sure that the individual has an awareness of what the implications are from a tax and liability and personal liability perspective are really important. So it's about, an education piece rather than a crisis support, imperative.

Robyn Jacobson

Yeah. So in a similar way, if I was a practitioner and someone I didn't know approached me and asked me to set up an entity, change a bank account, amend a prior lodged return, and then that generates a refund either from an activity statement or a tax return. I think my little antenna would be going up thinking, okay, is this all legitimate? Is this a potential fraud on the ATO? So in a similar fashion, it's not to say that anyone who sets up a new entity or changes a bank account is engaged in in fraudulent or inappropriate behavior, but it's perhaps a red flag to look out for. What are some of the other red flags you would suggest accountants should be alert to?

Dr Ann Kayis-Kumar

Yeah, absolutely. And that pays around bank accounts is really interesting. So where an individual, the client's spouse is assigned income, but then the funds don't go to that account or they go to a different account. The tax liability will still be triggered, but they may not have access to funds. So there's only so much that we can do as a profession. But just having some guardrails around awareness, I think is a really important first step in identifying and supporting, people in these situations. One really interesting piece that I often hear domestic violence advocates talk about is the need for, the victim survivors to have their own bank accounts, but that is set in a way that assumes that that is achievable. Often one of the really unfortunate elements is that that's not the case. We shouldn't take for granted that people have independent access to their own bank account. And the knock on effects of that is also something that it's still early days, but does make you wonder when it comes to lodging things, whether or not you use an accountant via myGov, for example, with director IDs, what potential issues there are that we're still, you know, just scratching the surface of.

Robyn Jacobson

So would you also be looking at for say changes in patterns of distributions from trusts or changing office bearers? So whether it be directors, trustees, appointors, shareholders, beneficiaries of trust, there's a whole swag of things there, perhaps looking out for amendments of returns or activity statements.

Dr Ann Kayis-Kumar

Yes, yes, absolutely yes to all of those things. Yes. And unusual patterns of really large numbers that can, create large tax liabilities that are outside the norm of that particular operation. While that might just be a really good boon for that business, it could also be an indicator of other things. And we've seen that in areas that are adjacent, like with protego. But it's just about I think from our perspective as a profession, the first step is raising awareness amongst the profession of what financial abuse, even is and what those signs could be, and the pace around consent and coercion and how they interact. Sometimes the victims will have knowledge, sometimes they won't. But in the US, it's really interesting because they don't require evidence of anything but the abuse to then be able to relieve the tax debt, which I think is really interesting because it goes that piece around, even if you had knowledge and so called consent, there's coercive control. So as long as you can evidence that abuse was occurring, that is the legal threshold.

Robyn Jacobson

We know in Australia about two thirds of individuals use a tax agent. And this might be a difficult question to answer, but do you have any insight as to whether it's more likely to occur where a new client works, walks through the door, or whether it's existing clients that you might have been looking out of for the last 10 or 20 years.

Dr Ann Kayis-Kumar

That is such a brilliant question, Robyn. And I think because this area is still so new, we're literally in the infancy. It's only really been unpacked in the last two or so years in terms of the literature base from an Australian tax and financial abuse perspective. I would love to know what that number is. And it's something that would be really instructive to have the data around. We simply don't have as rich an understanding from an empirical research perspective. So potentially, if any of your listeners, interested in doing research in this space, that would be really, really interesting to to have that data and would inform government and policymakers.

Robyn Jacobson

That's actually an interesting approach, because if the data shows that, I don't know, let's say 80% of this was happening where it is a new client, that it means agents and practitioners more broadly should be that much more attuned to when someone walks through the door to make sure the radar is off on all the range of issues, not just, whether there's financial or economic abuse, but of course, if there's any fraud that's potentially being planned. Whereas if the data showing that it's more the longer term clients, the ones that have got fixed, existing relationships with their agents, then that brings in a different dynamic.

Dr Ann Kayis-Kumar

It does indeed. And what we have seen with a number of our clients is that, often if they do have an accountant, it's the perpetrators mate or contact. Who has brought that account into the fray to begin with. So once there is a separation, the client spouse is on the out and that can have knock on effects as well. One thing that we unfortunately have seen occasionally is our frontline team not being able to get the records for the period that they were with that particular professional, and that could be for a myriad of reasons, including just simply the client not paying for the work that it can be a red flag if there is a withholding of that sort of data. And so that would be really interesting to get a sense to, of how prevalent that is, because like we've talked about the clients that we say are really at the pointy end, they're the most extreme. But we do have situations like that. And that's echoed in what the evidence has been presented to the parliamentary joint committee around the role of various professions and silence and subjugation across a myriad of different professions, and how that works as well.

Robyn Jacobson

Where my mind is going is the code of professional conduct and the Tax Practitioners Board and the regulation of the tax profession. And there are two things that jump out at me that one is about managing conflicts of interest. And of course, if you are then in the situation where the client, as in two people have separated, you then need to manage that conflict. There's nothing that says you must only act for one of them. But in a situation where it's quite acrimonious, then that could be a situation where you do need to pick one over the other so that you're not conflicted in that way. And the other is about the agents making sure they comply with the proof of identity requirements. So we know there are standards expected by the Tax Practitioners Board. They've got that in there, the guidance notes or practice notes. And so checking the identity and verifying who the client actually is is a really important piece of this. And that's needed for so many reasons to safeguard against inappropriate behavior. Absolutely no tax clinic. I just want to heighten this for a moment. Understand there are now 15 tax clinics across the country. You're getting Commonwealth funding, which is fantastic. And this is a really important piece of work. And I look at the stories, the reports and of course LinkedIn posts about people who work on the tax clinics going to remote parts of Australia and providing tax and superannuation services to those who probably haven't heard too much about it. How's the work going, and is there anything the profession can do to support the clinics?

Dr Ann Kayis-Kumar

Thank you so much. I really appreciate that, Robyn. I think one of the amazing things is our ability to collaborate. And also credit to the ATO for giving each of the clinics the discretion to formulate a clinic that best suits our geographical areas and serves our communities in the way that we were able to craft as we saw fit and where the demand was. When it comes to demand, obviously demand will far outstrip any supply in terms of frontline service provision, but I would definitely encourage anyone who's interested in contributing, whether it's in a in a pro-bono basis or in the case of my clinic, as an employee, albeit compared to what you'd be getting in practice, we'd only be offering you a peppercorn, but very much encourage anyone who's interested to reach out to your local clinic. And we are always really keen and welcoming of people who want to be at the frontlines and help people who need it the most.

Robyn Jacobson

Yeah, yeah, it's very, very, honourable work and very much needed. Some of the resources available to practitioners. Now reiterating that it's not about putting yourselves or your clients at risk. Of course, the key message here is leave it to the experts. That said, there are some resources, and it would be useful if you could just run through some of these. I am aware, in particular of the Redfern Legal Centre’s. Financial Abuse Service in New South Wales. Is there an equivalent in other states?

Dr Ann Kayis-Kumar

That's the pace that I think really highlights the deficiencies and the lack of awareness more broadly. For funding when it comes to this. So like you say, Redfern Legal Centre’s financial abuse service is a terrific service. And they're a strong partner organisation that we've been working with from an advocacy perspective as well as a client work perspective. And there's also some brilliant organisations like CWES’s money clinics, and they do some amazing work when it comes to economic empowerment and security. Unfortunately, though, that is quite unique to New South Wales. And we don't have across every state or territory, a financial abuse specialist statewide service. So that is a gap and it is something that would be really great to see, you know, a change in the funding model of the policymaking framework so that every state and territory can have its own specialist service.

Robyn Jacobson

What are some other services that are available to practitioners or to their clients?

Dr Ann Kayis-Kumar

Broadly, there's 1800 RESPECT. And so that's a really good first port of call. I wish we had a number for every state and territory that was financial abuse specialist and specific. But each state will have its own services. But at a top level 1800 RESPECT is a really good first port of call for people. If they're also experiencing financial distress and hardship, then the National Debt Helpline is really useful, as is the Small Business Debt helpline, and they will be able to patch in other supports that are specific to the client's needs and the geographic area. Once they are made, the referral out, those are the primary ones. We were talking about the interaction of mental health, domestic violence and financial stress, so mental health supports as well, would be potentially something where a practitioner would be able to, encourage particularly small business in the current economic climate to get support. But of course, it's hard because it adds to the burden of needing to go and reach out to get help. And that help seeking can be really powerful, but also it can be quite overwhelming for people. So that's one of the things of, you know, it's one of the challenges of it's one thing to give a number to someone. It's another thing for that person to actually go and take the step of calling that number. But there's only so much that we can do as professionals and I think the most critical thing is not necessarily the technical depth and the what is done, but it's the how. So if you have a client who discloses something that is financial abuse, or mental health, it's about not just glossing over that, but instead holding in that discomfort and saying, thank you for sharing that with me, believing them, and asking if there is a way that you can support and that can have a really profound impact on that individual, and it can even change the way that that person then chooses to disclose or not in the future. So that's really important to keep in mind as well.

Robyn Jacobson

And of course, the practitioner needs to be mindful of the confidentiality rules around this because they can't be disclosing their clients information to anyone without the client's consent. Alright: policy. So just in a minute or so to wrap up, what would you like to see change? How do we embark on this journey to make a difference to these people who need assistance?

Dr Ann Kayis-Kumar

Policy is such, this is the so what? Isn't it? So what I would love to see is, law reform that can give the ATO the right tools to be able to screen and support victim survivors. So we know from the US that they have multiple mechanisms for different under different grounds. You've got instant spouse relief that is specific to financial abuse. You've got, discretion to grant relief for tax debts on grounds of public policy, which we don't have here either. And you've got serious hardship relief provisions that are much more robust than what we have here in Australia, too. So the pointy end is the piece where the taxpayer is facing bankruptcy. And that would be the starting point for law reform here, enacting rules that can give the ATO the discretion to release a tax debt on grounds of financial abuse, and instead enable the ATO to retarget the perpetrator for the tax debt would go a long way in in profoundly changing lives.

Robyn Jacobson

And I can see you beavering away to make that happen. Ann, your key messages. What's the takeaway for practitioners? What are some things you would like them to reflect on after listening to this conversation?

Dr Ann Kayis-Kumar

Yeah, I think the top two things, one, the collective efforts around financial abuse have really been coming to a head, particularly over the last 12 months or so. And so I hope there is a ‘watch this space’ piece around policy changes when it comes to financial abuse and a tax lens overlaid on that. The other piece would be it is quite eye opening to know that it's 16% of Australian women. So it's about one in every six Australian women, and 8% of Australian men. So that's a lot of people across the community. Chances are that forms a small part at least of client bases. And so to have a heightened awareness that this is a national problem and being aware of that and watching out for red flags of that can hopefully help to disrupt the abuse to the extent that it's within our control as professionals.

Robyn Jacobson

Thank you. And I would add perhaps also the lack of awareness. There's no shame in still getting to grips with all this. It's going to be, for most people, firstly unfamiliar territory and secondly probably very awkward or difficult territory. So there is no shame in putting up your hand and saying, look, I don't understand this or I need some assistance to get my head around this so that I can better be there to support the client.

Dr Ann Kayis-Kumar

Yes, absolutely.

Robyn Jacobson

The other thing I would add is make sure as a practitioner, that you're not being used by the perpetrator to in fact, perpetrate more financial abuse. So keep that antenna up. Look at some of those red flags that Ann has identified and hopefully the whole profession can work as it always does together to make this a better system for everyone. So, Ann, thank you so much for your time and your insights. And your work is so important and so commendable.

Dr Ann Kayis-Kumar

Thank you so much, Robyn, and I really appreciate your support as well. It has been phenomenal. Thank you.

Robyn Jacobson

You're very welcome.  

Thanks for listening to this episode of TaxVibe. I've been chatting with Dr Ann Kayis-Kumar, Associate Professor of Taxation Law at the UNSW Business School.  

If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the centre of the tax conversation, a membership with The Tax Institute could be just what you need to stay current and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. Thanks again and till next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute. And your host of today's podcast. On the show, I chat with some of the tax professions brightest minds during on each guest unique perspective to give you valuable and practical insights you might hear every day. We hope you enjoyed this episode of TaxVibe. I'm presenting to this today from the Barossa convention. So Peter is up in Adelaide and I'm down the Barossa. So this is a South Australian experience today. I’m here with Peter de Cure,  chair of the Tax Practitioners Board, and we're very pleased to be able to speak with Peter today and unpack some of the developments of light regarding the changes to the Taxation Services Act. Peter is a professional non-executive director. His experience in tax matters has developed over 25 year career as a tax partner with KPMG, and is a registered tax agent for 16 years. Peter is a fellow of the Australian Institute of Company Directors and a Fellow of Chartered Accountants Australia and New Zealand. It is also a chairman and on the board of a number of other organizations, including the Royal Flying Doctor Service, S.A. and Inti, and the South Australian Fire and Emergency Commission, as well as Variety, the children's charity. Peter, a very warm welcome to TaxVibe

Peter de Cure

Thanks, Robyn. It's good to be here. And I think from a South Australian perspective, you’re a bit upside down. So we'd say you're up in the Barossa and we're down in Adelaide.

Robyn Jacobson

Yes, I am north of you, good correction.

Peter de Cure

That's all right.

Robyn Jacobson

Now. All good. Look, lovely to be here. But obviously here with the South Australian members predominantly and certainly I know they love showing off their valley.

So we are here to talk about the changes to the Tax Agent Services Act. We've had quite a journey over the past couple of years. And of course, this all started with the review of the TPB and TASA, as it's referred to back in 2019. And this has led to some very significant developments. So I just want to set the scene and and understand why we've got to this point. Obviously, integrity is a central point of any good tax system and the tax profession, and there's no question that the community must have trust in the system. And of course, they must be an integrity in the way that the tax profession and the practitioners conduct themselves. It's got to be free from any reproach. We acknowledge that most practitioners are doing the right thing, and we've got an few that have shone a light on the profession, which has led to setting a lot of political focus, media focus and even media articles this week continue to talk about these issues. So putting aside the revelations of 2023, there was momentum to reform. TASA, well before we found out about the misconduct of a few. So this review was in place that there were 28 recommendations in total, and 20 of those have been accepted by the government. So we're now into a space of working our way through the implementation of some of those. And this has come in a couple of tranches. Now, also tonight, Peter, as a statutory body is a government agency. You're there, of course, to lead the administration and the implementation of new laws regarding TASA. But of course, anything of a policy matter is beyond the scope of the TPB and is a matter for the government. So I acknowledge that upfront. And of course, our discussion will be confined to the things that are within your realm and what you can administer. So are you able to walk us through briefly how we've got to where we are? Because it has been a quite a journey. There've been lots of stages, lots of developments, and would be good to understand what's law and what's still to come.

Peter de Cure

Yeah. Thanks, Robyn. And I think it really is very important to acknowledge the The James review in 2019 was a pre planned and scheduled post implementation review of the TASA and the effectiveness of the TPB so that you know, really business as usual thing from a from a government perspective. And as you said, there was a range of recommendations in that large number of which were accepted by government, including one of them, which was to allow the, the minister in this, in our case, the assistant treasurer, a legislative power mike, a legislative instrument that becomes a code determination to add to the code of conduct. That does a couple of things. One is that allows the minister to respond if there is, you know, a major issue or some form of process. And we know that, you know, there's been both significant public and political comment around, you know, the misbehavior of, of a small number of tax professionals. So the minister's made the most recent code determination as his first term. And I said under the the revised legislation, one of the things I'd like to stress to practitioners about the ability for the minister to make a legislative instrument code determination is it also creates a capacity for the minister to do something in response to issues that agents might raise in terms of changing how the profession is going to work in the future. And I think, you know, the minister's capacity to be agile has been demonstrated by the fact that there's been a pretty quick response to add to the the termination, the transitional provisions. And that's been very much based around discussion with the profession. and the way that we've been speaking publicly about how the TPB intends to implement transition, so that that gave the minister an opportunity to respond very quickly and very directly to practitioner's concerns. The other part of these recommendations that, as you've seen, there's been several tranches of legislative change, including the introduction of the grants reporting requirements, including the expansion of whistleblower protection, so people who are eligible whistleblowers, I can now make whistleblower protected disclosures to the TPB as well as the ATO. Their consultation type is out there at the moment in relation to the appropriate accreditation and qualification requirements. To be a registered tax agent, there's a number of detail consultations in progress at the moment about guidance in relation to some of the changes in the law, and happy to talk about those as we go through today. And I think it's important to understand, for your members, that this started out as ordinary course of business. It's been pushed and followed around, perhaps by a little bit of farce in Parliament and the media around some specific issues. And government has worked with Treasury, ourselves and the professional bodies through the tax practitioners, governance and standards Forum to try and make sure that the legislation that comes out is practical and implementable. And by way of comment, I one of the things I really want to say that I think over the journey, the TPB is probably established, a reputation of practitioners. Yeah, we're a regulator and I think we're a robust regulator. But I think we've established a track record of playing a pretty fair lot. And we're going to stick to a risk based, management of compliance activity. first thing I'll tell you is that I'm not about to send out to our investigative team an eight point checklist of the new determination. And so I get out there and trip somebody up with this. What we're going to do is continue to focus on the high risk cases. The people that are really exposing the profession to reputational damage and deal with those. The new eight point code determination is consistent with the existing code. It's just a bit more specific.

Robyn Jacobson

And look, that's a comfort. What I would say, and this is a policy question. So I don't expect a comment from you on this. But I would like our listeners to understand is our position would always be that the law is articulate, free from ambiguity and clear about what it wants to achieve and what the policy intent is. And one of the overarching concerns we've got through a lot of the provisions that have been introduced is that there are very vague terms, we've got things like reasonable grounds and material and otherwise significant and ought to have. These are terms which are subjective and which require interpretation. So we as a professional class, relying very heavily on the TPB at the moment. And it's not just about trust, but it's about understanding practically how you can decipher the terms that are given to you in the law and then be able to be able to explain that to practitioners as to how they comply. So we would always prefer better drafted law. So less reliance needs to be placed on the regulator to interpret that and then provide the necessary guidance. But it is necessary, particularly in this case.

Peter de Cure

Yeah. And that you know what I'll say to you is we're working pretty hard on guidance at the moment. And, a number of those issues are going to be subjects aware of our guidance documents coming in.

Robyn Jacobson

So let's start getting into some of the detail. And I'm going to kick off with the breach reporting rules. So in order that everyone is clear this is law. We're not waiting on bills to be approved or any legislative instruments. This applies to breaches on or after 1st July this year. And very broadly, if, let's say I'm a registered tax agent or a best agent, if I have reasonable grounds to believe that I have breached the Code of Professional conduct or another agent has breached the code, and that code is significant, then I have a positive obligation to report that to the TPB. So in terms of the triggers for reporting, you really need to have reasonable grounds to believe and there needs to be significant breach. If you haven't got both of those things, then there's no obligation to report. Now, you've had, some of the feedback, Peter, or if not all the feedback, you understand, this particular set of rules is concerning from our perspective.It was introduced into Parliament without any direct consultation with the professional association. So the first we saw with these rules was when they'd already hit Parliament. And there is an explanatory memorandum that accompanies these particular changes. So again we're relying on TPA guidance. It has been issued in draft and we've had input with the board and working with you to refine that and make sure it's as, effective as it can be. And we're now waiting for that final guidance to be issued. So how will you administer this? How will you provide the guidance that's necessary so practitioners can navigate these rules?

Peter de Cure

Well thanks, Robyn. I think in the first instance, draft guidance is out for public consultation as we speak. And so I really encourage practitioners and, unusually familiar engaged in a LinkedIn discussion this morning. just encouraging people that have genuine concern and want to make representations to do it through the consultation process. And we will certainly consider that. I think, as you've mentioned, key things are about, first and foremost, a breach has to be a significant breach. And we're going to be giving some guidance on what what will you say is significant. And it's got a line up, I think quite conveniently with some of the stuff around informing your plants and significant matters about whether they should or shouldn't report. But in the first instance, you know, significant breaches of, matters that are clearly the sort of thing that the TPB regulates. So a significant breach of the code that would get you a sanction is something that that you should be thinking about. Yeah. We're we're saying in relation to the self disclosure pieces, that you wouldn't have to advise a client if you've been given a caution on the TPB, but you clearly have to advise them if you've been sanctioned, you clearly should be self declaring if you become a bankrupt, you should be self disclosing. If you have committed a taxation offense or been convicted of an offense involving dishonesty. So those things I think are relatively clear. There's going to be a need for people to use some professional judgment around breach reporting for technical matters or competence matters. And I think the, you know, the clear example that people are concerned about is circumstances where they're taking over a new client from other practitioners, especially with disseminated problems. What I'm encouraging people to think about is, well, first and foremost, if you're in that position, one thing I'd like to see there was talk to the client about how they got themselves into this position, because you know as well as I do sometimes the the practitioner leads the the client to a position. Sometimes the client insists on leading the practitioner to a certain way of thinking. So I think that's an important piece of context. If you've got a client that's got a significant deep seven eye problem and wants to take you down a certain road, you should be thinking clearly about whether you want to engage with that person. Is this a sort of client I want to be engaged with? And I'll use that example again when we start talking about the requirement to correct false or misleading statements. So, or to notify the TPB in the ATO about false or misleading statements, if, for instance, you had a client that might have false and misleading statements in their return or, another communication with the ATO, if you become aware of that, the first thing you need to do is to decline about if they're not prepared to notify the ATO, I would say that the statement is false or misleading. And I think you've got a real question to ask yourself about. I've got a client making a deliberate material, false or misleading statement, and they're refusing to correct it. Is it really in my best interest in my practice to be dealing with people like that, to be advocating for people like that? I don't think so. So, you know, I want to clear things I want to talk to our practitioners about is these sort of provisions. They're not that far removed from the sort of business practices you should be thinking about in your practice, in your relationship with the patient, professional indemnity insurer, and to protect yourself from negligence claims. So, you know, if you're representing a client that's making false or misleading statements and you get caught for that, do you think you pay? I insurers kind of want to defend that. I think it might be time to kiss goodbye to the odd client and stick to the ones that are prepared to play within the system.

Robyn Jacobson

That's for sure. A question of whether it's significant and whether you've got reasonable grounds.

Peter de Cure

Yeah.

Robyn Jacobson

Because the definition and we do have a definition of significance. So it's about whether you've got an indictable offense, an offense involving dishonesty, material loss or damage to an entity otherwise significant. How does a practitioner who, let's say, has no knowledge or skill in criminal law or indictable offenses or dishonesty, how can ascertain whether or not any of those have been triggered?

Peter de Cure

You know, if if you're a practitioner and you've been to court for a, for a speeding fine or something, you can probably Google whether that's, an indictable offense. If you've been charged with something more serious, you need defending yourself. You can probably ask the lawyer working to defend you. You know, doctor, Google's a powerful weapon these days. You know, there are relatively easy ways to to get at least a feeling for what territory. If you if you're in doubt, you probably close to in trouble. So get some help. I think is a great way to do it. And I think as we're we're trying to focus on significant and make that clear. And you also raised reasonable grounds or, you know, ought to have now and I don't know whether you remember Hogan's Heroes on the telly, but when I was a kid, I saw some churches debating and remember he knew nothing and he saw nothing. And for a practitioner, you need to be awake at the wheel. And you should have known if your clients were, you know, you've got a positive obligation under the code to make reasonable inquiries, if you can, to understand the circumstances and to be able to detect work properly. So you should be doing PR well, I think you should be inquiring about how they business runs or what their family circumstances are. And if you don't make those sort of inquiries and don't do the normal professional things, if they found yourself tripping over something, well, I think you should have known and could reasonably be expected to have known. So it's about being, awake in the circumstances that you do need. If you get a new client, they've got a series of problems, make be inquiries to figure out how they got to where they were. And that's going to be a lot of guidance.

Robyn Jacobson

You mentioned whistleblower protection before and in one respect I agree with you. We have got an extension of the whistleblower protection in that the TPB is now an eligible recipient of that information, which is appropriate. We still have concerns about the scope of the definition of eligible whistleblower. Now, again, this is a policy question. So I'm not asking for your, comment on this, but I do think it's important to point out to our listeners. So let's say you and I, Peter, are partners in the same firm. We, by definition, are what would call a section 318 associate. And because we are associates of each other, that would mean I am an eligible whistleblower. So I can then get to the relevant protection if I need to report you. But if you happen to be a practitioner down the road, unrelated, and we're not associates as defined in the 36 tax set, then I actually don't have whistleblower protection. And I just think that's something that practitioners need to be mindful of. We yet to see all this play out, and I don't want to overstate things, and I don't want to suggest these things will happen. But we have had concerns raised by practitioners about defamation proceedings, malicious claims. And I know you've already made comment about vexatious claims, where you might actually turn it around and focus some attention on the reporting practitioner as to whether they might actually be a fit and proper person if they're making such a claim.

Peter de Cure

Yeah. And I think, you know, the problem. There are those points, understood and acknowledged. I guess the things I'll say is that if a practitioner makes a complaint to us or a notification to us about another practitioner to the best of our ability, we'll protect them from disclosure, even if they if they're not in a whistleblower, if they're not an eligible whistleblower. But I can only do what I can to satisfy. So we, are subject to the normal laws of the land as well. Now, equally speaking, in relation to those matters, I think it's really important to note that there is protection for you so long as you're not frivolous, malicious, vexatious. and I'm not trying to make that as a threat, but I'm just trying to say to people just, you know, don't use it for commercial advantage because you don't like Bob or Jane down the road just because you're having a bit of a personal spat with a practitioner in, in your regional town or suburb or whatever, don't use it for that. Because the funny thing about those sort of things is when we look into the facts or when any, any investigator looks into the facts, the truth comes out pretty easily. And if if you don't have a serious cause to report somebody, don't do it. It doesn't get anybody anywhere.

Robyn Jacobson

What do practitioners do in this situation? I'm going to describe a few different scenarios, but it's all the same issue. Text discussion groups conferring with another practitioner. our profession has for decades relied upon referring to each other. We've said, I've got a client who what do I do in this situation? What would you do if you were me? And sometimes it's seeking formal advice. We certainly do have practitioners who formally advise other agents. We've got those who informally assist their colleagues or their friends in support networks. And then you've got more casual conversations. So this idea that you've now potentially putting yourself at risk by sharing an issue with a practitioner in good faith to try and resolve the issue, but for fear now that they might have to report you.

Peter de Cure

Yeah. And I've I've been involved in discussion groups and I've, in my professional career advise the range of other accounts and advisers in the profession, at the more specialist level. So I get where you're coming from. I'd say a couple of things. Firstly, I think a legitimate discussion group has nothing to fear when you come to the table when you talk about how to interpret the law, how to implement the law, you talk about client scenarios. I don't think there's anything in what I do think there is something new. If somebody comes to a discussion group and you're having a good generic discussion about those sort of things, the professional issues, how to interpret section 100 II or D7 or whatever it might be, and somebody says to you in that discussion group, are you a lot? That's a lot of bunkum. What we're going to do in our practice is we're going to implement this scheme to go around, or I'm sure you would have seen this. The odd practitioners at City Hall, we don't do it. That way. Where I come from, we just ignore. Yep. I think that's a completely different perspective. If somebody comes to you and says, I'm going to implement a scheme to get around that, or I've just we just always don't do that. And if you know that it's serious and it's not just better, then I think there's an issue there. but I think, you know, I wouldn't I wouldn't be going to stress about a bit of pub talk when, you know, I'm participating in a bit of pub talk, having TVs, and I wouldn't think that it would be a common issue for a tax discussion group, that there would be a problem that you would need to write to report, look for those serious ones, use those sort of examples of deliberate evasion, avoidance or, you know, implementation of tax schemes.

Robyn Jacobson

We still have issues where there is an issue with the clients and leave aside the discussion group, it's no longer pub talk, but I've actually gone to another practitioner and said, look, I think I've got a problem here. What do you think I should do? Or this is getting out of my scope. Is there someone you can refer me to? So in these situations, again, I might have inadvertently shared with that practitioner that I've done something incorrectly. From a competence perspective.

Peter de Cure

I would be simply sitting there saying, if it's at that level and you're saying, I'm not sure what I should do here, I need some help with this work. And I go to, I think, in a discussion where the person might you genuine attempts to get things so that you should probably side of them will listen. Are you aware of the breach reporting rules. Do you need to use the breach reporting rules? should you think about that? You know, perhaps don't put yourself in a position where you actually, you know, if you're engaged to give them advice and you get to the bottom of the fact, you say, well, might I really think given in trouble, you should advise on the breach report. And you probably need to say to them, you know, you've put me in a position where I think I need to do this time. So why don't we do it together practically?

Robyn Jacobson

In that situation, we expect both a self-report and a breach of another practitioner. Where is it sufficient if someone, say, does a breach report that the other agent doesn't need to report?

Peter de Cure

I think it's the if the agent who's made the breach does the reporting on the advice of another agent really, if push comes to shove, I'd probably say that's sufficient. What I think is the easiest thing to do is to get, you know, to the agent who's made the breach to report and the other one for breakfast, I understand so and so from down the road as self-reported. Yeah. You know, and we're not trying to create a wall between practitioners, but we are trying to have that set of circumstances where if you go to a more experienced practitioner for help and they tell you that you breached reporter Bob, put them in the soap as well. Yeah. Understand that makes sense.

Robyn Jacobson

Yes it does. So Peter, with now into early August it's a month on from in the role started. Have you in fact received any breach reports yet either self-reporting or reporting another agent.

Peter de Cure

Robyn, there's been a handful of breach reports my already and I can't really go into the detail of them, but what I can tell you is that they're going through a, a triage process so that we can get to understand the the nature and level of seriousness of the issues. And I think, you know, that allows me an opportunity to blow the whole up from the tape a little bit. We understand and empathize with the amount of work that's going on in, in England as we speak. But the other side of the coin is our team, working really hard on a real time pressure in the same time frame as you are. So I, we, you know, we're we're getting new law, we're trying to issue guidance, we're running consultation processes, we're doing our BAU registrations and compliance work, trying to issue tax time updates, and all of those sort of things. So the hamster's giving the wheel a pretty hard spin at the TPB at the moment.

Robyn Jacobson

It's a lot to do. But we could keep going on about breach reporting. And certainly there's more to say, more conversations to be had when your final guidance does issue and look incidentally or mentioned that, you will be making an appearance, you will be on hand and available to members and practitioners at The Tax Summit in Sydney. So that's 11 to 13 September and we'll be continuing this conversation as part of a panel session, also with Tim Sandow. So look forward to perhaps having more to talk about. Hopefully by the time we get to that Summit session.

Peter de Cure

I'll polish my shoes and be ready.

Robyn Jacobson

All right, so let's turn to the other major development, which is a little more recently, though we did have noticed back in December that this was on its way. So as you indicated from the outset, the law has been changed to give the relevant minister in this case the Assistant Treasurer and Minister for Financial Services, the I'll call it intellectual power is a legislative instrument, so it still needs to be tabled before both houses of Parliament. And this is a window for a motion to disallow to be put forward. But that's in the political hands. So we'll leave that to one side. But this determination has now been registered after being issued in draft last December, registered on the 2nd of July. There are eight additional code obligations which broadly we were aware of back when the draft was released and we come into them. But there are certainly some additional obligations built into sub provisions which were not in the draft. So we can't say hand on heart that in all cases where across every single new obligation before it came out on the 2nd of July. So can you walk us through the eight new obligations? Some of them, I would have thought, are fairly benign or to be expected. In fact, I would suggest shouldn't even be necessary. So if we're talking, for example, about managing conflicts of interest in dealings with government and maintaining confidentiality in your dealings with the government, you would hope that a confidentiality agreement would be sufficient. But we've obviously not got a legislated code in respect of those, so I don't think we need to delve into those in too much detail today.

Peter de Cure

And I think, Robyn, you're right with that. It's not going to impact the majority of your, practitioner constituency. It's really for those larger firms that are engaged with the government on consultation processes. You cannot apply unless you are engaged by a government to work for them.

Robyn Jacobson

And most of us are.

Peter de Cure

Not nice, most practitioners.

Robyn Jacobson

So all right. So let's put those to one side. Can you walk us through some of these other new obligations. And then we'll have a chat about when does all this kick in. So let's understand physically what the instrument does.

Peter de Cure

Yeah okay. So the instrument applies from the 1st of August 2024. And we've got also, an addition to the instrument to bring in a transitional provision. So the transitional provision will apply such that any firm with 100 or less employees has, until the 1st of July, 2025, to be fully implemented against things any firm with more than 100 employees or 101 or more, has until 31st December to have implemented these new points. Now, from there, I think the critical thing is, and I'll say again, there is an an eight point checklist going to where investigators to go out there and trip people up. What will happen is that if a practitioner finds themselves investigated by the TPB for other serious misconduct, and we go through an investigation, we will go and then, you know, be part of that investigation. We'll look at these eight points. Have they been keeping proper client records? Do they have a decent quality management system in place? by upholding the standards of professional and ethical behavior that we expect them to. So we'd have a look at that and see how that goes. And that's going to contribute to the whole picture of whether or not the sanction needs to be at the lower end or the heavy rain, if we might, you know, if we make a finding of code breaches. So we're not going out to enforce these specifically, but it might come up if you're doing other things that are wrong, I guess. Couple of things I'd really like to talk about. And we mentioned false and misleading statements earlier, but they are and have been a cornerstone of the tax business for as long as I've been around. You're not allowed to make a false or misleading statement of the commissioner. And now it's clear that you're not allowed to make one of the TPB, but it needs to be clearly understood. You can make a false, misleading, or inaccurate statement by omission. So if you are filling out a form and you don't put all the information in it, that can be as false or misleading as a positive state.

Robyn Jacobson

I want a system with the tax law currently. So we know that if we don't comply, the liable on a tax return, that's still a false statement.

Peter de Cure

Absolutely. And one tax return could contain 20 false or misleading statements. Okay. Let's agree that that's the same. So one of the things I really want to talk about is for practitioners who have existing code obligations to supervise and control their staff. If you get your staff to fill out your registration application for the TPB or renewal application, and you don't tell us about your significant unpaid tax liabilities, or you don't tell us that you're not discharged, bankrupt, or you don't tell us you've been convicted of a tax from their false or misleading statements. So if you're getting your I or Eugenie's to fill out a renewal application, make sure you check it because you're the agent responsible for supervision and control applies to that as much as anything else. So I think that that's a really critical thing. The other thing I'll go back to yep, I insurance if you're making false and misleading statements, positively evil by omission, I think you pay I insurers kind of drop you like a hot sign. you know if if you're getting sued by a client for something else and you and your insurer can say, well, you haven't, done the right thing in terms of false or misleading statements, you're going to be on your own. So I know it seems like an onerous additional recon, but it's consistent. We've had a run, a good practice in reality in.

Robyn Jacobson

Respect of those statements you've made. I agree, but I do want to hone in on 15 two, see which is a new requirement that we did not see in draft until the 2nd of July. And in the view of so many in the profession and the professional associations, this is a step into new territory. So it's one thing where you shouldn't be making false or misleading statements and you make efforts to correct them when you've made them. But this new requirement to report a client to the commissioner, where let's say you've prepared a statement which might be a tax return activity statement, could be an election, could be a private ruling, whatever. And then they have somehow identified or you've identified that it's erroneous. You have a chat with them and then they don't fix it up within a reasonable period of time. You're under an obligation to report them. And we've not seen this before.

Peter de Cure

Yeah. And I guess, Robyn, I'm going to go back to one of my early comments. If we're talking significant, false or misleading style, you've worked with the client. You've found out that whether you know, deliberately or unintentionally, that the statement is false or misleading and it's significant and it's in relation to their own personal tax phrase, you go back to them and say, well, look, Mr. or Mrs. Client, you made this statement in your returns. I'm pretty sure it's false and misleading of the view that is significant. And the client says to you, I don't want you to do anything about it. I'm sticking with it. You might then have a, you know, a significant discussion about explaining to them the implications of a false or misleading statement, both on them and on you. And I think you would have a discussion says, well, you know, I'm really sorry about this, but I have a positive legal obligation to disclose this. And I'm happy to give you some information about what I'm going to do, and I'm happy to tell your lawyer or whoever, but I've got a positive legal obligation to do it and impacts my livelihood and my ability to practice. I cannot do this, so I can't be involved with this. So if you're telling me that you're not going to correct it within a reasonable time frame, I'm just saying that I don't have another option. Now, what's a reasonable client going to say to a person that you want to be representing? They're going to get it. If it's the sort of person that says, look, I'm afraid the law doesn't apply to me, I'm instructing you. I want to make a false and misleading style. Is that the sort of client that makes the the priority requirements of your practice? I don't think.

Robyn Jacobson

So. Try to be so many questions of trust. And yeah, we're worried about what the community, the business community and the individual community might do. Yeah. Once they come to understand this new requirement imposed on practitioners.

Peter de Cure

And Robyn, I don't I don't want to undermine the the legitimate concerns that the profession has. And I think this is a new piece of law and we've all got to work to understand it together. I don't want to say that there are no new situations, but I have thought about and I sit there and say, well, if your client is telling you that you're wrong and that they have citing is what they got, and Mike and you're convinced that it's false and misleading and it's material significant, then you just tell me you got an obligation to disclose if you're wrong. Disclosure wanted.

Robyn Jacobson

I guess, to fully understand what information may be shared or not shared with the ATO as well. So what implications it could have for the client.

Peter de Cure

Well, you know, and it just depends on the matter. But there will be new situations. There will be situations where a client's position is reasonably arguable. If it's reasonably arguable, it's probably not going to satisfy that. The threshold for false and misleading is.

Robyn Jacobson

It's still something that obviously concerns the profession greatly.

Peter de Cure

Yeah, I genuinely acknowledge that is working through these things at price as I.

Robyn Jacobson

All right. Can we tend to keeping proper client records.

Peter de Cure

Yeah.

Robyn Jacobson

Yes. New requirements. Sounds fine in theory. Back in real world. Is this the end of verbal advice? Does that mean for clients just have to get that much better?

Peter de Cure

I think again, I'm going to go back to good practice. How to how do you run a good practice. How do you satisfy your obligations to your insurer? How do you make sure that the advice you give is professionally competent and not negligent? What's enough to protect you from negligence is probably enough to demonstrate maintenance of proper client records. So, you know, to verbal advice over the phone for a quick thing like what's the cents per kilometer ride for my V8 Maserati or whatever it is? You know, all you gotta do is a quick note to the file that says, you know, Bill rang us this, to that reference, Mark the tax car. What we're talking about is a tax return file should have enough information on it to evidence the tax return that's been lodged. So that's probably a set of accounts. It's a tax reconciliation. It's probably a couple of nights at the depreciation schedule or a logbook or those sort of things. And it's if there was a contentious issue, what did you do about it. What rolling. Did you look at those. Sort of not it clearly doesn't mean you've got a copy of every invoice and a copy of every journal entry that makes up the general ledger. What it does mean is that you can demonstrate professionally how you reached the position of rights in a written or a best statement, and why you dealt with an issue a particular way. What's the cheapest car park within one kilometer radius? What did you do to establish that doctor? Google was going to help you. Then print off the page from a Google search.

Robyn Jacobson

Would be really helpful when the guidance does come out, or because the more examples that you can give and I know you understand as a practitioner yourself how the professional. Right. So under studying how this is applied in practice it's going to be crucial.

Peter de Cure

And again you know the through the consultation processes please tell us the things that you want examples of. It's it's a pretty tough, gig for our time at the office of trying invent examples that that hit the threshold for the high jump hurdle of being practical and interesting. That's one of the tough jobs.

Robyn Jacobson

All right. We'll help you out with some examples. one more particular requirement. It's, section 45. In the determination, keeping clients informed of all relevant matters is how it's described. Now, the wording in the law talks about you need to notify all your current and prospective clients of any measure that might influence their decision to engage or continue to engage you. There's been a lot of concern noise. There have been lots of suggestions as to how far this extends. And again, we know there'll be guidance from the TPB. The biggest concern we've got is the scope of this. And if it goes before a federal court judge one day and they look at the wording in the law which says any measure, it's difficult to break that down, but practically, isn't that going to be necessary?

Peter de Cure

It won't. I'm not going to go into the writing down arguments because I don't write down the law on, administer, with my team. We administer and give our interpretations. But the, the determination is going to require you to advise and prospective clients of any matter that could significantly influence their decision to engage. You will continue to engage you to provide text services. So that's one obligation. The other is, is to advise that the TPB maintains a register of agents and how you can access that. And the other is to advise your clients and effect that they can and how they can go about making compliance. Now, this is about not your sexual preference, your religious beliefs, or whether you're back from Hawthorn or come. It's about matters that relate to the business of being a tax practitioner. So some examples that we will be putting in the guard. Have you been convicted of an offense involving dishonesty? Have you been subject to promote a penalty font. Have you been subject of an investigation by the TPB and given a material or significant sanction? So one crystal clear message if you've had a, a suspension or a termination, that's a significant sanction. If we give you a caution that's not disclosed to your client like that, that's like a speeding ticket, you know, it's you've gone off road, we get you back on track. That's not a significant matter that needs to be disclosed. I want to be really careful about personal health issues. It's not an issue for your clients. If you if you're suffering from some health issues, that's not their business. What is their business? As if your health issue is going to prevent you from providing them with tax services. So if you've been advised by your doctor or your mental health practitioner that you're not fit to work, that might be disclosed. And I'd like to use the example, if you're approached by a new client to take on a significant job and you know you're not physically up to it, and you know you want to take the job because you want to have to work for when you get better. But you know, you can't make the requirements. I think you should be saying, no, I can't do that. But you don't have to tell them the personal issues to why.

Robyn Jacobson

I've been asked even about pregnancy, and I think most would agree that in many cases, my mind would be taken off work.

Peter de Cure

That's not a disclosure issue. This is a this is about your legal, ethical, professional obligations to your clients. Can you make them or is there a reason for them to believe that you shouldn't? Have you been suspended as a, as a, from a professional association? Have you been banned by ASIC? Has the ATO said you can't be a trustee to self-managed super fund? They are professional issues. Whether you're banks, accountant or horse or whether you support soccer or basketball. Their personal issues, political religious beliefs are personal issues. If you're a member of the kind of a liberal party not disclosed.

Robyn Jacobson

Okay. Thank you. And we do look forward to further guidance on this issue. Since the start date, you've, referred to this deferral until July or January next year.

Peter de Cure

Yeah.

Robyn Jacobson

And look, this followed extensive advocacy efforts by not just the professional associations, but we know that members of a practitioners are writing to their local MPs, etc.. So whatever ultimately led to the decision, the minister announced on the 1st of August, following an open letter that was sent to the joint bodies that confirms that there will be this deferral, but it does contain the words, so long as they continue to take genuine steps towards compliance during this period. Otherwise, it would seem that the start date would still be the 1st of August. Yeah. So how again, are you going to apply this or interpret this and is the TPB going to provide guidance on what genuine steps is?

Peter de Cure

I'm not 100% sure whether that is in a Gunns plan yet, but I'll tell you how I think it will work and how I intend to get it to work. And it goes back to our compliance normal compliance activities again. So you're not going to see a TPB investigator asking you whether you've got genuine steps to implement these things as a specific order. The only way this is going to come up is if you're under investigation for another matter. I you know, you're a high risk practitioner, you're pushing tax games, you're, you're stealing refunds, you're not paying your own personal tax obligations and not lodging your returns. All of those normal things that are out and normal compliance activity applies to if we do an investigation of one of those and we might, and it's clear that you cannot compliant, we might also come and ask, well, what have you done about implementing these new things? If you say nothing, well then you haven't. My genuine steps. If you can demonstrate to us in your practice administration that perhaps you've been to a court to what do I have to do to quality management system? Talk to another consultant to help you get a quality management system. bought something off the shelf that you're in the process of implementing all of those sort of things are reasonable steps. But the answer oh, I haven't gotten around to it yet. That's not a reasonable step, is it? Okay. Like, you know, I think the the genuine thing here is think about our track record as a regulator and a compliance activity. If people are looking at the cases where we make significant sanctions, you are saying people, you know, practitioners who haven't lost their own returns for 3 to 5 years, who have hundreds of thousands of dollars worth of tax debt, often are hundreds of thousands of dollars and SGC debt in relation to their staff and, not paying refunds through to their own font. we have, you know, practitioners. I've seen a practitioner that's run $10 million of their clients money through to the same clients who, you know, are in trouble with drug debts to, you know, to the drug rings and using clients that that's high risk behavior. You know, the the normal practitioner, the people we're talking to today that's taking care of their own tax obligations, getting their clients work done, giving them their refunds, and applying the law in a sensible fashion is not going to come up against a problem with this, and they'll have to have the opportunity and the transitional provisions to meet those challenges. When it comes to things like quality management systems, you know, as well as audit, there's plenty of guidance out there from various professional associations on what it look like, how you can get one. And it's certainly, a set of circumstances where we will be proportionate. So quality management system for a big 4 or a second tier accounting firm is really sophisticated, probably computer generated type of system that works. For a small practitioner, a sole practitioner. It's going to be a much more simpler series of checklists might be, you know, making sure there's a training program within their office for their staff. And it's a little bit like, you know, competence is, is a standard that applies to all practices. But a small practice doesn't need to be competent in every aspect of tax. THey need to be competent in the aspects of tax they're providing services in, you know, so a Parramatta Rd practice that's doing small business and personal returns probably doesn't need a lot of competence in transfer pricing. They need to be smart enough to go and get some help when they need it.

Robyn Jacobson

Which is always been the case.

Peter de Cure

Absolutely. Yeah.

Robyn Jacobson

Yeah. Peter. Thank you. I feel like we could keep up talking about these issues infinitum, but we will continue the conversation next month in Sydney. So thank you very much for your time.

Peter de Cure

Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Peter de Cure, chair of the Tax Practitioners Board. If you'd like to join us at the Tax Summit from 11 to 13 September, there is more information on our website at taxinstitue.com.au. Peter will be part of a panel discussion among a whole host of speakers and a wide range of topics for you to enjoy and savour in the tax world.

If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen to your podcasts. We welcome any suggestions and feedback to catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you interested in being at the center of the tax conversation, a membership of The Tax Institute could be just what you need. Stay current and connected with tangible real world benefits. Learn more at our website. Thanks again and until next time on TaxVibe.

Robyn Jacobson 
Hello and welcome to TaxVibe, a podcast by the Tax Institute.
I'm Robyn Jacobson, the Senior Advocate at the Tax Institute, and your host of today's podcast. 

On the show, I chat with some of the tax profession's brightest minds, drawing on each guests, unique perspective to give you valuable and practical insights you won't hear everyday.
 
We hope you enjoy this episode of TaxVibe.

Today I'm joined by Robert Thompson, the assistant Commissioner for Experience, government and case leadership, individuals and intermediaries, and the official tax time spokesperson at the ATO.

Rob is an experienced tax professional with more than 10 years experience and has recently returned from his role as Minister, Council taxation at Australia's permit delegation to the Organization for Economic Cooperation and Development, the OECD in Paris. Rob has extensive experience across several diverse roles in the ATO, starting as a postgrad in high wealth individuals, Rob progressed to a compliance officer role.

He then worked his way into specialist task forces, policy implementation and strategic programs.

Rob also holds a Masters of International Taxation and the Bachelor of Commerce Prior to joining the ATO, Rob worked in the managerial role for a not for profit foundation in New York.
 
Rob, welcome to TaxVibe

Robert Thomson   
Thanks Robyn.
Thanks for having me.

Robyn Jacobson   
Pleasure and look, first thing we need to acknowledge is that we have a new face as the ATO tax time spokesperson.
So our listeners would be familiar with Tim Loh, who held those reins for some years and you've taken over that particular role. So you're doing the media circuit.
 
Robert Thomson
That's right.
That's right.
Obviously so some big shoes to feel given Tim's role, but yeah, excited to step into the role.

Robyn Jacobson   
Yeah, very good to have you here.
So I wanna kick off with tax time.
Why is it important?
It's obviously the start of a new financial year.
It's when we start lodging returns for the year just ended.
Why is the messaging so important?
Why do we need to get it right?

Robert Thomson
Yeah.
So obviously tax time for a lot of individuals is that one time of the year where they actually just engage with the ATO as well.
So, you know, there might not be thinking about tax the whole year around.
We'd like them to, especially when it comes to record keeping Robyn.
But so we're really out there just trying to make sure that people understand their tax obligations and that people have, what they need to when they got to lodge, whether that's online or through an agent and really just help them to make sure that they're in the best position when it comes to lodging their tax return.
Obviously a lot of our messaging is around, you know around the tax basics, but just around reminding people around some other things like record keeping and and areas where kind of focused on.

Robyn Jacobson
So we're talking about millions of Australians who will be lodging their returns in the days, weeks and months ahead and we'll get into more detail about when they need to be lodging by.
But really, it's so important that they get it right the first time.
What are the best ways they can do this?
And we often hear about this rushing to lodge in the first few days.
What sort of numbers have you seen in on the day three so far of the tax time season?

Robert Thomson 
Yeah.
Look, Robyn, it's it's too early to make any predictions around what numbers looking like compared to last year or previous years.
You know, last year also we started on a weekend and we traditionally know weekend lodgments are a little lower.
But no, we definitely are just reminding people some of the things we're focused on is just reminding them actually if they can, to wait for prefill in late July to kick in.
We know people.
Some people want to rush to get their lodgments in, but you're actually twice as likely to have your good to have your return stopped, if you launch either through an agent or obviously online it twice as likely to have it stopped if you do it before all that pre fill information is in, so you know that's one of the main things we're just trying to communicate to people is wait for all that prefill, and that includes where you're logding through an agent.
Obviously that helps agents as well, because then they can see those messages or see those income amounts and remind people of perhaps things they've forgotten about during the year, but also as they lodge, obviously you get the reminders around crypto assets et cetera, share sales and so also helpful for agents once all that's there because it can remind their clients to remind them that they've had that sale and there's some capital gains consequences and they need to have the records.
So we think we think waiting for people to lodge until the end of July is both beneficial for individuals that are lodging, but it's also beneficial for the tax agent because it can then it can stop and having to like go back later on and fix something or deal with the request from the ATO or an amendment.

Robyn Jacobson   
We also know that, of course, employees don't need to finalise through single touch payroll until mid July.
So anyone who's logging in the first couple of weeks is really working off data that hasn't yet been finalised by the employer.

Robert Thomson   
That's right.
And you know, and it's not just employer data.
You know, it's bank information.
It's information we get from other government agencies.
You know, it's your private health insurance information, which obviously can impact the amount of rebate that you should or should not claim, which can impact your tax return.
So it's just about making sure that people wait for all of that information to come through, make sure that you know the income statement is marked as Tax ready for employers which are talked about us then and that just really allows people to be in the best position to obviously make sure that they're including everything in the tax return that they should, you know, and getting it right the first time.
And then the agent doesn't have to worry about any reverse workflow later on as well.

Robyn Jacobson   
Banks are pretty good at getting the data to you each year, as are the listed companies with their dividends paid, but we've all heard stories about other data taking many months to come through, and whether that be managed funds or other types of data.
So what can taxpayers do?
It's one thing to wait a few weeks until the end of July, but it's quite another to potentially wait some months in order for that data to be prefilled.

Robert Thomson   
That is correct, Robyn.
I mean and for some of those, some of those, some of those obviously reporters, they do have legislative requirements around when they need to provide that to us and that can be a few months after the income year.
But we think waiting is just a good reminder, but it's also just a reminder that people still need to check the prefill information is correct, You know, if there is a discrepancy with the prefill information, then the client and agent need to work that out with the provider.
So for example, your employer, unless it's the bank information that you don't need to kind of work out with the bank.
But it's also just a reminder that it may not include all the income sources.
You know, we'll probably talk a little bit later about, you know, some side hustles and some of the income that people get from sharing economy, et cetera.
So it is a good reminder that it won't include all of your income, potentially for some for yourself or some of your clients, and they still need to think about asking, you know, agents still need thing about asking their clients about any other income sources that they may have had during the year or any other assets that maybe they've disposed of or that might generate income during the year.

Robyn Jacobson   
Just one more point before we move off this particular topic.
I've heard that there are people who literally stay up till midnight on the 30th of June just so they can then tick over midnight and lodge their return and be the first one.
Is there any prize offered to the person who lodges their return first?

Robert Thomson   
No, there is no prize Robyn and you are correct.
There are some people that do that.
You know it is an Olympic year.
Maybe they're inspired and wanna go for gold, but you know, like what we're saying to people is, you know, actually wait, you know, it's better.
Better to get it right the first time and that be a few weeks longer than be the first person to lodge.
No, there is no prize.
Obviously people can lodge before all that prefill information is there, they just need to make sure.
Obviously they've got all their records in order, but as I said before, you know.
We just find people, make more mistakes and they do double their chances of having the of they're having their tax return flagged by the ATO as being incorrect and now obviously holding it up while we have to go and ask questions.

Robyn Jacobson   
So revisiting the deadlines self lodgers have until the end of October.

Robert Thomson   
That's correct.
So if you're logging yourself, one July starts to one, you're saying hold off to mid July, but Deadline is 31st of October, if you're logging yourself, obviously.
Otherwise, individuals need to be on the books of a registered tax agent by the 31st of October and that registered tax agent needs to inform us that they're doing that.
If you are logging through a tax agent, obviously you may have up until the 15th of May to lodge a tax return through the tax agent and we obviously have the lodgement support and the lodgement program for tax agents which is designed it just a recognition of the important role that taxations play in the system and design to help them manage their lodgements through the year.
Now we've just published the 24/25 Lodgement program dates, Robyn. 
So they're on the website for everyone, and also anyone that gets our tax professionals newsletter will also be informed of  those dates.
I think in the next week or so, so also good plug for the tax professional newsletter and why you might want to sign up for that because it does have lots of helpful information in terms of you running your practice.

Robyn Jacobson   
Yeah, that's great.
And it does have valuable information. Something that I'd like to call out, is while those are extended lodgment dates for agents so they can spread their workload over the year.
There are so many agents who often talk about the clients working to those same dates, so it's a really good reminder to the clients of agents that don't take your work to your agent a week before the 15th of May and expect that you're going to be prioritised because there are so many other clients they need to look after.
So I’d be saying to the clients also get your work in as early as you can let the agent manage their workload over that 11 months period and don't just dump it on them in the days before.
And then expect it to be lodged on time.

Robert Thomson   
No, that's that's definitely right, Robyn.
You know, like it's not a, you know, it's not a, you know, handing their assignment in, you know, 2 minutes before it's due, you know, this is definitely making sure you have all your records in order and providing those to the tax agent as early as you can, even if you are lodging, if you've got that extension.
And one of the reasons for that is because obviously your tax agent might look at those records, have some questions or identify some other information that you need to provide.
And if you're leaving that to the last minute, you're really putting yourself at risk.
Kind of not being in a good place to lodge, so definitely talk to your tax agent about when they need the information from you.
If you are gonna lodge through a registered tax agent.

Robyn Jacobson   
We could talk about how the ATO gets ready for tax time each year, and obviously that's about awareness and it's education.
It's updating resources on the website.
The tax time toolkits, the occupation guides rolling systems over giving instructions to the digital service providers who update all the software that the agents use.
That's all stock standard.
Is there anything different this year?
Is there anything in terms of how the ATO is prepared for tax time?
That is a little unusual or something that is new.

Robert Thomson   
So there are one or two new programs obviously this year for tax time and which I I'll talk to in terms of lodgment requirements.
But one of the thing also we're just also highlighting to agents in terms of preparing for tax time this year is around proof of identity.
So just to reminder to tax agents to make sure that there's obviously the tax practitioner board know around the minimum requirements when you're on boarding a new client.
But we're saying it's important where you still have concerns about the identity of that client.
So even go beyond those minimum requirements and also to even check the check the POI of your existing clients.
You know, we do see criminals actually take over people's kind of identity and lodge through their existing agents.
So just to reminder around POI at this time of the year as well.
But in terms of changes, there's probably there's one or two changes, one that probably is being conflated with tax time, but won't impact tax time.
And that's the change to the rates and thresholds, income tax rates and thresholds that have come in this year. So obviously they apply from 1 July 2024 and so there we're just reminding people that and reminding agents that it's just a good time to have a discussion with those clients that are employers, that they've updated their payroll software to reflect those new rates or they've looked at the ATO’s new tax with holding tax tables which we've published, if they're not using a software provider.
But for individuals, you'll see the change in the tax rate and how much tax you pay for salary and wage earners in their take home pay from one July.
It's not going to impact the size of their tax return this year, and you don't need to contact the Ato or do anything for those tax cuts to kick in.
We know there's been a little bit of conflation of the two, so that's it's it's not new for tax time, but you know it is something that we have seen a little bit of questioning around the one of the main changes is around the non for profit return.
So obviously from for the 23/24 income year and from one July non charitable non for profits with an ABN need to lodge an annual non for profit self review return with the ATO
And so we think there's about 155,000 of these types of norm for profits that all need to lodge with the ATO.
So just to reminder for those that they need to lodge.
And obviously this came in as part of the 21/22 budget and it's just meant to increase the transparency in the integrity and the taxation system.
But there are a few things that non for profits can do.
Now so one is to set up my Gov ID and and obviously link that to RAM in online services for business is the 2nd is to just review their documents and their constitution around what their purpose is.
Umm, the third is, to look at our look at online.
We have a guide around eligibility, so checking the eligibility guidelines to see if you do need to lodge and the last one is just to make sure you update your details as soon as possible.
We've put the change of registration details form actually seeking.
Download it on the ATO website, but we are gonna be sending out more information in July and August to all these entities.
So it's really important they kind of update their details now so that we can make sure that communication goes to the right people that may be representing that non charitable non for profit with an ABN.

Robyn Jacobson   
A few points on that new regime Rob not for profits in a sense, have always had to look at whether their tax exempt or not.
But this requirement to lodge a self review return is new and this is one that starts 1 July 24, but it actually does apply for the 23/24 years.
So that's one way we do have to look back at the year that's just ended and you've identified there are going to be many, many 10s of thousands of not for profits that are gonna be going through this for the first time.
What is of great concern is that the data on the ABI in some cases will not have been updated for a very long time and so the person who was named as the Treasurer or the Secretary or the public officer or whatever on the business register is probably long out of date for many of these.
So I can see some challenges when they try to get a my Gov ID and then linked through the relationship access manager that it's not going to be a straightforward process.
So in that case, should they be reaching out to a tax agent for assistance?
Should they be reaching out to the ATO? 

Robert Thomson   
So either Robyn, obviously tax agents have a lot of experience in terms of being able to help people update their registration details etcetera, but they can also reach out to the ATO.
So we have a lot of good information on our website.
We know this is going to be an issue for some and we so we have already done some letter campaigns out earlier in the year to try and make sure that people's details are up to date, but we know there will be somewhere they're not.  
We know we're not so new regime.
We know it's the first year we also appreciate that a lot of non for profits are run by volunteers.
We have very much in these first few years about supporting people to make sure they get right, can get their lodgment obligations right.
This is really, I think, this first years about a lot of support and a lot of education for those that do have a new lodgment requirements.
So just with that message, obviously talk to your taxation or give the ATO a call, if you're having any issues updating your data files.

Robyn Jacobson   
And of course, just to mention that it to engage a tax agent now they have to go through what's called client agent linking.
To do that, they need to have a my Gov ID, so it becomes a very circular process and we've seen some challenges and difficulties with taxpayers navigating their way through client agent linking.
So just to make mention, there might be quite a few tax agents who are called upon to assist those who may not have gone through the process before.

Robert Thomson 
Yes.
And you know and, you know, I think we're continuing to obviously engage with the tax agent community around client agent linking and after every kind of every deployment of client agent linking, we have sort feedback around how we can improve the process.
So that is an ongoing kind of process for us with respect to client agent linking.

Robyn Jacobson   
Alright, so in terms of some common areas that people often either claim or tend to get wrong, they're working from home expenses.
So part of work related expenses, it's interesting because there isn't a separate working from home claim in the tax return.
It just falls into other work related expenses and in fact it's not even specified in the law itself.

Robert Thomson   
That's right.

Robyn Jacobson   
So the ATO’s approach of this fixed rate method now $0.67 an hour, is an administrative approach, and that's essentially because the law is deficient.
Uh, it doesn't address this properly in, so the ATO’s come up with this approach in terms of where it will direct its compliance resources.
So what are the key points people need to understand if they're going to be using this fixed rate method $0.67 an hour as opposed to claiming using the actual cost method?

Robert Thomson   
So Robyn, as you noted, there's two methods and it's obviously up to an individual as to which method that they would like to use.
So there's the fixed rate method which you've just talked about and that allows someone to claim $0.67 per hour for every hour that they work from home.
And that's an all inclusive method.
And so that's one method that people can use, and that method is also designed that we appreciate that under the actual cost method, some of those costs can be a little bit more tricky to apportion.
So if people don't want to go through the process of working out how to apportion those, they can, they can just use the fixed rate method.
So to be able to use the fixed rate method, there are some record keeping requirements which come into effect for the income year that you'll be logging 23/24 and that is you need to have kept a record of the hours you've worked at home for the full year.
Now that can be a diary, that can be a spreadsheet that can be whatever works in terms of either a physical or digital record that allows you to identify the hours you've actually worked from home for the whole year.
So that's one thing you need to have.
The second is just need to have copies some copies of some bills that show that you have incurred a little bit of expense, additional expense from working from home.
So for example, your electricity bill, you know your Internet bill, etcetera.
So that's the fixed rate method.
There's then obviously the actual cost method that people can use as well.
Now if you are using that method, you do need to be able to show for each cost that you're claiming the apportionment between the work related element and then the personal related element.
So a little bit more work on that.
There's a lot of information on our website around examples around how to apportion some of those, and obviously it also need to keep.
There are some time.
There are some time record requirements around that, not as extensive as needing to keep it for the whole year.
You know, to get the rest of the whole year, do need a give an indicative sample.
But what we're saying to people is if you actually keep the record for the whole year, then you've got the flexibility at the end of the year or your clients have the flexibility to choose whichever method they want and whichever method may actually give them the best result.

Robyn Jacobson    
And that record of actual hours worked from home should be run contemporaneously.
It's really not something that should be put together retrospectively once the year has ended.

Robert Thomson   
That's right, rather than that is definitely right.
You know, I don't sit down on 30 June and try and remember all the hours you went at home.
It does need to be a contemporaneous record of the hours you've worked.

Robyn Jacobson   
All right.
I also note that there should be an inverse relationship between travel expenses and working from home expenses.
Now, unless you're working 120 hours a week, in other words, you're doing an awful lot of travel and you're doing an awful lot of hours from home, there shouldn't be a high claim for each of these.
Is that fair to say?

Robert Thomson   
You know, I think rather than you know, like we've had some changes to those methods over the last few years.
You know, people still do need to travel for work.
I think it's remembering what exactly what trips you can claim as a work related travel.
You know, we continue to still think people still think it is.
Some people still make mistakes and think they can claim you know their from their home to their work  Travel.
So you know, it's just that reminder about if people are looking to claim work travel, obviously reminding them around what trips they can claim, then obviously in terms of the car expenses, if you're using a motor vehicle, there are the two methods that you can use.
So there's the cents per kilometre method that someone can use.
Now that doesn't require you to keep a log book.
It's the other method, but it does allow you to claim up to 5000 kilometres per vehicle without any receipts, but you still do need to be able to have a record to show you how you've calculated the five.
Yeah.
The up to 5000 kilometres, we see some myths out there that people just think, oh, I just need to have a number.
No, you still, if the ATO asks and before you lodge your tax return, obviously, you need to be able to show your agent how you've calculated, you know, the kilometres that you'll be using under the cents per kilometre method, which has gone up to $0.85 this year.
Then there's obviously the log book method.
Now the logbook method obviously does require you to keep a log book, not for the whole year.
For 12 weeks and obviously then, if you're that's, you know consistent year on year you can use that same logbook as evidence over a number of years, but you then do need to keep there are more receipts that you need to keep with respect to that method and the logbook method, you do need to keep receipts of all the types of expenses that you are going to claim.
Now one thing we do see here, one common mistake we are seeing people make is people think they can use their credit card statement or their bank statement as a receipt.
Just a reminder, obviously that normally for most claims, a credit card or a bank statement on its own won’t suffice as substantiation for those expenses.

Robyn Jacobson   
Because that only tells you you've spent money.
It doesn't tell you what you've spent it on, even if it lists the retailer.

Robert Thomson   
That's right.
That's right, Robyn.
I was at an event recently and someone, a tax agent, came up to me, and said but Rob, what else would my tradie client be buying from the servo you know other than fuel?
And I was like, I don't know. A sausage roll, a coffee? Like there's a range of other things.
You know the Tax Administration Act does identify some of the things that need to be included for, for to be a valid kind of receipt and substantiation of the expense.

Robyn Jacobson   
I've also heard over the years people who are still enough to try and claim whether it be a car expense or a travel expense or somewhere collated expense when passport records indicate they were not even in the country at the time or their mobile phone records indicate that they were in some lovely wine region as opposed to where they say they were or the E tag on their car places them in a particular location.
Now it could be that they lent their phone or their passport or their E tag to someone else, but chances are that wasn't the case.

Robert Thomson   
Yeah.
Look, Robyn, unfortunately, every year we do see, you know, the minority of some people that do try and, make some claims they're not entitled to.
I think recently we had a social worker that tried to claim about 12 cars as it as motor vehicle expenses for the year when they only owned one.
So you know we do see the occasional crazy claim that, you know, we think the majority of areas where we see non-compliance or people making with around motor vehicle expenses is really around record keeping and just not understanding the records that they need to keep.
So just a good reminder there for tax agents around just making sure that their clients have all those records in place before they kind of come and see them to do their return.

Robyn Jacobson   
And a quick one also, we've got guidance on electric cars where they can claim at the rate of 4.2 cents a kilometre.

Robert Thomson   
That's right, Robyn.
And look on that guidance.
Obviously we've put out some guidance there.
There are some limits around that.
Guidance around that's only for charging at home.
Unless you know your car specifically, does have the ability to track where your charging from that commercial versus home.
So if you are, if you are using.
If you do have electric vehicle, do you have a look at our guidance there and rounding what circumstances you be able to claim?
What costs?

Robyn Jacobson   
Moving to another area – rental properties.
Now these have long been challenging and I consider that it's become even more challenging the last five to 10 years, we've had a lot of legislative change and if we think about the rules around claiming travel expenses for residential rental properties, depreciation on plant and equipment that's already been used.
When we look at the way that we've got interest deductibility issues and having to apportion, we've got vacant land rules, they've got rules around GST withholding its settlement, we've got foreign resident capital gains withholding rules and you got to get clearance certificates.
So you don't lose part of your settlement proceeds.
There's been a lot of law change, so I get why people are finding a lot of hurdles when they're trying to navigate their way through this particular mine in terms of all the problems they face.
But at the same time, we are hearing stories about some people who seem to be wilfully double dipping or are not apportioning or are claiming for holiday houses when they should not be, so this is a really big focus area for the ATO this tax time.
What are some of the things you are seeing and what are the key messages to those who are claiming rental properties?
And I know it also, it's often been quoted, 9 out of 10 returns have errors in them and that is being challenged the profession's saying "really?".
So how do you respond to that?

Robert Thomson   
Or Robyn, you know, we do continue to see mistakes being made and/ and I might talk about genuine mistakes being made before we talk about those that maybe trying to inflate their claims artificially.
But as you've noted, there has been a lot of changes.
And then there's complexity in the law.
And so we think that actually a lot of those mistakes are due to the complexity or due to record keeping.
And so that's why it continues to be 1 area that we're focused on.
Obviously, you've talked about interest income, interest expense apportionment that continues to be an area that we do continue to remind people about the need to apportion.
But one area we've been focused on this year is about the difference between repairs and maintenance and capital works. Now you know spend money on the property.
It can be a repair, it can be an initial repair, it can be capital works or you could have spent money on a depreciating asset.
So you know, it’s not like an A or B choice.
It's ABC or D choice, so we're just reminding people there, you know about ensuring that they are spending money on the property that they do understand which of those kind of expenses it does fall into. Obviously, repairs themselves are immediately deductible.
Why initial repairs?
So we've bought a property and it needs some repair, and that damage was there prior to you buying it irrespective of when you discover it.
Anyway, that's actually not immediately deductible.
Needs to be, you know, needs to be deducted over a number of years.
Kind of in line with the capital works provisions generally.
So it's just about reminding people about that and ensuring that they're correctly characterising it, obviously perhaps being depreciating assets, another area where we see people that think it's an instant, you know, bought a new air conditioner for a few 1000 bucks, installed it in the rental, think it's an immediate deduction instead of deducting that over the effect of life of the property.

So were reminding people around the complexity and making sure that they're identifying the right deduction and claiming at the right time.
But we're also reminding people around record keeping and what I record keeping is really important because it can help you understand what you can claim this year.
But it sets you up to maximise the deduction.
You're entitled to claim every year by having good records at the start, and also then when you go to dispose of the property, as most rental property owners you know, investors don't hold it for 40 years.
It does help you to get your capital gain or loss correct, when you go to dispose the property.

Robyn Jacobson   
Some thoughts on repairs – we often talk about initial repairs and of course that is capital in nature and you can't just claim an outright deduction for that.
And that's something that's inherent in the property at the time you bought it.
But I think taxpayers also get confused with a genuine repair.
But it's to the entirety.
So for example, if you have a pothole in your concrete or paved driveway, and you repair the pothole, then that's a repair and it's deductible.
But if you can't replace the entire driveway, even with the same material because you've replaced the entirety, that's considered to be capital.
Replacing one tile on the roof as a repair, replacing all the tiles on the roof is capital, so it does bear going back to look at the ATO guidance and there is a ruling that talks about this and I think from memory it's something like 92.3 but don't quote me on that one and that does talk about when you've got these things in their entirety being replaced.  I think the other thing that confuses people is this distinction.
As you say, between what's capital, even if it is capital, is it cost base, is it depreciable or is it climbable over the 14 year period?
So there's a lot to navigate through there.

Robert Thomson   
That there is Robyn and your point around, you know, the pothole versus the driveways are really good example around, you know about a repair being improving something back to its basic functionality versus an improvement.
So replacing the whole driveway and so we have we have put out a lot of information in this in our investor toolkit to help people understand the difference.
But this is also why, you know, we have been saying in our messaging to people.
If you are thinking about investing, you might actually want to go and talk to registered tax agent so you understand.
Actually, you know, if you are going to make this investment, what your tax outcomes might look like, what records you need to keep from the start, so you've got good record keeping from the start because obviously that impacts just not every year tax return.
But obviously when you go to dispose of the investment as well.

Robyn Jacobson   
And of course, with interest rates that continued to rise throughout last year, we've seen them pause this year.
The claims that people are making for interest on their rental properties are now much more significant than they were some years ago, so the importance of allocating between the private use and taxable's was always there.
But now I'm gonna say it's even more important because of the more substantial figures that are involved.

Robert Thomson   
Yes, I I don't have the latest figures, Robyn.
In terms of the trend over the last few years and how that's played out, but you are correct.
What we continue to see is that people just fail or make mistakes in terms of apportioning their interest between, you know, where they've taken out a mixed use loan.
So they've bought a property, but they may have used some of that for a personal personal expense or a non income generating expense might be the more technical way to put it and.
And so there's 2 kind of mistakes we see there.
Umm one is well actually the same thing is really about people understanding.
They need to apportion that for the whole life of the loan.
And so, you know, if you've taken out a loan for, say, 750,000 and the you've used 50,000 for another purpose, you know some people think they can pay the 1st, 50,000 off and then everything else is deductible for the interest they don't need to apportion anymore. And so that's one mistake we're saying.
No, you're actually need to apportion for the entirety of the loan and obviously that becomes complex.
You know that needs to keep good records around how they're doing that year on year, but it is one area we do see people make mistakes

Robyn Jacobson    
The ATO has a top 10 tips for residential rental property owners.
It's a really good guide and and are doing encourage people to have a look at that.
Alright, let's look at side hustles.
Call it gig economy.
Call it what you will.
These are people who may not fully appreciate the extent of their tax obligations.
They may need to be registered for GST.
They certainly have income tax implications.
They do need to get an ABN, they have got record at keeping obligations and of course they may be kicked into depending on the size of their activity, the PAYG instalments system.
So there's quite a bit to get across.

Robert Thomson
There is, there is Robyn.
You know, I think it's like side hustles and like, start again, a new income stream or any new business you need do need to think about the tax consequences.
But we definitely have seen with the rise of online, social media, gig economy that more people are doing Content creation, side hustles, you know, might be working rideshare, on the side and it's just really a reminder for those people that they do need to do need to include that in their income tax return as income.
Now obviously they can claim the deductions that are entitled to in generating that income.
So, you know, don't just remember the income.
Remember the deductions, but this is 1 area where just reminding people you're doing a little bit of side hustle work.
While you might just think it's a little bit of side hustle, it could have tax implications.
So you do need to make sure that you've reported that income in your tax return, and that's just not income that can be whether you've received that income through online services, but also if you've also got cash as well.
So it's just about reminding people about their what income needs to go on their tax return.
And obviously another one in that kind of same space is around crypto.
So obviously we continue to see people are investing in crypto and we're just trying to remind them of their tax consequences there.
And we think about 30, I think 30% of people don't think they need to keep records for crypto, but obviously at a basic level, they do need to create keep you know the transaction dates, how much they bought it for, how much they sold it for etcetera.
So just a reminder and this will pop up, you know there is a pop-up alert when people go to file their tax returns to remind them that they might have had a crypto event or a crypto transaction during the year.
So it's just a reminder as well around crypto needing to being included in a gain or loss. If for individuals this year, if they've invested in crypto and one reminder is they were just under people, you know like every quarter download your transaction wallets, you've got that information there and before you close out your account, definitely make sure you've got you've downloaded your account.
Activity and information.
So you can give that to your tax agent at tax time and kind of work out your capital gain or loss on any crypto assets you've had.

Robyn Jacobson   
And do not lose your password.
I had a fellow who had his crypto pathway to his wallet password on the hard disk of an old laptop and inadvertently through the laptop out.
This was, I believe, in the UK and then spent vast amounts of money trying to convince the local council to dig up the tip to try and locate this missing laptop.

Robert Thomson   
They should’ve bought BitCoin early on Robyn.

Robyn Jacobson   
Absolutely.
Just sounds like he might because you're storing it on the head to.

Robert Thomson   
You know, a good reminder about why it's good to keep contemporaneous records, right?
So if you're downloading your transaction account every few months, you know your clients get into a good practice that doing that.

Robyn Jacobson   
Yeah, we're focused a lot on tax time.
Looking back at the 23/24 income year, but just perhaps some quick highlights of what's changing from one July, the rate of superannuation guarantee has gone up again by another half a percent.
So 11.5%.
So for employers, this is for payments made on or after one July of salaries and wages.
It's not based on when the work was done, so you might be making a payment today in respect of work done in June, but it will attract the higher rate of SG.
So that's really important.
The amount of a penalty unit goes up, so for those who are on the wrong side of the law, we've now got $330 for one penalty unit and penalties throughout the tax admin system and essentially based on penalty unit.
So you might have 10 penalty units or 50 or 100 or whatever it is based on the particular misdemeanour.
So that makes of course noncompliance, late, lodgment that sort of thing become even more expensive.

Robert Thomson   
What we'd say on the penalty units for late lodgments?
Umm is you know if you think you're gonna have an issue lodging by time, then get in contact with us early and we can help you work through that.
So you don't have to.
You know, need to worry about the penalty unit.
We do appreciate and we can probably talk about tax agents, support and a little while, but you know, we do appreciate other things come up in people's lives where perhaps they are intending to lodge by certain date, but they've got something that's outside of their control.
And So what we're saying to people is if you do find yourself in that situation make sure you in contact and discuss your circumstances or speak to your registered tax agent.

Robyn Jacobson 
That’s a nice segway into talking about what support is available.
So if people are having trouble lodging or paying, what can they do?
And then separately as a second part to that question, what support is available to agents?

Robert Thomson   
So if people are having issues lodging or paying.
You can go online.
There are some you can go online.
So for example, you can request some payment services online, so you can actually go to the ATO website online or your tax agent can help you with those.
So I think our main messaging is getting contact with us early to discuss your situation or speak to your registered tax agent early on.
Don't leave it to the last minute.
The earlier can get in contact with us, obviously, the easier it is for us to be able to address your situation and obviously we are busy at tax time as well, right?
So we have a lot of people trying to call us.
It's also leaving it to the last minute, you know, isn't the best idea.
So just engage with us early.
Also have a look on our website.
You'll also, depending on your circumstances, might be entitled to other support options like tax help.
So there is a lot of support on the website around how you can see support if you need it, how you can go on our online services to perhaps request a deferral or to request a payment plan but then who to contact if you need.

Robyn Jacobson   
Agents have something called the supported lodgment program.
So how does that work?

Robert Thomson   
So the supported lodgment program is a program that allows agents to acquire to request additional time, to defer some of their lodgments, and this can actually be done through online services for agents.
Now if you things about that, the agents do need to be aware of, it needs to be that the the deferral needs to kind of be because of exceptional or unforeseen circumstances, being your client or your practice and that those circumstances are actually affecting your ability to lodge.
So our reminder there and why I made that reminder is because we're seeing a significant number of these lodgment requests that deferral requests that come through where the the agent hasn't provided that information in the enough detail for us to be able to grant that lodgment requests. So really important for you to be able to provide detail to us, to explain what the unforeseen circumstance is, why that's impacting on your ability to lodge because otherwise we're just gonna come back to you on, it creates a lot of reverse workflow for both tax agents and us.

Robyn Jacobson   
Certainly in the last week alone
I've spoken with two agents who have lost Staff and this is really challenging.
We've talked often about the shortage of Labor across the accounting and tax profession, particularly post COVID.
But it's still biting and I know the governments are aware of this, but it's something that is a real issue for practitioners where they're trying to keep up with lodgements, whether it be dealing with last years, we've now got a brand new compliance season kicking off and when they lose Staff, it just depletes their resources and they can only work so many hours a week.
They can only do many so many six or seven day weeks without leading that break and and needing a bit of reprieve.
So to what extent is the ATO aware of this and mindful of this?

Robert Thomson   
Obviously we engage with the tax agent community quite often.
We have the tax practitioner stewardship group and we do understand the pressures facing tax agents.
So you know, we do have.
I've talked about the Lodgment program.
We also have other programs available, such as our tax Practitioner Assistance Service, which can help provide advice on an even administrative matters around your practice and the programs we've talked about, including that tax practitioner support program.
There are obviously available to all size of agents and we also have other programs. 
So I guess the main messaging is if you are having issues and you're an agent, just out getting contact with us early, that's the best idea and then we can work out what's the best support. 

Robyn Jacobson   
OK, look, this next issue is one that we could speak for hours and hours on, but with just a moment left: scams.
Try to identify what is genuine contact from the ATO.
We're all so suspicious, myself included, of phone calls, emails and text messages, and trying to work out.
Is it in fact the genuine supplier or provider?
Or is there someone scamming me and we've all been a victim of some form of scam or text message that is not genuine?
What does the ATO do and not do?
And if you're not clear on whether something is genuinely from the ATO, how can you check?

Robert Thomson   
Yeah, so, so good question, Robyn,
I had someone the other day calling me telling me that the tax office and they're gonna throw me in jail for a tax debt, which I kind of found funny.
And when I told them that I knew the deputy Commissioner of fraud and criminal behaviours, they hung up very quickly.
But no, it's it's something we're facing, right.
You’ve gotta you've got an unpaid toll account.
You've got an unpaid, you know, TV streaming account.
We do see it at Tax Time obviously though, because people are expecting to engage with the ATO that there is scammers use that to their advantage.
And what you know, I say scams all year round, but we see new scams at this time of the year and what most of them are trying to do is harvest people's mygov ID credentials, typically through either a fake email or a fake text message.
So a few red flags, one is that we're never gonna text you or send you an unsolicited email that asks you to click onto a hyperlink and enter your mygov  ID or details or any other personal information.
Well, that's one way that you can identify something is probably not from the ATO the other.

Robyn Jacobson   
If there's a link, it's not from the ATO.

Robert Thomson   
Not from the ATO.
What I do when I get those, even when I get I, you know, it's just you always just going to to your my Gov you know in your browser and check your activity that's the easiest way. So that's the first thing you can do.
That’s the first flag, the second flag is.
We're never gonna ask for personal information via email via text message over social media.
That's another red flag.
The other one is when the ATO calls you, it actually comes up as no caller ID.
So if you're getting a mobile number coming up and they telling you the ATO, they’re not.  and the last thing is we're never gonna make you stay on the line and threaten you with jail until you've made a payment.
So any of those things Red flag if you don't think it's genuine, you don't know, hang up, you can call us on 1800 008 540 and speak to someone and they'll be able to help you to understand whether it is you're generally talking to an ATO officer or not.

Robyn Jacobson   
Can you repeat that number again Rob?

Robert Thomson   
1800 008 540, Robyn.
There’s also a few things practices can do at this time of the year you know, so one is making sure that they've updated their obviously their IT security software.
The second is making sure that they're obviously gone through POI for all their clients, which we talked about earlier.
And the third one is to have a discussion about who has access within your practice, to what information and do they need it?
So that question around access to information.
So they're obviously things you can do as an individual, but there's also things that can be done for practices and the same information on our website for tax agents around what they can do to kind of make sure that they're protecting themselves as well.

Robyn Jacobson   
And I think it's also important to mention that there have been a number of changes in recent years involving the ATO’s approach and security procedures and so on.
And ultimately this is done to protect agents, to protect the community and to protect the ATO itself.
So sometimes they're inconvenient, but sometimes these steps are unfortunately necessary.

Robert Thomson   
That's right rather than we definitely want to protect taxpayers, we also wanna protect tax agents as well.
I mean, there's nothing worse for a tax agent than having their kind of their ID taken over as well.
You know that can impact their whole practice and their livelihood as well.
So this is very much about making sure we're keeping both the community and tax agent safe.

Robyn Jacobson   
Rob, I really appreciate you taking time out.
I know you've been doing a big circuit and this is one of just many, many discussions you are having, so we've gratefully appreciate your time.

Robert Thomson   
Thanks Robyn.
Thanks very much.

Robyn Jacobson   
Thanks for listening to this episode of TaxVibe.
I've been chatting with Rob Thomson, assistant commissioner at the ATO and the tax time spokesperson.
If you enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen, we welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the center of the tax conversation, a membership with The Tax Institute could be just what you need.  Stay current and connected with tangible real world benefits.  Learn more at taxinstitute.com.au. 
Thanks again. Till next time on TaxVibe

Robyn Jacobson, CTA

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson. We love the vibe of Tax and here at The Tax Institute we do tax differently. In this bonus episode of TaxVibe, you'll get a special insight into our member-only webinar. To see the full webinar and access other member-only insights and resources. Become a member of The Tax Institute. Head to our website to learn more. We hope you enjoy this episode of TaxVibe.

Chris Wookey, CTA

Hello everyone, and welcome to The Tax Institute's End of Year Tax Issues Member Benefit Webinar. My name is Chris Wookey and I'm a member of the National SME Technical Committee here at The Tax Institute and a life member of the Institute. And before I introduce our Speaker, I'd like to remind you to take advantage of the advanced rate and register for The Tax Summit being held in Sydney in September, later on this year. Now I'd like to introduce our presenter, Robyn Jacobson. Robyn is going to be well known to everybody here. She's the senior advocate at The Tax Institute. She's been around in tax for more than three decades in the profession. We started working together last century and so over to your Robyn.

Robyn Jacobson, CTA

Thank you, Chris. And yes, I look back on those days of how simple tax was in the mid-nineties and even early nineties and it's come a long way since then. So thank you for chairing today and good afternoon everyone. It's a pleasure to have you join us today right across the country.

This is obviously a very busy time for you all, but the purpose of today's webinar is to consider the issues you need to think about for both your own practice and the affairs of your clients as we lead up to June 30.

Alright, so let's get into it. Starting with what we know when it comes to the taxation of individuals. Now you're of course across the stage three revised tax cuts and these kick in on the 1st of July this year. Now just the completeness, this slide [member-only] shows you stage one and stage two, which of course have been in place for some years now. I'm not going to go through every threshold and rate with you, it is obvious by what's indicated in red. But I did want to make some observations about what this means for your clients and what their expectations are over the next year. So if I move now to this insight slide, firstly, I know there are going to be some clients and certainly the community more broadly, particularly those who don't use tax agents, who may confuse the start date of the tax cuts being 1st July 2024 with the tax position for 23/24. So of course this does not alter their income tax position for the current financial year, and nor does lodgement of the '24 tax returns have any impact. So '24 cut it off. Make sure you explain to your clients that this is all to the 24-25 year onwards.

Secondly, I haven't seen much narrative on this, and it's something that you may wish to raise with your clients, but the government has been broadly saying in all its messaging: every taxpayer receives the tax cut from 1 July this year. Well, firstly, it's only income tax. So of course if you're paying GST, then that doesn't make you a taxpayer for this purpose. Secondly, there are people who may pay tax, but they may be, in terms of the final tax position, below the tax free threshold. Now, of course, they would get a refund of any tax they've paid, but ultimately, if they're below the tax free threshold and whether that's increased by way of other offsets, apart from the low income tax offset, they may not have a net tax position, which means they're not going to benefit from this. But moving to those who are on the withholding system, anybody who's on a PAYG withholding arrangement as an employee will see an immediate benefit from their first payroll from the 1st of July this year. But anybody who's on the PAYG installment system only and I'm talking about sole traders, certain businesses, of course, and your investors, they pay their tax by way of installments. And these aren't going to be adjusted because of the tax cuts. So they will pay their installments, as usual, varying, if that is appropriate, and they won't effectively see the benefit of the tax cuts until they lodge their '25 tax return, work out whether any tax has been overpaid, and then, of course, that would be adjusted upon assessment. So it's just a distinction I think is important because those who are not on withholding are not going to see that immediate benefit. Of course, a reminder to employers they need to make sure that they adjust their PAYG withholding tables effective the first payroll from 1 July this year and we are expecting that the ATO will be updating those witholding tables in mid-June. Now that obviously would be around this week, perhaps into next.

Student loans. For those of you who have clients with the old HECS debts or HELP debts as they're now known, the Higher Education Loan Program in the budget it was announced that the indexation factor applied to increase the loan effectively as a pseudo interest calculation is going to be adjusted. And this is in response to the particularly high indexation last year when it was 7.1%, I think the highest it's ever been, or perhaps the second highest. But certainly typical increases over recent years have been around say 2 or 3%. So, effective from loans that were outstanding on the 1st of June 2023, instead of just applying the CPI indexation rate, which as you can see in that second bullet point was 7.1%, the law will instead apply the lower of the CPI or what's called the wage price index, and that would drop that indexation rate down to 3.2%. For the indexation on 1 June this year, instead of 4.7, it means it would only be 4%. Now about $3 billion of student loans is going to be improved, if you like, benefiting from this. But please note also if a student repaid their debt in full before the 1st of June 2023, they will have the indexation applied using only the CPI. They won't benefit from the lower of the two indexation factors. So something that I've said in a bit of social media where they've realised they've missed out on this particular measure,

Moving on to work related expenses. Now you can run a whole webinar on this alone, but some key considerations are listed in the next couple of slides. Now, starting with of course car expenses, there's your cents per kilometre. The $0.85 is in a registered instrument, so that is already, if you like, in the legislation. And the rate for 24-25., the ATO has issued a draft legislative instrument yet to be registered and it's proposing the rates will be $0.88. I've not particularly seen changes in the draft to the final over the years so I would expect that to go through as is. And then of course we've got the relatively new approach for electric vehicles at 4.2 cents per kilometer and that can be applied for either FBT or for income tax purposes. Now, notably D1 is only where you own or lease the car. If you're borrowing someone else's car then it becomes a travel expense at D2, not a car expense at D1. D2 – I'm going to skim over this.

You've got lots of guidance on the relevant reasonable travel and overtime meal allowance expense amounts for the 23-24 year linked there. There's information on FBT, accommodation, food, drink, itinerant workers. There is so much that goes into this but have regard of course to itinerant workers, bulky tools and equipment, home to work travel, whether it is legitimate travel or whether it's just someone who is choosing to stay somewhere else for the convenience of being closer to work. That doesn't automatically make it travel. So it's very important to look at the character of the expenditure that's being incurred and make sure it's being classified correctly. Also, the ATO will of course be looking at a correlation between working from home expense claims and travel expenses, and you would think that somebody who's working from home should have minimal travel expenses and vice versa, unless they're working particularly ridiculous hours and they're traveling as well as doing significant hours working from home. But a typical worker who does travel or is working from home, there shouldn't be high claims for each of those in the same return.

Moving onto clothing expenses at D3, a reminder about all the rules regarding compulsory uniforms, the non-compulsory uniforms which must be registered in order to make a claim for those, protective clothing is okay and occupation-specific clothing is okay. But anything that is required to be worn by the employer but isn't occupation-specific (and we go back to our chef's pants and our barrister's robes and the like), or is some type of compulsory or non-compulsory registered uniform, is simply not deductible and that includes the waiters who are required to wear black, that's still conventional clothing. Same with typically gym wear and similar. Now don't forget about your $150 worth of laundry. There needs to be a calculation of the various loads of washing. Also, if you're going to be relying on the $0.50 on the dollar per load and I will leave it with you as to whether you'll make the appropriate inquiries as to whether the, let's say, underwear is also being washed along with the trade clothing as to determine whether it's a $0.50 claim or a dollar claim per wash. I'll leave those personal and private questions to you and your clients, you can work through that one.

Now. Self-education expenses. A reminder that the expenditure must either improve your skills or knowledge that you currently require in your employment duties, or is likely to result in an income in your employment activities. So in those other income that comes from those activities. So we've seen so many cases over the years and time doesn't permit us going down all those rabbit holes, that you're well familiar with, the necessary nexus between claiming that and of course deriving the necessary assessable income. A reminder that the old $250 rule has been gone for a couple of years, so you don't need to worry about taking off that non-deductible threshold first.

All right, let's spend a little bit more time on the working from home expenses. For the 23-24 year, we're into the full year of the fixed rate method that was revised about 18 months ago. So we're talking here about the $0.67 an hour, the $0.80 an hour shortcut method finished up. That's long gone up post-COVID. Secondly, the $0.52 an hour no longer exists. So the taxpayer has a choice of $0.67 an hour under the fixed rate method or the actual cost method. If they use actual cost, they do have to keep receipts for everything and they will need to determine an appropriate allocation for challenging expenses like internet, telephone, power and your heating, cooling, etc.. Now that includes gas. So if you're going to go with the $0.67 an hour, that covers your electricity, your gas, telephone, your internet stationery, and computer expenses and consumables. So if you feel your client is going to be better off not using the fixed rate method, then you'll need to work out really essentially by setting out two sets of calculations that I'll share with you, that when I did my last tax return, I needed to work through this. I looked at the fixed rate and I compared my actuals and you've got to determine which one works better for you. But unfortunately it does increase, as a result, the amount of compliance work involved. Also, you do not need to have a separate office in order for the working from home expense fixed rate method. It is sufficient that it's simply working from home. You do need to keep a copy of the relevant bill that supports the electricity, the gas or the internet. Not every one, just at least one bill. And. also bear in mind that the $0.67 an hour doesn't include depreciation. So you are able to claim that separately, but you won't be able to claim certain other expenses because of the double dip. The other point to mention is that you have to keep a record of the actual hours worked if you're going to use the fixed rate method. You can't use a four week diary. You must keep a record in the spreadsheet or some sort of log book or whatever that records every single hour that you work from home during the year.

Right. Moving on to rental properties. Now the ATO continues to share data with us and I am the co-chair of the Tax Practitioner Stewardship Group. And whenever we meet this is often discussed and that is the fact that the ATO data is showing nine out of ten tax returns that include rental property claims have errors in them. This also includes Agent lodged returns. So there's no suggestion that the nine out of ten that are wrong are all self lodged returns. There are errors being made in returns lodged by agents. Now the ATO has released the top ten tips to help rental property owners avoid these common mistakes. And I do recommend you have a look at that document. You may run through it and think, yeah, yeah, we know this, but it is a good reminder and it's also useful to send your clients so they are aware of all the tips and traps that need to be considered when you're looking at rental property claims. Now we are looking at running a number only webinar on rental properties in the next few months. So keep your eyes out for that. But some common areas that are an issue. Make sure that the gross rent is being declared. The ATO are seeing instances where the net rent per the agent's statement is being included in the tax return, and then the expenses in that statement are being claimed against the net rent. So in other words, it's a double dip of the same expenses. Now obviously net rent is what gets deposited into your client's bank accounts, but they need to make sure that they're giving you the full information and that you're grossing that back up to include the gross rent, claim the expenses and of course, anything else that they incur outside the agent arrangement. I think it's also incumbent upon agents to ask the right questions of clients. So make sure when you're getting that figure, query them and say, is this the net rental or the gross rental figure from the agent. When it comes to mate's rates, if you're going to reduce the rental income rate for a friend, for family member, then you're not going to get a full deduction for the outgoings. So make sure that if non market rates are being charged, you appropriately adjust the expenses. There are still issues with clients who are not correctly apportioning their interest where the property is not generally available for rent, but they're still claiming the interest or they're failing to apportion where there is mixed use of the funds. Now another occasion we can run through the difference between a redraw of a mortgage and offset facilities. But it's very important to understand the nature of a loan. And when you've got all these different features, how you should treat the interest deduction accordingly. Borrowing expenses – remember the claim is over five years or the term of the loan if that is less than five years. It is not a straight line – in other words, you don't just take the amount and divide by five. Technically the claim runs for the number of days, but it runs over six income years. So four full years and then two part years. Check your repairs. Make sure there's no capital amounts in there. Check for something that could be constituted as an initial repair and instead should be treated as capital. Watch out for entirety. So if you fix a pothole on a driveway or a fence paling, that's a repair. Replace the whole fence, or replace the whole driveway, even if it's a repair, it is considered a capital amount because you've replaced the entirety of it. And it is worth looking at the ATO ruling on this, which from memory is something like 92/3, but you'll be able to find it with a quick search. Of course, don't forget about the changes with residential rental properties. So from 1 July 2017, you've got your rules for second hand assets in these properties and you'll need to consider whether the depreciation is limited. In these cases, you can't claim depreciation, but you would then calculate a capital loss under CGT event case seven when the property is sold. So in that case you'd have an A1, typically a capital gain on the sale of the property, plus a K7 capital loss on the sale of the relevant depreciating assets where they are second hand and they've been acquired after that date. You also need to consider no deduction for travel expenses where it's a residential rental property. The $300 rule is still available for rental property owners to claim minor depreciating assets, but it's not on a per asset basis. So anything that is identical or substantially identical or is part of a set, you need to look at that in the context of the $300 limit.

Thanks for listening to this bonus episode of TaxVibe. If you want to hear the full webinar and join a collective voice of 10,000 practitioner as the heart of the tax profession, become a member of The Tax Institute. Head to our website to learn more. To keep up to date with TaxVibe, be sure to subscribe wherever you listen to your podcasts. Please join us on our socials and let us know your thoughts or any topics you'd like to hear us discuss. We look forward to your joining us next time.

Robyn Jacobson, CTA

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson. We love the vibe of Tax and here at The Tax Institute we do tax differently. In this bonus  episode of TaxVibe you'll get a special insight into our post-Federal Budget reflection. A sneak peek behind the closed doors of our member-only only webinar.

You'll hear the highlights of key tax measures and their commercial and practical implications. You'll hear from our panellists, Annemarie Wilmore, Partner (Tax) at Johnson Winter Slattery, Clare Mazzetti, Chair at The Tax Institute and Todd Want, CTA, President of The Tax Institute. You'll also hear Scott Treatt CTA, CEO of The Tax Institute, facilitating the discussion.

To see the full webinar and access other member-only insights and resources, become a member of The Tax Institute. Head to our website to learn more.

We hope you enjoy this episode of TaxVibe.

Scott Treatt, CTA

Good afternoon and welcome to The Tax Institute's webinar, addressing last night's federal Budget, Federal Budget 24-25. My immediate reaction was in my professional career to date and I dare not say how many years that is, but I've never recalled a budget that was so light in tax measures. As a bit of an anecdote, because there were so many tax measures, I probably was up at midnight last night trying to find something interesting out of the papers, and I tried to find how many times tax was actually mentioned in the budget papers this year compared to prior years, and it's around half, half as many times last night as in prior years. And they weren't really on substantive matters. But anyway, let's start, and Clare if I may start with you, immediate reactions then to last night's budget.

Clare Mazzetti, ATI

Well, look, I had a very similar reaction to you, albeit not necessarily just focused on tax given I have a more commercial background and I'm not a tax specialist. But one of the really insightful comments I heard from one commentator last night was to reflect that once upon a time budget night used to be something of an event like listening to a political speeches and leader’s debates in a in an election year, people used to tune in and get quite excited and have a sense of anticipation of what the government would say and what agenda was being set as they would when the right of reply comes a couple of nights later. But the overwhelming sense in this commentary was that actually nobody is listening and there's really not a lot to say. And I think that that's really reflective of what we saw last night, and that's a great shame because it's such a missed opportunity. But if we contextualize it, we are coming into an election year while an election probably could be held as late as September next year, it's likely to be within the next 12 months, possibly much sooner into the new year. And so I think what was announced is really reflects on the government not wanting to expend any political capital and trying to sprinkle as many sort of breadcrumbs as possible to keep as many people happy, albeit there's not a lot of substance in that. Certainly the cost of living measures that were announced were largely already pre-announced, so there wasn't very much new in there. And look, just as a broader comment to close off this before we hear from our other colleagues, you know, I'm not really convinced that there's too much in the budget that will potentially stop the RBA from needing to increase rates again. So while there was talk of bringing inflation down, I'm not sure that some of the economic data globally will support that. So they were my initial thoughts.

Scott Treatt, CTA

Yeah, perfect, Thanks Clare. Todd,  I might pass to you next if I may, and again your initial reaction but I'd also like to explore if I could – could they have done anything different?

Todd Want, CTA

 I think, Scott, that the the budget was a missed opportunity to at least talk about tax. It wasn't implementing measures. Certainly substantial measures can take time. But from the tax system needing to be overhauled, not even putting on the table any real comments about that at all or tying them in to the the broader policies in any major way was really the thing that just seemed to slip away. The stage three tax cuts or revised stage three tax cuts that kick in from 1st July 2024, that was sort of seen to be our centrepiece, but a major part of the budget of the tax measures, and that was locked in quite some time ago.

Scott Treatt, CTA

It was, it was really just the budget was really just pricing in the impact now of those announced and re-announced and re-announced til the cows come home. These stage three tax cuts.

Todd Want, CTA

I was pleased as an avid enjoyer of sweet potato fries to see that the levies on sweet potatoes are coming down a little bit so I assume that will pass through to the costs when I'm go and buy those when dining out, but that type of thing when you're looking for those sorts of measures and saying well that's a bit of a highlight from the budget, not taking away from our sweet potato farming colleagues, that's disappointing with taxes. We've missed that. So I think for the business landscape, for our members and the types of issues that we have to deal with, the budget really didn't didn't hit on anything. It didn't give us any real growth.

Scott Treatt, CTA

Yeah thanks, Todd. Anne-Marie, your, your reactions to the budget.

Annemarie Wilmore, ATI

Yeah, similar to Todd and Clare's. There was not really much news for large corporates in here. There's some tinkering around the edges. We've seen a lot of legislation introduced in recent years, so there's some adjustments to some of those, but it's very much consistent with that theme of making multinationals pay their fair share of tax. That's a constant theme that seems to be coming through and I think one sweetener in the deal is that some of these measures that have been announced appear to be prospective and perhaps we're seeing an end to retrospective legislation, one can hope.

Scott Treatt, CTA

One can hope but I'm probably not going to be one that's holding my breath for that. But that out of this one glaring admission, Robyn, last night really wasn't there. This government's been in power now for two years, and a lot of work that we did when they came to power, we did have an incoming government brief at the time. And in that brief I think there was some 84 or so announced but unenacted measures, where are we at now? How many ABUMs, as they colloquially known, how many announced but enacted measures are sitting there today and where do we stand?

Robyn Jacobson, CTA

Yeah, ABUMs. These are a rolling figure. In other words, they always creep up every budget, they creep up every review, they creep up every election. And through the course of a term of government, we might knock a few off. What's been concerning is the longevity of some of those items, but they have been around for so long and for example, there are three in particular that we continue to focus on and continue to advocate for some progress.

The first is the corporate tax residency rules. There seems to be consensus across the profession and even in broader industry that what was previously announced is a good thing. So let's just get on with that. The individual residency proposals, you can't say the same. There are concerns about what they would mean if brought in in their proposed form. And then we've got the perennial Div7A measures which, look, we're up to 12 years if we can go back that far. It was May 2012 when the then Assistant Treasurer David Bradbury, commissioned the review by the Board of Taxation to review the rules to see if they were still fit for purpose. The conclusion was they're not. Changes need to be made and I'm not going to go back through all the history of those announcements, but we still wait for reform. Now. Scott, we often talk about, particularly in our Tax Policy and Advocacy team, about be careful what you wish for. So we don't necessarily want change for the sake of it. We don't necessarily want change just to reduce the length of the list of items. But we do want certainty. And when you've got measures that go on for years and years and years, we haven't got certainty, particularly when they have retrospective application. Now we say there was virtually no movement on the ABUMs. There was one. And this was that very odd announcement back in the 2019-20 budget, which is about ABNs and how if you had an ABN, you had to lodge a tax return, which is a current requirement anyway. So that's always been a perplexing one. If we look more broadly, there was a proposal in the budget to abolish 457 nuisance tariffs. Now Todd, I'm not suggesting that the marketing levy on the sweet potatoes is a nuisance tax and we give that one full credit for abolition. But the point is, Scott, that we've got a proposal to get rid of some nuisance tariffs because they are cluttering up the system. So productivity, they're not serving the system very well. Why aren't we having the same conversations about other taxes that are in the system? Why is the focus on, for example, these tariffs and not on many dozens of the taxes that were identified by Ken Henry in his review back in 2010? So we continue to advocate for some clarity and certainty on these items. There just doesn't seem to be an appetite. They just get pushed into the too hard basket.

Scott Treatt, CTA

I think that's right. And I am challenged by the fact that they don't take the budget as an opportunity to then improve what certainty we talk of confidence and certainty in the system, but it just leaves it as a really uncertain environment where you've got those measures as announced that untouched for so long in evidence. What do we do then? How do we deal with this? And so so Claire, coming back to you, if I could, like, where do we stand up off the back of last night's budget? Then from a business confidence perspective, the impact on the outlook, do you think that means for businesses as we are moving forward then?

Clare Mazzetti, ATI

Well, look, I think we're in a very precarious sort of inflection point and your monetary policy and fiscal policy continue to work at cross-purposes. And that is absolutely not useful. And it's been a structural problem for quite some time. And obviously, the institute has been through its advocacy work and talking about broader tax reform, you know, a very vocal voice around that. So I think that remains an important issue. But without bringing those two things into alignment, productivity is really the only way for the Australian economy to grow its way out of this particular challenge is the tax system is not going to be at least tinkered with or, you know, some pathway for broader reform is not going to be undertaken. So look, where does Australia sort of stand? I think we're very, very lucky that commodity prices again have been strong and obviously that was noted last night. You know, Treasury had probably on the budgeted by sort of quite some substantive amounts for four key, key resources. And that's really, I guess a key piece about why surplus was announced last night. So they've been strong and resilient, households have been resilient, and that's in large part because those Kogan buffers and cash surpluses that people built up are still there, albeit they're dwindling and they are dwindling fast. And our banking data shows that quite clearly. But unemployment stays very, very low at the moment, and that's also helping us remain quite resilient, even though we're seeing spikes in wage rises. But, you know, these pressures of global inflation, geopolitics, uneven growth throughout our economy, in a global economy are going to put significant pressure on us. And that is weighing on the broader business environment for sure. Doesn't really matter what business you're in. You know, this uneven or patchy growth and some of these patchy results are showing up in lots of different industries and more worryingly, at the moment, we do see that banks are starting to provision much more stringently for bad debt and insolvency fees are on the rise. And I guess how we would see that through the tax provision as well. But they are at decade highs. So what does it mean? I think that you know, there's a bumpy road ahead, a very bumpy road ahead and back to where I started around that misalignment between some fiscal and monetary policy. The longer that remains and the longer that all of this sort of structural work, particularly around things like tax reform, the can down the road, the harder it becomes for whether it's a large enterprise or small enterprise or a mum and dad business to be operating in that environment.

Scott Treatt, CTA

Absolutely. So, Todd, I'll come to you then if I could. SME’S It's the most touched part of tax provisions. I'd say over the last seven years would be instant asset write offs. And again last night.

Todd Want, CTA

 It’s, it’s fascinating Scott. We obviously had the COVID related measures where it got bumped up for a broader range of businesses with the instant write offs and temporarily expensing. But this is something that I think all, you know, all parts of politics are guilty of because this is if it's a lost decade, it's been happening. And I think it's something real. And like the seventh change in the last decade where we get to budget night and we're just wondering whether what the number is for the instant write off and it both the threshold for the dollar value of the assets bought and for the size of business. But it's literally a rinse and repeat of last year's budget of $20,000 for, for small business through the $10 million turnover aggregated turnover.

Scott Treatt, CTA

But this is still just an announcement.

Todd Want, CTA

this this is the this is one of the real problems that yesterday before the budget was handed down, the Senate had back in March proposed some changes to last year's measures because last year's measures still haven't come to legislation. As it stands, a small business has $1,000 instead of threshold. So last year's measures, yeah, we're obviously nearly finished this particular financial year and our legislation passed. The Senate had proposed a 30,000 limit. So businesses with an aggregate or turnover in the group of 50 million or less. So that passed the House of Reps yesterday to consider, they kicked that down the road to today and it would appear as though the tennis game is going to continue.

Scott Treatt, CTA

It's going to be fascinating, isn't it? So yes, last year's measure was $20,000 deduction for a 10 million cap. As you say, Senate then has pushed it back 30000 to 50 million right now. Where are we going to learn how to our members advise their clients around what to ask? Six weeks out for me and we've now going, Will, what is it for this year, let alone how will that impact the Senate's view of what it should be for next year?

Todd Want, CTA

This is where I think the tax policy and broader economic issues. This is a classic of it being one that businesses who are looking to upgrade, say, computer systems or other bits and pieces and spend money to improve their systems and processes and efficiencies, they just want some certainty. You cannot claim the deduction upfront for that. Actually be able to factor in an after tax cost. But what I need to be able to help grow the business in the economy yet this seems to be over many years now a political issue to get this point scoring on depreciation rates. Ultimately, for the most part, it's a timing issue. It's not a permanent thing. The most instances, most of these small businesses, they would have claimed that depreciation over three or four years sort of time period, a large chunk of it ordinarily. So it's only a timing thing. But for but it seems to be something that just makes an adviser's life so tough and clients, you know, when you're telling them, oh, look, we don't actually know for this year what you can claim. It's still not sorted out by the government They now what does that what are you doing? We are and so are we glad that there's not too many measures. Now. We'd actually like something like this just locked in as a permanent thing in the legislation. Let's forget about it being the number one smart business thing in the budget each year. Let's just lock it into 20,037, whatever the appropriate thresholds are, and get it locked in there and keeping certainty to just go out there. I mean, the the threshold of 20,000, a proposed threshold, most businesses are not going to be able to buy a car or a vehicle and walk that off instantly.  At that level, we're talking more desks and computer equipment and things like that, maybe some shelving and racking and the like. Very, very practical for a small business. But let's give them some certainty.

Scott Treatt, CTA

Absolutely. Robyn, I can see you wanting to say something. It's one of your pet peeves like this is a sugar hit to the government though, isn't it? Like this becomes like a it's a new sugar hit and.

Robyn Jacobson, CTA

Poor old instant asset write off. It's become this political ping pong. Well, clearly the government likes it and government of either persuasion because we've seen it change and altered increased under both sides. Clearly, business likes it and it's a no brainer because as you say, it's a timing difference. So we're having these enormous squabbles, the energy that is put into drafting legislation and debating it in Parliament to work out whether or not we're going to write something off now or in two or three years time. And the difficulty, Scott, is that at a policy level, it undermines the purpose for which it's being introduced, which is to provide an incentive, generate productivity, get businesses investing in these sorts of depreciable assets is six weeks out from your end and you've got no idea where the what you've already spent this year is eligible for a write off this year or not. And I don't feel that many practitioners don't fully appreciate that without any of these legislative changes, it has reverted already to $1,000. So what we're looking for is a transitional provision to supersede that and make this a 20,000 write off for this year or in the same case for next year. But as we've been advocating for in many of our pre-budget submissions and similar over recent years, we want this to be a permanent measure and take it off the table, give businesses certainty, and wherever you place those settings, look, we would like it under 50 million just confined to the small business entities I look with. You said it at 2025, 30, 50,000. At this point I cannot I can't. I just want to permanently in the law.

Scott Treatt, CTA

Absolutely, now Anne-Marie, so turning to capital gains tax.

 Annemarie Wilmore, ATI

Yes. For foreigners. Yes. So will be some changes in this space. There'll be an expansion of the scope in terms of the assets that might be caught. There's a new concept to deal with. So in terms of the current rules, we focus on a test of evaluating the indirect interests, whether they the the value is greater than 50% of Australian real property. That perhaps will change. It's unclear. Maybe there's an additional layer of integrity rules to be introduced.

Scott Treatt, CTA

Yeah, there's a lot of detail that's not quite.

Annemarie Wilmore, ATI

It's not quite it's not quite there. But there is this new concept of assets with a close economic connection with Australia, with Australian land in particular. There's also a change around the testing time. So at the moment you're quite to test at a particular time there's an averaging of 12 months and there's a notification requirements that is going to be it.

Scott Treatt, CTA

Which is fascinating, is maybe touch on the testing over time. So pragmatically for advisors, for their clients, what it's going to mean from a record keeping perspective and that can be challenging when you're talking to clients and you know only saw it on this day, why do you need all these other data?

Annemarie Wilmore, ATI

And it's a bit speculative at this stage, but I think it's it's going to require a bit of thinking through and planning for organizations that are looking to divest of their assets. You know, the valuation aspects will need to be worked through in terms of how a value a might approach this question over a period of time. And you run the record, there's going to be record paying implications for sure.

Scott Treatt, CTA

And so that notification piece, though, who's that applying to.

Annemarie Wilmore, ATI

Say, the the foreign residents who have who are considering to dispose of their shares in land that's worth more than 20 million? I think that they'll be required to notify the ATO that the announced measure actually says before the transaction is executed we should see some really early isn't really, really early. And it would be interesting to see if any attempts are made to strike a balance between that need and desire. So transparency on one part of the government and the ATO and the real practicalities of getting a deal done. And what we also don't know at this stage is what that might mean in terms of there's a notification requirement. I think that's clear. But what sort of powers will the idea have around this? Can they hold up a deal? Will they look to investigate it post post implementation? So these are sort of the unknowns in some ways, this is not a new issue for foreign investors into Australian assets. It's been around for so many years. I think there may have been a similar announced measure some years ago after the ACA litigation. So it's sort of a bit of a back to the future type vibe to it.

Scott Treatt, CTA

Look at it. I think we've covered off matters on fact that there is so little in last night's budget from a tax perspective and what have you. So maybe just to wrap this up, maybe from each of you. Well, on we've heard what we've heard. Yes, there's little in there is aside from a text perspective. So what's different then? If I'm an adviser, I've now got to sit in front of clients who don't get that some joys and thrills of sitting down at budget night and listening to Jim Chalmers wading through the papers. They've got questions that they want to I want to know what is it that I'm talking to my clients about? What is it that I need to do differently in the future, plan differently, etc.? What's your takeaway? And I'll go one by one if I might play starting with you.

Clare Mazzetti, ATI

Well, look, given my roles a little bit different, I might answer the question slightly differently because I'm not sitting in front of clients giving tax advice. But look, I think a broader macroeconomic comment is is just to reiterate what I've said before, that clearly productivity is needed in the Australian economy in lieu of governments of any persuasion addressing some of these structural challenges that we face into and obviously taxation reform and broader reform would need to be a part of that conversation. And we bang the drum very, very well and passionately and will continue to do so. But really not much is sort of different and not much will change. And in some ways, you know, I'm not that I sort of want to wish sort of crisis upon the economy, but Australia does respond well in a crisis and people pull together. And I think that COVID showed us that. And in many ways we almost need some kind of big crisis in order to have the will and desire to to address some of these structural changes where it can then be, you know, on a bipartisan approach.

Scott Treatt, CTA

Understood. Todd, You're a practitioner.

Todd Want, CTA

I think what what's clear from, you know, Robyn, talking about ABUMS and the depreciation measures, they're not being enacted. Uncertainty, even though things are announced, is just a given in this in this climate. But what does have more certainty out of these budget measures is the amount of money that the government keeps throwing in the ATO to conduct reviews, audits, task forces, etc. So those taxpayers who are either wealthier individuals, larger private groups, individuals that are pushing the boundaries on deductions, whatever it is, the cross section they expect and expect to review, that's that's what I take out of these papers, because dollar wise, if you dug into the amount of money thrown the way over the coming years for those types of things relative to the total pot of measures, it was a huge proportion of all. And so it's certainly giving a message that's and I think quite rightly, Robyn has thoughts on whether they go far enough in what the ATO should be allocated money for. But as far as taxpayers and as an advisor for clients, don't expect that reviews and audits are going to go away. Did they're part and parcel of the environment now having your records, your processes, procedures, your documentation in place and being prepared to to go through that and not, you know, I think some people perhaps if you went back a number of years, would consider themselves unlucky to have been picked for a review or audits. Well, I think now you just got to accept that's part and parcel of being a taxpayer and certainly in a lot of pockets of of taxpayers.It's just how it is now. So I don't see it as being unlucky. It's now the process you just got to roll with it. And the ATO are going to continue to be funded to deal with this stuff.

Scott Treatt, CTA

Absolutely. So I might then step out of line and then move down to Robyn just to comment or add to some of those comments and your thoughts on what this means to the future. I'll come back to you, Annemarie.

Robyn Jacobson, CTA

For many years we have advocated for a more permanent and certain source of funding for government agencies and whether we're talking the TPP, the ICAO or the dozens of others, there was significant expanded funding announcements or extensions of current funding programs that were new ones that were announced. The sense I get, it's like the teenager whose constantly putting their hand out for more money from the parents. And if they had either a steady allowance or maybe they're just not trusting the teenagers with the cash. Yeah, we'll give you a drip feed amount, so we're not going to give you a big sum of money. And when we talk about but can I have some money to go to the proverbial cinema, which is code for we want to do another review or we want to build some more infrastructure or we want to upgrade our systems. It's constantly having to be sought as a separate bit of funding, sometimes allocated on an existing pool, sometimes not. Now, over the last year we have seen the recommendation from the James Review with the TPP, where they've now got a special account and they don't need to seek an appropriation from the ATO's funding. They've got it directly from Treasury and that's a good thing. But it seems that they haven't noticed our members contacting the ATO 60 days for objections is kind of that's a bonus if you can get it within that period. We're hearing increasing of six months where people are not getting feedback from the ATO on those sorts of matters. They challenged by labor markets as much as any other business. So how the funding works long term but certainly would like to see something that's a little bit more permanent and gives them more certainty.

Scott Treatt, CTA

Anything else from a future perspective, then you'd like to close out on.

Robyn Jacobson, CTA

Look, I'm going to circle back to where I started. The ABUMS

We need to move on is we need to know what the government's position on a range of measures is. Now, I can remember many years ago, and I think it was under Tony Abbott where formed government and there was a cleanout and of the I think it was on like 75 or 77 odd items, they were classified into three categories. We will proceed. We will proceed with amendments, in other words, will change the policy, but tweak it and go ahead or we will abandon it. And it's almost at the point where I won't say people don't care, which is the three we end up with, but we just need to know where we're headed.

Scott Treat, CTA

Where the client is. Absolutely. Absolutely. All right. Annemarie last but not least by any means.

Annemarie Wilmore, ATI

Thanks, Scott. I think what's if we take a step back, what's promising and it goes back to my my opening comment is that a lot of the announcements seem to be prospective. And I hope that really foreshadow is the opportunity for meaningful consultation with businesses about some of these measures so that they're not caught by surprise and that the policy intent, particularly around some of the incentives that are offered, has that opportunity to have that full effect, because these are, I imagine, not decisions that are made lightly and need to be thought through. And I think taxpayers want to get a bit more certainty and clarity around what the what the detail of these measures might actually involve.

Scott Treatt, CTA

No, that's okay. Well, with that, greatly appreciate at the time of the panel. In short notice, obviously even in preparation for these immediately after the federal budget. So again, thank you for your time and we look forward to joining you again next time.

Robyn Jacobson, CTA

Thanks for listening to this bonus episode of TaxVibe. You've heard the highlights of our member only post-Budget webinar. If you want to hear the full webinar and join a collective voice of 10,000 practitioners at the heart of the tax profession, become a member of The Tax Institute, head to our website to learn more. To keep up to date with TaxVibe, be sure to subscribe wherever you listen to your podcasts. Please join us on our socials and let us know your thoughts or any topics you'd like to hear us discuss. We look forward to joining us next time.

Robyn Jacobson

Hi and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and the host of TaxVibe. On the show, I chat with some of the tax profession's greatest minds during each of the guest unique perspectives to give you valuable and practical insights. You may not hear every day. We hope you enjoy this episode of TaxVibe. Today I'm joined live in person at the South Australian Tax Forum by Tim Sandow, CTA, Tax Partner at BDO in Adelaide. Tim has more than 30 years of experience as a tax professional, including 25 years at the Big four. He provides income tax related advice to a wide variety of private and large public companies, as well as multinationals. He has advised on mergers and acquisitions, tax governance, corporate tax, international tax and employment tax issues. Tim is the partner leading BDO is national tax risk and Ethics group. Tim is also the national vice president of the Tax Institute for 2024, and is the South Australian representative on the National Board of the Tax Institute. Tim is a chat, a tax advisor with the Tax Institute and a Chartered Accountant with Chartered Accountants Australia and New Zealand. Tim, welcome to TaxVibe.

Tim Sandow

Thank you Robyn. It's lovely to be it and looking forward to the discussion today around risk and ethics. And I will say the opinions I shared today are my opinions, not necessarily those of the Tax Institute and not necessarily those of BDO.

Robyn Jacobson

So we are speaking, I'll just make this comment, from the Sir Donald Bradman Pavilion. So this is quite an esteemed place we're sitting in today.

Tim Sandow

Exactly. We're on holiday.

Robyn Jacobson

Yeah. All right. So a bit of scene setting. We've had a lot of attention squarely focused on the tax profession for the last 12, 20 months. And it's been in the media. It's been in political circles. Governance has come under the spotlight. And of course, professional or unprofessional conduct of particular practitioners. So we're not going to go into the specifics of that today. But in terms of where this has taken us and the journey we've been on at the last 12, 20 months, you've got a lot of background in managing risk and ethics of practitioners, and I'm really keen to explore that with you and unpack that further. But if we look at the reforms that are coming through the legislative landscape now, I think it's important we acknowledge that some of this was well in play before the revelations during 2023. So if we go back to 2019, there was a review of the TPB, the Tax Practitioners Board. There were 28 recommendations made and five of those made their way. And others are still to come into what I'm calling tranche one. So this is the Treasury Laws Amendment 2023 measures number one bills, a bit of a mouthful. And that bill has a number of measures in it.I’m not going to go through all those particular measures, but things like disqualified entities and not being able to take people on without getting approval from the board who are disqualified. But what we also saw last year, because of the revelations during the year is some amendments made to that bill in November, and there's amendments to that Bill. Number one were made by Bob Peacock, Senator Peacock and they deal with what we call the dubbing provisions. Now, that's the vernacular. And they fall term is they breach reporting rules. And I just want to mention all this as we get underway, because I think it does set the scene for where the rest of this conversation is going to go. Yep. Those rules were introduced into that bill without any warning and without consultation. And the main concern that we've got is around the breach reporting rules. We're still to receive guidance from the TPP as to what those rules are going to look like and how they're going to be played out in practice and what sort of guidance we got to get. But in terms of the administration, I know that it's something a lot of practitioners are concerned about. And then we've got the whole second tranche of measures which did come out of the revelations of last year. And that's what I'm calling the second tranche. And this is all the promoter penalties and the information sharing, etc. powers of the TPB and greater sanctions. So there's been a lot of movement. Some of it's enacted as law, some of it has already started on the 1st of January. Some of it starts 1st July this year, and some of it is still to come. So your initial reaction to all of this progression of legislation.

Tim Sandow

Robyn, I think you're right. I think that the events of last year really sort of was almost like that lightning bolt out of the storm cloud that brought it all to a head. I think the community's expectations around tax practitioners has probably gone up a step. I think it's pretty interesting. I think that's, nobody likes paying more tax than they should, and I expect their accounts to tell them about, well, what are the opportunities? I've got to save some tax, but I think there is a line there. And is it that where do you actually cross that line? I guess the other comment on how just about what we saw towards the last end of last year was there there were a couple of changes which I thought were a little bit reactionary and maybe not really addressing what the real issue was. And for example, the changes to the community representations on our tax practitioners border and limiting that to one firms of under 100 people. I just thought if the issue here is about managing conflicts of interest, there's actually not addressing what the issue is. And so it's very hard to see how you have community representatives when you're excluding a portion of the community that I should be representing.

Robyn Jacobson

And there would be an outcry if there was, let's say a TP board that was completely represented by Big Four or even second tier firms and no one from the assembly sector. But conversely, they shouldn't be a board made up of only SMB practitioners and no one from the big four.

Tim Sandow

That's right. And I and I think that's where it's about really understanding what's the core issue that we're worried about. And here's the remedy addressing what that core issue is. And I just wonder with some of the things we're seeing coming through now, particularly when there's very little time to make a submission in consultation with, it's just been a little bit rushed and reaction. Right.

Robyn Jacobson

Is it fair to say that what happened to that last year or the revelations last year? I should say, because the events obviously go back many years before that highlighted some drawbacks in the system. There were some areas where it was clear that the TPP was not able to share certain information and sign with the ACR. So has the pendulum swung too far in trying to respond to some of those deficiencies in the current framework?

Tim Sandow

Yeah. Look, I think it is. I mean, I think the average person on the street would probably be surprised by some of that sort of thing. But, you don't have this sort of communication channel between Treasury, the ATO in TPP. So in some ways that sort of information sharing doesn't feel like it's a surprise. So like it'll be interesting to see how that does evolve. Well, I think and obviously we're seeing an enormous number of resources now being allocated to the TPP guys in terms of the fair, the number of fan employees they have, but then also the technology that will be investing in we are going to feel like we are being monitored.

Robyn Jacobson

So talk to me about loopholes. That's an expression that is tossed around from time to time. Yeah. They can be defined in many different ways, but what is the responsibility of practitioners when it comes to either actual or perceived loopholes?

Tim Sandow

Yeah. And I thought, I guess that there's a lot of emotion in some of these words because usually they talk about exploiting loopholes. And it's the large companies and the multinationals and the big tax advisors. So all that exploiting loopholes. I think what I would say is there's very few really genuine loopholes, and they tend to exist for a short period of time, and then they get shut down the site. My caution to someone who feels like they have found a loophole is to really examine it very carefully, because what I often find is I'll come up with a really brilliant idea, or someone else will come to me with a really brilliant idea and then will say, have you thought of? And there'll be an integrity measure which I could apply. And, and I think I'm going to talk a bit about as we go through today about the power of the network having a really good, strong network, because what I find is that it's very hard to have all the knowledge in your own head. And so often when you're talking to somebody else, you can actually draw out, what is it that I'm missing here? So I think my first caution with day, is it really a loophole or is this something already in the law that sky to counter it, I think the next thing I'd be looking at would be to say, okay, well, look, maybe it is a gray area, a genuinely gray area. My next question is, is there a reasonably arguable position and is it just a reasonably arguable position or is it a very solid position. I think by then this is the next question about the discussion with that clients to say, look, this is genuinely a gray area, and I always like to talk to clients about having an eye to the bigger picture too often of saying tax planning and loopholes and stuff being exploited. When I save a small amount of tax now. But the long term consequences are quite large. And particularly if were waking the client who might have a terrific business, they want to sell it, or they want to do an IP, and we come in and we say, look, if you want to sell your business, the tax that comes from selling the shares in this company are significantly better than selling the assets. But if you want to sell the shares, that company needs to be squeaky clean. And so if there's something in there that looks like a tax dodge or at a position that someone's taken, even if the current adviser says that's erasing the arguable position, the purchaser is going to look at it and go, you know what? I'm either going to hold back some money or the deal doesn't go ahead. So saving that small amount of tax in the short term can have some really big long term consequences. So I think that we just need to be really careful at that, exploiting tax loopholes a bit. I think really genuinely there. And maybe a test for that isn't a rabbit hole for him. If I went to the tax office to ask for a private ruling that the it, I would agree and sometimes I did. I mean, you look back in time now for instance, from the rights the future income provision came out in 2010. In tax consolidations, there was billions of dollars of tax deductions were claimed at that time because the law didn't apply in the way that it was intended, and then it was shut down. So from time to time, as loopholes exist, I just tried really carefully.

Robyn Jacobson

So you make the point to about having a network around you that you can draw on. And that's so important because as experienced practitioners, we know that classic tax law, there'll be a rule, there'll be an exception to that rule, and then there'll be an exception to the exception. Correct. And if you really lucky, you'll find a fourth one.

Tim Sandow

That's right.

Robyn Jacobson

Younger practitioners or those who are perhaps not as technically proficient or don't spend their lives buried in the law itself, may not have the visibility over some of those deeper provisions that provide the exceptions or exceptions to exceptions. Yeah. So that's why reaching out to networks that look, has anyone encountered this or is there anything I've missed? It's such an important question to ask.

Tim Sandow

It really is. And I guess what I find is, I'm becoming more experienced is that I don't need to know everything. But if something feels a bit too good to be true, like if someone comes to me and says, I don't think this is taxable, I think we get a deduction for that. you know, whatever might be like, I remember that law coming out. I don't think that's the way it was supposed to apply. So if it feels too good to be true, I think that's the we need to really start asking some deep questions.

Robyn Jacobson

And look, let's link it back to obligations. Here. We have an item, as I referred to in the Code of Professional Conduct in the Tax Agent Services Act, and it requires you to act lawfully in the best interests of your client.

Tim Sandow

Yeah. 

Robyn Jacobson

So it's not just act in the best interests of your client. It's act lawfully in the best interests of your client.

Tim Sandow

Yeah, yeah. And I think the lawfully thing is the really important bit. And way I kind of look at that is I think if I've gone through that process that I talked to that before and it is something that exists and it is lawful, then I think to act lawfully in the best interests of my client would suggest that I should talk to the client about it. But I think this is where that communication with the client becomes really important, because that's when we can talk to the client and say, look, lawfully, I think this exists, but there is a risk. And then we can talk about what that risk might be. And, you know, whether that's something that we want to pursue. And it is interesting. And yeah, if if I look at what's happening globally because this is not an Australian only issue, the International Ethics Standards Board for accountants has been looking at some tax planning and, whether there should be this overriding public interest test. The discussion paper that I put out, it's very hard to articulate what in the public interest rates. So a and I'm sort of conscious as well that. Yeah, if you look at for instance, for example, in that case, and about reading the legislation assets as it's written and how you introduce other materials, including rulings, you know, that sort of statutory interpretation, part of it becomes critical. I mean, I've had instances where, you know, I've gone to the ATO to say, look, in my tax situation, I don't think the law was applied properly and quite rightly, they've said, Tim, I understand it's a bit unfair in your situation, but we have to interpret the law as its written. Yeah, but I think that goes both ways as well. So if the law is clear, then I think that, while there may not be an overriding public interest test, I think that the way they're articulating and just to say you need to talk to your client and explain what the risks are.

Robyn Jacobson

Something else that you talked about lawfully, we discussed that particular word. We're not thinking of tax evasion. I may that's acting outside the letter of the law.

Tim Sandow

Yes.

Robyn Jacobson

Part IVA and the general anti-avoidance rules and other anti-avoidance rules or equity measures to me is where you're acting within the letter of the law but outside the spirit of the law.

Tim Sandow

Yes.

Robyn Jacobson

So when we're talking acting lawfully in the best interests of your clients, are we talking the letter of the law or also the spirit of the law?

Tim Sandow

look, I think we have to be mindful to both. Yeah. and I think if we're acting outside of the the spirit of the law, I think we just really need to be very mindful of, we are 100% confident that this is what we want to do it.

Robyn Jacobson

I'm a client, I come in, I give you a whole bunch of information that could be in written form. I might be conveying things verbally to you. Can you believe what I'm telling you?

Tim Sandow

Okay, look, this is a really interesting one. And again, and under the code of conduct, we require to take reasonable care. So, what is reasonable care? if you look through the guidance, it talks about exercising professional judgment. Again, what's exercising professional judgment. So if a clime brings in a whole stack of information, I'm not required to do an audit. I don't have to verify every piece of information in that building. But I am expected to look at that with professional judgment and skepticism and say, what do I know about this person? What do I know about the industry that I operating? And I think for me, professional judgment is about standing back and saying, before that client walks in, what am I expecting to see? And if what they give me will be law, and then I can probably largely accept what they're telling me if something looks unusual, I think that's when this professional judgment skepticism steps aside. yes. I think you can accept what people tell you, providing there's nothing this really flagging. There's no red flag that thinks that doesn't quite sound right.

Robyn Jacobson

And tax agents are not auditors. Correct. So they're not required to go through an audit and sign off and certify that everything is true and correct in that respect. But in what circumstances is further investigation warranted when you supposed to dive deeper or ask further questions?

Tim Sandow

Yeah. Look, it's a good question, Robyn. I think that, as I said before, when something doesn't look and feel right, so and look an example for this might be, I mean, if I'm preparing the accounts and I'm not absolutely everything that's in there, then I probably know I'm not just accepting it. if, for example, I've got a client who's got their own bookkeeper or I've got their own accounting team, and they present me with a trial balance or a draft set of accounts, they might say, look, we don't want you to have a look at legal fees, for instance.

Tim Sandow

And I might say, oh, okay. Well, let's just have a look. Oh, that's I'm like, oh, that's I need $3,000 or whatever. That's probably to do with leases or something. Yeah, I'm I can accept that. If that number was $3,000 last year is $500,000 this year. Yeah. I don't think I can just accept that. Yeah. So I think that, in fact, talking to an accountant recently and I had that situation that actually found out that the owner of the business had put it through all of their, family law expenses that after the divorce they were going through, they'd put through their company. So, and he said, well, I was protecting my, my mum, my company for my spouse. So it should be deductible. Oh, do. Yeah. No, I know I do.

Robyn Jacobson

I can think of another anecdote. I heard of a firm that took over another small practice. and in doing so, they picked up the balance sheets of lots of their new clients. I'm having a look. And there was a property sitting on the books, and so I just asked to read normal due diligence. what's this property and what do you use it for with, like I said, etc.? Well, it turns out that property had been sold some years prior and for whatever reason had not been correctly accounted for. And it meant that the property that was showing as the debit on the balance sheet was in fact a debit loan, because the proceeds on sale had been taken up by the shareholders. So it was a Division seven problem. Yep. And without asking the right questions, you don't unveil these things now.

Tim Sandow

That's right. And I think that's where there is. There is a real role for experience. And again, a role for talking to other people and to saying now sometimes the professional judgment is also talking to somebody else and saying, does this feel right to you? And it's amazing how many times we talk to a colleague or even another member and just say, can you experience difficulty? This is right in my mind silently. And and I know that often happens in this industry or whatever month, but a conversation you can have with someone, it's just got old.

Robyn Jacobson

Tim, next scenario. I'm your client. You give me some advice and I don't like it. I don't want you to lodge my return on that basis, or I'm insisting that you do claim something that you know shouldn't be client. What do you do now?

Tim Sandow

Yeah, this is a really tricky one, Robyn, because, the correct answer is to say I'm going to refuse to lie to retain. And I think that's sort of, you know, even more important, we saw last the end of last year the, exposure draft on the code of conduct that came out, but really reinforced that a tax agent must not make a false and misleading statement to the commissioner, which includes lodging a tax return. So if that number, but it starts talking their bad material amounts as well. there's that expectation that we're always absolutely perfect. But I think that if the client's refusing to follow our advice and wants us to approach that retail, then the why? I like to look at this. I've got a colleague who describes this really well. She says, how we feel in three years time, looking back at what you did. And I think that making that taste like cake. Will the future team feel like looking back is a really good way of looking at it? Because if I'm going to lodge that, retain and feel sick in my stomach that I've done it, I think that's telling me I shouldn't do it. If I'm looking at it and thinking, well, it's only a very small amount, there isn't an argument. I can sort of almost get the I'll talk to somebody and see what they say. maybe I can get there. But, I do like this idea of the future self test, you know, how do I feel looking back about what I've done and if I'm going to feel sick that you know the item up, review it, then I think that's a really a really big test. And the other thing I'd say, of course, that client could go to another accounting and anyway, and that other accountant picks it up, maybe they're going to tell me none of these new domain rules. So I think that's, doing something now which you're not comfortable with, that you don't just have the risk of the tax office picking it up. You've got the risk of somebody else, a fellow tax agent, picking it up a name, feeling compelled to you out and doing all right.

Robyn Jacobson

So you've slept on it. It doesn't sit well with you because you've decided to claim it anyway. Then there's clearly a problem with your conduct as well as me as a taxpayer. If, however, you say, no, Robyn, you're not allowed to climb out. And that's my advice. Does it change anything? If I represent a really big chunk of your face? I'm a long term client. We've had a great relationship. You've looked after my affairs and that of my family, all my business interests, for 30 years.

Tim Sandow

That's right. And you referred me off to your friends and your friends in airports as well. And. Yeah, look, I mean, and this is where that's sort of, when we know the right answer is not to lodge the tax return becomes so much more difficult. the comment I'd have about that is, I still think you have to sit back and think about what does this do to my reputation? Do I want to be known as the person that can be walked over and lodge the tax return? Anyway, we'll talk a little bit later about reputation, but for me personally, I kind of fake. I've spent 30 years building a reputation. Am I prepared to let that go for the sake of lodging a tax return with an extra deduction? It and I try and weigh that up against the fees from the client and whatever. It's really going to be the case that it's worth it.

Robyn Jacobson

Well, weighing up on one hand, trying to look after one client supposedly this is putting at risk your entire practice.

Tim Sandow

Your entire practice, your entire career. And I doubt that client way there to support you when it all goes to pot. Yeah. Agreed.

Robyn Jacobson

All right. So moving on to the next bits. What duties do you have as a practitioner when you pick up a new client?

Tim Sandow

Yeah. Look, and I think this is getting a little bit interesting at the moment because the it's put out their best practice principles, which were aimed at the big four and the big four was signed up to them about 18 months ago. And now the it's having come and side with the mid tier firms. And so firms like ours and others about whether we would also like to adopt these and make a statement on our website that we've adopted the best practice principles. In some ways, the best practice principles are really restating a lot of the stuff we know already. There's very consistent with five. The tax agents code of conduct and also with the accounting body's ethical standards. So they're very consistent with that. One of the things I do talk about though is effectively you should not be doing, taking a position unless there's a reasonably arguable position. They also talk about if you're picking up a new client, you should be looking at what they've done in the past to see if they've all side paying, adopting, raising positions or what they've done in the past. So to me, that puts it an extra layer on top of what we probably already would have done. And I think that, often we might have just picked up a new client and, accepted what they've done in the past and focused on the future. So this is sort of suggesting there's an extra obligation to go back and have a look. that, of course, becomes even more so if the, for instance, there's been a position that's taken in the past which has an on going implications for tax returns that I might watch. Now, I will say.

Robyn Jacobson

E.g. Divison 7A. So let's assume again, I've walked through the door and the first thing you do is look at my company's balance sheet and you find there's a Division seven I learned from three years ago that has not been placed on complying terms, and there's no evidence that that amount was included as a team dividend in that year. Tax. So we got a problem. Or look at most graduates. We've got an issue with that not being declared a dividend in the year the loan was made. Let's assume there was a complying loan agreement. But then none of the repayments have been made. So that's where it becomes an ongoing issue for you.  What do you do in that case.

Tim Sandow

So look, Robyn, I think we'd be looking for the commission's discretion and, he can't ignore that sort of thing. And, I'll be very interested to see the TV base guidelines when they come out about dob-in provision yet. Because is this something that is serious enough, substantial that that would obligate me to dob in a practitioner and I feel really glad about that. You know, particularly if it's more of a mistake as opposed to a systematic exploitation of tax loopholes.

Robyn Jacobson

But interesting with these new breach reporting rules, am I yet to see some guidance from the TPB, so at the moment all we've got a literally the provisions themselves. There was no explanatory statement or memorandum accompanying the amendments been put through the Senate. So we've literally got the letter of the law only. There's nothing there about intent. So it doesn't talk about why you might have breached the rules or whether it was inadvertent. It questions whether there has been a significant breach and whether you have a reasonable belief that that has occurred. So what obligation are you under? And a practitioner may not want to do it. But the problem is you've got a positive obligation to report them, to dob them in. Otherwise you face penalties yourself one day.

Tim Sandow

There is that there is a time period for when I have to make that decision.

Robyn Jacobson

30 days.

Tim Sandow

It's not a long time.

Robyn Jacobson

It is not.

Tim Sandow

So I'm really looking forward to seeing what these guidelines say. but I do worry about it. And I do worry about the positive obligation it's putting on the tax profession to self-regulate.

Robyn Jacobson

Yeah.

Tim Sandow

And, and whether that's there.

Robyn Jacobson

Is interesting in the review of the TPB, so this was the James review. There was a comment that it is for the government agency. I.e. the TPD to regulate the profession and the conduct of agents. And it's not for the profession to self regulate.

Tim Sandow

Now, I and I look, I'm very busy and I think all of our members are extremely busy to expect us to also be stopping thinking and worrying about whether or not I should be dubbing in somebody else. We'll face some breach myself if I don't. well, on top of a very busy workload. Is that really the best use of our time?

Robyn Jacobson

But we can see where the system from. Now, competence.

Tim Sandow

Yes.

Robyn Jacobson

So obviously we have an obligation under the code as tax agents we need to provide our services competent like me. What happens when you act outside your sphere of competence?

Tim Sandow

I think more and more, Robyn, it is dangerous to do that. I think it's very important to understand what you know and what you die by. For instance, for me, we sat through this morning a session on GST and the GST margin scheme. I would not touch advice on GST and margin schemes, but I'm not here to call and I think that's really important. I think that's when we talk about the power of a network. I think it's really important to understand what you mean, know, not venturing far away from that, because I just think it's fraught with danger in term. You know, when you practice in an area and you know that area, you know, where all of the integrity measures, you know, where the exceptions and the exceptions to the exceptions and exceptions to the exceptions and the exceptions, all set. And so you're less likely to trip up and make a mistake when you're dabbling in an area that you're not quite familiar with. The risk is just getting too high. And hindsight's a perfect thing. So, you know, it's very easy in three years time for the future self to look back and say, why didn't I do that? Yeah. And for the client to say, why did you give me that advice? You were negligent because you didn't know about this.

Robyn Jacobson

So I actually got I can think of four implications here. We've got the possibility of being sued for negligence, although it has to be said that over the years they haven't been too many successful claims against accountants. We've got the risk of breaching the code, which requires you to provide your services competently. Yeah. There is the risk of breaching relevant bylaws of the professional association of which you are not. Yeah. And then we've got the other issue being the professional indemnity insurance policy.

Tim Sandow

Yes.

Robyn Jacobson

Which does tied to the negligence I accept. But there's a number of matters that come up there, whether or indeed covered and whether you're going to be going through litigation and whether there are sanctions.

Tim Sandow

And that's right, Robyn. What's interesting is over the years, from my understanding, is a lot of the claims of negligence against accountants have been in relation to small business CGT provisions, which are often extraordinary because those provisions are supposed to, you know, be there for ACMA companies and practitioners and they are some of the most difficult to understand.

Robyn Jacobson

Best fail in terms of also providing services as an accountant versus a lawyer. And this gets really important when it comes to state tax issues.

Tim Sandow

It's important when it comes to state tax issues because obviously, you know, as a tax agent, we provide advice on the federal law about income tax and JSA, FBT and so on. So stamp duty, payroll tax and so on. one standing, not, covered by tax agent services. So we have to be very careful as accounts about how far we strike into those state taxes. I think we have to be very careful also about the documents we draw for clients. particularly if they look like an illegal agreement. now I'm saying trust deeds being drafted by accountants. And I think, you know, I don't think I would do that.

Robyn Jacobson

And I think it's important just to strip this back and come back to some core principles here. Accountants are not lawyers. Accountants cannot advise on the law. And that is why we have the Taxation Services Act, because if not for that, then no accountant would be allowed to give advice on tax law.

Tim Sandow

That's right.

Robyn Jacobson

So tests are exists to allow accountants to be able to advise others on the preparation of tax returns and relevant statements, but also more broadly on transactions and arrangements. but TSA is federal law and governs federal tax laws, whether that be FBT, GST, income tax. But as you say, when we're talking about payroll tax, land tax and stamp duty, those are state taxes. Yeah. And losses would be a potential one across the federal. But some and I call it a class because you cannot expense at a state level. But they have levies and things like that. All sorts also apply the Texas taxes that we're all going to disappear. Yeah. And so advancing on those is getting into very thin ice. When it gets to the ability of an accountant to lawfully provide these services.

Tim Sandow

Yes. And where that becomes interesting is that clients, I expect us to be talking about, I particularly if a client comes up to us and says, can you look after my affairs? That normally means can you also make sure I'm paying payroll tax? Yeah. So again, having somebody in your network, good law lawyer in your network, who you can talk to about these things is is also very important.

Robyn Jacobson

Does it fair to say the more we all learn about tax, the less we feel we know about it?

Tim Sandow

look, it's it's really just. I've said that forever. The older I get, the more I see it. I in fact, I was talking to a very senior tax partner just recently. He was a doyen of the industry. And he said, Tim, the more I know about tax, the less I know. And I said, that's exactly how I feel. my other thing I say is I, I need to know everything. I just need to know who to call. Yeah, yeah.

Robyn Jacobson

So quickly, to wrap up, in terms of being accountable for advice to others in your practice might be providing.

Tim Sandow

Yeah. So if is something you can take out of the events of last year, is that, when you're in business with other people, you spend a lot of time building a reputation and which can be tainted by what other people do within that, within the same. And so I think you have to be very careful about knowing a bit about what your fellow partners, directors, business owners are doing and whether that is consistent with your own risk profile. Yeah. So because I think that reputations take a long time to build and a second to destroy. So we just need to be very careful and very mindful about what others in our practice doing.

Robyn Jacobson

Advice to practitioners, if they have an ethical issue, what should they do?

Tim Sandow

Talk to someone that it's amazing. When you talk to someone, you start to voice it. Sometimes as you're voicing it, the answer comes to you. The mere act of actually saying it out loud, rather than having a rattling around in your head, can often resolve the issue for you, but it's surprising how many times you can talk to someone and else have another opinion or another approach. And, have some words of advice about how you might approach so that in a day that network where you can ask those questions, it's just really critical.

Robyn Jacobson

Thank you. Look, Tim, I've really appreciated the discussion. We've covered quite a lot of ground. And I actually it's been there's some venues practitioners who are wondering how they best place the next.

Tim Sandow

Yeah. No, thank you, I rather enjoyed it. Thank you.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe, I've been chatting with Tim Sandow, CTA and Tax Partner at BDO. If you enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute. Please join us on LinkedIn. If you're interested in being at the centre of the tax conversation. A membership with The Tax Institute could be just what you need. Stay current and connected with tangible, real world benefits. Learn more at taxinstitute.com.au. Thanks again and till next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each case unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoy this episode of TaxVibe.

I'm joined by Liz Westover, FTI, a partner and national SMSF leader at Deloitte. Liz is responsible for the firm's SMSF Service offering, providing compliance and advisory services to the firm's clients. She has extensive experience in superannuation and has strong capabilities in the technical and practical application of superannuation and associated tax laws. Liz is a regular commentator on superannuation and SMSFs and has been involved in superannuation policy, development and advocacy, regularly liaising and consulting with government regulators and stakeholders on technical, legislative and policy matters for many years. Liz is a fellow of The Tax Institute, a fellow Chartered Accountant, a CA SMSF specialist, and holds a Bachelor of Business from the University of South Australia, as well as a master of legal studies from the University of New South Wales. She's also the chair of The Tax Institute's Superannuation intensive organising committee, with the online intensive coming up offering 8 hours of CPD on the 26th and 27th of March. Liz, welcome to TaxVibe.

Liz Westover

Thanks Robyn, lovely to be here.

Robyn Jacobson

Well, superannuation is always a moving area. It's always subject to so much regulation, constant changes and it's always good to focus particularly on their SMSF sector, which does represent a large chunk of the market. So we're going to cover quite a few topics in this discussion today, but let's kick off with the caps limits and thresholds. Now there are so many of them, and in our recent submission to Treasury, the pre-budget submission, we note a number of things such as inconsistent indexation or the number of different caps and rates and thresholds across the superannuation sector, in fact more broadly across the whole system. And really look at tax and superannuation there are so many caps and thresholds to be mindful of. We've also got challenges with certain caps being indexed and certain caps not. So can you read through some of the recent changes and what we're going to see coming up?

Liz Westover

Absolutely. And we do have quite a significant change coming up around indexation has been an increase in the concessional contributions from 1 July 2024. Broadly, your comments around change is our constant in the superannuation industry and it is frustrating. This particular cap, the concessional contributions cap is indexed via AWOTE and our transfer balance caps, for example, is indexed against CPI. So we have this sort of mismatch. In some years we get indexation on one and not the other. Sometimes it's both and sometimes it's none. For this year, it's the concessional contributions caps churn to get indexed. So we're seeing an increase in the cap from 27 and a half. $30,000 always goes up in those $2,500 increments. So $30,000 per annum from the 1st of July 2024. And because the concessional contributions cap is coming up, the non-concessional contributions cap is always four times the concessional cap. So we now have a non-concessional cap of $120,000 from the 1st July 2024. So no indexation on the transfer balance, couple of general transfer balance cap. So that's going to stay at $1.9 million and what does that mean, that threshold for which people's total super balance is for their ability to make non-concessional contributions caps? So I'll keep going on that one. I want to move all the gap. So your ability to use the bring forward provisions for non-concessional contributions caps is always starts with the general transfer balance cap. So anything above that balance on the 30th of June or the previous financial year dictates your ability to make non-concessional, period over that threshold. No concessional contributions for you. If you are under that, then we start to see these thresholds around your ability to use the bring forward in three years, two years or not at all, and that is set by the general transfer balance cap lets the non-concessional contributions capped for the year. So notwithstanding the $1.9 million isn't changing, those thresholds are changing. So it's now going to be less than $1.66 million. You can use the full three year bring forward provision. So $360,000 in that year. If the next cap is 1.66 million to 1.78, you can do two years bring forward to do $240,000 worth of non-concessional contributions, 1.78 to 1.9. No. Bring forward. So just the annual non-concessional cap at 120 and then of course, over 1.9. No non-concessional contributions. So no wonder it gets confusing. I'm sort of set looking at all these sort of thresholds and so on, but a renewed opportunity for people to make contributions.

Robyn Jacobson

So when you look at the different ways of indexation, you're fed to everybody, which is the or I was depending on your pronunciation, the average weekly ordinary time earnings versus CPI. Yeah, liquid need to unpack all the policy decisions made many decades ago as to why some use one basis of indexation and other caps and thresholds use another. But if we look across superannuation for example, the $500,000 retirement exemption limit has never been indexed. We have legislative changes to increase the ESG rate, which we're going to come to shortly. And then we've got these other modes of indexation for these particular caps and transfer balance of course, and concessional and non-concessional. It does make it very confusing. And while there is a limited amount of discretion where people do get it wrong, particularly in the case of concessional non-concessional caps, it's not easy to navigate this. No, it's really not. And you've got to stay close to your advisors. The ICRC website is actually very good, as is the money Smart website is very good for information and updates and so forth. I guess the other comment I want to make about indexation as well, because we know it's a big issue with respect to Division 296 tax and I'm going to be talking a little bit about that I think because we saw CPI on sort of inflation really increase quite significantly, which mean we had that increase in the transfer balance cap two years in one year effectively and no one really anticipated that that would ever happen.

Liz Westover

So I believe that there's a bit of a fear around automatic indexation because you do lose that control about when those thresholds actually increase, especially with due to nine six, it's actually not a deal breaker for me. I know the industry is pushing very hard for some sort of automatic indexation and there is a lot of merit in that. But so long as there is an ability to index at future times, which there will be and it might be every budget submission the Tax Institute does from here on in, there'll be a call for an indication of that cap, but I don't say they all and end all with respect to Div two on six I believe will be indexed over time anyway.

Robyn Jacobson

One area in particular complexity is the transfer balance cap and now it's designed to of course limit how much you can hold in this tax free earnings environment, in pension funds. But with the personal transfer balance cap, you don't automatically get the benefit of all the indexation when it does go from 1.7 up to 1.9 million as it did last year. You have to then work out your personal or proportionate amount of that increase based on how much you've already utilised. And the more times this gets indexed, the more complicated this is going to be.

Liz Westover

Yeah, that's exactly right. So whilst the general transfer balance cap gets indexed, you're right, personal doesn't necessarily. And once you commence an income stream you now have a personal transfer balance cap. So for someone who is fortunate enough to start an income stream in 2017 with $1.6 million, that's it for them. They will never be able to start anymore income stream subject to commutations and so forth. But they will not be able to start new income streams because they have already met 100% of the cap as it was then. So then means, depending on what your proportion of the cap that applied. So if I had only is 50% of the cap at the time, I would be able to use the remaining remaining cap plus 50% of the indexed amount. So you're absolutely right. The more indexation we have, the more complicated it gets and the more likely it is we're going to create a spreadsheet around it to make sure that we actually get it right.

Robyn Jacobson

Where would we be without Excel spreadsheets.

Liz Westover

Exactly.

Robyn Jacobson

Moving on to some release of data. Now, there are two aspects to my question to you on this. We've seen for many years data on what they called the tax gaps and in particular the superannuation guarantee tax. I mean can unpack that. But recently on the 22nd of February, for the first time, the share release data around illegal early access estimates. So in other words, they're estimating the extent to which they think people have access their superannuation illegally and early. So this is interesting to draw some insights and I'm interested in your thoughts on this.

Liz Westover

Yeah, look, it's an interesting piece of work and I think it was delivered quite well by the tax Office in a bit of a call to arms by the industry to try and put this out. It wasn't a criticism, personal thought. It was just, you know, really did come across as we've all got a role to play in making sure that we have a secure superannuation system. So that was quite welcome. One of the interesting factors I thought about it was that the main body of work was around the 2021 year and I think the numbers were $256 million they believe was illegally early released, which was actually a decline from the prior financial year of about $380 million. But you might recall 2021 was the year of COVID, and we had a lot of people applying for release of their $10,000, in fact, twice over applying for. I believe there might be some numbers in there. There are actually people who were reported as illegally in early release, but it may have been that they just withdrew their $10,000 without waiting for the release authority from the tax office. So there's an element of that. So I'm actually very interested to see subsequent years results. But also the Tax Office is doing a lot of work to try and stop illegal early release. As you can imagine, there's a range of activities including review of registrants. So if they believe there's any risk factors around it, they'll pick up the phone, potentially talk to the trustees, make sure they actually understand what it is they're doing and why they're doing it, that type of thing. And they believe in the 2021 year they've stopped about $168 million from coming out of a system that might otherwise have not intervened in that way. So that's a really good thing. I see that as as a real positive. But the interesting to see some trends in future years and just make sure we're all doing our part, doing the right checks and so forth to stop any of this illegal early release.

Robyn Jacobson

There's support for the proposition that many of the funds that were involved in this early release were in fact newly established funds.

Liz Westover

Yeah, that's often the case. And in fact the ATO sees light on non lodgment of a first year fund as a significant red flag around illegal early release. So, you know, they are very keen to make sure that the right people are actually registering for these funds. And there is a concern that a lot of these first year funds are actually as a result of promotions and scams and so forth. So they are using other means to be able to crack down on some of those promoters as well, to make sure that they're not encouraging people to sit up in a submissive role over there. They're after regulated funds. Money's into a dismissive and then take a very nice cut for the privilege of assisting and so I'm no fan of providers and scammers. So anything that they can do to shut that down and it's probably worth a plug for tax office and have dedicated pages for people to be able to report these promoters and any scams that they actually see. You can do it anonymously if you if you would like to what email, phone, whatever means you need to. And in fact, if you are in a tax adviser or an accountant, I imagine that the the Tax Institute would help facilitate some of those reports as well if there was really sort of any significant issues around that. But personally seeing the result of it where people have been encouraged to set up this massive promised property with lobbies and so forth, and the money's gone, it's just gone. And in a lot of cases it's with people who didn't have money to lose in the first place. So a lot of money to lose in the first place. Nor do they have the resources to try and fix it or get the advice that they need or know how to engage with the tax office. It is a big problem.

Robyn Jacobson

And regulation aside, these are heartbreaking stories because it's people's financial future. The analysis also found that around $200 million of prohibited loans have been made by self-managed funds, but then around three quarters of this have been repaid. So what are you seeing out there when it comes to making loans to members?

Liz Westover

Look, I think there's a bit of a misunderstanding. And again, this is sort of where the law just you know, you've sort of got to have this a bit of a knowledge and trust your advisers and get in touch with your advisers before you actually go and do these things. But there's a general prohibition on dismissive or super lending to members or relatives.But of course, it's called an in-house asset and there is restrictions on the amount of these in house assets you can have. So Fund can have no more than 5% of the total market value of this asset in an in-house asset. So we believe that that number reported by the office include people who would have gone over the 5% limit. So often when that happens you've got a breach of the 5% limit. It is reported as a disqualified by order. It's reported to the Tax Office, but part of that process is actually putting a plan in place to repay it. So it's good to see that those plans are actually in place and those amounts are being paid back as they're required to do so, to continue to comply with that with relevant law about the funds.

Robyn Jacobson

So we know that this illegal early access estimate will be done on an annual basis from now on. But for many years we've always had this ESG tax gap analysis. So what is this telling us about the difference between the amount of ESG that the expects should be paid and what is actually being collected by the funds?

Liz Westover

Yeah, look, the numbers are still quite staggering. It really is a little bit frightening. And I think that's why there is broad support for the new payday super. I write down the mechanics behind that once we get it right. And the latest numbers is that we've still got a 2021. The ATO figures with a gap of 5.1%, which means that people are still not getting the super guarantee that they're actually entitled to be paid from their employers.And that is that's a staggering figure really, and it's for a variety of reasons. I've seen in my own family where employers think they can call someone a contractor, and so long as they issue an invoice, it doesn't matter that they're actually for every other purpose or every other, you know, look and feel they're an employee. But I think because I'm a contractor, they don't have to pay extra for them. And in my family's particular case is, please don't do anything about it. Don't say anything. I like my job so people get away with it simply by calling them a contractor. So there's a lot of that and there's people who miscalculate amounts, and then there is a cohort of other employers who simply do not remit but are employed. And they're the ones I think we really need to focus on. I believe the law needs to be better for people who make mistakes. And it's not this sort of catastrophic outcome for people who make a mistake. And the way the law is written at the moment is it it's quite impactful from minor error can be quite significant. But by all means, anyone who's not paying the rate for their employees should absolutely have the book thrown at them that those deliberate nonpayment should be dealt with appropriately.

Robyn Jacobson

So all the figures when we talk about a gap of 5.1%, the positive spin could be that nearly 95% are actually meeting their obligations. So 5% doesn't sound like a lot, but the problem is when you translate into actual dollars, it's three and a half billion dollars in 2021 that wasn't paid in super staggering figure, isn't it?

Liz Westover

It's an unbelievable number. And when you think about that money that's not going in and the earnings that it could be doing in the way it could be invested in meantime. And, you know, what's been opportunities have been missed by people who are having that money invested for them. So, yeah, we have a problem. We need to deal with that. And I believe there are things being done to do that.

Robyn Jacobson

Yes, there are, and we'll get to that shortly. I also add that this isn't a one off fee or an anomaly. If we look at the last six years for 15, 16 through to 2021, which is the year that we have the gap analysis available for the net gap was more than 3 billion in five, six years. So this is absolutely a trend. It's not a one-off.

Liz Westover

Yeah, that's exactly what we need to do. We need to do more. But I think, you know, it will probably take time, I guess, for all of these measures to really take effect. But the impact that it does have on people's retirement savings is is huge. So if we get that money in there, it's less people in the age pension.

Liz Westover

Eventually it's more invested, it's better retirement outcomes, it's a win-win.

Robyn Jacobson

So let's move on to Division 296 and for the we vote all those that haven't yet and the legislation references Division 296 is a proposed new division in the Income Tax Assistant at 97 which is going to tax the earnings that relate to superannuation balances above $3 million, add an additional 15%, it's expected to affect around 80,000 people. Initially from when it kicks in 1st July 2025. But let's unpack this a bit more because whilst it looks like a fairly small proportion of the population around, I think they're talking point .5% in total. We've got obviously concerns about what happens in the future and the really big concern around this taxation of unrealised gains. So yes, motivations from you on, is this something to be concerned about of where we at with this proposed measure?

Liz Westover

It's a very hard one to articulate, particularly in the media. And the first thing I'll say is that my observation is that for the most part, people do not have a problem with an additional tax on earnings for people with high superannuation balances. That is not the trend. Most people are very much on board with this. The problem that people have with it is the manner in which they are going to be taxed and this division 296 actually has very little bearing on an additional tax on earnings for those relevant people. It's a brand new tax and that's the way that people have to think about it. And it is quite literally a tax on people who have had $3 million at the end of a financial year. And that'll that'll start from the 26 financial year. So we put balances on the first July 25. The report balances again on the 30th of June 2026. And if you got more than $3 million on 30th June 2026, we work out what your earnings is in that period and if you do have positive earnings, then you're going to be up for this division 296 tax. So by virtue of the fact that it's assessed against total super balance means it incorporates everything including unearned income or growth in assets, which is just not a feature of our tax system and the inequity around that and the possible. Where does it stop? What else are we going to tax that we previously haven't taxed on? Unearned income is a lot of concern, not just in super but across the tax industry. So there are other proposals that are going through at the moment. That Division ten on six legislation has gone to the House of Representatives, that it has not passed the House yet, but it has been referred to a Senate economics committee. They were due to report in April and that has now been pushed back to the 10th of May for them to report back. And whilst we believe that the law is going to get across the line, there is still hope on two fronts. One, that we see automatic indexation. And on the second one is that we see a different means by which the earnings is calculated because on this unearned income we have this inequity around it, but there's also some very strange outcomes as a result that seem to be inconsistent with what we were going, you know, government was proposing in the first place. So hopefully we'll see something different. I believe the proposal is for application of the 90 day bank bill rate that would be used instead of this change in total super balance to to calculate earnings. I have to say that's probably more broadly reflective of earnings. They'll still be some winners and losers out of it, but it's probably more equitable than this change in title super balance calculation.

Robyn Jacobson

Essentially using a balance sheet approach instead of a profit and loss. So sort of looking at the actual earnings of the fund allocated to the members account and that could be spread across multiple accounts, of course, multiple super funds proposing to use this moment in the balance sheet amounts and then assuming that any movement is attributable to earnings. But you could have movements in balances due to recovery of previously lost market value. One of the ways I'm describing this is it's agnostic. It doesn't care. The movement between those two balances is due to a revenue gain or a capital gain or a discount gain or a non discount gain or a realised gain or an unrealised gain. It just says the movement with a couple of adjustments for benefits and also pension payments. And any contributions is taken to be this earnings figure.

Liz Westover

And you could have these very strange outcomes where let's just say someone has $20 million in super at the beginning of the year, they get $2 million in dividends, interest, rent, whatever it might be, but the value of the asset actually declines by $2 million. So at the end of the start, you have $20 million. At the end you have $20 million, you will pay no division 296 tax. And yet that fund has a $2 million in revenue. So that's really inconsistent, I think, with what we were trying to achieve through this. There's also some equity around the starting date. So if someone has an asset that has declined in value quite significantly and let's say that's what it's reported on the 1st of July, the 30th of June 25. So the starting value is quite low and that asset recovers in value. So by the end of the year and it recovered as my money just recovered, they're going to pay off 296 tax on that recovery amount. And that to me is not fair. It's not federal. And then we're looking at the impact on farmers. If it was lumpy assets, how are they going to fund these new tax liabilities? So whilst all this this income is supposedly in super, not everybody's going to be able to access super necessarily. You do have a choice about whether you pay these amounts early or you get a release authority from the tax office to pay it from the fund. But again, if you've got lumpy assets in low income, your cash flow may make it very, very difficult to be able to pay some of these tax liabilities. There's some big issues around it that I think you've really been thought through. I think it's been sort of pushing, I mean,  being able to implement this policy, I can't like I say, policy, no one's got a problem with the implementation is what everyone has a problem with.

Robyn Jacobson

I agree it's the design. And you could have an interesting outcome where you pay your division 296 tax on, let's say, actual earnings. Then the fund makes a loss. And we've been advocating with the other joint bodies to be able to carry that loss back to recover the tax that you previously paid through a credit or an offset or something. And that's not being supported at this stage. So you can carry a loss forward. But what happens if you then die, for example, or there was a peak in the growth of that asset and it never recovers to that venue again, You will see these amounts of tax being paid on amounts that may never actually be realised.

Liz Westover

Correct. And if you are one of those people that sort of fluctuates above and below the $3 Million threshold, one year you're in one year out, how does that affect your losses and your ability to do it? It's very strange how that how that will actually work. And it could be these just these losses that are lost forever, you know, gone. You're never going to be able to recover on them just for people listening. That is the way it kind of works. If you think about it. Similarly to the way capital gains and losses works is that if you have a loss, you carry it forward to offset against future gain. So similarly here you carry for those losses to offset against future gains of future increases in your total super balance.

Robyn Jacobson

Though to let everyone know that we have been working very closely with the other professional associations across superannuation tax and accounting and we've put in submissions. We have been pushing for possible indexation of this $3 million cap. We've certainly expressed our concerns about the taxation of unrealised gains and also the fact that we can't carry these losses back. So they're the primary issues we've got with us and we wait to see what this does when it comes back before the rest of the Parliament.

Liz Westover

Yeah, I fear it's going to come through with very little change, but there is even still some very strange things in there. If you die before the 30th of June, you don't pay dip tune on six tax for that year. But if you die on the 30th of June, you do. It's going to be a drafting error but doesn't seem to have been fixed in that period when it actually was presented to Parliament to harmfully in the final version will at least get a change on that one to make sense.

Robyn Jacobson

We have said that's something that we did put in our submission to the Senate committee because that's completely anomalous that a single day in an income year would be treated differently from any other day in that year.

Liz Westover

Exactly.

Robyn Jacobson

All right. So moving on to the SG rate. We've seen it increase in recent years. It's currently sitting, of course, at 11%, what's going to happen to the rate next 1 July.

Liz Westover

So we're going up by another half a per cent from the 1st of July 24 and that'll be the second last one before we go to 12% from the 1st of July 2025. So we're nearly there in terms of getting to the 12%, The interesting thing is watching this interaction with maximum contributions base and whether that what indexation that amount will be. So we haven't seen the release of the new contributions by set for the current financial year,  any high income earner is pretty much having SG that takes them to the concessional contributions cap. So for next year with the kept going up to $30,000 will be just watching to see what that maximum contributions base actually goes to as well. And if there's any opportunities there for people to top up and play contributions.

Robyn Jacobson

And for anyone concerned that it seems that the maximum contribution base is indexed faster than the concessional cap is indexed, the law does contain a built in mechanism and what this does is basically limit the maximum contribution base to the concessional cap if it actually ever reaches that point, which it may well in the next few years.

Liz Westover

That's exactly right. And that makes perfect sense for it to be that way, because you do not want employer contributions from one employer causing you to have a breach of the concessional contributions base. Yes, we've got some built in stopgaps there, thankfully.

Robyn Jacobson

Yes. And a reminder that when these particular rates keep going up, so 11 and a half and then up to 12 over the next year or so, that increases based on the payment is made, not when the work is done. So employers can get confused about which rate they should be applying to which salary, wage payments.

Liz Westover

It's complicated.

Robyn Jacobson

It is. All right. Payday, super. Look, there's so much we could say about this, but just in a few short minutes, what's happening with this? Certainly the Tax Institute and other bodies have been heavily involved in targeted consultation, and that does continue. And we do expect to see some draft legislation and a bill later this year. Plus, we're being told that there will be some further announcements in this year's budget. But what does this mean? What can we expect in the year or two ahead?

Liz Westover

Yeah, So I think there's still a lot to happen and there's a lot of productive consultation on that revenue. You're very heavily involved and a lot of the consultation that goes on, which makes sense, right? We want it to make sense, to be practical, to anticipate any of what would otherwise be unintended consequences of changes in legislation. But it does mean that there's a lot of systems and processes that need to be built before this is implemented. So I believe it's we need at least 12 months or a clear year to allow payroll providers and super and employers to get their systems up to scratch, to be able to to kind of deal with it. But at the end of it all, it just means that contributions into super will be made at the same time as the pay cycle for employees. Again, that makes sense. Like there've been a lot of sort of amounts going in for them and there'll be more reporting to make sure we can identify where those are not actually being paid. So I think it's fantastic legislation. As we know, the proof is in the pudding. So, you know, we'll have a look at the legislation when it finally comes through. But I do believe there's some really good people doing some really good things in this area to get the right outcomes.

Robyn Jacobson

And look, we do hope the right outcomes are achieved. It is a great opportunity to streamline the current penalty rules and also to overhaul the disproportionate penalty outcomes we see on employers. With someone who pays just one day late is treated exactly the same as that really egregious employer who never pays the super. And we would like to see a lot more proportionality coming in there.

Liz Westover

Absolutely. And I think it is that opportunity to rewrite the legislation. It's always been clunky. It was hard to work out. It was easy to get it wrong. So streamlining it and making it easier to understand and easier to comply with is going to avoid a lot of problems for employers in and of itself, not least of all the outcomes, is that people get the money to super faster with greater clarity and investment earnings faster. So that's a good outcome.

Robyn Jacobson

The two major things that of course need to be considered apart from all the technical interactions with other parts of the law, the cash flow impact on employers who do pay quarterly at the moment, they will notice, of course, a big change in the impact on their cash flow. And secondly, the timing of all this. It is a one July 26 start date at this stage. Now that sounds like a long way off, but there's an awful lot of work to do in the meantime. Plus, we have a federal election that, on my reckoning, would need to be held by May of next year at the latest. And then we know that the digital service providers, those designing the software, want an act of law in place for at least a year so they can invest and design the systems that are needed in order to implement the new regime. So it will be an interesting couple of years. There is a lot to achieve and it sounds like a long time, but it's actually going to be gobbled up pretty quickly.

Liz Westover

Agree. And I don't blame them for wanting legislation in place. When things can change so quickly, so rapidly for a developer I imagine that would be a big problem until you've got absolute certainty. But it's similar, you know, even with the division 296 where we're talking about it, we're raising it with clients and so on. But at the end of the day, just hold back on acting until we've got legislation. We know exactly what it's going to look like.

Robyn Jacobson

And just a completely different sphere. Liz, We've got the $20,000 instant asset write off threshold for small business entities for the current income year. That is one July 23 to 30, June 24. We're now sitting here in March and that bill is still before the Senate. Interestingly, court obviously measures not arm's length of income. So we talk about having certainty for taxpayers and yet we're what are we, eight months into this income year and we still haven't got certainty on that particular measure. Wow. Yeah, not ideal. So where do we go from here? You've got your event coming up. We know, of course, there's lots going on in this space. And I think something that is of interest that you might touch on in your session, that's the superannuation intensive, the amount of money sitting in super. Now of course continues to be published every quarter. But what are the current figures for the self-managed fund sector.

Liz Westover

We've cracked the non $913 billion in self-managed super funds, which means the SMSF sector itself is not far off cracking the trillion dollars. So it's it's amazing amount of money that is sitting in our sector and just shows the importance and the criticality of what we do as advisors for our clients to protect those monies and encourage, you know, good retirement savings outcomes. So amazing. And I think the number was the same 23 figures, 214,000 is some six or just over that number. So we continue to increase in number and assets under management and so on. So a very healthy sector, but the bigger it gets, the more critical it is for advisors to stay up to date and back to attending things like the Superannuation Intensive, just to make sure that you're getting the latest on some of these strategies and measures and changes in our legislation.

Robyn Jacobson

Liz, I get very excited about tax, but I think you get even more excited about superannuation.

Liz Westover

I do.

Robyn Jacobson

Thank you for your insights and I'm very interested to hear your session and your insights. That's your session at the superannuation tax intensive coming up in March.

Liz Westover

Thanks Robyn.

Robyn Jacobson

Thanks Liz. Thanks for listening to this episode of TaxVibe. I've been chatting with Liz Westover, fellow of The Tax Institute partner and national estimates leader with Deloitte. If you've enjoyed this episode, we'd love for you to subscribe rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute. Join us on LinkedIn. If you're interested in being at the center of the tax conversation a membership at The Tax Institute could be just what you need. Stay current and connected with tangible real-world benefits. Learn more at taxinstitute.com.au. Thanks again. Until next time on TaxVibe

Robyn Jacobson

Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On the show, I chat with some of the tax profession's brightest minds, drawing on each guest unique perspective to give you valuable and practical insights you won't hear every day. We hope you enjoy this episode of TaxVibe.

I'm joined by Jonathan Ryall, co-founder of Frontline Accounting, and Paul Franks, partner at Lambourne Partners, based in Newcastle and Sydney. Jon is a chartered accountant who's based in Melbourne, has more than two decades in public practice. Jhn previously worked in public practice serving many clients across large and small firms. These days he's focused on an innovative space bridging staffing gaps. He co-founded Frontline in 2012, an award winning Philippines based BPO. At his business process, Outsourcing, which provides a staffing solution for hundreds of accounting firms worldwide, Jon is also the coauthor of Offshore or Die The Original No Nonsense Guide to All Things Offshoring. Based on his own experience, hiring and training offshore team members. There's a special book offer for our listeners today, so stay tuned for more details. Paul is a chartered accountant and partner with Lambourne Partners and is based in Newcastle. He's also a chartered tax advisor and ACA SMSF specialist. The firm is established 38 years ago and is a business based practice offering tax business advisory, audit, financial planning, bookkeeping and mortgage broking services from the group. Lambourne Partners has been using offshore staff in the Philippines for the past nine years and Paul has been the responsible partner during this time. John and Paul, welcome to TaxVibe

Jonathon Ryall

Thanks for having me.

Paul Franks

Thank you, Robyn.

Robyn Jacobson

It's great to be here. This is a really interesting discussion and very timely with all the staffing shortages that we're seeing around firms at the moment. So it is the start of the year and it is important for practitioners to have hopefully had an opportunity to take time out and reset, recharge and come back into the year. Reflecting on what sort of opportunities are available for the way that you're running your practice.

We know that 2023 was a challenging year for many reasons, including the staffing shortages that continued to grip firms across the country. So there are opportunities out there to consider different pathways and looking at options and solutions that might improve the way you are resourcing your practices. So, Jon, can I start with you and just the basics of the language that we're using. What is outsourcing? What is offshoring? And is there a difference between the two?

Jonathan Ryall 

Thank you, Robyn. Yes, it's a common question. And when most people we talk to and haven't really been exposed to offshoring, they just think offshoring and outsourcing is the same thing. So the models are different. Outsourcing really is you know, you take a piece of work and an actual job that goes to another company. Usually in another offshore location somewhere. And they quote the work on a number of hours or on completion of that particular piece of work. And then that comes back to you in shape. Offshoring on the other hand, is more of a labor hire arrangement where you have your own staff solution in another location. You're building your own team under your systems and training and management.I would say the biggest difference between the two is that is the issue of control around workflow offshoring. You have full control outsourcing. You're giving that control to another company.

Robyn Jacobson

There are lots of different models of offshoring, and some might involve using our own staff. Others might involve contractors or using labor hire firms. Can you run through some of those different models, how they operate and what are the advantages or disadvantages of using these different models?

Jonathan Ryall 

In the early days, we would often engage in contractors. When I was in my accounting firm, we had managers that would just be brought into specific purposes to do bits, pieces of what I suppose that is in terms of remote staffing. It is it is a flexible remote staffing arrangement that's similar to two offshoring. So you get the flexible body and the skills you need without asking to put in a lot of training. If you go to the next, I guess another level of kind of a more managed service, which would be there'd be an actual office in a location with staff working you, you're really kind of like renting the desk, you know, in a sense, renting the infrastructure via the Internet and then the salary and wages. Really, you're just paying for those plus that monthly sort of infrastructure charge, which would be our service fee or leasing fee. And that still gives you that element of control over what's happening. And then the next probably level after that would be going to outsourcing, where there's some management in place watching over that person that you're working with and you've taken the workflows more on them than you.

Robyn Jacobson

In the pandemic, we had such a shift in work practices and the working from home. That acronym WFA, has become so familiar to all of us is this is an extension of that. So prior to pandemic, the idea of people working remotely was occasionally out there, but certainly not a mass idea that was embraced by the profession as a whole. Now it's become so commonplace and we're used to dealing with people virtually even this recording we are recording virtually as well. So is it just an extension of that or is it something completely different?

Jonathan Ryall 

Yeah, good question. I would say it's a work from home. The difference there is probably been in the home, it's remote work or multi office is similar, but it but it's a bit more infrastructure around that person's working environment. I mean, for us, we have a big combination of staff that are working from home or working out of our office in Manila. And certainly the pandemic has broken down some of the walls that people had up around a kind of a set up. Yeah, true. What's going to be you have working in the home? And I think remote work is probably a little broader than just that.

Robyn Jacobson

But it's the idea of the firm being used to what I'm going to talk about. Control and security and all those sorts of issues as we get further into this discussion. But it is a cultural issue and it's a mindset, and that's a shift in terms of the way you might have run your practice in the past.

Jonathan Ryall 

Yeah, definitely. And I think Australian firms, we've all been through that, haven't we, you know, through the pandemic. So we've all been forced along that journey to.

Robyn Jacobson

Come to you in more detail shortly about your experiences, all of this. But just as an initial question, how do you go about venturing into this space? What's the first thing you've got to think about? Or how do you go about taking that first step to go into offshoring?

Paul Franks

I guess it's probably a little bit easier now than what it was nine years ago when when we first started, when we did it, I guess we looked at the different locations, whether it be India or Philippines, and we decided to head over there with with one of my partners. And we then went to a number of different outsource companies within the Philippines and really looked at what then was the best match for us. That's how we came across that line. And we've been using their services ever since. But it's finding the right match. The company that works with you and going to get the best outcomes for your business. It's really looking at those different fits, the cultural fit and all the other aspects of what you need to do.

Robyn Jacobson

We, as we look at the sorts of countries and you've mentioned the Philippines, Malaysia, but there's also offshoring in India and Vietnam, other countries. So what are some of the considerations when you're choosing a particular country as the right fit for your practice?

Paul Franks

The language was was one of the first obvious things that people have concerns over. I guess people have had the phone calls and with people trying to sell them different products over the years. And what we found culturally, the Philippines was quite similar to Australia. It was, I guess previously a US sort of base. There was a lot of US influence within the country and culturally their English was was very good, they were highly trained, they timezones were quite similar. So they were working when we were working at similar times in Australia. So meant you could get on the phone, you could talk to them, you could zoom, call them. So all those sorts of aspects were important because if the staff overseas have to culturally mold into your practice and the culture of your own business. So if you can't do that, if culturally they're way different, then it's going to be very difficult for your business that way.

Robyn Jacobson

Now, Australia is always a long way from anywhere. It takes 7 hours just to leave our shelves in most cases. But if we're talking about physical proximity, some countries might be more attractive than others in that respect.

Paul Franks

Absolutely. And the Philippines is only, I guess, a relatively short flight of around 8 hours, whereas some of the other countries a further Y plus all the infrastructure in Manila makes it the i.t. Is is quite sophisticated and you get Paris into some of the other countries. So nine years ago I'm sure that Vietnam and India and those sorts of countries advanced a lot further, but we just found a much better cultural fit to our practice and that's what drew us to the to the Philippines.

Robyn Jacobson 

Jon, what do you find is the main driver for the decision to outsource? Is it always about saving money?

Jonathan Ryall 

Not usually, yeah. I mean, that is a benefit to using it, but going offshore is, you can operate out of a lower cost country with lower wages and things. But the vast majority of clients that we're in prospects we're talking to, we're doing it as a staffing solution. Unemployment's been low here. It's three and a half per cent or something and it's been low for quite a while, particularly in a rural or, you know, regional location. There's just limitations inside. They're getting access to, you know, the 2020 million people living in the Manila area and over 100 million in the Philippines as a whole. So there's just this whole other pool of talent that they can access. And we're, of course, noticing the challenges of getting grads and young professionals interested in this profession. Now, we think it's wonderful. We're decades into it and we can't think of doing anything else but try to get younger ones interested and attracted to tax and accounting and all that. It is a challenge out there. Absolutely. When I started as a, you know, university grad, someone invited me along to a CIA evening somewhere and I thought, Wow, this is great opportunity and it sets you up in the business world and all that sort of stuff. But clearly that hasn't been. Yeah, we've got the image problem in this area with the next generation. They don't see it. The same. And talking to some firms that I'm speaking to, I think a firm from it was regional Victoria and there's a university in their in their area and the volume of accounting students coming through just isn't there at the moment. So they weren't actually wanting to do offshoring but sort of had to because they needed some other alternatives.

Robyn Jacobson

So let's turn now to the, I guess, the business side of things, on the serious side where we need to look at risk. How does a firm in Australia manage issues such as quality control, supervision of staff, the culture, the regulatory environment, particularly cross-border and training and supervision of making sure that the staff are up to speed in the technical, see a lot of issues in there.

Jonathan Ryall 

Ultimately, offshoring is going to be an extension of what you've got going in your own set. So if you've got good quality control procedures before you're offshore, you're probably going to adapt those into the offshore team as well. There's some key things that I would look for when I'm talking to someone that has never offshored. Firstly, have you got someone that's got the time just to supervise the staff that you're about to hire? You know, they're going to come in, they're going to need lots of training, they're going to learn new softwares and all that sort of stuff and have lots of questions and it's just not going to work Well, if they don't have a friendly face at the other side to be able to get help when they need it, that's a big one. So if the partner is swimming in work and can't get stuff out the door, offshoring, maybe not the best solution because there needs to be some freedom at the in the early stages to help that new person.

Robyn Jacobson

Quality control.

Jonathan Ryall 

Yeah, quality control. So I mean, if you were to hire a grad out of uni, you'd have probably keep a pretty close eye on their work progress. Are they actually improving in the review points being repeated over and over again, or are they learning each step of the way? So in the early stages of quality, it really comes down to good training. You need to be prepared to put some training into the team. We have some training programs as a people. Some of our clients take advantage of an ongoing supervision beyond that. So it's definitely not a plug and play, it's not a set. And forget this is a new team member. They'll come to you with some good accounting skills. So debits and credits, I should know, maybe not so much on the Australian tax all the time. So that needs to be trained. So you need to have someone reviewing their work, writing that feedback to make sure that by the time it gets to the level or out the door, it's being checked and that the quality that the firm would expect it, which you would do anyway if you had a if you had a grade come in and learn from the ground up. Obviously there's security things to consider. So and again, no different to any any work from home set up. You need to have that security environment needs to be sort of considered. I mean Paul probably would have some of the specifics about what they do in that area. But but generally speaking, it's things like, you know, the hardware. So, you know, we provide sort of encrypted computers that, you know, where USB hubs a disabled and so staff can easily just grab things off and do what they want with it. There's monitoring type software if needed. There's think about password control and the normal things that your IT person would want to look at. We have an IT teams who are often working with IT teams to make sure that that is all sort of flowing from firm to offshore staff on a on a consistent sort of security environment.

Robyn Jacobson

All from a practical perspective when actually interested in the cultural challenges or opportunities and also the regulatory environment. So how do you manage both of those and ensure there is cohesion with your own practice?

Paul Franks

Just jumping back onto one of Jon's comments before I run into that, Robyn, the one point I probably make there is it's not that different putting on a new overseas staff member to putting on a garage here in Newcastle for instance, you're going to have to supervise and you're going to have to put in time training them. And the more effort you put in at those early days, the better outcomes you get into the future. It's no different from an offshore perspective. It really works in the same way. So I guess I don't want people getting the impression it's more because it's pretty similar. The difference is, is you're doing the training via a zoom or a phone call compared to walking up to their desk. But if they're working from home, then it's really no different in in that aspect sort of thing. So the key point in there is really if you want to succeed in the offshoring environment, you've just got to put the time in just like you would with the normal staff in Australia, put the time, you'll get the results long term. So that's a long pie if, if that's what you're looking for. In terms of the your question, the cultural aspects and engagement, we got our staff locally engaged by having a local mentor. So what they would do is there was a responsible senior staff member in Australia who dealt on a probably a daily basis quite regularly with the staff and that building, that contact between the staff built relationships. We also would bring we've brought our Philippines staff to Australia to, to give training. They then get to meet all the time in Australia and as work very well even for our local staff. Our local staff really get a kick out of seeing the staff coming from the Philippines. They've, they've never left their country before. They turn up in Australia with their eyes are as big as there's dinner plates send and they get an experience, but you get it back tenfold because their enthusiasm, once they've been here, they've know our staff, take them out on the weekends to do touristy things. But that all is a part of the business that's moulding them into our culture and building those, those personal relationships. So that's probably the key building, building strong personal relationships between the staff in Australia. And that's why I guess I've been the consistent sort of partner who will regularly, along with other staff. So that builds the whole team and the strength into the other team. So I guess our Australian staff see how from the top, how the partners deal with, with the staff over there and they're treated like any other staff and I guess that's where leading by example.

Robyn Jacobson

What's the legal nature of the arrangement? So are they contractors, Are their employees, are they your employees or are you paying fees through the intermediary?

Paul Franks

I guess technically they're not our employees, but I think look, Jonn can answer this. The legal aspect from the Philippines is they're not our employees, but we see them really as just another employee of our practice. Correct.

Jonathan Ryall 

Just in substance, they are employees, but it's a legal and payroll purposes. We have a company that deals with the tax and and the legalities of employing in the Philippines. And so for one of to give his staff pay rise then he can, you know not just get notified they are or whatever and that'll just go on the invoice can be passed through straight to the straight to the team member. But yeah, there is a lot going on. I guess you'd call it an employer of record in the Philippines to handle that type of thing, the legality of it.

Robyn Jacobson

And they are dedicated staff for your practice. Also whilst there it's an arrangement through this intermediary, they are still wholly allocated to you. You're not having them part time or sharing. There are lots of other practices.

Paul Franks

That's correct. It's I guess it's probably calling it a labor hire arrangement, just like you could employ staff in Australia. It's exactly that same arrangement. So you have your your invoice for the staff that includes every cost, the provision of the, the seat, the computers, the technology, the I.T, the staff wages and hopefully a little bit of profit margin in there for Jon. So he continues into the future. You know, in all other aspects they're seen as our employees. So when we put the time and effort into them, we see the results through their improved skills and experiences. And one of the staff that we started with is still an employee nine years later.

Robyn Jacobson

So how do you protect yourself from whatever risks might be associated?

Paul Franks

Really no different to any of our other staff in Australia. We have our to factor authorities authorizations on all of our software. Most of the software we're using now within the practice is cloud based. We can switch them off if we have a had we've never had to. If we had to kick them out of software or not give them access, then it's very quick and easy and it can be done instantly. So and certainly the I.T. controls that are in place in Frontline is as good or probably better than than what we see in Australia. There really is leading edge technology to to ensure that there is no breaches of technology and it touch forward with. We've had an excellent experience and no issues in any of these type.

Robyn Jacobson

I'd like to delve into your experience a little more. What difference has this made to your practice and where do you see the benefits continuing into the future?

Paul Franks

I'd certainly say it's been a very, I guess, a very positive experience. What it's done is it's given us a capacity. That was one of the main reasons that we started looking at the offshoring quite a few years ago. It's also provide us a well-trained, very stable workforce. So what our experiences were and I guess many medium sized firm was we'd find that we'd spend a lot of time, we'd put graduates on every year, we'd spend a lot of time training them up. They'd get up to intermediate level, and that seemed to be the level where people in their careers might different choices had a staff member who joined the police service staff who wanted to go to Melbourne to to see the bright lights. So you'd spend a lot of time and a lot of resources training staff up for three or four or five years and then they turn over. So then you'd be back to square one. So from a client perspective, which was I guess top of the list for us, you saw turnover and that wasn't a great outcome for a client. So one of the top benefits with using the offshore staff has been the stability of clients sort of in that, you know, junior through to to sort of mid-range experience. It's it's been a really a really good outcome for us. And probably the other point we like many firms when we first started out down this road, was wondering what was going to be the client's reaction. How will our clients react to using offshore staff? A little bit nervous to start with, but we found pretty quickly that our clients just wanted a good service. And what these did was it enabled us to provide a better service. We were able to be more responsive. We had capacity, so we really don't want a staff member in Australia sitting around with no work to do. But if you've got a staff member offshore that is costing you significantly less, you can have a little bit of excess capacity there that if something needs doing, then it can be done instantly because you've got that capacity. That was sort of another key aspect and the client reaction is know they've seen better service, quicker reactions, their response times have only improved with that capacity. So they've been enthusiastic through, through the process as well. Not everyone likes it and I've got a couple of clients who, for whatever reasons, haven't been a fan of it, and we just use local staff to do it. But having those offshore staff frees up the local staff as well. But there's also there's arguments around that having a lower cost with those offshore staff gives you the ability and the capacity to look after your Australian staff even more as well.

Robyn Jacobson

Everybody wants foreign staff client-facing or have any contact directly with clients or is it only the Australian staff who deal with your clients?

Paul Franks

Good question. We have a number of our offshore staff dealing directly with our clients and we provide bookkeeping services. We have mortgage broking our at mean for their our parapan as in our financial planning practice. Also so broadly across all of the staff in the Philippines, they deal directly obviously with supervision, just like with any other staff member. But if you need something sent off quickly, some reports, you know, a payment slip, anything along those lines, then they have that direct contact and the clients are just happy to get good service. And these are highly skilled staff over there. Some of our staff have done the equivalent. If you're a CPA, they're university trained and they're doing bookkeeping, so you don't always see those sorts of highly skilled people in Australia providing that service.

Robyn Jacobson

To keep our listeners a sense of the sorts of differential in salaries or wages that are being paid. If you had, say, an Australian worker on 75 to 100000 K a year, what would be the equivalent in the Philippines for your workers?

Paul Franks

The range obviously depends on experience in that sort of range with all the own costs. So wages we provide medical even down to the presence that you send to them on their birthday, those sorts of things. The administration costs providing premises, I.T, services, internet, all of those all wrapped up probably cost us in the range of 25 to $30000 a year.

Robyn Jacobson

Being roughly a third say of what the Australian equivalent would be.

Paul Franks

Yes, that's correct.

Robyn Jacobson

Yeah. It's quite a significant saving by staff. Training was something that you know, certainly was my background. It's something that is dear to my heart and important and and it's worth sharing also that for our listeners, Paul was a trading client of mine a long time ago and for a very long time. So it's nice to have a chat with you again. But in terms of staff training, you run that for your Australian staff participation by the foreign staff as well?

Paul Franks

Yes, just like Australian staff, we want them as highly trained as well as we can get. So what we do is we involve them in all our internal technical trainings. So if we do an online webinar they will also log into that. We also will travel a couple of times a year to the Philippines and I'll take staff with me because my staff are much smarter than I am, so they will spend time training them and we also from time to time bring our Philippines staff out to Australia and give them a couple of weeks of intensive training as well.

Robyn Jacobson

Now something that I know is a challenge when it comes to getting access and security, let's talk microbiology for a moment because in Australia you've got to your various strengths and with our Australian driver's license or our passport, you can of course get the highest strength possible. When you're a foreign individual. That's very difficult and usually it's just the standard that is the maximum that is capable of being obtained. How does that work in practice for you? So does that restricts the ability of the foreign staff to do certain things because they can't get there, might have it to the strength that might be needed for the tasks that are being done by those in Australia?

Paul Franks

That's true. So with my goals, the only level you can get them to is the basic level and it's a bit of a process. It's not as easy as you would for an Australian, so you've got to lodge paperwork with the Australian Tax Office, you've got to get certified documents from the Philippines to send off to it, but it gives enough access for a lot of the basic, you know, pulling reports off, getting information off. But there's the upside as well, where I guess a lot of practitioners would probably feel positive that there are restrictions in on what they can do. So they can't go in and change bank details for a client. They can't go and do other aspects that you can with a higher level like I.D. So it actually provides some some additional levels of security within the practice without really stopping everything. So the access is adequate for what we need them to do. And it also gives people who would be new to offshoring the confidence that a client's refund couldn't get sent somewhere else. But an Australian staff member could do that as well. No different to any other employee that people have concerns in that area. So it's a strength as well.

Robyn Jacobson

Jon, I want to go down a couple of pathways now. Those who have been early adopters with this approach of resourcing their workforce and those that are yet to, they're shut down this pathway. So what would be your key messages for each of those groups? So let's start with the early adopters, okay?

Jonathan Ryall 

So early adopters have had plenty of experience and don't sort of need to be told what to do or how to do it. It really is, I guess just an analysis of how their overall firm's going and how those staff are, you know, growing and and progressing in relation to how they'd expect an Australian to do. And in my experience, I mean, I did this myself for about a decade, like Paul, I had people start and I was I had spent nine or ten years with them and saw them move up the ladder really, So that manager level and able to handle quite complex things on their own sometimes will tend to put a little bit of a cap on their offshore team for some reason. Maybe it's like, Yeah, you'll only ever be able to do bookkeeping or things like that. So my approach is really don't put limits on what they can do with the right input. They'll grow and progress like, like anybody. So obviously that answers your question. So the established ones.

Robyn Jacobson

You've talked about a possible warning sign where screens go black on video calls.Can explain this?

Jonathan Ryall 

Okay. So best practice is really you want to have cameras on. Plenty of contact with the team. I recommend that sort of a daily huddle or something. Checking on screen regularly. Daily is is probably best practice at least you know where things have fallen off the wagon a bit is where we had one client that only emailed his staff for nine months, never called them, never did a zoom or anything. To be honest, I'm surprised that the person stayed that long. You know, we've had people in tears in Manila because they've been chatted on from a manager in Australia and it's just, you know, maybe some small caps. I think the words were dammit, you know, in all caps on to do with a particular issue. But the staff thought they were directing that at that. Just a real signal that there's not the communications breaking down a bit. So so I would say extra effort around communication with all working remote and that really keeps things moving, keeps things working well.

Robyn Jacobson

The screens start going black and they start doing email only and they're not engaging with you. That's a reason to be concerned, definitely.

Jonathan Ryall 

I think often times partners get this, and I think partners usually are partners because they're good at what they do. They're good with with people most of the time develop delegated to a manager, and perhaps that manager didn't want to work with an offshore team or, you know, it's a little bit intimidating. We've never dealt with Filipinos before or something like that. That's probably where you just want to make sure that those things are being done the right way.

Robyn Jacobson

Paul, any comments on that?

Paul Franks

I was just going to say you wouldn't have an employee in Australia and put him at a desk and not talk to him for nine months or only send emails. It's really not that hard. You walk in, you talk to yourself in Australia, that's all Jon saying. It's no different. It's not that hard. 

Jonathan Ryall 

In addition, there's there's social things you can do. I mean, you know, some firms will have, let's say a celebration, someone's on another birthday or a significant anniversary or something like that, and everybody gets pizza. So they order pizza over in the Philippines, not pizza in Australia, and then get on a call and have some banter and fun pizza, you know, that sort of thing.

Robyn Jacobson

Now, the groups that are yet to venture down this path are if you're coming cold, if you've been adverse to this idea in the past, if you're reaching the point where you're still struggling to find staff and this really could be an option, what would you say to them?

Jonathan Ryall 

So we talk about it in depth in the book, but there's three components that you really need for it to work well with an offshore team. So and I say it's a bit like a triangle or a three legged stool. You have to have all three things in place. So you've got good systems in place. You need to have checklists for people to follow. If it's all in the partner's head, it's going to be a hard and frustrating training and getting productivity. So yeah, think about the systems that most firms are pretty good at. That training is, you know, one of the legs and monitoring is the other one. So accountability as your daily catch ups you've got with that, you're holding your team accountable to billing targets and things like that and called the offshore team to that as well, make sure that they know what their targets are, you know, and that it's visible. I think the real really good spot to be with this is is to set things up in a way that creates an internal team peer pressure so that if there's visibility on what everybody's doing, you know, team members can see other team members activity and that sort of thing, then it's not all on me to make sure that they're performing. It's, you know, they don't want to look bad in front of their peers. So it's just a way of setting that up. So things are visible, reports are visible, you know, that that sort of thing works well. Well.

Robyn Jacobson

Paul, you made the comment to us in our planning discussions on this that most of the risks associated with offshoring are not specific to offshoring, but in fact they exist with Australian staff as well. And I think you've made that point a few times throughout our discussion today.   

Paul Franks

Absolutely. The aspects of offshoring are they're very similar to having employees in Australia and it's really just being consistent. It's just making sure that you communicate with them, you treat them as any other employee and that that's really the key and just dealing with them regularly. Like I said, it's not rocket science in that respect.

Robyn Jacobson

So Jon, if anyone ventures down this pathway. They get into offshoring, they set it up, they run out for six, 12, 18 months, two years, whatever. And then they find, you know, well, this is not for me. How is it to unwind or to exit from that particular arrangement.

Jonathan Ryall 

That has happened? You know, on rare occasions that firms have gone down the road and then for whatever reason, it just hasn't worked for them. Obviously, from our perspective, as you know, we're a star staffing company. We have quite a few other clients to be extremely interested in staff that have got some experience. So it's it's quite easy for us to say, well, let's make an agreement and find new homes for them. But look, the normal procedure there is normal procedures that would be followed around, you know, making sure that is it performance or whose end is the fault? Is it the staff's performance or is it you know, the firm really didn't do their part and kind of making assessments about where those staff, what their future would look like in that regard. You would know the standard sort of procedure would be two months notice to switch off and then we try and find a quicker solution if that's on the cards too.

Robyn Jacobson

Jon, you've had the rare situation where you've actually asked a client, a firm, to leave the arrangements.

Jonathan Ryall 

Yeah, Yeah. I mean, we've had a few. Normally we get warning signs. Yeah, we've got a, we've got a team that are checking in with staff welfare and all of that sort of thing regularly and we might hear, oh, such and such wants to resign and that's not unusual. And staff everywhere don't stay forever. But it's more when let's say the whole team wants to resign, you know, okay, we've got some problems, you know, so it's it let's pull out all stops. Let's find out what's been happening. The ones where it's it's usually mutually agreed in those situations or perhaps the firm didn't realize and they want to turn that around and we'll work with them to try and salvage where it had to be turned off. Like I said earlier, it was you know, we've had two or three where, you know, new managers come in. They're people skills are not really like the old one was. They sort of see it more like software or, you know, something that should just happen automatically that in terms of their offshore team. And it just turned it into a the offshore team didn't respond well, just turned it into a mess. So in those situations you've got it. Yeah, you've got to make some calls. We obviously our interest, we want to look after the staff, We want the clients to be happy of course. But yeah, it's, it's, it can be a bit messy but we would come to some sort of a plan to work it out.

Robyn Jacobson

Thank you. Paul, any final comments from you as to recommendations, advice your suggestions as to whether this is a good idea for firms and what benefits it could bring them?

Paul Franks

I guess like anything in business, owners and partners have got to continuously adapt. We've got to consider new innovations, technology that we can improve our business. And I guess offshoring has been around for a little while now, and I think that most businesses should at least consider it to see if it is going to improve their services to their clients. So there's that aspect to it. I, I guess also there's a risk factor there if you're potentially not using offshore staff and you've got competitors within within your local area that are using those, is that going to put you at a disadvantage? So I think that firms also need to consider that. But on the other side, they might go down the other path where they differentiate themselves by not having offshore staff and it's not for everybody. So I'm not suggesting that that either, but I think it's important to to consider it and to make sure that all those aspects and benefits. But for us, it's it's been a great success. It's given us good capacity. It's given us a good, stable workforce across all different divisions within our with our business. And to some extent, it's now quite critical to our business. If we didn't have them there, our our staff, then that would be quite a difficult outcome. And just having great stability, we've got a great team there in the Philippines and they do a great job. And it's not just that low level work. I guess John Knight mentioned before, we certainly not capped the sort of work that our staff do and they do everything from dealing with the ATO, talking to the ATO on the phone all the way through to self-managed super funds, super fund audits, all different structures and quite complex work. So we found just like with our Australian staff, if you challenge them, then they certainly will lift and you'll get the best out of them. So don't I guess, have the source that they don't have the skills. They're certainly highly skilled and worth considering.

Robyn Jacobson

May I add that it's perhaps made the world a little bit smaller for your practice as well, but the cultural benefits it brings for your staff working with offshore workers and the offshore workers getting access to the beautiful beaches of Newcastle?

Paul Franks

Yes, absolutely. The staff, it's like Christmas when they when they turn up our staff from the Philippines, everyone wants to take them out for lunch or take them whale watching on the weekend. And it's culturally it's been a great thing for our staff as well to experience another culture, even for my of my children, when when we started bringing staff out, we had them stay at my house and the experiences that gave my children and adults that the staff are seeing, what other cultures, what they experience and it makes them appreciate what they've got in Australia and when they see how hard the Filipino staff work and how they live, it's certainly much different to Australia. So it's a good it's a good wake up call. It values sort of aspects of it as well. But it's good for business and good, good for a lot of other aspects of what we do.

Robyn Jacobson

Thank you Paul and Jon, final words from you and then let's hear about this book offer for our listeners.

Jonathan Ryall 

Yes. So if we have a book, which is just just that, read one there, I will. I'll send a free copy of that to anybody that's on this podcast. All you got to do is send me an email. At jon@frontlineaccounting.com and I'll have someone in the office send that out And that's got all the, I guess how to make it work, you know, all the various stories and things that can go wrong and how to avoid them and just our own experience over a decade of building offshore teams.

Robyn Jacobson

Terrific. And that email again is jon@frontlineaccounting.com and Jon with J.O.N.

Jonathan Ryall 

That's it, no H.

Robyn Jacobson

Thank you both for your time. It's been a really interesting discussion and I hope our listeners have got a better insight into the world of offshoring.

Paul Franks

Thank you, Robyn

Jonathan Ryall 

Pleasure 

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Jonathan Ryall, co-founder of Frontline Accounting and Paul Franks, partner at Lambourne Partners. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute, join us on LinkedIn. If you're interested in being at the centre of the tax conversation and membership at The Tax Institute, it could be just what you need. Stay current and connected with tangible real-world benefits. Learn more at taxinstitute.com.au. Thanks again. Till next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I’m Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. On TaxVibe, I chat with some of the tax profession's brightest minds, drawing on each guest's unique perspective to give you invaluable and practical insights you won't hear every day. We hope you enjoyed this episode of TaxVibe. I'm joined by Todd Want, the president of The Tax Institute and a director in William Buck's tax services division in Sydney. Todd has more than 20 years of experience with expertise in private client tax matters. He advises clients on a broad range of tax issues such as CGT structuring and restructuring acquisitions and divestments, small business, CGT concessions, Division 7A, Taxation of Trusts, International Tax Issues and Tax Risk Management. Todd also provides specialist consulting services to accountants, lawyers, financial planners and other professionals in public practice to assist them in advising their clients. He's a regular presenter on changes to tax legislation and interpretations. Todd is a Chartered Tax Advisor with The Tax Institute and a member of Chartered Accountants Australia and New Zealand and CPA Australia. As well as being our President for 2024. Todd is also a member of the National Council and the New South Wales State Council with The Tax Institute. Todd, congratulations on your appointment and welcome to TaxVibe.

Todd Want

Thanks, Robyn. I'm really pleased to be here today and looking forward to what 2024 has to offer.

Robyn Jacobson

Kicking off the year but before we get into all the the business side of the conversation, how did you spend your summer? Did you get some downtime?

Todd Want

Look, I did. It's actually been a really enjoyable summer, you know, spending plenty of time actually away from the world of tax time with family and friends. Had some family come out from the UK to visit us, which is wonderful. Some of the kids went to cricket, spent the beach catching up on a bit of DIY around the house, that sort of thing. So getting plenty of stuff over the last few weeks. But looking forward to getting into, you know, into the world of tax again.

Robyn Jacobson

Sounds like a good Aussie summer. So we had a big year last year and I hope that practitioners around the country have had some time out and an opportunity to relax, reset, recharge, reinvigorate. We come back into the new year and as we do lots of collections. Briefly, can we cut back on 2023? What are the learnings perhaps at a macro level?

Todd Want

I think it's been an interesting few years and it's continued to build. You've had a whole range of cost of living pressures that are being felt. Rising interest rates, that type of thing, inflationary pressures and and that's built across a broad range of people and we have multiple speeds in the economy. I think it'd be fair to say some are really feeling the pressure on the household budget, others perhaps not quite as much. But I think if we if we're looking more broadly the tax system and where that heads to help people out to have some more fundamental changes to the tax system will be great to have some genuine tax reform on the table there. But I think we've got enough interesting areas or evolutions in the world of tax this year that it's certainly not going to be a quiet year in the world of tax.

Robyn Jacobson

I was just reading this morning there's been another construction company that's gone into administration this morning down here in Victoria. And I'm wondering with the all the government support that was provided during 2021 and even into 22 is that 23 and 24, we're really starting to see the impact and we'll continue to see the impact perhaps of the post pandemic and the fact that the government support has come to an end.

Todd Want

Look, I think that's right, Robyn, and I think businesses needing to stand on their own two feet, so to speak, and some of those things washing through the system as far as the catch ups where businesses that perhaps have overextended themselves or they've got labor market shortages that are hitting their workforce and their ability to fulfill contracts and do it cost effectively, I think all those types of things are really starting to hit and probably much like myself, getting a bit of time away from from the profession that are operating day to day, a lot of other business people will have taken the opportunity over the summer to to have a little bit of downtime, probably reflect on what has happened with their business and where their business heads moving forward and whether they need to make some difficult decisions leading into 24 or be prepared for difficult decisions that might come. And that's never pleasant. But I think there's also a lot of really positive decisions that people could look forward to this year and opportunities that, as the saying goes, never waste a good crisis. So opportunities also come out of this type of thing. So I think a lot of people will be ready to to step up in their profession and and move forward with a strong 2024 and beyond.

Robyn Jacobson

I'm particularly interested in delving a bit more into the the shortages with the workforce will come to that in a moment. In terms of 2024, what do you see as being the really important factors at play? What's going to shape the landscape of 2024?

Todd Want

Look, I think, as you say, we'll come back to the labor shortages in the profession and more broadly, but inflation is something that we saw obviously over the last couple of years. There was some fairly significant inflation that's know appears as though it's starting to ease. But how quickly does that ease and what does that do for for clients, for businesses, for pricing, for household budgets and also dovetailing into that where the interest rates go and I think have they kept out, is there further increases or will actually we see some cuts later this year. It's a fascinating little interplay there with, with what that means for borrowing capacity as well, be it for for businesses looking to invest. And we've obviously had certain government measures yo instant write off temporary full expensing type things that have meant a lot of businesses acquired, a lot of capital assets, the ability to borrow for those sort of things. Now where's the borrowing capacity for future acquisitions of capital assets, albeit perhaps they aren't as tax effective. Now with with the changes to the instant write off type measures, But still businesses looking to keep themselves at the forefront of their industries. So I think that's an interesting part. Tom. As you mentioned, Robin, the the government support and the ending of that, what will that actually mean? Businesses needing to to manage an environment where they need to be able to fend for themselves and genuinely be able to push a path through without those levels of support. And that will be tough for many of them. I think you've also got get the mortgage cliff that's been talked about and fixed interest rates coming off. People who are on these 2% interest rates or sub 2%, some of them rolling on to five, six, 7% interest rates. What does that look like? And same as business borrowing, What sort of interest rate of businesses borrowing money at and how does that flow through? So I think those things are certainly going to be interesting during the 2024 year. But those businesses, those clients, those taxpayers that have have managed through sensibly, they'll be able to work a path through this. And it's all part of of good business management and economic management, household budgets, business budgets, all those type of things. So certainly those those are some of the things. And perhaps, Robin, you know, we touched on this labor shortages aspect now, because I think that's probably one of the biggest things that is ahead is the labor shortage dovetailed in with what impact does I have on the on the profession. So labor shortages more generally, I think across the economy, the tax in a tax and advisory space is certainly not exempt from that. Are we seeing those shortages where people are trying to recruit more people to us despite proving very tough? And it's not just those people who are running businesses out in the regions and the suburbs. It's everywhere that trying to get good quality people isn't easy. And so that's not going to solve itself magically just because we've all had a Christmas break.

Robyn Jacobson

The idea of upskilling and training staff and looking at alternative pathways. In an upcoming podcast, we're going to be chatting with Frontline who are experts in offshoring. And that's going to be a whole different conversation about how the firms actually resolve that using labor that is offshore and how do you control that. But if we come back to the Australian market for the moment, the course is being studied.vAre we still getting people wanting to embrace the accounting and tax profession as a career, the traditional pathways where you had a job for life, where you stuck with this career and you might have changed jobs four or five or six times, but that doesn't necessarily the same anymore. We've got people who are exiting the profession now, whether it means they're going off into industry, meaning they're still an accountant, for example, but they're simply not working in public practice or whether they're actually exiting the profession entirely. It's an interesting landscape.

Todd Want

Look, it sure is, Robyn. And I think if we look more generally at businesses and and that is new businesses, technology, everything else that has meant that the breadth of skills needed to assist and advise those businesses has evolved over time as well. And the tax profession is is one where people from different backgrounds, not just their cultural backgrounds, but also what they've studied previously, what they may be, haven't studied, whether they do need to upskill in certain areas of tax, whether they specialised in areas. I think it is something that we have got an evolution of what that looks like and perhaps people are looking for different things than perhaps people in previous generations did. The tax profession, though, is still one where there's many, many hugely interesting and exciting things to look at in all areas of tax. But I think the key thing there, Robin, about upskilling and training is really crucial. It doesn't matter the background, if someone is keen and they are bright enough to do it, they can do the study, they can upskill, they can train and bring themselves up to speed and be able to be a really well equipped advisor to be able to provide the sorts of things that clients are looking for. And then that's exciting. I think as a profession that the the breadth of skills the different backgrounds bring can actually make the profession more vibrant moving forward. And I think that would be a fascinating thing to play out over the next generation or to.

Robyn Jacobson

Comment on cultural shift. And I'm not just referring to working from home, although that's a big part of it. Are we seeing changes in the way that an aspiration to be a partner? Amersham may not be the driving motivation for young practitioners. Maybe they do want to progress, but they don't want to take over the ownership or the capital, the equity or the responsibility of running a practice. What are you seeing out there?

Todd Want

Well, look, I think there's certainly still a a strong amount of people who do aspire for that partner type thing. But there's also a large amount who perhaps that's not for them and there's nothing wrong with that as long as it's clear to everyone and the balance is right, nothing wrong with people wanting the balance in their life and perhaps the changes of their career throughout, I think I certainly enjoy my week here. Yes, there's plenty of hours worked in my week, but I also enjoy going coaching my kids sports teams or taking them to swimming lessons. You know, every every couple of weeks they're going to see them. And that's a part of my work life balance that actually helps keep me sharp for for the time that I am focused on working on client matters or doing tax related things. So I think that the evolution of you're not chained to a desk, if perhaps there was a perception that that was the only way to to be effective. I think that shift is an important one. But the work life balance and what that phrase actually means, I think is a really important one. And getting that right for for everyone and making it clear between the employer and the employee that, hey, they might aspire to be a partner, but that doesn't mean they have to work ridiculous hours every day of the week getting that balance rights are important. So I think we'll continue to see an evolution of it. Robin, as you say, the work from home is a part of that. The flexible working hours, those types of things. I think it's just something that will continue to evolve.

Robyn Jacobson

In terms of the role of technology. Some firms have embraced it, others are still perhaps a little more resistant. And I'd like to do things the way they've always been done. There are certainly some great tools out there, but if we look at, for instance, CBT and in terms of it being a useful tool, productivity more efficient, but is it any way in terms of detracting from the quality of what we bring as professionals with the expertise and the experience? Can it make decisions? Can it judge ethical dilemmas? It's an interesting question about how I can be used in a practice.

Todd Want

I think you could open up a Pandora's box here, Robyn, of things, but technology there is no doubt about the fact that technology, if harnessed correctly, is very powerful in the world of tax, be it whichever part of tax you're you're coming from and what your job description or role actually is. But the efficiencies that can be driven there, if you understand the process and what you're actually trying to get the technology to do, I think is critical. And you take your reputation in that they can be very useful, but don't expect them to give you a completed solution to a problem. You still need to have the technical nous in the background to be able to identify whether it's complete and correct. It may be that something that GPT has put out is somewhat correct in a particular context, but is it actually fit for purpose for what you're you're actually trying to achieve? So those types of things, I think is where technology has a place and will continue and obviously I will continue to get better and better, one would assume. But the real skills that I experienced and keen tax professionals have, that'll be very difficult to replace the breadth of what that is. And as you say, Robyn, the ethical dilemmas is often those require a judgment call that is far from easy in many instances, and sometimes you need to to discuss that with others and take on board different views to come up with a solution to a potential problem. And a lot of people in the world of tax, the role could probably be more aptly described as a problem solver rather than a tax person. And and problem solving requires the same core process, irrespective of whether it's a tax issue or an ethical dilemma or whether it's something you're trying to as I've been doing, trying to fix around the house a few DIY problems and whatever else. You've just got to come up with solutions using a process to get there. So I think technology is something that 2024 is. Technology's only going to become more powerful, but people need to understand their process and make sure they've got an efficient process because the old adage of garbage in, garbage out probably still applies pretty well there, that you haven't got the right systems and processes you technology's not really going to help you in the way that you perhaps think it will.

Robyn Jacobson

Be also important to check the veracity of what it is you are reading that is produced by a I heard of a lawyer who was provided with some research and the precedents that were discussed in this research were compelling and persuasive, and it was all very well put together. And of course he did his proper due diligence and make sure that he checks that this was all correct. And the cases that had been described in this artificial, the intelligently produced document was in fact all made up. It isn't going to be just because you're provided with something from the computer. A computer may not be correct.

Todd Want

Well, that's one way of supporting your technical arguments with things that exactly fit the fact pattern not even led to a good story in the way the truth has.

Robyn Jacobson

So moving into our space, looking at what's on the radar from a tax perspective in 2024, it's a most dominant discussion at the moment and not just because of the time frame coming up. We have, of course, got the federal budget and it's this annual gathering. I'd describe it nearly as the most exciting night of a year, where, of course, at the Tax Institute. We all get together, we spend the night poring over the budget papers and producing reports and summaries and and videos, etc. for our members in the broader profession. But it is the 14th of May this year scheduled at this stage, and certainly the focus is on the stage three tax cuts. So it's worth making the point that these were legislated back in 2018. It was a three stage approach stages one and two were deliberately targeting the lower and the middle income earners first. And it was always intended that the stage three tax cuts delayed until 1st July 2024, would target the higher income earners. Now, in order for them not to proceed, the government would need to change the law. So they need to get the support of the Parliament to actually put some amendments through. We will watch and wait with great keenness over the next few months to see how this plays out. And I am not interested particularly in getting into the political arguments here, but certainly it is dominating headlines and cost of living Relief is something that the government has undertaken to provide in the budget. Your thoughts on this?

Todd Want

I think, Robyn, you've got obviously, as you mentioned, this was legislated a number of years ago, so this is not something that requires a budget and in future passing of legislation, it is locked in. So there would have to be superseding legislation to go and change those tax cuts. What we've probably got is the fact that we're not in that extreme deficit position that was perhaps forecast as little as a year or two ago, largely because of the natural resource prices and the strength of the tax, the inflows that are being coming in. So I think that means that it perhaps is the ability to have the stage three tax cuts just continue to to to flow through and happen in six months time when they're meant to kick in, but also provide some cost of living relief for those lower income to middle income earners who perhaps are finding it tougher. So it's something that I think the federal budget, as you say, it's a really exciting night for tax person. And reading through it, I'm not going to sit here and lie about that. It's interesting whether there is a lot of changes or whether there are not and the speculation around why or whatever. So it so I think I think it would be nice, obviously, irrespective of political party to see some bold tax measures. But I think the the budget position being where it is, there probably is some room for them to provide certain reliefs there perhaps that weren't as readily available without going into even bigger deficits, as I say, because of those natural resource prices and that type of thing that has assisted.

Robyn Jacobson

Yeah. And we are in the process of preparing our pre-budget submission. So this is an annual process. Again, the government calls for this each year and we are gathering feedback from our members and I'm putting this together to let the government know what our thoughts are on what they should do in the budget.

Todd Want

That's right. And I think we we're always looking to to make sure that the tax system is fit for purpose. And and some of that involve measures that are a bit more future looking rather than perhaps political type measures. And so I think trying to find the right balance and putting it forward to the politicians to to make sure they're at least considering some of the things that we believe as an institute and as a tax community are worthwhile to consider.

Robyn Jacobson

So perhaps my tip to those who are interested in budget night, cancel all your social engagements unless you're going to spend the evening with an accountant or a tax lawyer. Or do you pizza and settle in for an interesting evening?

Todd Want

I think the pizza delivery companies and the different pizza companies, that must be a real kicker for their not that they now would know that it's the accountants and the tax professionals that are are ordering big from that Tuesday night each major.

Robyn Jacobson

All right. On to another really significant development for those in the assembly side of things. We had a tribunal decision last year. And when we look at the decisions that come out of the Administrative Appeals Tribunal, which by the way, is in the process, of course, of being rebadged and redesigned as a new administrative review tribunal, that's not going to come further on down the track. We've got a decision that deals with unpaid present entitlements. Now, you and I and and of course, members of the profession have been talking about EPAs for about 15 years now. So it's 2009 and that particularly came on the agenda. And all these years we've been having debates about whether or not a an entitlement that is made from a trust to a corporate beneficiary is in fact a loan for divisions that repurposes. We've had various forms of ATO guidance. It's been reshaped and it's shifted and it's adapted and been extended. And I won't go back through all of that guidance that has been issued. But this decision Bindal has certainly grabbed our attention and it is now on appeal to the Federal Court. Perhaps. Can you describe a little bit more about the case, why it is so interesting to us and what it could mean if indeed having had a culture that cost the taxpayer win in the tribunal. The tax office has appealed this up to the federal court. So what happens next?

Todd Want

This is certainly one of the biggest things in the SME tax base for 2024 of them. There is no question about this, because for as you mention, this past 15 years, we've all been having to focus on distributions from trusts to corporate beneficiaries and how to deal with those distributions. Do they need to physically be paid in previous years? Could they be put on sub trusts, interest only facilities, all sorts of things like that? This decision certainly I won't say it flips that on its head, but it certainly brings the technical issues to the forefront and something that a lot of people are probably saying, Well, why has it taken so long to get here? These technical issues we've had the ATO's view for for well over a decade now or their broader view that's evolved over time there. But practitioners have had to either put their clients and themselves potentially at risk if they're taking a more aggressive approach or take them, perhaps what some may say is the more conservative approach consistent with the ATO view and paying those distributions through to corporate beneficiaries or putting them on Division seven, a complying loan arrangements, that type of thing. So this issue I think will be fascinating is to where the Federal Court decision goes. And if it goes in favor of the taxpayer, do we see legislative change? Do we see it reached the high court? If it goes in favor of the tax Office again, do we see it going to the high court? Where does it go? But probably more broadly, what does this mean for distributions in recent years where people are having to either clients or their advisers assisting them in making decisions on what do they do with these distributions from trusts to corporate beneficiaries? What does it mean for tax planning for 2024 for the June 24 distributions? And I think it's probably too early right now to make a definitive call on what people should or shouldn't do. But unless we get a decision over the next few months, which probably may take more time than that, they probably do have a really interesting next few months as to, well, will some clients push for their advisors to say, Hey, can we take a more or less less conservative approach this year than what we did previously? But does that come with a risk that if the Federal Court decision is in favor of the commissioner, what does that mean for those distributions? So I think this is a really interesting in the tax planning space and also the use of trusts where we've obviously had a whole range of trust related matters in focus over recent years. This one was one that had once it died down, but it certainly has not necessarily been the focus until the BENDALL decision came out. And now I think it's going to be a fascinating year on this front, Robyn.

Robyn Jacobson

It's important to remember this is an administrative decision at this stage. So in other words, when the tribunal makes a decision, they're not changing the law. They are simply standing in the shoes of the commissioner and remaking the decision that he's already made. But in this case, it was different to, of course, what the commissioner had decided when it goes to the federal court, or it could, in fact, go straight to the full federal court, we will have proper case law. And then, as you say, it's a case of whether it gets appealed further up to the high court. Also, I've referred to prior years in question. So, for example, if there was a UPC in June of 2022, it is now that the trustee and also the advisors are going to have to think about, well, how are they going to treat that? They go back to, for example, a distribution made in June of 2022 in that would have become potentially a loan by lodgment of the 22 return. So sometime in early 2023. And then if it is indeed a loan, it would need to be managed by lodgment of the 23 return of the company, which is roughly right of this year. So there may well be a reasonable approach where people are focusing on distributions made in the 24 year given we've now got Bendall in play. But in fact it could be 22 or 23 distributions that are actually affected at the moment or will be certainly by lodgment day this year or looking at June 30 this year. So as you say, we don't need to do anything right now. But I would hope in the months ahead that we would see a little bit more guidance from the ATO on what practitioners can do. They have already issued a decision impact statement in an interim form back in November last year. So perhaps they won't issue any further guidance beyond that where they stated we will stick with our current position until we're told otherwise by the court.

Todd Want

I think I think you're right, Robyn. This is yet another area where practitioners can't necessarily give a definitive answer to their clients on what they can and can't do, but more a position as to, well, this is where the whole matter sits at the moment. These are the options you've got. These are the potential downsides and upsides to each of them and making an informed decision or advising their clients or the client to make an informed decision based on where they wish to go. It is one that hopefully we do see this federal Court decision and if it does proceed that far, the High Court decision and get a bit more of a definitive set of ground rules as to how to manage GP's with corporate beneficiaries. But in the meantime, just another one of the areas of tax where we're all sort of sitting there looking forward to to where this takes us.

Robyn Jacobson

We should get our popcorn and sit and watch and play out.

Todd Want

Said like a true tax person. Robin But it's certainly not going to get me disagreeing on that.

Robyn Jacobson

Now, very briefly, the multi national package, there's a bit going on in this space, so can you just briefly run through some of the key points that this particular package is looking at? Because we know that people like to have a go at the multinationals and say they never pay enough tax. In fact, they are one of the best tax payers in terms of the gaps, the difference between what they should be paying and what they do pay. Nonetheless, we've had some fairly significant tax measures come in in the last decade and we've got some tightening up of some of those rules.

Todd Want

Look, we do, and I think this is where the multinational area continues to be a focus and continues to be one where the costs of complying or the technical issues just keep growing. In this instance, things like thin cap anti-avoidance rules for denying deductions, for certain payments relating to intangibles where they're related to a low or no tax jurisdictions, reporting requirements to enhance tax disclosures, debt deduction creation rules. There's a whole range of things that they require, not just necessarily an Australian coordinated response, but also knowing the broader group that an entity might operate as part of. And and that's certainly something that for multinationals, be they smaller multinationals in Australia, larger ones, it can touch these things can touch a whole range of businesses that operate cross-border. And I think that's where these packages and the issues where the Bendall type case may have been something that the SMB area, it's a hugely important thing. I think those who practice in the, you know, the larger end of town or the cross-border type in these multinational things and the continuing evolution of packages relating to multinationals and tax issues, there, this is just going to be another year where there's more measures that keep tightening things and requiring a very robust compliance approach for taxpayers and also a robust set of planning to to manage the issues so that it is not inadvertently achieving unintended poor outcomes for taxpayers.

Robyn Jacobson

Heading back to the ATO and away from Treasury, we've seen a firmer and quite definite shift in the approach taken by the regime when it comes to debt collection. So we know that during the pandemic they were going really softly and gently with businesses they didn't want to send them under and we had payment arrangements being offered and we had remission of the general interest charge. We had, if you like, a holding on things like garnishee notices and those sorts of things or actions. But all this has cranked up, including director penalty notices. So again, as a practitioner, what are you seeing out there? What are you hearing and how do you think this is going to play out when they've got still a very high level of collectible debt going by, in particular, small businesses?

Todd Want

Look, I think it is one problem where the government probably needed to go back to business as usual on debt collection, that it was very carefully managed by the tax Office during that COVID sort of period and trying to to give businesses the best chance to survive through that period and come out and and continue on. But the sheer size of the the debts that are sitting there, it's just massive. And so people who genuinely need some assistance and some time to pay it off, making sure that they get that time and assistance from the tax office is important. But equally, those who will never be able to pay it off, Unfortunately, the decision does need to be made and sort of making sure that those debts are managed appropriately because we can't just have debts continuing to balloon know forever. Ultimately, they do need to be paid or managed. And so I think it is going to be a year where because we have had interest rates increase, debts will grow a lot quicker just because of the interest component adding on top as well. So the ability to manage some of these debts will continue to be harder for those who don't have the cash flow and don't have the ability to pay it off. So speaking with an appropriate advisor in that area is probably quite a useful thing for those businesses who are just not sure whether they've reached a point where it's actually their debts too big or how best to manage it.

Robyn Jacobson

To put some figures to the large amounts you're referring to in June of 2019. So about six months out from the pandemic, we had collectible debt at about 26 billion. Now that increased 89% to June 2023. So over a four year period to more than 50 billion and about 33 billion of that is owed by small businesses. So it is disproportion that given the contribution and and the extent to which we have small businesses in the economy, given of course the turnover in the tax they pay. So it is a concern that that collectible debt has gone up. And I'm not talking about debts that are collectible. These are amounts which are regarded by the ATO still being recoverable.

Todd Want

So it's a big number and I think of that number, there's a lot of them that will have just needed some short term breathing space. Others where perhaps they are using the tax office as their pseudo bank and perhaps that's not the right mindset to have and actually coming up with a payment arrangement that they can manage, that they can work with and that chips away at the debt over an appropriate time frame is really important. So picking up the phone to the Tax office and having a chat to them about it in equally the Tax Office hopefully being reasonable in setting it a payment arrangement that will work in a sensible timeframe.

Robyn Jacobson

Many of our listeners may be aware that there was an announcement in the Mid-Year Economic and Fiscal Outlook in December which announced the Government's intention to make general interest charge and the shortfall interest charge, which is a lower rate nondeductible from I think it's 1st July 2025. So this is something that will have a quite a big impact because there may be businesses that have debt, but the way they're prepared to manage it is, yes, we know it attracts interest, but at least that interest is deductible.Once that deductibility is taken away, then it becomes a much more significant cost to have an outstanding tax debt.

Todd Want

There's no doubt about that, Robyn. And I think it's yet another measure that's encouraging people, whether it's with the carrot or the stick, to to pay their tax office debts and make sure that they're up to date with those. So it is something that for those businesses that are paying their debts on time, there's an element of probably fairness to them for those who are not, it's an increased cost that suddenly they're having to pay their tax office debts and that interest not being deductible increases the cost of that debt. And it is one of those things that will focus the need for some businesses to make some hard decisions on how they get themselves out of this into superannuation.

Robyn Jacobson

Two major reforms, proposals, measures on the horizon, and one of them's a little bit closer than the other. We've got a bill before Parliament currently which is due to commence and take effect from one July 20, 25 in the tax world as boffins call a Division 296, because that's where it sits within or will sit within the 97 Tax Act. But in layman's terms, this is the additional 15% tax on earnings from superannuation balances above $3 million. Now there may be many out there who say, I wish I had $3 million in my super fund, but for those who do, this is certainly going to be a significant change. Now, most across the profession agree that if the Government wants to increase the tax rate, not only is its prerogative, but those sorts of policies come and go all the time. The biggest noise we're hearing around this particular policy is about the proposed taxation of unrealized gains encapsulating those earnings. Again, your thoughts?

Todd Want

It's absolutely right, Robyn, that taxes, tax rates go up and down forever in a day when there's been a tax system. But the taxing of unrealized gains, that's the big one. That's the really big one here. And I think, you know, some of the concerns from people that, hey, I'll be taxed on again that's unrealized that I may never realise. So I'm paying tax on an amount that I never actually Kit And where's the fairness of that and the appropriateness of that? And I think that's the discussion and the real issue that a lot of people are finding very, very tough to to get their head around. And I think probably more broadly making sure that if this does come in as a measure, that it doesn't spread out into other parts of the tax system and suddenly become a norm across other areas, because we don't want this to create a precedent in that regard because it suddenly it will fundamentally change behaviours. And is all of it a good change to behaviours or not making sure that superannuation system and the cost to the tax system that superannuation has is sustainable into the long term is an important part of government decision. There's no question around that. But dealing with it in a fair and reasonable manner and taxing unrealized gains, is that fair and reasonable? I think that's where a lot of people are finding this one particular challenge. So how do to nine six evolves will be an interesting one. And obviously we will have a federal election between now and when that kicks off. So will that become an issue from a political point of view leading into the next election? Who knows?

Robyn Jacobson

My explanation for of in layman's terms, is instead of using a profit or loss statement, which is actual earnings of the fund for that particular member, they're instead using a movement in balance sheet approach. So the balance in your superannuation accounts and unfortunately the balance in your superannuation account is the unrealized gains that are embedded in these assets and that's what they're effectively going to be taxing. So that's why we're keeping a very close eye on this. The other measure, which is a year later, one July 20, 26, but no less significant, in fact I would suggest this has much broader application is what's called Payday super. And we're going to see a requirement of all employers at this stage. There is no carve out no de minimis rules where employers will need to pay the superannuation guarantee at the same time that they pay their salaries and wages. The Tax Institute and and in particular my self has been directly in targeted consultations and having sat through a number of these meetings and I'll say that many of them have not been confidential, so I am afraid to discuss this with you now. It's been very pleasing to see the collaboration, the openness to ideas, the tabling of issues, thinking through all the aspects, all the different stakeholders. It's not just a change in timing of payment. It's going to affect the onboarding of employees, the gathering and sharing of information, the development of reporting systems, how the ATO ascertains, whether there has been in fact a shortfall. It's going to necessitate a whole design redesign of the guarantee charge. So when we look at this current 11%, maybe 12 and a half, eventually to 12%, it's not just that the charges impose, but all the draconian penalties that come with it and that currently operates on a quarterly basis. So to start moving it to a weekly or fortnightly does need a rethink. So without going into any more detail, I see this as a golden opportunity to bring this very archaic regime, very necessary, but the regime itself is over 30 years old and bring it into the 21st century. From your client's perspective, are they going to welcome this? Is this something that they are going to be concerned about? Where does the business community sit on this?

Todd Want

Look, I think the vast majority of businesses do the right thing by their employees and they genuinely pay the right amounts of their wages, withholding, super, all that sort of thing for their employees, pay them their wages, comply with their SGP and other obligations. And so this will probably from a compliance point of view, be more of a cash flow type thing where it's a managing cash flow there at the moment they may be paying the super quarterly. This will require it to be paid earlier and in, you know, perhaps more bite sized chunks. But that cash flow change will be important for a lot of businesses. The degree that that interacts with. If you look at the size of the ATO debts there, that the sheer growth in the size of that, that's probably indicative of how tough some businesses are finding the cash flow at the moment. So is this going to be another thing that weighs on cash flow for businesses and creates bigger problems there? That's a question that I think needs some more delving into. You know, there's a whole separate issue there, but I think you're quite right, Rob, And the ESG penalties, the broader rules around super and the mischief or non mischief and the degree of a penalty when a business has genuinely tried to apply with their obligations but perhaps has an inadvertent error or mistake there and is the penalty that they cop for that fit. So what has actually occurred? I think it's the right time to relook at all those things. And so I'd love to see a broader piece here. And we've got time that these measures are not proposed to apply for well over two years. So I'd love to see that. And it's refreshing to hear that there is genuine breadth of consultation ideas, thoughts coming together, and hopefully we land on something that's user friendly and able to manage things appropriately.

Robyn Jacobson

We would certainly want to see a much more proportionate penalty so that if you one day like this is someone who never pays on behalf of their staff, they are treated differently and as they should be.

Todd Want

As you mentioned, Robin, with super heading to 12% for ESG and it started at a much, much smaller number than that many years ago with the cash flow impacts the the quantum of the penalty because of how it's calculated, it suddenly can become a very big number. So we need to make sure that it's fit for purpose.

Robyn Jacobson

Now, turning to the integrity of the tax profession, I know that we can speak for a long time on this alarm. We ran a webinar for our members, which is available on the member portal at the end of last year. So if members want to go and look at that from the Tax Institute, they can delve into it in much more detail. Very broadly. We've got some major legislative changes coming in affecting the regulation of tax agents and best agents. Some law has been enacted, some is before Parliament, some is still in the pipeline. So there are quite a number of stages being rolled out at an overarching level, the approach to this, it's certainly appropriate to look at improving the integrity of the system, but at the same time it is also valid for genuine concerns to be raised about the design of the provisions.

Todd Want

That's right, Robyn, And I think that's we fully support that. The Government wants to ensure that there is a high degree of integrity in the tax profession and that the profession does engage in ethical conduct. I don't think there's any issue with that. I think the vast majority of tax practitioners do operate in an appropriate manner and they are fully aware that society should hold them in high regard and they want to be held in high regard as someone that can be trusted to act appropriately, ethically, with a high degree of integrity, where, yes, they are looking after clients and taxpayers, but they are doing so within the bounds of the tax laws in an appropriate manner. So, yes, some have overstepped the mark, there's no question about that. But the response needs to be commensurate with that. Those who are operating at the fringes or even well outside the fringes, they should be dealt with appropriately. But we need to make sure that the measures here don't lead to the everyday client being unable to access tax advice and assistance because of cost effectiveness or that sort of thing, because tax practitioners are so burdened with the red tape or the regulation they need to go through to just be able to get a client on board. It ought to be able to document things or deal with it and so on to be able to give advice to clients. We've got to find the right balance there and make sure that we don't price the everyday Australian out of getting good quality tax advice from a tax agent and tax advisor. But we need to manage the integrity of the tax profession and ensure that tax practitioners do act ethically and do act in a way that is where the community expects that practitioners should be operating.

Robyn Jacobson

Finally, your vision as president. So you've got a year ahead and we've probably got you at the commas point of view a year. It's only going to ramp up from here and you will of course be traipsing around the country, going to lots of our events and other activities and meeting with members and looking at our advocacy work in terms of looking at submissions and so on. What do you hope to get out of the year for the Tax Institute? What direction do you want to take instituting and where do you think our focus will be.

Todd Want

As an institute, I want to make sure that we have got the, the offerings that are right for our current and future members that we're bringing through the next generation of tax practitioners. And that can be a broad range of things. You know, if you look at something like our Tax Academy that's just recently been launched, they bite sized chunks of micro credentialed learning. That is a fantastic set of tax learnings there where you can take the opportunity if you're a novice in the world of tax to upskill, if you're a strong, experienced practitioner but want to upskill or refresh in certain areas, you can take some bite sized chunks of learnings out of that. It's technically very strong, it's practical, great set of things there. So Tax Academy is something that we've built to help that be the way that people want to learn bite sized chunks on the go. But for a breadth of people who it's not just aimed at the novices or the experts, it's for everyone. As you say, Robyn, I'll be going around the country. I'm really looking forward to meeting members around the country, hearing what they've got to say, helping advocate for the issues that are affecting them and also taking the tax profession forward in an appropriate manner. I think one of the real strength of the Tax Institute is the sharing of knowledge, the experience and the skills. And I think that's something that we need to make sure is fit for purpose moving forward. As to how that is, we run some fantastic events where our presenters freely give up their time to both present on the day, but also write their papers, share their knowledge and skills and put back into the tax profession. And that's something that I want to make sure that our tax community continues to work together to pass the baton on to the next generation, but also help design a tax system that's fit for the future. So advocacy sticking up for the tax profession, not just providing, you know, one sided views, but a balanced consideration of what is good for the tax profession, also for members raising issues that and obviously for for part of your role, Robin, is taking forward issues that members might have and helping them get those resolved if they've got issues along the way. So supporting our members, our practitioners, our tax community to really make sure that as a profession it's an attractive profession to be part of. It's an interesting and exciting one. It's a fulfilling one and that it's one that we are fit for purpose for the future. So I want to help take the tax profession, the Tax institute forward. And that's that's something that really excites me. So I'm looking forward to 2024. Robyn I'm looking forward to working with the team at the Institute. I'm looking forward to working with the members, with the broader tax community to be able to achieve a lot of things this year.

Robyn Jacobson

Well, thank you, Todd. On behalf of the staff at The Tax Institute and all of our members and the broader profession, thank you for your commitment over many years. You don't just become president overnight. It's many, many years of voluntary work up through our working groups and committees and state council and then on National council. So congratulations again on your appointment as President. We look forward to your energy and your your drive and the vision for this year. And let's roll up sleeves up and get into the work.

Todd Want

Thanks, Robyn. I think it'll it'll be a cracker of a year for, for the world of tax and I'm looking forward to it.

Robyn Jacobson

Terrific. And thank you also for your time today.

Todd Want

Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Todd Want, CTA, President of The Tax Institute and Director, Tax Services with William Buck in Sydney. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute join us on LinkedIn. If your interested in being at the center of the tax conversation. A membership with The Tax Institute could be just what you need to stay current and connected with tangible real world benefits. Learn more at taxinstitute.com.au. Thanks again. Till next time on TaxVibe.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate of The Tax Institute and your host to today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of Tax Vibe. I'm joined by Vivek Chaudhary, Vivek joined the ATO in 2019 in his current role, Deputy Commissioner of Lodge and Pay at the ATO. He has 20 years of global financial services experience transforming and growing business teams into highly productive operations. Vivek previously worked at NAB and was responsible for transforming its collections function into NAB assist, making NAB the first Australian company to make the Fortune's Change the World's list in 2016.  Vivek has reshaped the ATO's approach to lodgment and payment obligations to one that focuses on tailored solutions based on a deep knowledge of the client's circumstances and behaviors. Vivek, welcome to TaxVibe

Vivek Chaudhary

Thanks, Robyn. Thank you for having me here today. Yes, at the recent Tax summit, I spoke about how the ATO is returning to normal operations to address collectable tax debt, and I look forward to discussing that with you here today.

Robyn Jacobson

Yeah, that's great. We know the ATO had a very different approach during the pandemic. Not only were you handing money out through things like job keeper and cash flow boost, but the very supportive approach in terms of remitting GIC and other penalties and payment plans and so on. But we are now in a situation where debt has increased and we do need to return to a business as usual type approach. But we also know that there's been some observations made out in the community and in the profession regarding the ATO’s changed approach. So I look forward to unpacking this with you. So at the Tax Institute's recent tax summit in Melbourne, you recently outlined the shift in the ATO's approach to addressing collectable tax debt. Would you give us a brief overview of what you provided in your address?

Vivek Chaudhary

Sure. Through the pandemic, we shifted our focus from debt collection to stimulus payments and assistance with tax. We redeployed over 5000 staff and turned our attention to focus on how we help and assist taxpayers. As part of this, we paused most of our firmer debt collection actions, which was appropriate at the time, and we encourage taxpayers to lodge even if they couldn't pay. We offered payment plans deferred due dates and as you mentioned, remitted penalties and interest without question. Offering additional time to pay was an effective lever to help small businesses stay on track. And a large portion of the tax bills were paid before those deferred due dates. This was the right thing to do for a lot of businesses and it delivered many successes. But it has also had an impact on payment culture. And we are seeing more businesses not paying tax on time since before the pandemic began.

Robyn Jacobson

So Vivek, do you think there's a bit of change in approach? People have got used to those supportive approaches from the ATO and they've taken that into a post-pandemic phase?

Vivek Chaudhary

Some businesses, yes, are probably have changed their habits for the worse, but the vast majority of the system continues to operate at good health. 70% or more tax obligations are met on time and the vast majority of tax liabilities are paid on time. And our concern is for those that are doing it tough, but yet paying taxes on time, it makes it unfair for them that some others are not. And that's why we are changing our approach. Otherwise it remains something that is growing at an unsustainable level and may get out of hand.

Robyn Jacobson

So what are you seeing out in the market and in the community?

Vivek Chaudhary

What we're seeing is that too many businesses have accumulated unsustainable levels of debt and we also see a number of profitable businesses who have the capacity to pay their bills but are choosing not to. Over the past 4 years, collectable debt has increased 89%, and now we do feel it's the right time to reestablish that culture of paying taxes on time and turn this trend around. Where we see businesses are behind with tax, there's a fair chance that they are also falling behind in payments to creditors, suppliers and even their employees, which isn't good for those that are directly impacted. It's not good for the system and it's not good for that business itself. We do know that many people are facing cost of living pressures right now, but we also know that the community expects all taxpayers pay the right amount of tax and pay it on time. And the ATO has a critical role in protecting not just the revenue but also the taxpayers themselves from creating too much debt and from impacting their creditors or the broader economy.

Robyn Jacobson

So can you provide an example of what you're seeing out there.

Vivek Chaudhary

Obviously I cannot talk about individual taxpayers, but I can tell you if and this is a recent real life case and something we do see more often than we would like to, the case concerns a smallish business, one that had quite a few staff, customers and suppliers. The business was impacted by the pandemic due to the lockdowns, but also other factors that resulted in the business started to pay late and our response was to support them with payment plans and other support options and ones that were supportive and gave the owner some breathing space. It also meant that the business owner was not forced to face what the business was and some of the habits that were not in the best interest of that business were formed and they weren't forced to think about their pricing, whether they were too reliant on debtors who were paying late or might be in trouble themselves, or whether they needed to slow up their expansion plans. In the end, the business became insolvent and the business owner has now personal debt that are substantial and will probably take a very long time to pay off. But it doesn't just impact the business owner. They were over 150 creditors both businesses and consumers, as well as staff who had not been paid their entitlements, including their superannuation, which is their retirement savings. So in this case there were no winners other than the insolvency professionals. While we can never know what might have happened, we have to think that if we had intervened earlier about the debts they owed to the ATO and their staff, there is a chance that the business owner might have either taken action to set the business on the right course or taken action to close the business earlier, which means less damage for everyone that was involved.

Robyn Jacobson

And sadly that's not going to be an isolated case.

Vivek Chaudhary

There's like I said, there's many more that we're seeing than we would like to see.

Robyn Jacobson

So what are the trends that you're seeing in terms of collectable debt?

Vivek Chaudhary

As I mentioned so the total collectable debt has increased by 89% over the last four years. 90% of the collectable debt, which is $45 billion of it is owed by businesses and small business continues to be overrepresented in our debt book. And so of the 45 billion, 33 billion is owed by small businesses, 23 billion of the 33 billion is unpaid activity statement debt. So this is your PAYGW the withholding from the wages. It's net GST that is collected or adjusted but not paid and it's PAYGI which is based on anticipated profits in the future year. $1.8 billion of this is also superannuation guarantee charge and that has that direct impact on the employees.

Robyn Jacobson

So Vivek, I just want to make an observation. Leaving aside the PAYG instalment, you mentioned then PAYG withholding, GST and the unpaid SGC and all three of those are of course personal liability for directors. So director penalty notices can be issued in respect of those debts. So they're not just business debts. This can actually flow on to be a personal liability of the directors.

Vivek Chaudhary

Absolutely. In fact, the liability exists in a corporate structure from the time someone becomes a director and the director penalty notice is a requirement for the ATO to issue those prior to commencing recovery proceedings is a requirement for us to do that, and that creates an account into their personal tax obligations until either it's paid by the business or by any of the directors themselves. We do as a strategy and a contemporary approach during COVID because we had stopped our firmer actions. As we look to recommence them, we issued awareness letters. So writing directly to directors of these businesses and we had seen some great engagement from many on the back of that awareness campaign. There are so many that at the moment that we do not have the engagement from businesses or their directors and we are continuing to issue director penalty notices to them and collect from those. I want to make a point clear, although small business is overrepresented in the total tax, collectable debt, non or late payment is a focus across the board for the ATO from individual taxpayers all the way to the big end of town. So our expectation is that people will lodge and pay on time and if they are not able to do so, that they will engage with the ATO before the due date, not after the due date. Our expectation is that people engage with us before.

Robyn Jacobson

The point of engagement. So if people aren't in a position to pay, you'd much prefer them to at least come on to your radar and keep up to date with their lodgments?

Vivek Chaudhary

Keep up to date with their lodgments and have a payment arrangement in place. If they do not have a way to enter a payment arrangement, that should be something that they need then to consider whether their business is viable. We would be able to provide them additional time to go seek advice from the appropriate professionals. May that be tax advisors or insolvency or restructuring advisers. But we do not want that they grow the amount of debt without actually having a good understanding of whether they can recover from it. Because I was saying earlier, it's in their best interest to do that, but it's also in the best interest of other businesses that are dealing with them and their employees who we are very concerned about.

 Robyn Jacobson

While small business makes up a sizable chunk of the collectable debt. You are still seeing issues across the board.

Vivek Chaudhary

Yes, we are, absolutely. In fact, our focus is not in a particular segment of business. As I said, 90% of the collectable tax debt is from businesses. Our focus is that, particularly for this year in five specific areas, the first one is super guarantee charge so those that have already have a super guarantee charge debt that they have not paid. We have always prioritized these debts. So this focus area is not new, but it's certainly one that we would be keeping on top of our pile of work because it is so important for us to make sure that we can reunite that super to the retirement savings of those employees. We're also focusing on refund fraud. We view that fraud and take it very seriously, that taxpayers who engage in refund fraud that they can expect serious consequences. We have a very clear and deliberate approach to recovering these debts, and we won't hesitate to apply to all of those clients who are involved in this. We will fully extend our stronger powers where necessary, beyond our ordinary posture for these clients. We are also doubling our efforts in the recovery of aged and high value debt. So these are debts that are of high value and aging. The 2023 24 budget has funded a four year program for us to focus on public and multinational groups and privately owned groups that have debts over $100,000 and have been overdue for more than two years. For these clients in particular, that are no concessions available. Debts will progress to firm actions and payment plans will be very limited and for a very short duration, and they will align to the reporting cycle. So what we do want to see is these businesses get back on track and remain on track, otherwise they really have to consider their viability and seek the appropriate advice. There is one more that we are increasing our focus on this year and they are employers with new debts. Our experience shows that ultimately businesses that choose not to pay the employee superannuation, they start by not paying some of their initial obligations, such as their BAS payments, and that includes a PAYGW and GST. And what we are doing is looking at timely action and quick turnaround in terms of these debts. So anyone that employs staff should expect that we will be prompt in taking action if they incur debt.

Robyn Jacobson

Looking further down the track, Vivek of course we've got pay day super which is proposed to commence on the 1st of July 2026. So without getting into that many detail, it's going to be another game changer for employers where it's going to be yet another obligation that they will have to meet at the time of paying the salary.

Vivek Chaudhary

You're absolutely right. In fact, we are actively thinking about how that is not a shock to many businesses. And if we can influence and communicate now to start turning those payment habits and that payment culture, that will mean that when that new legislation comes into place, that those businesses are ready to adapt to that rather than be finding themselves in a state of shock.

Robyn Jacobson

Yeah, that's really important. So why are the changes being made now? You've talked about we're out of the pandemic and the level of debt is not sustainable. So I guess that answers the question. But can you provide a bit more detail around why the changes are being made now?

Vivek Chaudhary

Look, it's essential that we shift payment behavior for the good of the Australian community. We are reaffirming now that our expectations have climbed and resetting what clients can expect of us. And practically speaking, this means that tax professionals and their clients can expect to see us acting earlier than we have been. We know that preventing debt is the best way for businesses to stay on track, and we have seen that leaving debt unchecked and unmanaged for prolonged periods rarely improves future viability of a business. We have a role to play to protect the taxpayers from accumulating debt. That becomes a burden sometimes for the rest of their life. And may impact their family home and those who pay late or do not pay and do not proactively engage will have interest and penalties apply. And we do not want clients to rely on remissions, and we will consider them only in very limited circumstances. But clients who make a choice to contact us early will be best placed to discuss options that are available in early means before missing the due date, not after missing the due date. Certainly not after the ATO has had to chase them. You know, at that stage we would have very limited room for concessions. The taxpayers that are contacting us can expect a conversation about making payment in full. So if we will assess if they have the capacity and we will encourage them to make the payments in full. But if they need a payment plan, our approach will be that it is one that is in the shortest possible time frame and really an ideal payment plan would be one that gets them back to square before their next payment obligation. Like I said before, if there is an inability to do that, that is the time for them to consider their viability in their financial status and position and they should seek advice and that is what we would recommend to those businesses. I do want to make a point about superannuation as well. That is a growing concern for us. It has grown over the pandemic from less than $1 billion to now over $2 billion, and we do review every complaint of unpaid super. We monitor payments to ensure that employees receive the correct and timely amount of super, but we will continue to apply a full range of firmer actions, including garnishee, The Direction to Pay, Director Penalty notices, the disclosure of business tax debt and prosecution actions to ensure payment of super. And we will continue to detect if employers are taking advantage and not paying the relevant entitlements. This is a key concern for us and a key area of focus that we'll continue to look into.

Robyn Jacobson

Back in yourspeech at the tax summit, you mentioned the range of firmer actions, including director penalty notices, DPNs, disclosure of business tax debts and insolvency, and you've just mentioned those again now together with garnishee notices. Would you tell us a bit more about when the ATO is likely to apply these firmer actions?

Vivek Chaudhary

Sure. So over the past 12 months we've started to use more of the firmer and stronger actions, but they are for those who are choosing not to engage with the ATO.  And some of these stronger actions are director penalty notices and disclosure business tax debts, to credit reporting bureaus and the potential legal actions to either wind up a company or bankrupt an individual. There is over $5 billion owed by clients who currently meet the criteria for disclosure of business tax and the signs posts are that this is likely to grow. And what we are seeing is that the disclosing action, it does provide strong incentive for the engagement with the ATO, either when we intend to disclose notice, we see lots of businesses that engage, but then some engage even after they have been disclosed. Since July 2022, over 24,000 director penalty notices have been issued and these are in relation to about 18,000 companies. In last financial year we issued 19,000 intent to disclose notices and nearly one in three clients had engaged with us in response to that entered a payment plan or made payments in full. I think 2000 clients paid their debts in full, that was nearly half a billion dollars that was put back into the system for critical services that was otherwise not being paid. We do know that not all businesses are viable in having a tax or super debt is often a symptom of insolvency. And you would have seen there’s a lot of media currently that insolvencies are on the rise after a slowdown during the pandemic. We are a party to many insolvencies and we are often a major creditor. Generally, corporate insolvency action is initiated by the directors themselves or by other commercial entities. ATO initiate one in six insolvencies. So we’re not a major initiator of insolvencies. In terms of timing, I think more businesses who remain disengaged can expect these actions. And like I said before, we are also looking to bring forward the timing of these. So, for example, employers who are choosing to not pay their activity statement debt they will see quicker action that includes disclosure and if their debts are greater than $100,000, that disclosure of business tax debt will be quite timely in those cases. Finally, I would also say that the disclosure of business tax has been a reasonably new provision in the suite of actions that the ATO has and we've completed now the full system implementation of all the letters that have to be issued and the exchange of information with the credit bureaus. And that means we will be clearing up a backlog of many businesses that are already eligible or were eligible for some time before the system implementation. We have now written to over 15,000 of these businesses and in the month of October, if they still remain disengaged, that we're likely to disclose them.

Robyn Jacobson

The winding ups that you take through the Federal court, what's the trend you're seeing here?

Vivek Chaudhary

Normally we wind up pre-COVID about 1000 companies in a year roughly. During COVID that had significantly reduced due to our approach in the last six months that's about 500. So, we are sort of back to our pre pandemic levels and in the most recent month of July, we had about 100 wind ups initiated. So that kind of gives you a sense for we're back to normal levels and these are the levels that we expect to maintain. In some months they may go up, they may come down in another. But overall, go back to the same levels.

Robyn Jacobson

You’ve made some recent comments about the need for a collaborative approach to shifting the payment culture of predominantly the business community, but also individuals. So why do you see tax professional's contributing to this change in culture and the role that they play in terms of fitting this alongside the other pressures of their roles and there are many of them out there, including ongoing labor shortages?

Vivek Chaudhary

So we are very conscious and aware of the pressures everywhere in business as well as businesses that are professionals. And our aim in shifting our approach is to position businesses to avoid falling behind in the first place and position them to better be able to recover if they have fallen behind. As trusted advisers for their clients, tax professionals can help their clients avoid bill shock by setting up good habits and see them put aside the money that they have collected or withheld from others, so they can pay it when it is due. And tax professionals can reinforce that their clients are only the temporary custodians of GST, PAYGW and super guarantee, it is not theirs. Professionals also know the time when a business is struggling on the brink of insolvency or perhaps needs to be told the time has come to exit gracefully. Having these conversations at the right time rather than clients waiting for us to take action will ensure that they are best placed to manage their bills, avoid actions that may have more lasting effect. We also encourage professionals that their clients and to their clients that they talk to each other. And particularly if someone is experiencing financial difficulties, they need to contact us as soon as possible so we can provide them with support. And we do appreciate that tax professionals are busy and that helping their clients with debts will take more time. And to save some of the professionals time, we will increase our self-serve payment plan threshold in November this year from $100,000 to $200,000. And what that means is that more clients can be put through that self-serve online option. But I must emphasize that this is for those who have capacity to pay in full, should still pay in full rather than enter a payment plan. We have also heard from tax professionals the feedback that our calls can sometimes be untimely. We don't allow people to prepare for a conversation and that results in a game of telephone tag. And what we are making now is appropriate adjustments and have recently implemented a change to streamline our lodgment and payment interactions. When we are unsuccessful in a phone conversation, we will send a practice mail through the online services for agents platform and that will allow the agents to contact us back at a time when they are prepared to talk about the matter and have their client's instructions on hand. So we hope that some of these things will help reduce the pressure on the tax professionals. But we do think that it is a collective role for everyone to influence what is best for the broader system.

Robyn Jacobson

You mentioned the increase this November of the self-serve payment plan threshold to $200,000. That's a permanent increase in that threshold? It's not a temporary increase?

Vivek Chaudhary

Our intention is to keep it at 200,000. That said, I cannot predict the future. It may be more suitable in the future to increase it. It may be suitable to reduce it. We don't know that today, but based on what we are seeing and the value of money itself continues to change. So the $100,000 threshold was set up quite some time ago. We do think that the $200,000 is an appropriate setting for now, but yeah, we do not have an intention for it to just be temporary. So that should remain in place.

Robyn Jacobson

So what is your final message or key takeaway for our listeners today, for those who have tax debts, it can be an incredibly challenging and difficult time, very stressful but there’s obviously ways that they and tax professionals can work with the ATO. So what's your takeaway for those who are listening?

 Vivek Chaudhary

Thanks, Robyn. My key takeaway is it is essential that we shift the payment culture for the good of the Australian community. Australia needs all taxpayers to pay the right amount of tax in full by the due date. It's also crucial that employers withhold and pay their employees correct pay as you go withholding and super. My final message is that tax professionals, as their trusted advisor help their clients understand that it's in their best interest to pay on time and engage with the ATO rather than waiting or having the ATO reach out to engage with them. And I do want to acknowledge the role that the Tax Institute plays. And Robyn, you fearlessly advocate for your members and your sector, but also I think really contribute in a very positive way to the overall system operating at help and building it better for the future. So I do want to take the opportunity to acknowledge that and thank you for having me here today in your podcast.

Robyn Jacobson

Thank you, Vivek and very much appreciate on behalf of the Tax Institute your comments and your feedback. We obviously represent the tax profession and our members, but we're also so dedicated to improving the tax system overall and whether that's tax reform and the development of policy on the Treasury in the government side of things, or whether it's tax administration in working with you and your colleagues. So thank you. We all want a better system that serves all of Australians. So I really appreciate your time today. It was very interesting to hear your address at the tax summit and for those that want to go back and look at formally your address, it is available on the ATO website in the media section. But thank you again, Vivek.

Vivek Chaudhary

Thank you very much.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Vivek Chaudhary, Deputy Commissioner Lodge and Pay at the Australian Taxation Office. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of The Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.com.au. We look forward to you joining us next time.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax here at The Tax Institute. We do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you might not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Karen Payne, Inspector General of Taxation, the Taxation Ombudsman. Karen was appointed the Inspector-General of Taxation and Taxation Ombudsman and commenced a five year tenure on the 6th of May 2019. She leads the Taxation Ombudsman Complaints Management Service for Taxpayers and Adviser’s and the Inspector General of Taxation is review and public reporting function, both of which are directed at improving the tax administration system for all taxpayers. Karen was previously a member of the Board of Taxation, as well as the inaugural CEO of the Board of Taxation. She was formerly a partner with Minter Ellison, specializing in corporate and international tax mergers and acquisitions and capital raising for various sectors. She brings a wealth of experience and extensive networks to the role of Inspector general, having worked with a range of government and private stakeholders, as well as the legal profession and many industry bodies. Karen is a solicitor admitted in New South Wales. A chartered tax advisor with the Tax Institute. A chartered accountant and a member of the Australian Institute of Company Directors. Karen, welcome to TaxVibe

Karen Payne

Thank you. 

Robyn Jacobson

Karen, can you explain the role of the Office of the Inspector General of Taxation and Taxation Ombudsman? Because there are two different roles here. What's the purpose of each?

Karen Payne

Well, the Inspector General of Taxation was set up in 2003 and it's fundamental to address the secrecy and confidentiality provisions in the tax rules. So we were set up with powers to, if you like, lift the secrecy veil to go and take a look and provide independent assurance back on back to Parliament and all the community and all the minister on what should be improved. In 2015 we inherited the Taxation Ombudsman role and that is a very different role where we're now investigating on behalf of individual complainants. And by individuals I mean not just people with heartbeats but entities as well, but anyone who's a taxpayer who wants to complain about the way in which their affairs are being administered. So that is a role we've been providing since 2015. And we can also sorry, I should mention, even though more than 90% of our complaints are about the Tax Office, we do investigate complaints by practitioners about the way in which the Tax Practitioner Board has dealt with them as a practitioner.

Robyn Jacobson

Essentially, the role of the Taxation Ombudsman is to deal with an individual taxpayer complaint. When I say individual, it could be any type of taxpayer that initially made a human being taxpayer create a complaint of an individual taxpayer who has a situation. Whereas the role of the Inspector General of taxation is more about understanding the processes. And if there are systemic problems within the way the system is being administered. But might there be occasions where in looking at a taxpayer's matter, you realize that they're not alone, they're not Robinson Crusoe, if you like. There in fact repeated instances of that occurring, and somehow this has morphed into a systemic issue which might indeed lead to an investigation.

Karen Payne

I think that's exactly right. And I think the key thing is that these two roles are very complementary. So we see stuff happening in our review space in death and taxes, for example, and that then leads to people acknowledging or recognizing they can lodge complaints with us about the way the ATO is administering deceased estates. But the the genesis for the Death and Taxes review was the complaints we were in fact receiving on deceased estates. Similarly, we saw through the job keeper, job maker processes a number of complainants coming to us and we had investigated those individual complaints, but collectively we thought actually this is something we should report on publicly So people are aware of and this has been the improvement we've identified in administration for the Tax Office to take on without needing to come and lodge complaints with us. So the two processes, the two investigation models absolutely are complementary and one informs the other.

Robyn Jacobson

Could you briefly explain, Karen, the scope of the powers? So what are you able to do? What can you ask for? What do you have the right to demand of the ATO and what do they have to comply with?

Karen Payne

I'm going to start with the very extreme view. Right. We have powers of compulsion. We can go and conduct a Citibank raid on the Tax Office if we need to. So we have very, you know, compelling powers to access information if we choose to exercise those powers. Now, I would say that it would be ridiculous for us to exercise those types of powers of compulsion on every occasion. So the more frequent way in which we get access to information is through our ordinary investigation rules. Now, once upon a time when we were the Inspector General of Taxation, we had access to information as a right. When we inherited the Commonwealth Ombudsman, Legislative framework. We now have access according to the rules of the Ombudsman Act, and those rules say we have access to information. If the Commissioner chooses to give us access to that information now whilst practically I'm not suggesting the Commissioner is preventing us from accessing information, if I were to stand back and say what what is independent access? What does an independent investigation look like? Well, for me, it doesn't look like the head of the agency that you're investigating gets to choose whether you do or don't get access to the information. So if I you know, if I could have a wish for Christmas, it would be that we got actually unfettered access to information. Because even though I'm not suggesting we don't get the information that we request, sometimes it's a challenge. I think the fact of having an unfettered statutory right to access information changes the way people see that they should engage with you. And you can see some of those recommendations in the robodebt Roll Commission report, where the commissioner has suggested that there should be an obligation to assist the agency through an investigation. The recommendation is not that it's just imposed on the head of the agency, but on all officials that work in that agency. So that's one of the recommendations in the Royal Commission that we keenly watching.

Robyn Jacobson

You've been delivering sessions for the duration of your tenure to date. And one of the questions you ask in your sessions is about the importance of integrity and the awareness of your office, both that of the inspector general and that of the ombudsman. What are you finding in terms of awareness and is there more that your office and more generally the profession can do to understand what it is you do?

Karen Payne

I think absolutely there is a need for greater awareness of our office. We did a review into how effective is the ATO in advising taxpayers of their rights to appeal, complain and dispute challenged decisions. And one of the recommendations out of that review investigation was that actually the Tax Office should proactively tell people how to lodge a complaint with them with the tax Office and with us as the Taxation Ombudsman. You'll see in our charter on page three, the Tax Office have now put that into our charter, but that's only recently come out. It came out in June and they've made clear in our charter that your position, your rights as a taxpayer are not affected, just because you choose to lodge a complaint either with the Tax office or with ourselves. That's very important because fear of reprisal action, I think, is what sometimes holds people back from lodging complaints. Anyway, it is now formally in our charter that you can lodge a complaint with us as the Ombudsman, but ideally in the first instance you try and resolve your complaint with the tax office. It's also the case that the Tax Office should be putting that information on decision correspondence going to taxpayers. They should be reminding everybody that if you disagree with the decision or you wish to challenge the decision, here are your avenues and one of those avenues at the at the very least should be recognizing the tax ombudsman. But I absolutely acknowledge there's more for us to do. I am always surprised at how many people, when I put up my polling questions at conferences will say either they don't know that we existed or if they're aware of our existence, they don't know what we do know. I'm should also add the Senate Economics Legislation Committee did a review three months into my term. They did a review of the performance of the Inspector General of Taxation and one of their recommendations. They make 16 recommendations. All good, in my opinion. But one of their recommendations was that the government should fund a program to promote the fact that there is in fact a taxation ombudsman and service.

Robyn Jacobson

To the community.

Karen Payne

Correct, yeah, I didn’t advocate for that, the committee came up with that idea themselves, which would be.

Robyn Jacobson

But you're perfectly happy

Karen Payne

Happy, but I'd be very happy to read that to receive additional promotion because as I said, I'm speaking to sophisticated tax literate audiences and they don't know that we exist. Well, how is the rest of the community going to be identifying that we exist?

Robyn Jacobson

Karen, do you have any observations on the evolution of your role from its genesis to now and from now into the future?

Karen Payne

Yeah, I think we are evolving as an agency in terms of where our core focus is on. I think it's always still the case and I think it always will be that we need to make sure we're engaging with stakeholders to understand what are their concerns. That's kind of fundamental and core to what we do. So I don't see that changing. And whether that's to inform our review investigations or to just help, you know, promoting the fact that there's a tax ombudsman in the system. But on the Taxation Ombudsman side, I can see that that will evolve materially and significantly. And in particular, because we're now seeing ourselves investigating more complex and highly complex disputes where, you know, we are looking to see if we can get outcomes for people where they've been recognizing they've been through three or four decision processes internally at the Tax Office as well as a complaint process sometimes as well as, you know, objection and or appeal processes. And then they come to us. So you know, we're at the end of the complaint chain. And so by the time they come to us, they're very frustrated, They're sometimes angry, they're very confused. You know, they just looking for answers. They think something's unfair. We're finding that we are more and more engaging in investigations of very complex dispute issues. And that's a big drain on our resources and our time. But the rewards, even though we can't compel the Tax Office to do anything, I think the community does respect the fact of our independence when we've gone through the process, even if we sometimes come back to them and say, look, we've taken a look at what the tax officer have done here, we would have done this differently, but we can't compel them to do anything. And, you know, here is our report. So more and more complex investigations and trying to find better ways to interact with the community so they understand where their investigation process is at. That's where I kind of see the next stage in our evolution.

Robyn Jacobson

And I think it's fair to say that your office is not about that. I use the word in a non-criminal sense prosecuting a government agency or otherwise acting in the interests of the taxpayer. It's about what's good for the system, particularly with your inspector General Hatchell, and trying to improve the efficiency and the way the tax system is administered. Now, there are times the taxpayers, of course, can play a greater role in the responsibilities, particularly we look in the fraud space of making sure that everything is done properly according to their obligations under the law, but equally, the administrator has enormous responsibilities to administer the law properly. So in terms of your role, I always see you as a bit of a guardian or a custodian of the system. You're always trying to improve the way that works.

Karen Payne

That's right. So we're not a taxpayer advocate service like they have in the US. We're there to investigate independently, and that means we're not taking the taxpayer's side or the tax office's side. We're there to report or mediate, if you like, exactly what we find and what we think is the fair outcome as an independent observer. So I don't think that's always understood. And sometimes the complaints that we get back after we finish an investigation is, you know, oh, well, you weren't able to change the tax officer's view. You couldn't get me a different outcome. What got your decision Override the Tax Office decision? It's an ombudsman model. We we don't.

Robyn Jacobson

You don't? The Federal Court That's right.

Karen Payne

We don't pretend to be substituting for the Tax Office's decision. It's their decision. It's their administration. We like an independent commentator on whether or not that administration is fair and consistent with law and the Tax Office's own guidance.

Robyn Jacobson

Hey, Karen, I'd like to look now at some of your previous investigations. There are many of them, and anyone who wants to look at those can jump onto the website, which is i g t decaf dot aew. So some of the key investigations have undertaken. You've looked at the way the ATO administers and manages objections and there's an interim report available for that. You've looked at how the ATO deals with deceased estates. You've examined the future of the tax profession. You've looked at how the ATO handles and manages the use of garnishee notices. And even in 2014 there was a report that circled back to some of the previous investigations to say, Well, how have these reports gone and the recommendations that we put forward? Is that still the case? And if not, what is the process now for looking at whether prior recommendations are implemented?

Karen Payne

So we did actually change the way we're going to go back and if you like, do a post implementation review, recognizing we have limited resources, we thought another approach that might have suitable integrity was to rely upon the ATO's own audit and risk committee process. So since 2014, we don't do post implementation reviews to see how things have been progressed and implemented. But instead what we do is we write and confirm at various regular intervals with the Audit risk committee that they're seeing sufficient evidence of the implementation by the Tax Office of those recommendations. It's also fair to say that because we do still engage actively with stakeholders, if things that have been promised to be implemented and are not actually either progressing fast enough or they're not being implemented in the way that it was once anticipated they would be, we get stake all the feedback on that and we, you know, we go and make independent inquiries or individual inquiries to say, hey, what's happening there? So deceased estates is a classic. There are still a lot of complaints that we get around the ATO's administration of deceased estates, and I still get lots of stakeholders coming to me saying, Hey, this was supposed to happen and it hasn't and where is it? And we're, you know, we do chase those things.

Robyn Jacobson

Have there been any positive changes as a result of your report, an investigation into the handling of deceased estates?

Karen Payne

Look, there's been a recognition that the representative that the Tax Office can engage with is not always going to have probate. And there has also been a recognition within the tax office that the threshold before, which, you know, they can deal with somebody, has been increased to allow more people to engage with the Tax office, even though they don't meet those formal legal, personal, representative requirements.

Robyn Jacobson

Because the law is very strict around, of course, who is authorized to act on behalf of the taxpayer or when your taxpayer has passed away, then they, of course, can't authorize anybody. And we often see the example of the executor and administrators a slightly different situation, because it tends to be, of course, that more court appointed. But an executor wants to go to the accountant who looked after the deceased person's affairs and said, Well, why can't you just do this? Why can't you just lodge the outstanding return and why can't you make this happen? And there's all this administrative red tape around what they're able to do and what they're authorized to do. So they've got to be some practical cut through as well.

Karen Payne

Exactly. And there was actually a report that was released earlier this year. It's not in the tax base, but it's on the operation of my golf where they acknowledge that, you know, not everyone who should or needs a myGov account is going to be computer literate. So the suggestion I think it was some folks report the suggestion was that you should have some kind of a nominee arrangement that is acceptable in relation to my job rather than people basically defrauding their relatives, pretending to be them. You should just set up a nominee account or a nominee arrangement and that should be permissible. I'm not sure where that's all got to, but I guess it's the kind of same theme where you have a number of well, in the case of deceased person, they're dead, right? They can't they can't engage with the tax office. But somebody who is acting on their behalf and or who has responsibilities to wind up their estate, even if they don't need probate, why can't they be recognized for the purposes of engaging the tax office.

Robyn Jacobson

And just to play devil's advocate, in this current climate, an environment of identity theft and cybersecurity issues and even elder abuse, I can see why there would need to be a great control series of controls over who would be authorized to do that, because you certainly don't want to pave the way for people who are not authorized, who claim to be authorized getting access to that type of information.

Karen Payne

I totally agree. But you also want it to be user-friendly, so you try to keep in balance these two competing objectives sometimes. But provided you've got the right checks and balances in the system, it does still seem appropriate that you can have lines of communication that are user-friendly and that are accessible.

Robyn Jacobson

So turning now to your current investigations, there are certainly three that are currently sitting on your website, and this has to do with the exercise of the commissioner's remedial power. Secondly, the exercise of the commissioner's general powers of administration. And thirdly, the ATO's administration and management of objections that you've been working on these for many months. In fact, I've got to suggest over 12 months in some cases. Where are these actions and when can we expect for those to be publicly released? And what do you hope will come out of these three reviews?

Karen Payne

So the report that looks into the commissioner's administration of his general powers of administration is currently with the minister. That report makes recommendations for both the Tax Office and makes recommendations for legislative change because it includes recommendations for legislative change. It has to be I don't get to release that publicly. It has to be released by the minister, but I've provided the report to the Minister for his consideration and he may or may not choose to respond to the recommendation at the time he releases it, but there is a statutory obligation to release it within a particular time frame. I think it's 25 House of Representatives sitting day. So that should be out before the end of October. Similarly, the remedial power report is largely written and if not currently with the Tax Office soon to be with the tax Office. So again, I would say that that should be released to the public sometime before the end of October. And importantly for me, because I see both of these reports as dealing with to some extent a similar problem. I wanted to do these two reviews together, but I was persuaded that we should separate them. So anyway, they'll both be in the market largely around similar times. The objective report. We're still working through a raft of information that the Tax Office has given back to us. The phase one process was to put out the will. This is the data, and then phase two is then to go and interrogate for some of the concerns that people were raising, whether it's around the data. So that's probably not going to come out. I haven't seen a draft of that report. I don't believe that will be out this year, but in the meantime, we've released other reports and we're doing other self-initiated or unemotional reviews. So we recently released a report on the ATO's administration of the Small Business Litigation Funding program, which the funding from the Tax Office came to an end on the 30th of June this year. But I believe the Tax Office's intention is that it will just roll into test case funding. We've made a number of recommendations in that report, even though it wasn't a review. We did it on the back of having done two very detailed dispute investigations where we engaged a cost assessor who's, you know, clearly experienced in the ways of the Federal Court to come to look at what the process was for those funding arrangements. And based on their report back to us, we've then made, if you like, recommendations on on what we would like to see as improvements to the funding arrangement, because fundamentally people were not clear upfront on what costs would or would not be compensated. And if you're about to go into litigation, I think you need to be very clear on is how much of these costs are you funding yourself and how much is being funded. Because the Tax Office has chosen to brief somebody externally. And then we've got a number of other own motion investigations that we're either currently scoping or will we'll get off the ground soon. One concerns the way in which the ATO administer a debt release on grounds of serious hardship, and that was a follow on from an earlier review that we did in relation to collectible but undisputed debts. And then we've got another review, a self, an own motion review where we're looking at the concept of an approved four. Now you might say, well, that's a pretty specific thing to be looking at, but it has big implications on whether or not the commissioner has a discretion to give you more time to lodge an approved form. So we're kind of we think it's important to take a deep dive on that.

Robyn Jacobson

There's always a lot that you're managing, but with all of that going on, what's ahead in the next 6 to 12 months? Say what's on your radar and how do you see your role evolving even further to bring fairness to the system?

Karen Payne

So there's a lot on my radar. There's a lot of things I'd like to be doing. I have to manage resources and do, you know, do the things that we can do. And for that reason, I have to prioritize. So the one thing I would say is we keep a register of potential review investigations on our website. I wouldn't mind if people took a look at that and maybe feedback through the Tax Institute. You know what are your top three issues? If you have a look at that list, or maybe there's something that is on your top three that's not on the list that you want to feedback to us. And that way that helps us to prioritize what we should be looking at in terms of the dispute investigations. The key thing we're looking to do in the next 6 to 12 months is to implement a new case management system. That system, I think, will be game changing for us because it's going to have a protected portal that allows a complainant to see where our investigation on their complaint is at. And that way they'll feel like there's more control from their end in terms of understanding, you know, is it the ATO that's delaying the in the conclusion of their investigation? Is it the fact that we requested information from the Tax Office and we haven't got it, or is it in fact the complainants delay because we've asked them to give us something to, to progress their investigation and we're waiting on that so we can progress it. I think that aspect of our complaint Investigation service will help us a lot in terms of helping the community understand where their investigation is at. And take a if I'm frank, take a lot of the frustration run out of the process because sometimes it does feel like a bit of a black box. And I totally get that.

Robyn Jacobson

Considered also improving the relationship or communication because essentially what you're describing here with that system upgrade is improve transparency and visibility. So instead of something being submitted through a website or ad, that's generally how complainants will do so. But they might also make a phone call that might save some of those unnecessary calls, which the more occasions your staff are dealing with phone calls to say, where is this at, the less time they have to spend on actually investigating the particular issue. But certainly having that transparency will be a really good thing to taxpayers.

Karen Payne

Yeah, So I agree. I think it's all about improving the transparency of our investigation, but improving the accountability within our investigation by for those that could objectives.

Robyn Jacobson

And I assume there'll be some communications about that next year when all that rolls out and improved experience for the complainants. 

Karen Payne

We hope so. Absolutely. 

Robyn Jacobson

Karen, thank you so much for your time. It's been great chatting with you. 

Karen Payne

Cheers. 

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Karen Payne, Inspector General of Taxation and Taxation Ombudsman, to keep up to date with Tax five. Be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of the Tax Institute. Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.ocm.au.  We look forward to joining us next time. 

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate of The Tax Institute and your host of today's podcast. I'll be chatting with some of the tax profession's great thought leaders who will take valuable and practical insights you may not hear every day. We hope you enjoyed this episode of TaxVibe.  

I'm joined by Emma Rosenzweig, Deputy Commissioner Superannuation and employer obligations at the Australian Taxation Office. Emma is responsible for ensuring a complex ecosystem of employers, workers and retirees and ensuring that superannuation funds operate efficiently. Support willing participant nation and safeguards entitlements has worked for the ATO for 24 years in a range of roles across nearly all areas of the organisation. Emma holds a Bachelor of Laws, a Bachelor of Commerce and a masters of tax. Emma, you last spoke with us just over a year ago now. So welcome back to TaxVibe. 

Emma Rosenzweig

Thank you, Robyn. Thanks for having me. 

Robyn Jacobson 

Look, it's really good to check in with you on a regular basis to see what's happening in your ecosystem. And it's a big one when you're looking at the employer obligations as well as the entire superannuation system, both large funds and small. So there's always a lot we can talk about. But as usual, that's a good place to start with the superannuation guarantee regime. Now a few things are going on here, but let's just set the scene. We've had 31 years now of the regime and yet it continues to be a challenge both in the area of law, the way that it is interpreted, the way that it's applied and of course dealing with it in practice by both employers and employees. But there is still a really significant gap and that is basically the difference between what you should be receiving by way of employer contributions through the superannuation system and what is being paid. So what's the extent of the gap and what's the ATO doing about it? 

Emma Rosenzweig

That's right, Robyn. So people would be familiar. We measured tax gaps across a range of the texts that we administer and so the super guarantee gap does the same thing as you describes. Our last measurement of the gap puts it at 4.9% or $3.4 billion, and that is the net gap. So after our intervention, that compliance intervention, so, you know, that is still a very big number. A small percentage in a very big system still relates to a very big number of gap. It does mean that a large number of employers are doing the right thing, though, and I think it's important not to lose sight of that. It's easy to talk about the problems, but that that really does say that 95% of the contributions that should be going into the system are going in, which is actually really, really good. So we should recognize that most employers are doing the right thing there. But it is important that we tackle those employers that are not doing the right thing. And I guess for the ATO Super Guarantee is one of those things where we do probably have a tolerance for people who are not compliant because that is entitled minutes that we collect on behalf of employees. So some of the things we take it very seriously. We obviously action any of the complaints that we get from employees about unpaid super. I've got the figures for the 21/22 year. We got 19 and a half thousand complaints from employees in that year and actioned all of those complaints. We also initiate our own cases based off data that we have, and we also get voluntary disclosures from employers who do undertake things like payroll audit or they have an employee come to them directly and they realize that they've made a mistake. And so we do have employers come to us voluntarily to lodge super guarantee charge statements. So we do try to be very active in this space. But I really predominant approach is to try to help employers get it right this time. So we also try to do a lot of communications and messaging. We've got some videos out at the moment having conversations like these. We do a lot of speaking engagements, conferences or direct to employers where we try to help them make sure they understand their obligations and get it right, because that's really the best way for this to work that they get it right the first time and super goes into funds for those workers 

Robyn Jacobson 

Like so many other parts of the tax system. The ATO relies heavily on data in regular data, not just through single touch payroll, which has been in place for a few years now, depending on whether employees transitioned in early or later on. But of course, you've now got the data coming in from super funds, so there's quite a bit of matching going on. To what extent is this vital to the work that the ATO does? 

Emma Rosenzweig

So data is a growing increasingly important part of the work that we do, and we are making some big investments in the way we can bring that data together. We were provided with some additional funding by government in budget to do that as well and to enhance our ability to be much more proactive where employers have made a mistake. So we've been talking for a while to both employers and super funds about the importance of quality of data and the importance of so the data that they were reporting to us is right because we are increasingly bringing those to big datasets to talk to that together to try to identify where an employer has not met their obligations. And one of the things that we are looking to do is for April next year or the end of the first quarter next year, we'll actually be starting to nudge employers who have not met their obligations to that quota. Or five forces will be starting to prompt them and actually write at them, indicate that we're aware. We've identified that there might be a problem. We will obviously make sure those employees get a chance to correct Doctor, if that's incorrect. You know, sometimes that happens, but we will be much more proactive. So at the moment, you know, compliance activities are predominantly driven by employee compliance. And we still take that very seriously. But we really want to get to a position where we are proactively identifying those underpayments much earlier, and we're not reliant on an employee. We don't put employees in a position where they feel that they have to come and complain to us. So data, as you can tell from that, will be increasingly important. And I know you want to ask me about payday Safer in a bit, but if you think about as we work towards payday Safer on 1st July 2026, it's really important that employers start to have those expectations that we will be more proactive and that we will be identifying problems earlier and that we will be acting on it and expecting them to act on it, which we also hope will help employers get back on track. So I think super can be one of those problems where if people get behind, they can bury their head in the sand a little bit and then the problem grows and grows and sometimes gets to a point where they actually can't deal with it. It gets to be a very big liability that they have to be paying off. So we also hope that by acting earlier, we will actually be able to put employees in a position where they can respond faster, hopefully get back on track quicker. 

Robyn Jacobson 

You’re right Emma, I will be asking you about payday super very shortly, but before we get onto that, it's probably worth reminding our listeners that the rates are continuing to increase at the moment and when I say at the moment, there was some rate increases put through some years ago that go right through until 1st July 2025. So at the moment we're on 11% for this year. Is the SG rate or the charge percentage and it will move to 11 and a half and then finally to 12% of years' time. With all the pressures on businesses at the moment, in fact, more broadly across the entire community with cost of living and rate rises and so on, are you findin that I guess there are two issues in here. One is about the change in the rate and making sure employers are on top of that information so they know when they go into a new income year, they are actually applying the correct rate. And there's the secondary issue that as that rate increases, depending on whether the employee is on a package, which means as the rate goes up, take home pay comes down, or whether it's more a wage plus super, in which case the employer pays that and that becomes very much a financial impost that's increasing on the employer.

Emma Rosenzweig

That's right, Robyn. I think you've described the scenario. We do a lot to try to remind employers about those rate increases at the right time. We don't see that as a big problem, that employers are getting that wrong. So that's great. Obviously, the message is getting out there. I think also many payroll systems actually have it built in and have those automatic updates built in, which also makes it really easy. That is probably one thing that with checking, sometimes employers have overridden those automatic updates or they might have an agreement in place that they've put a different amount in. So it is always worth checking at the beginning of the year that your system has actually updated and has gone to the new amounts. So we don't see it as a really big problem that employers aren't on top of those increased rates. But yes, all those challenges you just noted that that working out the total remuneration package amounts or whether this is in amount on top is something that employers just need to keep on top of. 

Robyn Jacobson 

Let's turn now to the rising debt. So you've referred a couple of times to employers who sometimes don't pay it and then it becomes a growing problem and sometimes it all becomes too much and they just turn away from the problem but that doesn't make it go away. And I do remember the ATO saying at a conference years ago that, you know, don't ignore us because we don't go away. We're still here. And that debt doesn't disappear and it's not going to magically evaporate just because you don't want to deal with it as an employer. So when you talk us through these, the level of debt now a concern, what is the ATO doing about this? How closely do you work with the Chaudhri and his team at Lodge and Pay? And just on that point, we have separately recorded a podcast with Vivek and we will be releasing that in the next little while. And what sort of action are you taking in respecting employers who don't do the right thing? So it's quite a bit to unpack there.

Emma Rosenzweig

Look there sure is, And look, I was going to say, many of you or many of your listeners might have been at the tech summit and heard Vivek speak personally about the reset approach to our collection activities, which is really critical and super guarantee is a priority for them. As part of that. So if I just paint a bit of a picture, the debts to super guarantee, which is the amounts that we have identified, people go and actually crystallized as a liability, has grown from just under $1,000,000,000 before the pandemic to around $2 billion today. So really increased significantly in a fairly short space of time. The other challenging part of that picture, to paint is that about 87% of that unpaid super guarantee debt is owed by small businesses. And as I said earlier, super is an amount that really is an entitlement to your employees. And these are the people who are working in your business, helping your business grow or thrive or survive perhaps. And so amounts that you're not paying are really directly impacting their futures. So we do take that pretty seriously. And as you can see from that growth, it is something that we are concerned about. I'm sure that we'll talk to you in the other podcast with him about some of the actions he's taking. But certainly we give people plenty of opportunity to engage with us. The best outcome is that they can be in a position to pay those amounts and get on top of their top of their liabilities. But if people can't and if people or people won't engage with those debts, there are steps that we can take. So we have direct penalty notices that we can issue. We can issue directions to pay any fee. And if you Don't comply with the direction to pay. It is a criminal offense. We also wind up businesses and can prosecute people. And another power that we have that we haven't used very much yet. We were given this just before the pandemic. And so it is something that we're thinking about, how we use that we actually now have the power which is an exception to our secrecy provisions, that if you have not met your super obligations, we can actually inform all of the employees that you have of that, not just employees who have complained to us about unpaid super. So obviously that is almost putting people on notice about your behaviour as an employer, because often employees don't pay attention to this, so they might not realize. So that is another power that we have to make sure that the people who are affected by this understand that. So, you know, I think, as I said, those are all almost last resort things we'd like to do. We'd really much prefer to be in a position where we can work with the business and get them back on track, paying their obligations. 

Robyn Jacobson 

I’d like to ask you about the winding up, and I know over many years we've been conversations around, well, if the ATO proceeds with winding up, then doesn't that eliminate the ability to recover anything? Whereas if the business continues to operate, at least there's a chance of recovering something. How do you respond to that? And also, where does the issue sit as a priority in terms of that is do you see liability in a winding up of the company? 

Emma Rosenzweig

So I might start saying I'm not insolvency expert, so Super guarantee does have priority in a winding up. And as I've said a couple of times now, that is because it is an entitlement that goes to the workers. So that's important to realize. And look, getting that balance right between is a business in a position to be able to trade out of the difficulties or not. It is a real judgment call that our staff have to make And it is a hard one tonight. I would say if you're a business who is having that conversation with us, the more engaged you can be in that and helping us understand why, on what basis you think you can actually try it out of that, the better informed stuff to then make a judgment about whether I agree with you not. I think people also need to think about not only do you have to be in a position to recover the liabilities that you currently have, but you have to do that on top of then meeting your ongoing obligations as they do. So there's no point cutting up past liabilities if you're actually just digging a bigger hole next door with new ones. So all of those things are relevant. I think in the case of business with employees who are not meeting the super obligations we have, and I certainly have a lower tolerance for businesses who may be just digging a bigger and bigger hole and getting themselves into more and more trouble. And so that judgment call about the reality of cannabis and actually try tried out of this problem is probably one we have a lower tolerance for when there is belt simply because you know I've said I'm like a broken record today but it is the employee's money. And in a sense we have to really think about how long we let that business go on becoming more and more indebted to their workers before we take any action. So, look, I think getting that balance right, it's not a science, it's a bit of an art, but the more informed out stuff be, the better position you can put them in to understand your thoughts on it.On why you think you can trade out the better decision making might

Robyn Jacobson

We think about superannuation. I am not suggesting that it is any more or less or greater importance than paying salaries and wages. But if I don't pay you a dollar today as an employer, you're missing out on that dollar. Let's assume that some after tax that when we're talking superannuation, a dollar today that's not sitting in the superannuation fund and isn't invested for what could be 40 years, we're talking an enormous compounding benefit that's not available to the employee either.

Emma Rosenzweig

That's exactly right, Robin. So and I think one of the challenges with Super is that often employees, particularly young employees, might be in this job. It's not something that they're necessarily thinking about and it's not as easily identified to them if it's not being paid. So if you're not getting salary wages and you can't go out on Saturday night, you might have been paid. That's really obvious. If you haven't been paid to super, it's not something that particularly young people are really checking. So I think some businesses think it's easy to get away with it because it's one of the last things that people might identify that they haven't paid and I guess this goes back to the point we were talking about, about our use of data. We really want to be in a position where we put all the data that we've got in the system to work really hard so that we can identify when that happens. And those young people go out on Saturday night and know that we we are looking after it for them. 

Robyn Jacobson

There's also the power imbalance that when you've got a young employee, they might find it incredibly challenging. And I get why to take on their employer and challenge them on the fact that maybe super's not being paid for fear of losing their job or for it to have an effect on the way that responsibilities are allocated to them in the workplace or their relationships with their colleagues or their employer. So it becomes really difficult from a workplace perspective too.

Emma Rosenzweig

That is true. That is that is very true. It is interesting. We are saying, you know, we're in a tight labour market at the moment and we're actually seeing an increase in employee notifications coming to us. So that's where employees come and complain about unpaid super. And we are seeing more and more employees complain while they're still employed then previously used to be much more common for people to wait till they had left a workplace to complain. You know, I've not done any scientific analysis to prove that that is related to the tight labour market, but it is a really interesting thing to observe that some people seem to they might also be students, that there's a lot more conversation about super at the moment. And so that encourages people to pay a bit more attention. But we are seeing a lot more people come forward and complain at the moment.

Robyn Jacobson 

And if nothing else, it shows there's an awareness of that mechanism to be able to notify the ATO. So that's good. 

Emma Rosenzweig

Yes, that's right. 

Robyn Jacobson

Okay, Payday Super. Let's chat about this. So it's an announcement that was made in this year's federal budget. It is due to commence 1st July 2026, which sounds like a long time away. But having already been involved on behalf of the Tax Institute at some of the target of consultation, that's taken place, I've got an insight as to just how much work is involved, and we're going to need every minute between now and then to be able to design the framework, get the policy implemented.  And of course that needs to pass through Parliament. And then of course the ATO needs to turn its mind to the rolling out of this in the awareness campaign and so on. So broadly, can you tell us what Payday Super is all about, What's going to change and for both employers and employees and so many other stakeholders in this, for those two cohorts, what does it mean for them?

Emma Rosenzweig

That's right, Robyn. It's it's quite an exciting reform that the Government has announced. So I'll probably need to qualify this by saying it is in announcements and it's not law yet and there is still work to do to come back to budget in next year to consider the actual detail of the policy. But the announcement was that employers will be expected to pay their super at the same time they pay salaries and wages. And I guess we've been on this journey for a while with the introduction of single touch payroll. We started reporting at event. So rather than once a year getting that reporting from employers that we actually get event based reporting through single touch payroll, this takes the next step to say actually we need event based payments as well of superannuation. So that's that's the basics. So employers just pay more frequently or some employers pay more frequently than they are now because we know there's already a large number of employers paying more often than the quarterly minimum obligation at the moment. As you said, though, there's lots of parts of the system now that need to actually operate to make this work. So employers are reliant on the software providers to report to us, but also to automate these payments. So we know that digital service providers are going to need to update their systems to do this. There are clearinghouses that offer services to employers. They're going to have to be able to accept these super funds who report regularly to us on contributions. And so they're going to have to make changes to allow for this. And one of the other potentially slightly overlooked, except perhaps by super nerds, elements of the government's announcement was the fact that they will be made to be changes to the super guarantee charge regime as part of this in order to really could temporize those rules about what happens if an employer doesn't meet their obligations. So that is a huge job, but also a really great opportunity to be able to tackle some of the issues that we know employers struggle with at the moment. We know some of the rules are very inflexible and it's partly because they were designed a very long time ago. So very different operating environment than we're in now with prior to choice, prior to a quarterly regime, even never mind a pay day regime. And so it's a really good opportunity to think about what what is the right mechanism to have where employers do not meet their obligations and how do we have the right consequences in place to tackle those problems. So really exciting opportunity and I'm really looking forward to it. I know that we've got a very diverse group of stakeholders in the community as well who will really work with us to help get this right.

Robyn Jacobson

I see it as a golden opportunity to modernize these rules and they were, of course, the back in the early nineties. So history we've had since 1992. Back in those days, we didn't have quarterly payments. That only started in 2003. We had payments made by check. We certainly didn't have a hefty we didn't have the clearing houses, we didn't have stapled super, we didn't have choice of super as you say. And we've ended up all these years later, over 30 years with a system that you describe it as inflexible. I'm going to go a step further and call it draconian because when you've got employers who are treated exactly the same way, regardless of whether they never pay the super for their staff or they pay at one day late, that happened not to tell the ratio through a formal history statement and paying the charge. And that's where it's unfair because it shouldn't be the same penalty regardless of the level of culpability. Also, the fact that the nominal interest continues ticking on whether or not you've paid the amount when that was actually designed to reimburse the fund for the lost earnings, for the contribution having not been made up when it was supposed to. So if you paid the contribution a month late, but you still do till the 80, So that interest keeps ticking and in my view it becomes effectively a double penalty because we've already got the part seven penalty for not notifying the ATO when at a policy level you've also got this interest that keeps on ticking. So that's nothing the ATO is able to exercise discretion on. There is no flexibility for the commissioner as we well know. So that's why I call it a golden opportunity because I think this is a chance to bring these rules into a modern environment, into the 21st century, where we can acknowledge the digital tools we've now gotten, the technologies we're not paying by check, but as you say, to have a quarterly charge when you're going to be potentially paying on a weekly or a fortnightly payroll basis just doesn't work.  And that's why it does need to be altered and refined and made much more flexible to cope with a flexible payroll cycle. 

Emma Rosenzweig

That's right. And look, we've done what we can in terms of we do have party remit the pot seven penalty. And so I think we've worked with a bunch of people a little while ago to put out a press statement about how we would apply those. And that seems to be working very effectively. And the goal of that is to really think about applying or remitting those penalties in line with the behavior of the employer, whether they're someone who regularly doesn't pay, whether that's someone who one off has made a mistake, we hope. And I think the way our penalties are applying now does genuinely reflect that behavior much better. But I think this is an opportunity really to take all of that feedback about the current consequence rules, the current charge regime, and think about what's the right model to have in an environment of pay discipline, a digital environment and really contemporary it. So I agree, Robyn. I think it's a golden opportunity. I don't want to preempt what that outcome might be, but I think reflecting that the goal of this is to get money into the fund for employees in a timely way. It is really important and I think it is a real opportunity to ensure that employees are getting the right amount of money to ensure that business is can manage their cash flow appropriately, reflecting the fact that those amounts are really entitlements. So they work as is really a great opportunity. 

Robyn Jacobson

We shouldn't overlook either the cash flow impact. So it's one thing to change systems and upgrade software systems and technologies and processes, but this will have a real impact for those who are currently paying super on a quarterly basis. The idea is if you're paying smaller amounts more frequently, then you more able to keep on top of those obligations rather than it building up and even potentially falling behind. 

Emma Rosenzweig

That's exactly right. You know, the thing is, I gave you before so that 87% of the current debt is held by small businesses and in some cases they are businesses. Very few cases. Their business is willfully not paying. In most of the cases that we see, they are businesses who have struggled to manage their cash flow in a way that lets them meet those obligations. And so I think that's right. There will be a real impact that hopefully we can get on top of the issues earlier and in the small moments.

Robyn Jacobson

Moving to another issue that never goes away and that sort of employee base as contractor from the perspective of looking at how the tax rules deal with this, there's currently a draft ruling 2022 D3, and there is also advice under development with the ATO at the moment and that can be found on the ATO website. This continues to remain a challenge. So do you have any remarks about where we're at with this particular debate? And of course we've had the recent High Court cases and I'm sure there'll be more cases in the pipeline.

Emma Rosenzweig

 It has been surprisingly active lately. This issue, you know, it goes for a bit of a lull and then we have had a number of cases. So as you said, we have put out a new draft ruling at 2022 slash 33, which was drafted after those two big high Court cases in gem sick and personnel contracting. It also has we have also put out a practical compliance guideline with it which talks about where we're putting our flags on the dates in terms of employers making decisions about how they treat their workers and where they can expect us to apply our resources to looking at those issues. And I'm really grateful for all people who provided a step back and comments on that. So far they seem to be taking an approach that seems to be practical and realistic for people to be able to comply in a way that might give them a bit more certainty. They asked to draft. We have had a bit of feedback on them, but we also had a recent Federal Court case of James versus the commissioner and we want to make sure that we reflect the considerations in that case in those two cases. So if there are more cases in the pipeline that then it will become at what point do we finalise these and have to update the cases? We're not aware of any other cases at this point, although we have sought as special leave to appeal in the JMC case on one particular element of it. So we are just waiting to hear about whether we'll be granted that special night before we finalize those. There has been a bit of a that has taken a bit longer to finalize them than we initially thought, but we do want to make sure that they genuinely reflect the current state of affairs in this issue. But but it is an interesting and complex issue. We know for a lot of businesses to work through. So we really do highlight that our approach in that case gives some clear guidance about the steps a business can take if they want to have confidence about how they will look at the decisions they've made.

Robyn Jacobson

Neither of us are particularly Fair Work experts that I just also want to mention to our listeners that there is a bill before Parliament that is dealing with proposed changes to the Fair Work Act, and for that reference, it's the Fair Work Legislation Amendments, Closing Loopholes Bill of 2023 and might be good to look to bill once it goes through Parliament, may be early next year and have a chat about what that means from an employer and a superannuation perspective.

Emma Rosenzweig

Yes. So that that Bill does not make any changes to superannuation or tax legislation. And so we're obviously interested observers in how that progresses. It's been referred to a committee who are due to report early next year, but at the moment that Bill does not make any amendments to any of the tax laws. So we don't say it directly affecting the way we administer any of that current legislation.

Robyn Jacobson

Thank you. So to another of your huge portfolio, Fringe benefits tax. Now, we're not in FBT season at the moment, as we all know, but you are still finding that there's a bit of a knowledge gap, and particularly with this tight labour market that you have referred to already, you're saying particular types of behaviours that concern the ATO because there could be some employers not aware that they're offering taxable fringe benefits and therefore could be overlooking their obligations here.

Emma Rosenzweig

That's right. So I would say maybe it's not FBT return season, but perhaps all year is FBT big. And if you are offering some of these benefits. So, you know, I have to put a plug into good recordkeeping here and make sure that even though it might not be tax return time, it is important to think about the records you might want to keep. But that's right. We are seeing more and more employers think about how they can retain staff or check staff. And part of that might be to offer them non-salary benefits. And that might mean some employees who've never been part of the system before are now suddenly brought into it or aren't aware that actually they should be paying if they pay on these benefits. So really want to encourage people know your business listening to this and you are providing non-cash benefits, whether you're giving people tickets to the footy or to the theatre, or you're providing a car or all sorts of things, if, if it's a benefit you'll give in to your employees. Have a think about whether they could apply. And if you're a practitioner, perhaps it's great to ask some of those questions to, to some of your businesses as well about whether they've taken on any paper or offered any new package arrangements to people because it is a real challenge to make sure people are aware that they've got these obligations.

Robyn Jacobson

You provide some specific examples of the sorts of benefits you're seeing out there that perhaps are more common or perhaps being offered by an employer for the first time? 

Emma Rosenzweig

Well, look, I think one of the things that we might have seen a little bit of media on recently, because we've been trying to bust some myths about the fact that providing a car, particularly a use this seems to be a myth that if you buy a you can provide it to your employees that it's not subject to if they take a there's no magic in it being a ute. And so I think it's really important to people to know that it will be subject to FBT unless there's really minor and incidental private use of that vehicle. So that's one of the things we say, you know, people providing a car, that car can be taken home in the weekend and you drive kids to soccer games and you might go camping with it. Particularly Ute’s really good set camping that is not incidental personal use and does make that subject to fringe benefits tax. So I think thinking about the use of work cars is really important. There are record keeping requirements people need to meet to to show the use of the car. And we do look at those. If we if we come and look at you and ask you questions about your as they say, the cars would probably be one of the biggest benefits, Robyn, that we say people, people get wrong, 

Robyn Jacobson

but it could also include tickets to events and I'm thinking of, for example, the Melbourne, the Australian Open is coming up again and we've got Melbourne Cup season coming up and football finals and all that sort of thing. So a lot going on down in Victoria. There could be school fees being reimbursed by the employer that you may have to sacrifice arrangements, not into super, but I'm talking other types of benefits. So there could be a range of things that people do need to turn their minds to.

Emma Rosenzweig

There are a whole range of benefits that people offer. And and I think that's right. There's all sorts of entertainment benefits that we say people are afraid to say meal expenses, reimbursement of living expenses. So all of those things can be subject to, as they say. And so I think if you're providing any of those to your employees, it's worth going and asking the question.

Robyn Jacobson

Might be worth highlighting another one that people can overlook, we've got the changes over the last year relating to the provision of electric vehicles. And if I might, certain conditions they can be exempt from FBT, but it doesn't stop them being reportable as a reportable fringe benefit. So that's something else that employers need to be mindful of and employees because it can affect, of course, their overall reported income.

Emma Rosenzweig

That's right. So it's still important to recordkeeping purposes to make sure that even if they do meet all those requirements to be exempt, so an employee salary packaging an electric vehicle, it may well be exempt from FBT. But you're right, Robyn, that it will still be considered a reportable fringe benefit. And that is important to report through to us. And as you say, it can affect people's entitlements to other benefits, welfare benefits. It can affect if you have a fixed it, it it gets included for calculation of your HEX debt. And the other thing with electric vehicles, I think is important to note, so things like the running costs of the vehicle registration insurance and I understand they don't need anywhere near as much maintenance, but repairs and maintenance costs can also be, if they take free things like the provision of a home charging station is not actually included in that exemption. It is it is not part of the vehicle running cost. And so that's another thing to think about too. If you're actually providing reimbursing for the home charging station, that is likely to be subject to if it's a property fringe benefit or an expense payment fringe benefit.

Robyn Jacobson

Helpful. For the last one, on a technical level, consolidation for income tax purposes does not facilitate consolidation for FBT purposes. They're quite separate pieces of law. 

Emma Rosenzweig

Yeah, look, it is something we do see that some that businesses are trying to lodge a consolidated return and so that makes it really hard for us to data match. It is very likely that if you're trying to lodge a single FHA return for a group of companies, that it will generate some questions from us. And generally people prefer to avoid having us come and knock on the door and ask them questions. So I really encourage that if there is a corporate grade in place, the H employer in the group needs to lodge their own FHA return. 

Robyn Jacobson

So in closing, any tips or where people can go for more assistance or help? 

Emma Rosenzweig

Well, we have plenty of information on our website ato.gov.au. We try to give it in lots of different formats. We have some great videos on Super Guarantee and a lot of information about FHA as well. If people are interested in what we do do in terms of super guarantee compliance, if they search for ato.gov.au/sgsnapshot, you will get straight to some information about the compliance activities we do and we'll be updating that in about October when our annual report goes out. That would be the latest SG gap as well. But obviously then organisations like yours as well, Robyn, and tax agents, BAS agents, payroll advisors are excellent resources for people to ask for assistance in. 

Robyn Jacobson

As always, there's always so much to unpack, so much more we can say that I thank you for your insights and for sharing your various experiences and anecdotes with us.

Emma Rosenzweig

Thank you so much for having me. 

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Emma Rosenfield, Deputy  Commissioner Superannuation and employer obligations at the Australian Taxation Office. To keep up to date with TaxVibe. Be sure to subscribe, rate and review wherever you listen to your podcast. If you'd like to connect with us, you can find us on socials.

Not a member of The Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit, TaxInstitute.com.au, we look forward to you joining us next time.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of Tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the Tax profession's great thought leaders who will say valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Ian Raspin, who is an estate taxation specialist and managing director of BNR Partners, based in Melbourne, which is specialised in the taxation of deceased estates since 2008, provides estate taxation, compliance and technical advice services across Australia exclusively by referrals from legal practices listed on public trustee companies and by direct appointment from the Supreme Court. BNR has one of the only dedicated teams of accountants in the country who specializes in this neat and often complex area of taxation, which frequently involves cross-border estate issues. Ian is highly regarded nationally and internationally on estate taxation matters as a published author, as a frequent presenter at legal and accounting conferences and events across the country. Ian also consults with the professional associations, government agencies and regulators and the private sector on estate taxation issues. Ian is a chartered tax advisor at the Tax Institute, a fellow of both CPA Australia and CAA NZ, a current sitting member of CPA Australia's Tax Centre of Excellence for Registered Practitioner at the Society of Trusts and Estate Practitioners, of which he is the current National Chair and a graduate member of the Australian Institute of Company Directors. Ian, welcome to TaxVibe. Great to have you here.

Ian Raspin

Wonderful to be joining you again, thank you for the invitation.

Robyn Jacobson

So, Ian, you've certainly established yourself as one of the preeminent experts when it comes to the taxation of estates and related matters. And we can draw back on a very famous quote from 1789. I don't think anyone who works in the tax profession, who hasn't had this one and many outside the profession, from Benjamin Franklin, and he said, ‘Our new constitution is now established. It has an appearance that promises permancy. That in this world nothing can be said to be certain except death and taxes. And you've very successfully combined the two.

Ian Raspin

Growth industry at that too, Robyn. Great, great quote.

Robyn Jacobson

So what makes this area of law so complex?

Ian Raspin

Great question. And really, I think we need to sit back and look at it and say, well, as tax practioners we are working with federal tax law, so, you know, Income Tax Assessment Act, but a state law is a jurisdictional base thing. So every state in Australia has their own jurisdiction or staff succession law as well as the trustee act. So it's an interplay between tax law, the Income Tax Assessment Act and those particular areas. You overlay that and say, well, the income Tax Assessment Act has particular provisions in the way that deceased estates are actually treated and estate actually falls into Division six of the act. So it's treated like a trust, but by default that creates a whole heap of technical nuances when it comes to deceased estates. So it's a combination of those sort of areas. We also need to be, I guess, judicial changes in our interpretation of law. The location of the beneficiaries and the LPR also changes the domicile and treatment of assets and tax purposes out of that and believe it or not, the circumstance of the deceased are their wealth, what structures they've got that wealth in their migration patterns. Where were they when they died? How does that interplay in relation to this area of tax as well? And I think overlaying all of that, you've sort of got to go well, complex area that's probably not appreciated by many practitioners, but at the end of the day, that is there is ITII guidance out there. Some of that guidance is dated and some areas and it's sort of lacking in relation to that. And look, I think in that sort of area that things are progressing very quickly, whether it's generational wealth transfers and growth and in death rates in Australia. So it's an area that needs quite a bit more focus I think.

Robyn Jacobson

And the expertise of practitioners, how specialised or otherwise do they need to be to work in this space?

Ian Raspin

Look, I think a lot of it starts with the Manila estate where with things are black and white and it's pretty straightforward. You know, mum and dad were guys a hassle? I'd be a bit of money in the bank on the share portfolio and that's that's about it. And prima facie, again, it's a pretty simple estate, but embedded into that, there's a lot of potential through tax nuances and traps that come along with it. And what can seem to be very simplistic can soon become quite a complex estate and given numbers. United Small Estate. The risks probably pretty small. If it's an estate, tens or hundreds of millions of dollars, all of a sudden the risks exposures and those levels are quite high. And one of the nuances I guess with deceased estates is that the LPA, the executor, administrator or whatever title might be given in that particular case is personally liable for tax. And, you know, they finalized the estate administration, their liability remains. It's not on to the beneficiaries. And so if something goes wrong, that means that those people will be turning around to their technical advisors as to what's actually go on here. So I think an awareness of these areas are really good. Know what you do know and what you don't know? And to reach out when you get into some of these technical nuances and every day I'll reread the legislation around provisions I know just to make sure that things navigate their way through the way I think they should on a particular matter.

Robyn Jacobson

And to give us a sense of the scale of the number of estates you cover each year, what are we talking about?

Ian Raspin

On average, we'd be doing with about 5000 estate tax matters a year across Australia, which sounds like a very large number. But when you sort of break that down and you say in Australia last year there was just over 190,000 deaths in Australia that's an average of 521 deaths per day. You know, so many dealing with a fraction of the market. But I think if you start looking at that too and you go, well, a lot of those estates are just going to be really simple estates, age, pension, not much else. That's a nice easy estate to just off. So that deals with the majority. But there are the others and that's where the Frankenstein monsters are, is for the Paid Representative Tax Institute. Just a couple of weeks ago.

Robyn Jacobson

As I go into this next question to you, I just want to set the scene, because sometimes terminology can be a bit confusing and there is a whole different language when it comes to estates. So, for example, we talk about someone who dies intestate. And I want to make it clear, I didn't say interstate, it's interstate. You might be interstate when you die intestate, but it's about someone who doesn't have a valid will when they die. Now, that itself informs the terminology we use because we've already mentioned the other legal personal representative, which is effectively the trustee of the deceased estate, the trustee of the trust. But it breaks down into further terminology. So if you die with a valid will, you have someone who is called the executor. And in fact, the executrix, if we're talking about the masculine and feminine version of those words, whereas if you die without a valid will, holds an administrator, and again there is a female equivalent of that. So in our space, we often see accountants taking on the role of executor for their clients. And yet you've seen a trend by many legal practitioners who in fact decline copies of invitations from their clients. So what are some of the risks and why do you think the lawyers are perhaps moving away from taking on those roles? But we're seeing accountants still taking that on behalf of their clients.

Ian Raspin

I personally won't take on the roles any longer because I become very much aware of what's involved here. I think to the legal fraternity, you know, remember a while ago there was one year I attended. I regularly speak at law courts across Australia. The three conferences in one year where somebody got up as a presenter and actually lectured a roomful of lawyers, that qualified lawyers that specialized in this space with their master's degrees or specializations, accredited specialists, and telling the audience not to act as executors. The risks in the area are phenomenal and thus look at it and say, well, look, if the legal fraternity at telling people that understand law and are actually qualified just in this space and focus in this space not to act executives, well, why would another professional stand into that place like an accountant? We don't understand that most accountants would not understand or probably haven't read the succession Law Act in their local jurisdiction, let alone understand the terminology. You look at it and you sort of go, Well, am I covered? And this is a really important one for a journalist to be looking at. Am I covered by professional deputy insurance? And when you look at the PR cover for me, accounting firms, you are not covered to act as an executor. So it's a personal responsibility, not a professional responsibility, right? You will be held paid professionals standards in relation to acting in that role. So a number of times I can give examples where I saw practitioner will act as an executor and the impact on their practice from doing so is just phenomenal. You only need a simple family maintenance claim against the estate and you find yourself in court, know, defending the estate and the world against those sort of claims. And so much of your time and energy has gone to that you're not really qualified to do and you're getting legal advice to be able to do that, that you drop the ball around your own practice. And I've certainly seen practitioners suffer significantly from taking that so wrong. I advocate very strongly that probably not to look at it. It's very nice. You know, a client comes in, they'll be the client for years and you go, Well, hey, you know, you act as my executor again. This is a major, major honor, you know. Yes, I'm happy to do that and help tie the family together. But again, you can do that, but you might find yourself in a fight with next generation. Then you end up with no clients. Right.

Robyn Jacobson

So it could be better to keep your arm's length and charge for your professional services as you need to, but not get legally involved in the arrangement.

Ian Raspin

To find someone else. Now, more so where, you know, people will actually say, I'd like you to refer to my accountant X, Y, Z for advice on this matter. Therefore you can go looking to charge those professional fees as an executor. You might be an executor or a commission born into the world, but it doesn't mean you're actually going to get that commission. It's open to challenge by the beneficiaries in judicial interjection. So it's not necessarily a cash cow. Some people think it's going to be.

Robyn Jacobson

So moving on to some broader estate issues I've already discussed with you, we have people who die with and without valid wills, but I often feel there's a perhaps a false comfort that people get by having a will. They think that it kind of deals with everything. And in fact, there are quite a number of assets that you can't deal with through your will. Can you give some examples of those?

Ian Raspin

Oh, absolutely. And really good point. You know, particularly for some practitioners out there that are trying to have those discussions with their clients around estate planning. Superannuation is not part of your estate unless you get a binding death benefit nomination to pay to the estate or the deed is hard wired for it's county estate. That's often an estate planning technique not to have it part of the estate, particularly if there's a second, third or fourth family. Nobody knows about their assets holding companies or individuals, trusts, family, trust. That is, they don't form part of your estate loan accounts to those entities. Well, maybe the assets within a company that owns a whole heap of real property, you know, you won't own the real property. You own the shares of the company, but it doesn't give you the right to actually transfer that real property in the company to a particular beneficiary and of course, jointly held assets. The rules of survivorship can come in here where the asset actually moves across to the surviving spouse. And so it's a matter I think it was sitting down and listing what the assets are, who owns them. So estate planning, working out who's ultimately are they an asset to which a will can actually control?

Robyn Jacobson

It's an interesting one because if you have, say, a couple who are both killed at the same time, so let's assume there's a car accident and they're both killed instantly. The law of survivorship, where you've got one person leaving their estate to the other and vice versa, you've got a tiebreaker needed because how do you work out which model you invoke first? And the law says that the oldest person is taken to die first.

Ian Raspin

Exactly right. So marry somebody older than yourself.

Robyn Jacobson

All right. So to superannuation, we talk about the role of the Biden death benefit nomination. Now, you could either arrange to leave all of your superannuation benefits directly to your estate or of course superannuation being a trust in its own right. You can direct the trustee of the fund to pay those benefits out to nominate a beneficiary. It strikes me that in recent years we've seen increasing litigation, often involving, as you say, the second, third and fourth families that people didn't know about. I'd like to think people did know about the vote anyway. So in terms of that litigation, it's often two generations that you'll have, if you like, the current partner and perhaps the children of the first or former partner. And it can lead to some pretty ugly disputes between families.

Ian Raspin

Are hundred percent. In fact, the Law Council of Australia, you know, started a few years ago that this is the biggest or one of the biggest growth areas in litigation in Australia and that is around the sister states and super is part of that. You know, beneficiaries going after executors or going after each other or going after professional advisers. Litigation is rife in this area, people trying to obtain what they rightfully think is theirs and recipients start looking, well, what's the binding death benefit, you know, executed in accordance to the terms of the will and not the will? The trustee wasn't in the right format, was it actually submitted to the trustee? You know, there might have been completed, but was it ever submitted or acknowledged it lapsed.And so all these sort of things into place through there. So a very, very complicated area in which professional advice is very much needed. But yes, a lot of litigation.

Robyn Jacobson

In terms of administration. When you very briefly outline the concept of probate for those who may not understand it and for those who don't have a will, because probate suddenly where you do have a will is called matters of administration.

Ian Raspin

So it's an application of the court. So the Supreme Court, in the relevant jurisdiction, you make an application and effectively turn up with will. Your Lloyds ends up with where we make an application. And the role of the court, I guess, is to determine whether that's the most current and valid will and therefore the appointment of the executor. And by getting that in the case of a will, by getting your letters or a grant, what actually happens is that's effective your license now to go and deal with banks or the assets or to represent that particular party in the case where there is not a will as you sort of said, that's an intestacy. And so that goes down to the last administration and as a ranking order is who can actually apply for that. But you go on to make an application as administrator and effectively the same sort of thing. It gives you a license once the courts are allowed you onto that or appointed you to act as the administrator to deal with those assets. I think what's really important is to concepts here. One is that once appointed, it's very, very hard to get out of it, to renounce will be removed. So once you're in there, you're always in there. And secondly would come in that you intermingle with some estates that as you actually start to act as an executor, even though you haven't been formally appointed, you may actually be deemed to be the executor, and therefore you may end up in that role, but you don't want to be particular in. So I think it's really important to not intermingle with the estate during those early stages until a grant has actually been provided. Third thing outside of that is just in every state of Australia except for Queensland and these are required Queensland, you don't necessarily need a grant of probate to be able to act for the estate. So again, that sort of goes down to every state is different.

Robyn Jacobson

I want to play back to your remark then about that period in between. We know that when an estate is beyond the stage of probation, it's being administered. It is, if you like, a regular trust. Now there are special tax rules that apply as to how the incomes taxed and so on. But broadly, we're into a tax base where it has to lodge a tax return, it gets its own TFN and you either distribute the income to the beneficiaries or the income's retained on the assets to the trustee at a special tax rate. What about the period between the date of death? So when the estate begins to be administered now that could be a period of months or even years and legally owns the assets in the meantime.

Ian Raspin

Good question. And that'll come down to a state by state jurisdictional basis. But generally you will find that will actually exist within the public trustee around Australia. But there's no no active role where it's this thing just sits and idle. It's all, you know, often a grant is actually provided to then the executor or PR. It's got LPA as the term for executor administrator. It's sort of a joint term. They still retrospectively become responsible for that all the way back to the date of death and need to deal with the tax returns, etc., during that period. So it's not once they've been appointed, once they've been appointed, it's not like you can wipe your hands and say, well, that was at eight months that we don't have to write that. Now, you still have that responsibility retrospectively.

Robyn Jacobson

There's a whole lot of administration, and I particularly at this point, want to go into the TFN for the estate and DE-REGISTER and GST and ideas, but there's certainly a lot of bureaucratic process that needs to happen from that perspective. In terms of notifying the ATO and receiving the administration of the estate, what are the issues that need to be considered here?

Ian Raspin

Well, there's an obligation to actually notify the ATO death form. So simple form, you need to notify the ATO death and nowadays that needs to be submitted to the ATO. Sadly, in hardcopy it needs to be sent with certified copies of will, probate, etc. Along with that, the ATO has a little bit of a problem and it's time that you bring that up because you know, you need to submit this to the ATO to prove that somebody died. That makes sense. They want to know somebody is dead before they actually, you know, provide access to the ATO portal, etc.. Right now this process can take 3 to 4 months with the ATO. Not only that, even though in my office, again we deal with a large volume of these, you know, you send them in, we'll do it by certified mail where be able to track it's the ATO that it's physically been received by the ATO, but then it falls into the void and often we had one matter just this last week we've done three different submissions for the same estate in relation to date of death notifications, because whilst we can prove it's been there, it's just been lost. There's no lying issue here. That's certainly creating a lot of social media attention at the moment too. And that is that you said that you need a certified copy of the will and grant, etc.. Well, lawyers are signing those. You know, you act for a client you've drafted. Well, you've now they've died. You've got these documents, you certify, you send them in either through us or through your accountant or directly and the ATO announcement around and saying, well actually there's a conflict of interest there. You know, you've acted for the client, we can't accept you certifying this document. And so that's creating a backlog on this sort of stuff as well. So once you get through all of that, you can then get access to nowadays in the deceased's pre-death area on a portal access. And obviously as you and I have spoken about previously, that was an issue for a few years. Then we can certainly access that and apply for an estate to and start that process. But until that point, it's an offense for the ATO officer to speak to anybody around a person's tax affairs that they don't have authority for. And it's a sexual offense that carries a two year jail term, but for the ATO officers, so they take this role very, very seriously. So you have to jump that hurdle before you can really start interacting.

Robyn Jacobson

You talked about having to notify the ATO of the death toll signature and not receive information from the Registry of Marriage.

Ian Raspin

Robyn, I think he just playing with my buttons here today. Yes, yes. So there is data sharing and this is one of the areas I think is quite frustrating that certainly does interact with the registry of marriage, births and deaths right around Australia. Again, a state by state or territory based jurisdiction thing, but that just doesn't seem to correlate into this area here. And whilst there has been recommendations by our Inspector General of tax the get away from this area up and through to explore this that certainly hasn't happened. And as far as I'm aware, saying not on any immediate ATO radar list, I'll take that. It's helpful to Robyn and it's a sad indictment because sort of set of a lot of the states are very simple and small and you know, this is surviving spouse that needs access to that money, those kids that need access to the money, maybe 30 or 50 grand. But, you know, by the time you get a grant of probate, you go through, notify the ideal things you might be a year or two later before you can get that out. The process should be a lot simpler for those simpler estates.

Robyn Jacobson

And that has real ramifications for beneficiaries.

Ian Raspin

100%. 100%.

Robyn Jacobson

So the Inspector General of Taxation and the Taxation Ombudsman, Karen Payne, did release a report in July 2020 titled Death and Taxes An Investigation into ATO Systems and Processes for Dealing with Deceased Estates. And that investigative report is on Inspector General's website. What have we learned out of that investigation?

Ian Raspin

Great [ ], investigation by the campaign at her office, the inspector general on that, and to commend the office for the work that went into that. But I think at the end of the day they raised some very pertinent points and the ATO has responded to a number of those points and has acted in parts of some of those points. But I think there's still some serious work there to be done and trying to build that space up and to bring all that together. But I think in the scale of things and to the Commissioner's sort of defense, I mean, the tax revenue, as I understand it from the space is about 4% of tax revenue in Australia that comes from deceased estates. Currently it's growing. And so the focus of the ATO on these areas aren't necessarily as large as it is, but there are holes and chance reports, certainly points some of those out and I think it'd be good to see a little bit more traction from that report.

Robyn Jacobson

We'll keep an eye on that one. Now, in terms of the tax issues, look and you and I could spend the rest of the day talking about this stuff, but let's just perhaps pick on a few of the high points we've got to trust. Let's assume that we are retaining the income while the estate is being administered. We're not distributing assets or income out to the beneficiaries at this point. In a sense, we've got the normal rolls in Division six, in part three of the 1936 Tax Act. That is, the trustees assessed on that share of the trust's taxable income. To the extent that no one is presently entitled to the trust income, there are special rights. And what do we do when it comes to resolutions? Do we still do them when it comes to a deceased estate question?

Ian Raspin

So, yes, look, a couple of things. There are special rights. It's Section 99. So ordinarily, our listeners will be aware of Section 99 rights which apply to a trustee of a trust, and that is tax rights all the way through context to the stage two state section 99 rights apply at the commissioner's discretion. He generally use that discretion if he lodge the returns on that basis, and that will apply for the first three income tax years after death. So if I died on the 1st of May, my first income tax year would only be two months. Okay, so two years and two months. And that effectively Texas's adult marginal tax rates the 18,200 tax free providing it's a resident trusts estate and not a nonresident trust. And thereafter Section 99 rights will apply. But without the 18,200 tax rates are still progressive marginal tax rates. But I go back to my point that it's at the commissioner's discretion and he can invoke 99 rights at any time that he believes the estate administration has been delayed intentionally for tax advantages. I don't want the example. We have every beneficiary in the highest marginal tax rate, so they want to try and take advantage of the longer years. And so I really, really caution against that.

Robyn Jacobson

If you've particularly seen that in practice when 99 has been used instead of 99.

Ian Raspin

Per cent of [ ], and I've seen cases where it really should be invoked and I say in a live case no, because the way we practice and I guess the trustee companies around Australia practice and we consult and work with, we certainly adopt a more considered view on that because you'd be exposed as an executor if she did something like that, the beneficiaries may come after you. I am aware that there are practitioners and practices out there in Australia that are taking advantage of these provisions and they bear the risk. I guess is the best way I can respond to that.

Robyn Jacobson

Question, what about resolutions? Are they still needed?

Ian Raspin

Yeah, look, I think so. As a tax ruling, I tell you, 2622, very outdated ruling. It came out before self-assessment in Australia, certainly. BANFIELD And in an Australian tradition. So it certainly needs to have a right, which I think at the tax conference last year, Robin, the ATO representatives did say there were close to releasing a redrafting my take 2620 to understand it's on backburner now but that sort of talks around stages of administration and divides the estate into three stages. So during that stage where you're trying to work out what's going on, what the assets, how the liabilities, get a grant, etc., all incoming as the trustee, it's a it's a matter of that ruling matter in law. So that's clear middle stage. You're in that stage where if you make an interim distribution that's were beneficiary of income, they would be assessed on their share of trust income. And the final stage, obviously, where you've got to the stage that you've basically administered the estate, you might not have transferred assets, but you can say, well done, everything. Now I've put money aside to pay for tax pull out. Now I've got to do is to transfer assets. At that point, beneficiaries can be presently entitled to income. I'm a big advocate, however, the sort of game I think doing resolutions around present or specific entitlement, particularly specific entitlement are absolutely paramount in this space, particularly for the larger states where you really want to clearly demonstrate what the intention was. And again, it comes down at risk. Then in failure to do that, you know, the trustee will be assessed against that capital gain or that income. And it was a capital gain, for example, or a beneficiary had a capital loss or it was a not for profit beneficiary. And I said, for the not for profit sector are shaking down the market at the moment. They will come after executives and advisors for not doing that. So I think best practice is definitely to look at that and say, no, let's, let's do a resolution, let's get this correct. That's really document and demonstrate what the intention of the LPI our trustee of its testamentary trust is at year end in relation to both those areas.

Robyn Jacobson

Let me respond to the notion that a deceased estate would be regarded as a fixed trust.

Ian Raspin

Or another really good question. So really the fixed trust sort of thing during the estate administration stage? No, they can't really be a fixed trust until the end of the state administration because, one, you don't know whether you're insolvent. You know, a person may look solvent, but they might have a couple of million dollars worth of debt. You know, it's in the background that nobody knows about. There might be ATO history you don't know about and you don't know whether you can distribute. So it's only in the final year of estate administration that you can actually turn around ground and go, Well, is this a state, a trust? And in that final year, certainly you could argue you're that's final stage. You might have beneficiary offshore, for example, entitled to the capital gain from a nontaxable Australian property. You could try and argue that that was a fixed trust at that point. And certainly we've got some rulings with the ATO where that's actually been confirmed. I will 540 which effectively means that if the fixed trust are to which the nonresident beneficiary is in receipt, the trustee wouldn't be taxed on the non taxable Australian property portion of that distribution. But I think it's sort of one of those areas that I would never take for granted. Certainly the trust sector right across Australia, wiseguys for rulings and those sort of areas as well to to make it there. And given the delays in getting proper rulings at the moment of the ATO, you want to make sure it's a sizable amount of money before you started delaying processes.

Robyn Jacobson

Division 7A, another area where of course across the country and across private companies there are some very substantial sized loans. Yeah, even the old quarantine ones, those were made prior to the 4th of December 1997, when Division seven commenced. They are still liabilities that are effectively owed by these individuals. I don't know is regarded as such, but an asset that is receivable by a company by definition means that it is payable by the shareholder or the associate. So when they die you do have to consider the implications of that line. So briefly, can you talk us through what happens when you've got a line that inside back to a private company and it hasn't been repaid? Does the estate then assume that liability?

Ian Raspin

So yes, and this is a really complex little area that sort of dies out. So if you had a the estate does, so the executor effectively stands into the shoes of the deceased and so you become the deceased for all intents and purposes. So that for tax purposes is a separate area, a separate tax entity. So any individual seven guideline agreements that are in place when that person dies, an executor needs to continue to meet the obligations of that division, separate loans through the estate administration, and that is to pay the minimum amount with interest, etc., all the way through back and finally to do that will trigger a Division seven dividend to that extent, which is a little bit of a problem. It's interesting, though, that if a deceased died and let's say there was a loan and it was taken out in that year of death and in that particular case there, they hadn't actually entered into a loan agreement, but the company's tax return lodgment date hadn't come to light as yet. Well, the taxpayer hasn't had the opportunity to enter into a Division seven guideline agreement. The APRA is not obliged to do so. And so whilst yes, it's still an effective line back to the company, it falls outside of the scope of Division seven provisions. And so you've got those sort of areas through there. And if it happened during the loan and the estate was compliant on the way through, you know, the deceased was two. Again, you don't have that issue. But as an executor, if you sort of students the shoes of the deceased and you go on, okay, well, we do have this loan agreement. Are they retrospective years? What was non-compliant? You had that obligation to look backwards and go, well, three years ago, we failed to make this right. We need to go in a minute, depending on your amendment periods, because it's a real issue and we'll see. Often people will draft wills where they sort of, I think, give these lines, you know, either way. And they try to clear things up. And we just got to watch their, I guess, the commercial debt forgiveness rules, etc., and the implications that they could have on it. So a really, really important area to look at up on the other side, Robyn. You know, that's an estate asset and so that's an asset that could be called upon or should be called upon by the estate or the administration. It might be an asset that they pass across the next beneficiary like an upper until they've lost trust as opposed to calling it in and effectively maybe causing the trust to collapse. This is where it starts to get a little bit more nuanced and we need to sort of really sit down and have a look at what's going on.

Robyn Jacobson

With other thoughts. You talked about the commercial debt forgiveness rules if the loan is forgiven, but if it's a Division seven alone and it's forgiving, you could actually just have a straight deemed dividend and depending and on the estimate itself, my other thought was if your loan is big enough so you might have the beneficiaries, the family who think I we're going to be inheriting $5 million from the family member who's passed away. But it turns out that there was a $6 million loan back to the private company. So, in other words, when I say back to us, the money was went to them and that's a liability. So you may actually have an insolvent estate because by the time the loan is discharged, you may not have any net assets left over.

Ian Raspin

Also say whereby the shares in the company are being gifted to one party and the residual beneficiaries who thought they were going to get in. Your example, $6 million end up with a Coke bottle at of time that loans going back where they all went up one person.

Robyn Jacobson

So even if the loan is repaid which effectively depletes the value of the estate if they become the shareholders of that company, then effectively all you've done is convert a receivable in the company into, let's call it cash back. But if it's other shareholders who take over the control of that company, then the benefit of that line being repaid goes off to somebody else, as you say.

Ian Raspin

So it goes back to our early conversation around litigation. Now, this is the massive area of growth of litigation in this area, and that is if you're say you and your brother were in that scenario and it all went to you and your brother began, Well, I actually I should get everything this was never the intent. I've got to go and challenge the will. I've got to take the executor to court. If that executor happens to be one of our members, well, they've got to be in court for the next 12, 18, 24 months, whatever it is trying to argue that as opposed to focusing on their practice, unintended.

Robyn Jacobson

CGT, huge area when it comes to estates. And again, there's so much to unpack that we can't possibly achieve in our short time together that we of course have rules around the date of death being pre or post CGT post 85 we've got when the asset was acquired, how the asset was used. There are special rules for the CGT discount and of course we've got all our main residence issues as well. So and in fact you and I have run sessions together talking about mine residents. So this short time we have. What do you see as the key aspects or the key considerations when it comes to the maintenance.

Ian Raspin

Of things for practitioners to put in their mind? And that is that to the extent that is the main residence of the deceased at date of death, you get a market reset at that particular point. But one of the requirements is that it's not income producing a date of death. And so I had a case just this last week whereby, you know, it was a property mum had that she was living in her property, but the granny flat out the back was rented to a third party. So all of a sudden we have a problem because it wasn't primarily used for her date of death as a principal place of residence. So to that extent we can get that uplift. I think that's really important to look at. But then you've got to step back and go, well, what was the size of the property? We had one and Toorak of all places, and you go into our problems, it's going to influence the exemption size of two hectare exemption. Well, this lady had actually acquired just over two hectares of land and we put an African mansion down a track. And so, you know, point whatever percent of her estate was now subject to capital gains tax when her main residence was sold. And again, the amount of tax in that was quite considerable, let's just say just over six figures just on that small proportion. And again, if you failed to pick that up in an active audit, they didn't match with title officers. They lost more than two hectares executors going to where that and I can't go after the beneficiaries Brown's case 950 whatever it was they'll come after your cover. So it's about sitting back and going, okay, two hectares, is it under that? Yes. Do we get the market uplift? Yes. Were they a resident or non resident when they died? That changes the entire dynamics but one but yet again. And then looking at it and saying, well, proportional rules, you know, days that it was main results versus days it wasn't main residence and the ability to be able to access those provisions as well. Also very important. I think the other thing that I'll be saying there is that and a really interesting one that's often missed is that, you know, you have two years from date of death on which to sell a principal residence without triggering CGT as a concession. It used to be 12 months and often it's two years. They've now come out with a peg which allows you to say, Gee, six, 19, slash five, I think it is, which allows you to extend an additional 18 months on that in the Safe Harbor rules. So looking at those and sort of going well, we saw it as sort of two years. Do we now have another 18 months? Do we make those rules? If we don't, doing it's going to get a private ruling by the commissioner, you know, to protect that the parties that are actually involved, a really important sort of considerations as mine residency rules to step up to market value also attach themselves to any private residential property. So if you had a couple of investment properties that were pretty five that were owned by the deceased, now you get market step up as a daily death as well, but you get two years to sell them without capital gains as well. So you might be as so say three properties in my example without CGT consequences within two years, without a death.

Robyn Jacobson

In the situations where you don't get the market value, uplift in cost base for whatever reason, it could be that within fact got it high CGT property that wasn't solely a main residence, for example. There are going to be enormous challenges in identifying when it was acquired, what the cost base is. And imagine this three chains of muscle chains of estates. So, you know, I'm very good at my record keeping, but I know that plenty of people are not. And so when you got someone who bought it as the home is on the ever used it for their home but let's say they were renting out the granny flat at the end. Suddenly you can't use the market value rule on death. So in fact, we've got to go back and reconstruct the cost base. How do you manage that? What do you do with the records?

Ian Raspin

It's horrific. We had an estate for about three years ago and I think they had about 15 properties in this estate and they were all being try. And so I think we're in the fourth, we just heading into the fourth generation. But these properties have been a series of, you know, fairly quick deaths that had happened through this family. But those properties had all been used for different purposes through the years as main residence for different people and different things. And it's a matter of tracking that back and being able to work it out where it is. And I think a really important note to our members is to say that when you lodge a tax return, not only is the client saying it is true and correct, but so is the taxation. And so if you can't backtrack on that and I've had many a scenario where you can't you can get to the titles office from most jurisdictions and get a detailed research which provides you the cost base of the property, etc., not necessarily the duties that were paid on all the legal costs. Nothing around the swimming pool that was built in the backyard or capital improvements. You put together what you can and sometimes it's a matter of going to the commissioner and saying, look, vulture disclosure, you know, basically we've got everything we can here to pull together on this. But this is what we've got to and I'm a big advocate to say that, you know, adopting a more conservative approach, particularly, is the opposite. Personally liable is probably the better approach. And government commissioner putting a position up to say, well, look, basically this is the best that we can possibly do. Can we get some effectively coverage from this? We've agreed to these terms and therefore, can we pay the tax on the settlor and settle the estate administration without leaving the executor personally? But, Robyn, that that opens a paradox. There are issues, too, because these are historically, you know, lots of senior tax counsel around the country, etc., that do work in this space. You know, they watch these sort of voluntary disclosures to the ATO, and we've been out to settle millions of dollars worth of tax debt across Australia with the ATO on these matters, on many, many estates. And it's a bit of a change of practice in the eighties at the moment where they really push back on such voluntary disclosures around assist states, and I'm not sure whether that's an administrative practice, but somehow states have sought, according to within the aggregate, whether it's a broader issue that that in itself is relying on state administrations as those parties are actually now having to grapple. Well, we can't sign this tax return because it's perjury, but we can't administer the estate because we to be personally liable, that's going to clog up the judicial system in Australia as people go for court directions to be able to take themselves on that or they're going to continue fine with the ITII in trying to release those. So that's an area we're actively engaged in some discussions with the ACA at the moment, but if you can't sign it, it's not correct. You need to open up the door ways to try get that certainty.

Robyn Jacobson

As we say, we've fallen short on what we would like to have as the documentation or the tax position. Can you help us out?

Ian Raspin

Correct. Yeah.

Robyn Jacobson

Look, there is one shining light in all of this doom and gloom that we've been talking about and try to reconstruct records and those tax liabilities, those who pass away, who still owe a hex or helped debt. It's one of I can think of two things that go to the grave with you. Apart from any personal belongings, capital losses and tax losses cannot marry for to the estate or the beneficiary. So they go to the grave with you. Now, that's not a good thing necessarily.

Ian Raspin

It's very, very pertinent observation. As I say, too many tax practitioners where matters are referred to as post their work that send a message that they can't use those losses in the estate. I think.

Robyn Jacobson

They're gone. But so as you [  ] you help liability. So there has been some talk over the years about possible legislative changes which haven't proceeded. So the current law remains the case that when you die out, the liability does not pass to your estate or to any surviving beneficiary of the estate. It goes to the grave of you. It's completely white.

Ian Raspin

Now, it's an interesting topic. In the year of death, the executor still have to pay up to the date of death in a proportional sort of basis because the personal still life and they have it. You're right, the debt's written off. And you also make a good point. There's been many discussion around that's not fair. It's costing the Australian economy so many dollars and significant amount of money. But I think we need to sit back and this is where it always sort of starts to pull back on and to say, well, who are the parties that that debt is? And you know, we all think every day, you know, it's you know, when you turn 80, 90, 100, whatever, by accident or something, you're going to die. So it's an aging population that many has died. I a car accident 30 year old you know suicide 35 year old fire. All these incidents like that, young people die and these people are often just recently married. They leave a spouse, maybe two or three kids, you know, maybe a mortgage, maybe nothing, maybe maybe they were living on the brain, borderline.And there's an extent and there's a little bit of superannuation or a little bit of something coming in. So it's probably not a good example, but a little bit of money there that could help that family significantly. But if it has to go unchecked, it and that's why this thing keeps getting pulled back. But it is still very much a lot of discussion. Your 100% are on.

Robyn Jacobson

A bundle of issues to wrap up with things like control of entities. So we've spoken about how you might own shares in a company, but you don't personally own the assets in the company. So the role of the director, the trustee, the appoint, all those office holders that control entities, this doesn't automatically pass to the APRA, does it?

Ian Raspin

Not at all. And this is again where estate planning, particularly space, is really, really critical. I recommend going to an accredited specialist or a member of Step Society Trust. And so practitioners there, people that just do it's not general practitioners that I guarantee GP the documents need to be provided. You need to have a look at the trustees on the constitutions. How does control really pass? Is it possible to hardwire that in the will do you need to change, you know, the constitution of the company to be able to make this happen. And in a maybe and I've seen this happen to where, you know, the deceased is a sole shareholder and director of a private company that employs people, dies. How do you pay the staff? You know, if there's nobody in control of this thing, like how does this sort of get dealt with? And this sort of issue is live issue. And it's a matter of addressing this as part of estate planning and working out how it goes. Now, an example such as that, arguably, yes, the estate will inherit the shares once you get a grant, a probate three, six months later, you know, ordinarily you could then you have the shares you can vote your self in based on those shares as director. But you got my staff left. They've all gone walkabout. So I think it's really important to look at that. But also situations and we've had situations whereby there's a company in the state is no control there. But at the end of the day, you know, we had one here in Melbourne whereby the family thought this guy would support, you know, those $1.3 million in their bank account. His company, the estate got the shares. That's how we found out about it. But it was like, well, hang on a minute. What does that money come from? They all thought he was doing nothing since drugs, this is people trafficking where they come from and like, holy cow, who wants to be director of this thing? What liability or responsibility you want to take. So they sort of issues are really pertinent to be part of the estate plan.

Robyn Jacobson

What about digital assets, cryptocurrency, social media accounts, other digital assets that have wealth that are sitting in these accounts? To me, the control and being able to access those accounts is a crucial feature and very much an emerging issue because a lot of people are getting into this space.

Ian Raspin

Then very much an emerging issue and. You're right, the control of those things. How do you get that? You know, Facebook, for example, I believe it varies jurisdictions, you know, they block that. They won't pass it on to an executor. Okay. So as far as what sorts of things in there that all of a sudden you can't access, so you're not necessarily dealing with Australian law, you dealing with different jurisdictional law in relation to the grants of access and agreements that people have just ticked as they are into these environments that they haven't read the detail or ever considered. And if there's some real intangible assets within some of these areas, that needs to be considered as part of the estate plan, it's that about access. You know, you sort of turn around and say, well, somebody has got a few Bitcoin, you know, IP worth half a million or ten, 20 mil, who knows? You know, but how do you pass that across? How do the coding to be able to get access to that on the Keys? And you know, there's a law conference just last week, two of them actually speak at regular law conferences and both conferences. There were there was a speaker talking exactly around this and that we're recommending to lawyers, do not hold the keys to these things in your vote. You do not want to take that responsibly only so these sort of things need to be brought to the table. Our members are understand, I hope, how you know, cryptos taxed, etc. but these are real, tangible assets and they can be some real value in a it's a nightmare. That's an entire conversation at a time.

Robyn Jacobson

It is. Look, so is this next point aging population. So challenges in the next, let's say 10 to 20 years. What do you see as the major issues there are?

Ian Raspin

Look, we've just on the cusp of the largest generational wealth transfer to ever occur. 2019. The wealth transfer by succession in that year was just on $107 billion. By 2050, they're going to say it's projected to be $224 billion one year because all of a sudden you've got all this intergenerational wealth transfer going on. We have a people in Australia, a very multicultural society, so we have assets, beneficiaries, executors, all sorts of things in and out of this jurisdiction all over the globe.  And we're one of the most multicultural countries in the world. So that into place. And so to me it's really the issues and the challenges in the next few years is one of the biggest growth areas litigation going on biggest in the generational wealth transfer a recurring the complexities around structures and things that are people have got their overlay with international jurisdictional sort of play on all of these across all of those parties involved in an estate and the assets and tax law that really needs to be looked at. You know, to me, the sister states, because it was kind of it was logical at the time you and I formed part of Division six antitrust provisions, but it doesn't necessarily make sense to be there. You know, we because of that, we fall into things like family trust elections. We fall into nonresident estates. So I could be a resident of Australia.I point somewhere in Singapore as my executor and my state becomes a nonresident estate and that opens up an entire paradigm of new tax issues there. Go to the UK, the residents of the estates determined by the residents to the deceased. So that would stay in Australia. So I think there needs to be an overhaul. I'd like to see special provisions invoked around assisted states in Australia. I'd like to see the domicile put back here, Australia and particularly with a risk to our members around this litigation. It is absolutely horrendous. It's an exciting area, it's a growth area, but there's a lot of a lot of risks and a lot of complexities in there that people need to be aware of.

Robyn Jacobson

And this is within the around 40% of Australian adults having a valid will.

Ian Raspin

And how scary is that, you know, because you love the people around you, but yes, there are rules of intestacy in which who's going to get what? But they need to go and deal with that. If you want things to be uncertain direction, go make a well. It's not hard and I deprecate our clients in our clients, our members, you know, representing taxpayers. So these people are your clients, you know, they're paying you money. One question whether you don't have an obligation to actually try and point them in this direction, you know, go get a will, get professional advice, deal with these matters. Just reverting back to your earlier comment about, you know, what else I see playing out, I think that you'll see a death tax play out again in Australia. I'm not an advocate for it. I think if you look across the OECD world, you know, a lot of countries are actually pulling back from the administration of death duties, you know, gifting provisions in place as well for these sort of things. And administrative costs of running those and all these other jurisdictions often outweigh the benefits of these areas. You know, if you got a 0.5 or 1% move to GST, you might get a similar outcome here in Australia as opposed to the administrative burden of doing the other. But I think politically there will still be a push for this. It does keep raising its head. It's tall poppy syndrome, the haves and have nots, the minority, you know, taxing the upper echelon to to death duties, etc., sort of politically makes sense. It's an election platform or it was an election platform that was lost on a few years ago. I do think we'll see that surface, but it's just demonstrated anecdotally around the globe and I've said countries that do do these things, but it just doesn't work the way it should.

Robyn Jacobson

So and you're going to be speaking at our Death and Taxes conference in Brisbane in early October.

Ian Raspin

That's correct, Robyn. It's a fantastic annual event. I'm really looking forward to that. I'm sitting on a panel up there and I'm really looking forward to the event two day event in Brisbane and highly recommended to our members.

Robyn Jacobson

Terrific look. Thank you. And your insights as always have been so valuable and thank you for your time.

Ian Raspin

Nice to be involved. Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Ian Raspin, managing director at BNR partners. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of The Tax Institute, join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit TaxInstitute.com.au, we look forward to you joining us next time.

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at the Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

I am joined by Tim Loh, Assistant Commissioner and Tax Time spokesperson at the Australian Taxation Office in the Individuals and Intermediaries space. Tim's role is focused on understanding the risks and behaviours that drive noncompliance and designing a strategy to address those concerns with the aim to reduce the tax gap and make it easy for individuals to comply with their tax obligations. Prior to joining the ATO, Tim worked at one of the world's largest mining companies, two large international law firms and a big four accounting fair. Tim holds a Master of Laws, Bachelor of Laws and a Bachelor of Commerce. Tim is a chartered tax advisor and is admitted to practice in Victoria and Tim, this is not your first rodeo with us. So welcome back to TaxVibe.

Tim Loh

Thanks for having me, Robyn. It's really great to be here again.

Robyn Jacobson

Look, it's that time of the year again. You're on your usual media circus. You've been chatting to anyone and everyone who listen about tax time. So we're very pleased to be here today and have a chat about what this means for taxpayers and for the profession. So what are the key messages and why is tax time important?

Tim Loh

Yeah, thanks, Robyn. And I've seen you on the circuit as well, so it's fantastic to see and hear your voice as well. You're incredible role model in the tax industry. So it's great to see you on the look out over the next few months and millions of Australians will be watching their tax returns and my job as the spokesperson for the ATO is to get out there on the TV screens, airwaves and print to help people get their tax returns right the first time. And we know for many interacting with the is a once a year occurrence if you don't live and breathe tax like we do. Robyn Communicating these key messages means taxpayers are aware of any key changes and focus areas and can avoid mistakes when it comes time to lodge.

Robyn Jacobson

Look, we get rather excited about tax all year round, but for these people it is a once a year occurrence. So to try and get together and get all that information and all the documents which we're going to run through, it's something that people do tend to put off. Others will jump in in the early days and lodge so we can chat about that. So how long does tax time typically run for?

Tim Loh

Well, as you know, text time begins on the 1st of July. And for most self preparers, they'll need to lodge their tax return before the 31st of October of this year. Now I have access to later lodgment dates if you are up to date with your lodgment. But those planning on lodging with an agent will need to be on the books of a registered tax professional before the 31st of October. So if you do use an agent, you typically have until May four. It's really important that if you've got all your prior lodgment lodged on time already.

Robyn Jacobson

And just on that point, Tim, it's really important that taxpayers understand they may have a delayed or deferred lodgment date of, say, 15 May if they're lodging for tax agents. But that doesn't mean they should be turning up on the 13th of May and saying to their agent, Well, I'm here, make sure you can lodge within two days. The purpose of a Staggered Lodgment program is so that agents can manage their workload over that entire 1011 month period. So I really encourage people not to leave it until March, April, May, to turn up at their age and say, Well, here I am, that actually try and get to their agent earlier in that period.

Tim Loh

That's right, Robyn. So it's really important that, you know, you've got all your information ready. You really organize it present to the registered tax agent, all that information so they can streamline that. And like you said, don't leave it to the last minute.

Robyn Jacobson

I imagine the tax office does a lot of preparation well in advance of one July. So what are the some of the things that The Age has been doing this year to get ready for tax time?

Tim Loh

Yeah, look, it's a really a year round job for us. As soon as one tax time ends, we're already preparing for the next one. I know a couple of colleagues already who are already preparing for next year's tax on it for 2024. And what we are doing at the ATO is we're obviously constantly trying to work and build and improve our systems through updates and testing. You know, the tax agent community is a really important partner for us when it comes to that testing. And we have a range of new data matching technologies that we're trying to use to help assist with incorrect reporting and making sure that tax agents have access to that so we can actually help reduce the tax gap. Now, leading into tech start, we develop a range of communication and media activities to help educate taxpayers and reach the tax agents, making them aware of any changes. Our focus areas and additional resources we have available to support them and help understand their obligations and eligible deductions. They always are constantly working to improve our online services. We anticipate that during the tax time period, particularly through July into September, of course, centers and service centers will be in high demand and we may see some increase waiting times. We know that most people call about these issues and some of these issues particularly can be managed through our online services. So that's something to keep in mind. If your client can use the online services to view their income statement and check the progress of their tax return, for example. And while tax professionals can use online services for agents, among other things, check your client's progress and return. Set up payment plans if they're in a deposition lodge business activity statements and also report single touch payroll as well.

Robyn Jacobson

Tim, is there a key message that profession should hear as to their role in how they can assist the ATO or making tax time run more smoothly?

Tim Loh

Yeah, so look, from our perspective, it's we've got up to date information. Our systems, it's really important that you check that information out on our system so you can really plan in terms of their workloads with your clients. You know, this year, remember mining tax professionals to make sure their clients preferred financial institution details are included on all returns.And this includes when you lodge multiple returns and for debit assessments as well. So when the information is left off a client's tax return, their financial institution details will be removed from their income tax account, which means any refund or future payments, including interest from early payments, will be issued as a check, which we know is in anyone's preference. Right. We also recommend that tax professional utilize any pre-filled data that is available in the preparation of the tax return at this minimizes their errors and actually save you time as well. Talking to clients to understand if any of their circumstances have changed. For example, do they have a second job or side hustle? That's really important in terms of getting the tax return right the first time.

And finally, the terms and conditions for online services agents have been updated. From one July of this year, agents are required to complete verification prior to providing tax or agent services for those clients using IT systems. As you know, Robyn, you need strong client verification that helps take tax professionals, clients and Australia's tax and superannuation system from misuse and abuse due to identity theft and related issues that we've seen quite a bit over the last 12 to 18 months.

Robyn Jacobson

Not more about identity theft and scams later, but it is rife and right through our community. We hear every day of people that are being scammed and cyber attacks. It's it's just awful. So I think on this particular point, it's important to mention that agents shouldn't be retaining these documents per say. So you don't want to take a photocopy of your client's driver's license or their passport and keep that on your files, physical or virtual, in an electronic form.

Because if that information is stolen, whether it's a physical break in or something where it's a cyber theft. So there are lots of software solutions available today where practitioners can verify this information, but it's not actually storing that off the site. So it's something for them to consider.

Tim Loh

Absolutely.

Robyn Jacobson

Right now, terms of lodgement stats have you got some rough figures on how many tax returns a year we lodge collectively across the country? It must be many millions.

Tim Loh

Yet to date, 3 million income tax returns have already been received this year, which surprisingly is an 8% decrease compared to the same time last year where we had received 3.3 million tax returns in total. Last year we received nearly 15 million income tax returns and when it comes to lost income, know 67.8% of those income tax returns were lodged by REG the tax agents and the 32.2% were lodged by self preparers.

Robyn Jacobson

So it's really interesting. It's often been maybe more than two thirds, even three quarters of individuals use the tax agent. And I think the figure, something like 95% of business taxpayers use the tax rate so that 2122 figure is suggesting it's down slightly. So it'll be interesting to see what the data looks like for the 23 year amount.

So that's in.

Tim Loh

Yeah. It will be interesting to see, you know, from our perspective, we're always, you know, big believer in choice whether you want to do it yourself or whether you want to use a registered tax agency, it really is up to you, and particularly if you've got more complicated affairs. We do recommend using a tax engine to help with your tax return.

Robyn Jacobson

Absolutely. And look for the world that I live in. We certainly know how complicated the tax law can get. So, yeah, there are minister. I think. Can be extremely useful. So let's turn our minds now to what's new this tax time. There are quite a number of changes that taxpayers need to get their heads around.

Tim Loh

Yeah, look, there have been a number of changes, Robyn. That's right. The first one that a lot of people are talking about is the working from home expenses and how you can calculate that to claim working from home deduction for the 2020 223 income year. There are two methods to choose from the actual cost method and the revised fixed rate method when it comes to the revised fixed rate method from the 1st of July of last year to the 30th of June this year, we have the revised fixed rate method that would increase the rate from $0.52 per hour to $0.67 per hour when you work from home and the key change that's happened, there are a couple of changes that happened there, but one of the key changes is no longer either dedicated home office space or Home Office to use that method. So you could be working on the couch, the kitchen bench or the dining table, and you can access that method.

Robyn Jacobson

So many more people are working from home permanently. Now, whether that's five days a week, seven days a week in some cases, or whether it's just two or three days a week, the idea that you're no longer bound to an office and I think this recognizes that post-pandemic there are much more flexible work practices.

Tim Loh

That's right. One of the reasons for updating the method was to reflect the changes coming out of the pandemic in the way we work. And one of the things we wanted to change was making sure more people had the ability to access the revised fixed rate method. Then one of those big changes was to remove that dedicated workspace requirement.

Now, in terms of what else has changed with the working from home expenses, we've also changed what expenses are included in the rate. So the right now includes the cost of any additional running expenses. So things like energy costs as well as any computer consumables, stationery and phone and internet usage as well. On top of that method can also claim separately for the declining value of any depreciating assets that you purchased during the year that you use to work. Those are things like your laptops and home office furniture that you might have purchased during the year. Now, most importantly, the recordkeeping requirements have also changed. Using this revised fixed rate method, the clients are required to keep a record of the number of hours they've been working from home so you can use a timesheet or diary entries. So document the number of hours that you've been working from home. Now, one thing we have done for this year as a transitional provision is allow for a representative period from the period of 1st July 2020 2 to 24 February this year. And you can just use effectively a representative periods of four week diary or timesheet entry to reflect that period. But then from one march of this year to the 30th of June this year, you need to show the number of total number of hours using that diary or timesheet entry time.

Robyn Jacobson

It's also important to note that this requirement to keep a record of actual hours is ongoing. So certainly for the period one March to 30 June for this tax time. But as we move into the 2324 year and onwards, that requirement to record actual hours will be ongoing.

Tim Loh

That's right, Robyn. So it's really important that you've got good record keeping always on the TV or radio, same records, records, records and you know, having good records gives you the flexibility to choose the methods that suit your circumstances the best. Right. So you may want to choose the revised fixed rate method used to calculate that we've got you on the show or speak to your registered tax agent that might give you a particular result or the actual cost method, if you've got really good records, can give you a potentially a better result. So it really is up to you. But if you've got really good records and as you suggest, probably keeping a record of the number of hours you've been working from home, the receipt for anything you purchased during the year that will give you maximum flexibility to choose the method that gives you the best result. Now, one last thing I wanted to mention in terms of record keeping was any of those additional expenses that you have incurred. If you are using the revised fixed rate method, just make sure that you've got a copy of the phone bill, electricity bill or an Internet bill in your recordkeeping suite. Now, more details about it on our website at update forward slash I.

Robyn Jacobson

Thank you Tim. Look I'd also expect there would be an inverse relationship between people that are claiming travel expenses and working from home expenses. In other words, you can't have it both ways. You're either traveling, in which case you're not at home or you're at home. In which case you're not traveling. So I would expect that if taxpayers had claimed significant working from home deductions at the height of the pandemic and they normally do a lot of travel for work, that their travel expenses would start to increase. So maybe the employer is covering those costs for them and they're working from home. Claims would drop down. So people just need to be mindful that this sort of relationship is noted by the ATO. And if you've got someone is claiming high travel expenses and high working from home expenses, that could be a red flag raised.

Tim Loh

That's right. You know, everyone knows that you can't be in two places at once. Men can't be in two places at once. And what we say to people is, don't just copy and paste loss use claims. It's really important to look at your facts and circumstances. And like you said, we're tracking all sorts of different records. We do see the trains much busier between Tuesday and Thursday because employees of US employees are coming back into the office. So yeah, absolutely right. You travel expenses might go up to the extent it's not reimbursed by your employer, but it's really important just to look at your particular facts and circumstances, especially you might have even changed jobs or have a second job, that it could be different expenses that you might be able to claim. So copy and paste, you might be undercutting your own tax return because you've just been copying the previous year's claim. So it's really important to put your facts and circumstances.

Robyn Jacobson

All right. So what else is new or different this year?

Tim Loh

Yeah, two other things that have changed this year is on one July of last year, the requirement to exclude the first $250 of certain self-education expenses has been removed. This change applies from 2020-2023 financial year onwards. And the second thing that's changed is for those who are eligible to claim those cards, Spencers, the cents per kilometre method, if you are using that method, has increased to $0.78 for the 2020-2023 income year. So that was $0.72 previously. So that's quite a decent increase as well.

Robyn Jacobson

It is. And look really good to see that old 250 rule being removed. Most people wouldn't understand it was actually a legacy from some changes that were made way back in the early to mid eighties. This just remained in place and it really shouldn't have been in place all these years. So that is now gone and that's good to say with the cents per kilometer. If anyone's thinking about car or engine size, that's irrelevant now. It is just a flash cents per kilometre. And I think I'd also just point out to everyone, just make sure you're picking the right rate for the right year. We're now sitting in the 23-24 year, but lodging the '23 returns. So make sure you're using the rate in your 23 return being the $0.78, not the $0.72 from the year before or the $0.85 that now applies that this current financial year.

Tim Loh

That's right, Robyn. A really good tip.

Robyn Jacobson

Also worth noting with electric cars, the ATO has provided some guidance around what sort of rate per kilometre can be claiming working out your electricity charging, because clearly you're not going down to the servo and filling up your fuel tank. So the ASIO's released a draft package which is 2023 D, one which puts forward a proposed rate of 4.2 cents a kilometre. Now that sounds really low when you compare it to the $0.85 for this year or the $0.78 that we'll be using for the '23 year. But this is really about working out the FBT aspect for employers who provide a car or for those who are using the logbook method. And this enables you to work out how much electricity charge you might be using because it's very difficult to keep track of this in practice. But I just want to point out to everyone that you can't claim your 4.2 cents for these electric vehicles on top of the $0.78 that you might be claiming under the cents per kilometre method. So you've got to make a choice which method you're going to use.

Tim Loh

Yeah, that's a really good call that, Robyn. And it's really important that you don't you do double dip in terms of the deduction methods that you're using.

Robyn Jacobson

All right, So let's turn now to record keeping, which is, I've got to say, the dullest part of tax. Even as we get excited about tax, can't get excited about record keeping, but it's a very important part of the tax process. So what sort of advice can you offer to people in this space who are wondering what records they should keep or how long ago to keep them for and how to go about it?

Tim Loh

Yeah, you know, I'm going to sound like a broken record, but it's red records, records, records. Robyn And if your clients are planning to claim deductions, you need to have records full stop. And these can vary, obviously, depending on the type of expense that you have. And you can use the information on our website to help guide those conversations with the clients. Now, if your individual sole trader clients want to, I would suggest using the ATO, the actions tool. It's great. It's a great place to have all your receipts in the one place. And we are the records as well. And when it comes time to lodge, they can easily send them to the tax agent or if they are self-repair, I can upload it into my tax. So I always say that's a really good place to keep your records. Whenever I talk to people, everyone's got slightly different record keeping processes. You know, when I speak to a number of people, they sometimes have a folder in their email account labeled Tax. That's another way in which you can keep all your records. But the key thing is, starting from the 1st of July, making sure you've got those records, and then when you come to lodge your tax return, you're not looking around in the old shoe box for those receipts or manila folder here or the glove box in the car. Having an all in one space ensures that you're not rushing when it come to lodging your tax return. And then you can also maximize the deductions you're entitled to nothing more, nothing less.

Robyn Jacobson

The issue is often spoken of three golden rules, so we should roll those out again to remind everyone what are the three golden rules when it comes to record keeping?

Tim Loh

Yes. So when it comes to record keeping, you must have spent the money not be reimbursed. Second, the expense needs to be related to your work so they can't be a private component to it. If there is a proportionate. And the third is making sure that you've got good records or receipts, the best form of records to have when you ignore deductions like.

Robyn Jacobson

The many years the shows put together some very useful tax time toolkits. I think the actually loves the alliteration here with all these trades. So what do these tool kits having them? How are they useful for taxpayers.

Tim Loh

When it comes to these tool kit? So what we try and do is we're not about to audit people when we need to. But, you know, our preference is for people to get it right the first time. We always talk about prevention before correction and making sure that people have the right information so they can actually get their tax return right, whether they're lodging the tax return themselves or using a registered tax agent. When it comes to the tax agents, we want registered tax agents to help the clients get it right the first time. So we're all about producing these tax time tool kits to really make sure that people, I guess, get it right. As I said before, the first time. And so we've got a number of different toolkits that are available this tax times. We've got a regular tax time tool kit that helps so preparers work out what deductions they have. We also got nearly 40 occupation guides to help people get that right in terms of what deductions that they can and can't claim. So registered tax agents can use that as a guide to help them educate their clients about what kind of claims that they might be able to claim when it comes to lodging their tax return. When it comes to investors. We've also got an investors tool kit as well, which is a really great useful resource for anyone who's got a rental property investment as well as any investments in shares crypto as well. So my box is to really have a look at those types of toolkits. They're really great resource and they can help facilitate a much more well rounded conversation with the clients as well.

Robyn Jacobson

I'm not sure how routinely the ATO does this, but we've certainly seen cases where the ATO has engaged with the employer. So for example, if there's a taxpayer who's claiming a higher amount of work related expenses and then they speak to the employer and the employer says, no, they don't travel or No, they don't need to carry that for work or whatever the case may be. So, there are occasions where you may engage with the employer or other third parties to help establish the profile of the taxpayer or verify what they're saying is correct.

Tim Loh

Yeah, this can happen on occasion. You know, our preference is you already have information to substantiate your clients. As I said before, it's all about the records. If you've got the records, there's nothing to worry about from our perspective. But typically we find that when we have to progressing to that direction, the taxpayer doesn't have those records and we don't have those records. Life becomes a lot more tough. And we go, we're going to go through things with a bunch of Australians want to know that people are doing the right thing. So it's really important that you have those records. But like you said, you know, there are certain situations that will go in that particular direction to get that substantiation, to corroborate the claim that people are making their tax returns.

Robyn Jacobson

A quick anecdote. I was in one of the major department stores speaking to one of the sales assistants in the handbag department and these are the ones that are all chained up, the really extensive ones. And I was looking around and having a chat to this lady about the rate of theft in this store. And she didn't tell me how much is stolen or quantified, but it just gave me a sense that it is a substantial cost for retail businesses. And it just made me think if you look around the store of all the goods that have to factor in the cost of theft, they have to price all of their goods accordingly to cover that cost. So I think it's the same with tax. If everybody paid exactly the right amount of tax that they should be paying, potentially we'd all be paying less tax because the government wouldn't have to cover the cost of evasion and avoidance that's undertaken. So that's an interesting aspect about people that think, oh, well, someone else is doing better out of this, so I'll just claim this because no one will notice the ATO does notice and it does affect the system as a whole.

Tim Loh

Yeah, that's spot on Robyn. And I always say you know when you over claim incorrectly by $100, if everyone does that it's about $1.5 billion. We're talking a lot of schools, it's probably a hospital, you know, in terms of operational costs. But, you know, for schools and hospitals and all the public services that we rely on as a first world country. So it's really important that people understand that it's important to do the right thing just because someone else is doing it doesn't mean you should do that. And I think the commission feel comforted by the fact that we are making sure that people do the right thing at the ATO and we will come down on people who are deliberately gaming the system.

Robyn Jacobson

You remember that series of ads in the zine? Just because the traffic was doing it doesn't mean you should as well.

Tim Loh

Yeah, that's right. That's right.

Robyn Jacobson

So it's interesting the increasing use and understandably this use of data and we've seen for many, many years now the ATO using data matching projects where they will obtain data from a third party and then extract certain information or run certain tests through it and match it up to what's been lodged in these things don't make sense. So some practical examples of this. There are some projects underway at the moment with landlord insurance. So the ATO is going to the companies that provide landlord insurance, which tells the ATO who owns a rental property, and then that can lead you to inquire about if the rents are appropriate or deductions are appropriate or whether there's a capital gain on the sale of it that's been properly declared. You're going to the banks to look at who's obtaining loans for obtaining residential property and again, whether if that's a home, they shouldn't be claiming anything. And if it's a rental property, is that being done properly? There's also a current project underway for motor vehicles. So the ATO is going to all the registration boards all the way down to Victoria. We call it VicRoads, of course, and understanding who owns a vehicle and that's a really good one because if it's owned by a company or trust, then the obvious question is how is the FBT looking if it's owned by an individual, well, do they use it for work, in which case it's okay that there are claims being made, but if in fact it's not being used for work, why are claims being made? So I think there's a whole series of questions that come out of this. But when I look at the scope of what the ATO can gather, so it has information, mobile phone, metadata, sort, it need to be making a phone call for the ATO to know that my phone's connected to a particular tower. And we know, for example, in criminal investigations the police are using this increasingly to place people at a certain point in a certain location. So you come back to superman earlier comment. He can't be in three places at once. Well, how can I be on the phone in a holiday beach area or a vineyard area when I'm claiming to be meeting a client in the city and therefore claiming some sort of tax deduction relating to that meeting? So with passport records, if I'm claiming I'm in the country using my car for work purposes, but my passport shows that I'm voluntarily out of the country, then questions need to be asked.

Tim Loh

Yeah, that's right, Robyn. And I think you touch on a really important point, which is we are using data a lot more, both from a compliance perspective, as you pointed out, but also we want to use it from an education perspective as well. As I said before, you know, it's all about prevention before correction. We want people to get it right. The first time we are in the business of auditing everyone, we are in the business of making sure people get it right. The first time. So for us it's about how do we make it easier for people get it right. First time there's an education component to it, but also, as I mentioned before, there is a compliance component, but we only want to use that component for the people who are deliberately doing the wrong thing.

AD BREAK

Robyn Jacobson

All right. So what are your top areas that are being focused on for 22, 23 returns? So this is the 23 income. Yeah.

Tim Loh

Yeah. So we talk obviously a lot about expenses, work related expenses. You mentioned before around the travel expenses and not copying and pasting losses claims. That's a really important area for us. It will continue to be important area for us this financial year and beyond. We've also focused on capital gains tax. We are seeing people make errors in relation to disposal of property, particularly around the main residence. So we are seeing a lot more people rent out a room in their main residence. So we're just reminding taxpayers there are capital gains tax consequences when you do sell that main residence into the future. So just making sure that got good records in place. The other thing we're focused on is rental property deductions, in particular for rental property investors. We are seeing nine out of ten rental property investors get it wrong. So it's really important they get it right this time.

Robyn Jacobson

That's a really high figure. Nine out of ten returns.

Tim Loh

It is a very high figure. It's something that we're very conscious of. And of these returns, 87% are prepared by tax agents. So what we're saying to people is particularly agencies, to ask those extra questions of a client in relation to the state of affairs to make sure that they're giving you the right information. It's really important that you do that because we just can't have those mistakes being made year on year. And one of the key things that we do see people make mistakes with is just in relation to rental income being left out. So for example, some of the things that we are seeing able to claim the matching amount after deductions from the annual property management statement rather than the gross amount and then claiming deductions. Again, it's another example of double dipping, right? So it's really important that you just take the extra care into making sure that the right income's been included. There isn't the double dipping of the deductions and the client is giving you all the information that you need to make a proper assessment particularly, but also around relation to introductions as well, where there's a bit of refinance you've done for private expense. It's just really important that you get this right because it is an area, as I said before, that we're really focused on this year.

Robyn Jacobson

And this is quite dynamic at the moment. And I mean that because we've had all these months of rate rises over the last 14, 15 months now, that's had an effect on, of course, potentially pushing up negative gearing losses, but it's also going to be an increased cost along with everything else going up with the cost of living and insurance and rights and so on. So rental incomes are also going to be going up. So there's no one size fits all in terms of the outcome. I've got to say, for taxpayers, some might have bigger losses, some might have more positively geared income coming through. But my point is that I'd expect to see changes this year compared to last year's return.

Tim Loh

That's right, Robyn. That's exactly right. So, yes, obviously the interest rates rises will potentially have an increase in terms of the deduction side. But we also know that there is a shortage of rental properties and the rental incomes have gone up as well. So we expect that to increase. But like you said, it really depends on the area city involved in the location. So like you said, it's really important to understand that your tax return will be different this year and the agent is really important just to make sure that you ask those questions of your clients to make sure they can get it right the first time.

Robyn Jacobson

That one on the net rent is really interesting and I could see how that could happen because if you own a property and it's managed by an agent, they of course take their agents fee and certain of the repairs and maintenance that they arrange out of that gross rent. So if you were simply relying on your bank statements and you went through your used bank statements and picked up the rental figure, yes, that will be the net rent received from the agent. So that's why I think it's really important for agents, international tax agents, to be asking the right question of their clients to say, would you give me this rental income figure? But as you said, Tim, is it the gross or the net figure? And maybe some taxpayers just don't realize that they have to declare the gross amount, not just simply what turns up in their bank account.

Tim Loh

That's right, Robert. So, yeah, it's just really important that you take that extra care. Like I said before, it's a real strong focus area for us this year and going forward. So people need to understand that you've got to get it right the first time and that's why those investor toolkits are really important kind of access. It's got all the information there for you to make your job a lot more easier and have those conversations and ask those questions of your clients as well.

Robyn Jacobson

One more mention on property before I move on to the next topic. But holiday homes, we've always had issues with people potentially not allocating expenses when they use it for private use or during mates rights or things like that.

Tim Loh

Yeah, look, it's that's again is another focused area, you know, holiday homes, Robyn, it is important to distinguish between a rental property and a holiday home. People can't claim deductions for those periods. They are producing income which includes when they use a property for private purposes with a renting out mates at mate's rights. And when the property isn't advertised in a way that is desirable for tenants.  So for example, we've seen properties stipulating a three night minimum stay, then every Sunday it's blocked out, right? So those are things that we're looking at and we'll be taking a really close interest this text on.

Robyn Jacobson

Right. So onto capital gains tax. It's been around many decades now, but it continues to be a complex area. So why the focus this year.

Tim Loh

When it comes to capital gains tax? We are seeing people make mistakes on it. And if your clients do have investments like shares, crypto management investments or rental properties, they need to tell you when a CGT event occurs. So that includes things like selling assets, share buybacks, transposons, exchanges of crypto gifting, typical situations where you no longer the legal or beneficial owner of the asset. So it's just really important to ask those questions when you are speaking to clients now, when it comes to selling property, as you know, Robyn, some of your main residence is exempt from CGT. But as I've said before, if you are renting out a room through Airbnb or stage, it's important that you have good records and when you do sell the property there are some capital gains tax consequences that you need to work out, which can be quite a complicated calculation. So I would suggest speaking tourism, taxation about that one practical tip I have is typically getting a market valuation done at the time. So you've got a starting point to calculate that CGT rather than waiting to eventually sell out potentially years in advance, do that again. It's those records which I keep talking about. I do sound like a broken record now, but that is really what it's all about when it comes to working out what those capital gains tax consequences are going to be coming out of that. The other thing to note is that we've got a new fact sheet that we brought out in our investor toolkit. As I mentioned before, you can find that out today for such a fact sheet. So it's really important that just to finish up on this particular point that we don't want your clients to fall into the trap of thinking we won't know this if we sell an asset for a gain and don't declare it. As you said before, Robyn, we're using a lot more data from different sources. So we've got the residential investment property loan data, over 1.7 million individuals, but the landlord insurance data as well. So we've got different data points that we're using to cross-match against the data that we have on our systems. And then we use that to make sure we cross-check against the information that's put in the tax return as well.

Robyn Jacobson

Cryptocurrencies is a burgeoning area and we've got lots of tax payers getting into this space either for the first time or have been doing it for many years. But the point is there are still CGT implications for dealing in crypto and if you're going to exchange one type of crypto for another, it's no different to exchanging some Telstra shares for BHP shares, for example, CGT that still get triggered. So try to get that message through. How, how's the ATO going with that particular issue?

Tim Loh

We think of these things similar to kind of other investment assets, right? So we think of it like shares in many cases. And as you were quite rightly pointed out, Robyn, there are capital gains tax consequences when you sell, swap or change cryptocurrency. Now everyone knows that cryptos fluctuate a lot over the last 12 to 18 months. So some people would have made a capital gains, some people would make capital losses. But if you have held some of your crypto for at least 12 months or more, you can get the 50% CGT discount. So that's something that investors should be aware about. The other thing to note is with any capital losses that you made into your crypto, you can offset any other capital gains not just from crypto but any other message that you have. So just something for investors and clients and savings to think about when you lodge any tax return this year.

Robyn Jacobson

But you can apply those capital losses against your normal income like rent or interest on your salary.

Tim Loh

That's right. Robyn. Yeah.

Robyn Jacobson

Now side hustles, gig economy. There are lots of names for this particular part of the economy. What are you seeing in this space?

Tim Loh

Yeah, we've got a lot of data that's showing that nearly a million people have multiple working jobs. So that's about 7% of Australian workers working two or more jobs or supplementing their income with these side hustles or gig economy activities. And look, there are obviously new and different ways to earn an income these days. You can be driving movies or you could be making content on Instagram and you can get some dough out of that. So it's really important that whatever way you were earning your money, the tax obligations are exactly the same. Clients need to make sure they keep accurate and complete records and declare all their income in the tax return. Now, if new clients already come through continuous and repeated activities for the purpose of making a profit, that's going to be considered a business. And it's really important, as I said before, to declare that income into your tax return. You know, some things aren't going to be considered to be running a business if you're doing the annual garage sale of some old items, that's probably not going to be a side hustle. You won't have to include that in your tax return. And one thing to kind of also note in this is if you do have clients earning income, that isn't just money. So could be just goods or services. They receive tips or gifts, you know, subscription payments or fees. That's considered to be income. I need to include that in the tax return as well. And one thing that we have noticed is people have been getting tax bills. And part of the reason for that is people with some of these side hustles aren't having any tax withheld at the time they receive some of these payments.

So that's resulting in a large tax obligation at the end of the year. So it's really important that you have a think about signing up to the page. You go withholding installment regime to make sure that you are withholding tax on an ongoing basis so you don't have a big tax bill at the end of the year.

Robyn Jacobson

Really good advice, too. And we certainly see instances and it's reported across the media a lot lately with people with unexpected tax bills and some of these people have formerly been employees where all this was taken care of them. And when you go out on your own, you are now responsible for your own tax position. So if you've not been paying installments along the way through Pay I YJ and you've no longer got an employer taking withholding amounts out of your salary, then yes, you will have a shortage of tax paid during the year, which means it's got to be paid almost into the return. That's when some of the surprises happen. But also it can lead to unexpected steps that people aren't prepared for. And of course, they're not getting super support because there's no employer to pay that anymore. So they also need to think about should they be putting some money aside for their own super. And it's difficult because often gig economy, they're on relatively incomes.

Tim Loh

Yeah, that's right, Robyn. And you know, you're spot on in terms of what you just said when you are with an employer panel where you think it's kind of like living at home, your parents typically pay for everything, but then when you move out of home, you've got to take more responsibility. And it's really important that you put aside money for your tax obligations. And as you said, a really important point when it comes to superannuation, consider whether you need to keep some way for when you retire, which is always a bit hard to do because it's obviously many years into the future. But super is a really important asset for your retirement, so it's well worth having a think about that and speak to a financial advisor. That's something that you're interested in doing.

Robyn Jacobson

We know that there have been some taxpayers with unexpected tax bills this year. Part of this that I can't say it's wholly attributable to this is the removal of the low and middle income tax offset, which ended on June 30, 2022. Now, whilst it ended that date, people of course, were still seeing it coming through their income tax assessment notices throughout 20 to 23 years. They lodge their 22 return. So it's really only now one year on that people have said, oh gosh, we're now seeing a smaller refund of perhaps some even payable. There was plenty of messaging about this at the time through the ATO and by the profession that maybe not everyone understood the implication of what the removal of that offset has done. So I think it's important to note that the amounts of the low and middle income tax offset was effectively baked into the stage. Two personal tax cuts that kicked in some years ago, and then it was temporarily extended for another couple of years. So if people have unexpected tax bills, what can they do? What sort of support is available for people that find themselves in a tax position they didn't expect?

Tim Loh

Yeah, look, if you do get into a tax debt position, it's really important that you don't bury your head in the sand. It's really important that you do know that we do have payment plans. So you can do that, actually do that yourself online. And if you do get a tax bill, just don't stress about it too much about it, but make sure that you do lodge as per normal. And then if you are having trouble paying for this, make sure you're trying to pay a and you can do it yourself or mine or you know, or you can speak to a registered tax agent who can help when it comes to agents, you know, you can use your online services for agents to view, set up, adjust or cancel payment plans for your clients.

Tim Loh

So that's something that happens as you start to lodge a tax return on behalf of your clients. Do go to our website, which is Oakdale Value Forward slash module paid and get some further information to help you out in relation to this.

Robyn Jacobson

What about agents themselves who might be feeling under the pound for a bit overwhelmed? We know there are still labor shortages across the profession as there are in many sectors across the economy. What can I do to seek support?

Tim Loh

Yeah, good question, Robyn. Tax time is a really busy and challenging time for the profession. You know this, I know this, and tax agents listening know this. And we do acknowledge the aggregation of events over the recent years, including the pandemic, has added significant pressures on all of us. Really. We think it's really important that you're having those conversations with your clients to manage expectations. And we know a lot of agents are already doing this as well. And as you said before, we've been telling people for months now about potential for lower refunds and potential depositions. But we do know, you know, that some agents might be encountering circumstances beyond their control that will prevent the potential of lodging on time. So we've got, as you know, a lodgement program and lodgement deferrals that can provide agents with additional time to lodge without incurring the failure to lodge them. Time penalty. Now, the problem of your experience affecting your whole practice, for example, as a result of a significant event or ill health, you can request assistance via a supported lodgement program. So whatever the reason, we're here to help and work with you to get your lodgement program back on track and making sure that we can tailor our support to you, to your particular facts and circumstances. So my best tip is to check out our website, look after reports that lodgement program help and get some further information to help you with the potential support options that we have to help you get your practice back on track.

Robyn Jacobson

We've also got a new feature within a CSA online services for agents, and it's a new lodgment deferral function. So any agent is listening to this. So remember the, the wonderful days of having to send in a spreadsheet with a list of clients they Clare's ato can we have a on these particular lodge lodgment and a working group and set up of which the Tax Institute was part of. And through this process we collaboratively designed this new feature. So we're really pleased to see this go live and effectively it's a digitalized approach. So instead of the old fashioned spreadsheet being sent in, there's now a digital feature where you can basically say to the ATO, These are the clients, we want to submit a deferral request form and in real time you can see what's happening. You can keep track of what's being progressed. If something needs to be manually dealt with by the ACR, then they're made aware of that as well. But it seems to be much more efficient and more responsive than the old spreadsheet.

Tim Loh

Absolutely. Whenever you have to look at a spreadsheet on Excel, it's a good thing. I would say, look, you're absolutely spot on. We have worked collaboratively with tax practitioners, professional associations like yourselves to come up with this new function. We do hope it does dramatically cut the time it takes to lodge a deferral request and we wanted to make things easier. You know, this is a cost to tax agents that they shouldn't have to deal with. And we hope this new process helps tax agents streamline their processes. This tax time and beyond.

Robyn Jacobson

Something that people should be aware of. And this isn't a particularly happy note, but the amount of a penalty, you know, increased again on the 1st of July. We do see indexation every three years, but we also had a separate increase on the 1st of January. So one penalty unit is now worth $380. Now that may not sound much when you're talking one unit, but when you go to the tax law and you might have ten penalty units or 20 penalty units or 50 penalty units for not doing something such as lodging or not attending to a particular obligation, these penalties can get quite substantial. So I just remind people that in the background where there is a breach of a particular tax obligation, you can find yourself with some hefty penalties as a result, and that's separate from the general interest charge. So turning now and basically finishing our discussion on another not so happy note scams, cyber security, fraudulent misuse of identity and it's just such a hideous part of reality that we all need to deal with. We've seen the banks tighten up an enormous amount of spend that they've invested in tightening up security. We're seeing all the government departments and agencies doing the same thing, and scammers will always find the weakest link. So if they find that at the government level, things are so tight they can't penetrate the defenses so good, then they'll just go to the next weakest link and they might filter down through the professional, they filter down to businesses or they filter down to the individual taxpayer. What are your best tips? I mean, there is so much available online that people can rely on, but there are certainly some do's and don'ts when it comes to being really smart about looking after your data and your identity.

Tim Loh

Really good points and observations from the weakest link observations are really pertinent point and unfortunately, you know, scams are becoming increasingly widespread. There's been a lot of data breaches at Optus, Medibank and a few other organizations as well, and the scammers are just unscrupulous, right? They're going to, like you said, find the weakest link to make sure they can potentially get that data and use that to infiltrate not only the government systems, but any other organization for that matter, to extract moneys for devious purposes. Now, when it comes to the advice that we give when it comes to tax time as we are now, it's just pretty important to be on the front foot, be wary of any scam emails or text messages, phone calls and impersonated accounts on social media claim to be in the show. So a few tips I'd like to tell people is never provide any personal identifying information by email service will never include that type of request in those emails. Something else that you don't like to do is any hyperlinks. Hyperlinks are typically there to fish information from you so that scammers can direct you to a fake website where you're putting your personal details. And through that, they can access information relevant to you and use that to commit identity fraud. The other thing is, when it comes to phone calls, we always call you with a no caller I.D. So a number that would never project onto your phone and the other thing to also note is, will never speak to you in a threatening tone, threatening rigorous deportation or jail. Typically contact you in a friendly voice at the ATO. And the third thing is we do engage on social media, which we do. We never ask for personal information like your myGov details, your bank account details or your text phone number. Given why you might give details like giving away your case to Australian Media House and then watching them change the locks on your house, it's not a place that you want to go and with identity as this they can make your life so and it's really important that don't give those details away. So those are my best tips in terms of making sure that you look after your personal information and your bank account. You want to give your bank account details to a stranger. Why would you give your Marg update details to a stranger? So take those really personal details, then hold them really closely to him.

Robyn Jacobson

How do I know if someone calls me and they say they're from the 1890? How can I be sure? How should I respond? How do I act?

Tim Loh

Yeah My best tip is actually to hang out. My best tip is to hang up. If it does, tell me that it's a scammer. So my best hope is to hang up. And there's two things you can do. The first is to call us on our dedicated scam hotline, which is one 800 00540. And the other thing you can do is also check out our website at 8:00 today for that scam. Now, it's really important to ring that number because sometimes it could be a genuine person from the show, but by ringing that number, you can find out if in fact all the genuine call from the show or indeed was from a scammer. So that's my best tips when when it comes to working out whether it was a scam or someone calling me.

Robyn Jacobson

Thank you, Tim. I know that wasn't the most positive note to end our discussion on, but a really important one. As our community continues to be vigilant and fight off this hideous aspect of modern cyber activity. We love the online activities and we love being able to do things efficiently and be connected. But it does come with some really big risks.

Tim Loh

Yeah, and I just want to add probably one thing which relates to tax agents. Obviously, as you've said before, we talked about ad nauseum, Robyn, about identity fraud and cyber security risk across the community. It's really important as an agent, but you've got those range of controls and security mechanisms in place to prevent the fraud, which agents are responsible for managing their own security and cyber protection, and to not lose sensitive identifying information. And it's really important they've got that security in place. So some of the tip I have is to check out a website. I talk to you for us, touch professional security for for more information on this. It's really important because it can be quite disruptive if there is a situation where the scammers get a hold of your information or your client's information.

Robyn Jacobson

Absolutely. Because one of the first things the show will do is close off access to online services, which means you can't logically engage with the ATO, you can't access your client information. So it becomes very debilitating. And speaking to agents who have had this happen, there's a lot involved and it can take many, many months, if not longer, to be able to get them back up and running again.

Tim Loh

Yeah, that's right. And it's unfortunate, but these scammers are unscrupulous and un-Australian, and they'll do anything to take people's money.

Robyn Jacobson

Yeah. Look, Tim, thank you. I also wanted to personally thank you in terms of your contribution to the tax profession. I know this is your last round as tax time spokesperson for the ATO. You've become a very familiar face on our TV screens and across the airwaves and right throughout social media. I hope you've enjoyed it as much as we've all enjoyed your little anecdotes and your tidbits of advice, but you've done a wonderful job in this particular space now.

Tim Loh

Thank you so much, Robyn. It's been a privilege to have the opportunity to represent the ATO but also represent the tax community as well. For me it's been a real privilege after working many years in this space. But yeah, looking forward to getting back into the books a little bit more over the next coming years. So thank you for that wonderful acknowledgment.

Robyn Jacobson

You’re very welcome. Thank you, Tim. Thanks for listening to this episode of TaxVibe. I've been chatting with Tim Loh, Assistant Commissioner and Tax Times spokesperson at the ATO in the individuals and intermediaries space. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of the Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.com.au. We look forward to you joining us next time.